Advanced Supply Chain Management (POM 625) - Lecture...

Dr. Jinwook Lee

Advanced Supply Chain Management

(POM 625)

- Lecture 1 -

- Introduction

- What is Supply Chain Management?

- Issues of SCM

- Goals, importance, and strategies of SCM

- A Brief Review of Linear Programming

- Using Excel Solver in solving LP problems:

- Production Planning Problems

- Transportation Problems

- Capital Budgeting Problem

Topics of Lecture 1

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Flows in SCM

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Stages of a detergent Supply Chain

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Stages of Supply Chain

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Supply Chains of Apple Inc.

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- Supply Chain Management is primarily concerned with the efficient

integration of suppliers, factories, warehouses and stores so that

merchandise is produced and distributed in the right quantities, to the

right locations and at the right time, so as to minimize total system cost

subject to satisfying service requirement.

What is SCM?

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- Maximization of the overall value generated.

- Supply Chain Surplus = Customer Value – Supply Chain Cost

- Supply chain management is concerned with the efficient integration of

suppliers, factories, warehouses and stores so that merchandise is

produced and distributed:

- In the right quantities

- To the right locations

- At the right time

- In order to

- Minimize total cost

- Satisfy customer service requirements

The Goal of SCM

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- As manufacturing becomes more efficient (or is outsourced), companies

look for ways to reduce cost

- Several significant success stories (Walmart, HP, Dell, Apple, etc.)

- The huge growth of interest in the web has spawned web-based models

for supply chains: from “dot com” retailers to B-2-B business models.

Growing Interest in SCM

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- Supply Chain strategies cannot be determined in isolation. They are

directly affected by another chain that most organizations have, the

development chain that includes the set of activities associated with

new product introduction.

- It is challenging to design and operate a supply chain so that total

systemwide costs are minimized, and systemwide service levels are

maintained.

- Uncertainty and risk are inherent in every supply chain.

What makes SCM difficult?

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SCM is core!

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Supplier

Supplier

Supplier

Storage} Mfg. Storage Dist. Retailer Customer

Typical Supply Chain for a Manufacturer

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Typical Supply Chain for a Service

Supplier

Supplier

} Storage Service Customer

- Firms have discovered value-enhancing and long-term benefits

- Who benefits most? Firms with:

- Large inventories

- Large number of suppliers

- Complex products

- Customers with large purchasing budgets

- Benefits

- Lower purchasing/inventory costs, higher quality/customer service

Importance of SCM

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Phases in a Supply Chain

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• Supply chain strategy or design

– How to structure the supply chain over the next several

years

• Supply chain planning

– Decisions over the next quarter or year

• Supply chain operation

– Daily or weekly operational decisions

The Value Chain

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Achieving Strategic Fit and Scope

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• Strategic fit – competitive and supply chain strategies

have aligned 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

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How is Strategic Fit Achieved?

1. Understanding the customer and supply chain

uncertainty

2. Understanding the supply chain

3. Achieving strategic fit

All of the advanced strategies, techniques, and approaches for SCM are

focused on:

- Global optimization

- Managing uncertainty

Strategies for SCM

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Sequential vs. Global Optimization

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Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Global Optimization

- The supply chain is complex.

- Different facilities have conflicting objectives.

- The supply chain is a dynamic system.

- The power structure changes.

- The system varies over time.

- And, more importantly, there is always uncertainty and

risk!!

Why is Global Optimization Hard?

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Level of Demand Uncertainty

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- SCM, as we’ve seen, is all about integration.

- How do we make the right decision over a complex system where many

business entities are involved?

Decision making in SCM

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- People are interested in finding way to the best outcome. In business,

we want to find out the optimal solution to maximize profit or minimize

cost.

- Mathematical programming (or optimization) is the action of choosing

the best solution of the objective given a defined domain limitations.

- If the objective and domain are linear functions, then the associated

optimization problem is called “linear programming” or “LP.”

Linear Programming

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- LP is the problem of minimizing (maximizing) a linear cost

(profit) function subject to linear equalities or inequalities (so-

called constraints).

- Linear function

- A function f is linear if the followings are satisfied:

1. f(x+y) = f(x) + f(y) for all x, y in the same size vector

space

2. f(cx) = cf(x) for any real number c

Linear Programming

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- Major components for LP

- Decision variables

- Objective function

- Constraints

- Four assumptions of LP

1. Proportionality

2. Additivity

3. Divisibility

4. Certainty

Linear Programming

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Suppose GM makes a profit of $200 on each Chevy, $300 on

each Buick, $500 on each Cadillac.

- These get 20, 18, 16 miles per gallon, respectively. And

Congress insists that the average mileage of these must get 18

at least.

- The plant can assemble a Chevy in 1 minute, a Buick in 2

minutes, a Cadillac in 3 minutes.

What is the optimal solution to maximize profit in 8 hours?

A very simple example (Production Planning)

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- 1st step is always to define decision variables:

Let xi denote the number of Chevy, Buick, Cadillac,

i=1,2,3, respectively.

- 2nd step is to find a formulation of objective function:

Maximize 200 x1 + 300 x2 + 500 x3

- 3rd step to to find a set of constraints:

a) Mileage:

b) Time limit:

c) Nonnegativity:

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Then, we can write the complete LP model as:

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Chandler Oil has 5000 barrels of type 1 crude oil and 10000 barrels of type 2 crude oil available. Chandler sells both gasoline and heating oil, which are produced by blending together the two types of crude oil (in addition to other processes not mentioned here).

Each barrel of type 1 crude oil has “quality level” of 10; each barrel of type 2 crude oil has a quality level 5. Gasoline must have a quality level of at least 8, and heating oil must have a quality level of at least 6.

Gasoline and heating oil sell for $25 and $20 per barrel, respectively.

Selling each barrel of gasoline incurs an advertising cost of $0.20, and selling each barrel of heating oil incurs an advertising cost of $0.10.

Assume that Chandler can sell as much of both products as it is able to produce. Within its existing supplies of crude oil, how much of each product should Chandler sell to maximize its profit?

A bit tricky but still simple example

(Another Production Planning Problem)

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- 1st step is always to define decision variables:

- 2nd step is to find a formulation of objective function:

- 3rd step to to find a set of constraints:

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Then, we can write the complete LP model as:

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The Brazilian coffee company processes coffee beans into coffee at m plants. The

coffee is then shipped every week to n warehouses in major cities for retail,

distribution, and exporting.

Suppose that the unit shipping cost from plant i to warehouse j is cij. Furthermore,

suppose that the production capacity at plant i is ai and that the demand at

warehouse j is bj.

It is desired to find the production-shipping pattern xij from plant i to ware house j,

i=1, …, m, j=1, …, n, which minimizes the overall shipping cost.

This is the well-known transportation problem, and this can be formulated as a

linear program.

The Transportation Problem (general case)

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This problem can be written up as:

The Transportation Problem (general case)

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Two Interconnected Transportation Problem

• Consolidated Mining Company mines zinc ore at two locations: Blue Mesa

(New Mexico) and Dry Pass (Washington State). Once mined, each ton of ore

must be moved to one of two processing plants, one near Boise (Idaho), and the

other in West Texas. The processed ore is then shipped to three customers,

Galvanic Industries, MunchCo, and American Metals. These customers require

600, 400, and 700 tons per day of processed ore, respectively.

• Blue Mesa can produce up to 800 tons of ore per day at a cost of $12/ton. Dry

pass can produce up to 1000 tons of ore per day at a cost of $10/ton.

• The Boise plant can process up to 1000 tons of ore per day at a cost of $17/ton.

The West Texas plant can handle up to 700 tons per day at $15/ton.

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Two Interconnected Transportation Problem

• Shipping costs per ton between the mines, plants, and customers are given in the

following two tables:

What pattern of production, processing, and shipping will allow the firm to meet

customer demands at the lowest possible cost?

Shipping cost to

From Mine Boise West TX

Blue Mesa $4.50 $3.00

Dry Pass $3.50 $6.00

Shipping cost from

To Customer Boise West TX

Galvanic $2.25 $5.75

MunchCo $3.35 $2.95

American Metals $6.00 $7.10

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Two Interconnected Transportation Problem

• For this type of problem, drawing may be helpful to get some idea to formulate

a suitable LP problem:

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Two Interconnected Transportation Problem

• Decision variables:

• Objective function:

• Constraints:

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Two Interconnected Transportation Problem

• Then, we can write the complete LP model as:

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Capital Budgeting Problem

A municipal construction project has funding requirements over the next four years of

$2 million, $8 million, and $5 million, respectively. Assume that all of the money for a

given year is required at the beginning of the year. The city intends to sell exactly

enough long-term bonds to cover the project funding requirements, and all of these

bonds, regardless of when they are sold, will be paid off (mature) on the same date in a

distant future year.

The long term bond market interest rates (that is, the costs of selling bonds) for the next

four years are projected to be 7 percent, 6 percent, 6.5 percent, and 7.5 percent,

respectively. Bond interest paid will commence one year after the project is complete

and will continue over 20 years, after which the bonds will be paid off. During the same

period, the short term interest rates on time deposits (that is, what the city can earn on

deposits) are projected to be 6 percent, 5.5 percent, and 4.5 percent, respectively (the

city will clearly not invest money in short term deposits during the fourth year).

What is the city’s optimal strategy for selling bonds and depositing funds in time

accounts in order to complete the construction project?

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Capital Budgeting Problem

• Decision variables:

• Objective function:

• Constraints:

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Capital Budgeting Problem

• Then, we can write the complete LP model as:

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