2 of 223

Learning objectives

Learning objectives for this Chapter:

What is transformation process and value creation?
What is operations and operations management?
What is supply chain and supply chain management?
Which decisions are in the scope of supply chain and operations management?
What are efficiency and resilience SCOM paradigms?
Which objectives are used to measure performance of supply chain and operations management?
Which qualifications should obtain a future supply chain and operations manager?
Which career paths are possible for supply chain and operations managers?

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

3 of 223

Introductory case-study

SCOM is everywhere! – production, logistics, healthcare, airlines, entertainment parks, passenger transport, hotels, building and construction,….

The best supply chain and operations manager in the world

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

4 of 223

Operations and transformation process

Labour
Machines
Materials
Information

Products
Services
Emissions

Transformation

process

Control

Value adding

Input

Output

Feedback

Operations is a function or system that transforms inputs (e.g., materials and labour) into outputs of greater value (e.g., products or services); in other words, the operations function is responsible to match demand and supply

Transformation process

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

5 of 223

Operations and enterprise structure

Organization

Operations

Finance

Marketing

The operations function along with marketing and finance is a part of any organization.

Operations management is involved with managing the resources to produce and deliver products and services efficiently and effectively. It deals with the design and management of products, processes, and services, and comprises the stages of sourcing, production, distribution and after sales.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

6 of 223

Operations performance measurement

COSTS

QUALITY

TIME

Objective triangle

How to achieve maximum of the desirable goal with limited resources?

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

7 of 223

Extended SCOM performance

How to achieve maximum of the desirable goals in a sustainable and resilience way?

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

8 of 223

Supply Chain

Supply chain is a network of organizations and processes wherein a number of various enterprises (suppliers, manufacturers, distributors and retailers) collaborate (cooperate and coordinate) along the entire value chain to acquire raw materials, to convert these raw materials into specified final products, and to deliver these final products to customers.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

9 of 223

Supply Chain Design

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

10 of 223

Supply Chain Management (SCM)

The first use of the term “SCM” is commonly related to the article “SCM: Logistics Catches up with Strategy” by Oliver and Weber (1982). They set out to examine material flows from raw material suppliers through supply chain to end consumers within an integrated framework that has been named SCM.

Supply Chain Management is a cross-department and cross-enterprise integration and coordination of material, information and financial flows to transform and use the supply chain resources in the most rational way along the entire value chain, from raw material suppliers to customers.

SCM is a collaborative philosophy and a set of methods and tools to integrate and coordinate local logistics processes and their links with the production processes from the perspective of the entire value chain and its total performance

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

11 of 223

Supply Chain as an Integration Function

SCM integrated production and logistics processes

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

12 of 223

Changes in competitive strategies

Customer orientation

Market globalization

Information society

Individual products

Reaction speed

Flexibility

Emerging markets

Outsourcing

Transportation increase

Internet

IT systems

New business concepts

Intra-organizational integration and inter-organizational coordination along the entire value-adding chain have a profound influence on profitability and competitiveness, rather than the local optimization of intra-organizational functions

Supply Chain Management

Why SCM?

“Supply chaining is one of the main drivers that would make the world more competitive on a global scale in 21st century” (T. Friedman)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

13 of 223

SCOM: Supply Chain and Operations Management

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

14 of 223

SCOM as a bridge to match demand and supply

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

15 of 223

Basic decisions in SCOM

Case study „Chocolate Supply Chain“

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

16 of 223

Basic decisions in SCOM

Supplier Selection
Sourcing Strategy

Sourcing

Production

Distribution

Strategy

Planning

Execution

Production Strategy

- Facility Location

STRATEGIC COLLABORATION

Collaboration Strategy; Risk Pooling; Supply Chain Organization; Contracting

Communication

(e.g., SupplyOn)

MRP /EOQ
ABC analysis

Aggregate Planning
MPS / Lot-Sizing

Distribution planning
Transport. planning

ERP
MES / WMS

- Ordering

Inventory Control

Scheduling
Sequencing

Vehicle routing
Tour planning

RFID
Barcodes/Odetta

Distribution Strategy

- Transportation Design

EXECUTION COORDINATION

Vendor-Managed Inventory / Supply Chain Event Management

PROCESS INTEGRATION

Demand Forecasting / Inventory Management / APS / JIT-JIS

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

17 of 223

SCOM responsibilities

The responsibilities of decision-makers in SCOM are really multi-faceted. The decision-making area in SCOM ranges from strategic to tactical and operative levels.

Strategic issues include, for example, determination of the size and location of manufacturing plants or distribution centres, decisions on the structure of service networks, factory planning, and designing the SC.

Tactical issues include such decisions as production or transportation planning as well as inventory planning.

Operative issues involves with production scheduling and control, inventory control, quality control and inspection, vehicle routing, traffic and materials handling, and equipment maintenance policies.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

18 of 223

SCOM House and Book Philosophy

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

19 of 223

Trends and Challenges

Risk Management and Resilience
Business Analytics
Information Technology (Big Data, Cloud computing, Industry 4.0, data mining, etc.)
Networking
Sustainability
Flexibility / Standardization
Simplification
Acceleration of Product Life-Cycles
Additive Manufacturing (3D Printing)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

20 of 223

Major paradigms in SCOM

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

21 of 223

Major paradigms in SCOM

Three major SCOM paradigms can be classified as follows:

Design-for-Efficiency: efficient and responsive SCs and operations are coined by lean and agile principles. The key idea of such leagile operations and SC designs is to utilize the available resources (i.e., material, time, capital, technology, and workforce) at the highest possible degree of efficiency to avoid waste and maximize profitability.

Design-for-Resilience: resilient SC and operations are designed to absorb unexpected, severe disruptions (e.g., natural disasters, fires at facilities, strikes, or pandemic outbreaks) and restore operations thereafter. Resilience helps mitigate the impact of disruptions using some redundancy (e.g., inventory, capacity buffers or back-up suppliers) and to recover to an original or even better performance later.

Design-for-Sustainability: sustainable supply chains and operations are designed to reduce the negative impacts of manufacturing and logistics on nature and society (e.g., CO2 emissions or unfair labor conditions). Sustainable supply chains and operations are built around the triple bottom line of “ecology – society – economics”.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

22 of 223

�Chapter 3��Processes, Systems, and Models

Free companion web site:

http://global-supply-chain-management.de

23 of 223

Learning objectives

Learning objectives for this Chapter:

Interrelations between business processes, quantitative models, and information systems
Role of business process management in operations and supply chains
Role of managements information systems in SCOM
Management information technology, e.g., ERP, APS, WMS, RFID
Planning, problem, and decision
Role of models and modelling in decision-making
Quantitative methods of decision-making

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

24 of 223

Introductory case-study

AirSupply

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

25 of 223

Process management

Process is a content and logic sequence of functions or steps that are needed to create an object in a specified state.

Business process is a network of activities for accomplishing a business function. Processes have input and output parameters and may be tied to functional area or be cross-functional.

Today companies are organized on the process basis. As said by W. Edwards Deming (Professor at Columbia University; 1900-1993), “if you can‘t describe what are you doing as a process, you don‘t know what are you doing.“

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

26 of 223

Business process management

The basic concept for managing processes in an organization is called business process management (BPM). BPM contains a variety of tools, methodologies to analyze, design, and optimize processes. BPM comprises the following steps (Hammer and Champy, 1993):

Identify processes for change
Analyse existing processes
Design the new process
Implement the new process
Continuous measurement

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

27 of 223

Process performance analysis

Process performance

Costs

Quality

Flexibility

Time

Capacity

Sustainability

Risk

Production Costs

Service Level

Wastage

Utilization

Product Variety

CO₂Emission

Resilience

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

28 of 223

Key performance indicators (KPI)

Service Level

Capacity Utilization

Flow Time

Lead Time

Total customer orders

Total customer orders – Dropped cutomer orders

Customer order arrival

Production start

Production finish

Customer order delivered

Maximum capacity

Actually used capacity

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

29 of 223

Business process modeling

Process models describe the SCOM activities from an information processing perspective. Process modelling can be referred to as descriptive modelling and serves as an interface to information systems development. Process models can also be used to describe the workflow of decision–making processes.

SCOR (Supply Chain Operations Reference),
ARIS (Architecture of Information Systems),
UML (Unified Modelling Language) and
IDEF (Integration Definition for Function Modelling)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

30 of 223

SCOR

source: www.supply-chain.org

The main value of SCOR is the standardized business process models. Besides, a coherent system of performance indicators is correlated with the process models. Finally, the data origins to calculate the performance indicators are explicitly provided.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

31 of 223

Role of Information Technology

SCOM managers say:

Where information is missing, material is also missing.

A universal property of the management processes, irrespective of the problem domain, is that it has a notably informational nature, i.e. is connected, first of all, with the

collection,
processing,
analysis and
usage of data, information, and knowledge.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

32 of 223

Role of Information Technology

Management Information Systems (MIS) collect, process, store, and distribute information in order to support decision making, coordination, and control.

MIS use data, i.e. are streams of raw facts. Information is data shaped into meaningful form.

For companies, MIS is instrument for creating value. Investments in right information technology (IT) can result in superior returns regarding productivity increases, revenue increases, and long-term strategic positioning.

MIS automate steps that were done manually previously.
MIS enable entirely new processes by changing flow of information, replace sequential steps with parallel steps, and support new business models.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

33 of 223

IT for SCOM

Planning at the enterprise level

ERP (Enterprise Resource Planning)
MES (Manufacturing Execution Systems)
WMS (Warehouse Management Systems)

Planning and control for supply chain coordination

APS (Advanced Planning Systems)
TMS (Transportation Management Systems)
SCEM (Supply Chain Event Management)

Real-time control

RFID (Radio Frequency Identification)
T&T (Trace and Tracking)
ASN (Automated Shipping Notification)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

34 of 223

IT for SCOM

Business intelligence and Industry 4.0

Big Data Analytics

Industry 4.0

Machine learning

Cloud computing

Supply chain communication and data interchange

EDI (Electronic Data Interchange)

E-Commerce

XML (Extensible Markup Language)

Mobile technologies, Android

Electronic payment systems with security services

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

35 of 223

IT for SCOM

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

36 of 223

Implementation of Information Technology

1. Issues of investments in IT infrastructure:

amount to spend on IT
IT can be bought, but also rented or used via cloud computing
IT can also be available via outsourcing.

2. Whatever option is selected, total cost of ownership (TCO) model for costs analysis should be used. It analyzes direct and indirect costs. Note that hardware and software costs account for only about 20% of TCO. Other costs include installation, training, support, maintenance, infrastructure, downtime, space, and energy.

3. IT project management. Activities in an IT project include planning work, assessing risk, estimating resources required, organizing the work, assigning tasks, controlling project execution, reporting progress, and analyzing results.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

37 of 223

ERP

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

38 of 223

Enterprise resource planning (ERP) systems
Suite of integrated software modules and a common central database
Collects data from many divisions of firm for use in nearly all of firm’s internal business activities
Information entered in one process is immediately available for other processes

ERP

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

39 of 223

ERP

Source: Heizer/Render: Operations Management, 2013.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

40 of 223

ERP

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

41 of 223

APS systems

Further reading: Stadler H., Kilger C. Supply Chain Management and Advanced Planning.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

42 of 223

APS

Source: Stadler H., Kilger C. (2008) Supply Chain Management and Advanced Planning, Springer

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

43 of 223

APS and Erp: how it works

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

44 of 223

APS

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

45 of 223

Planning

Order release

Vehicle dispatch

Shop floor control

Monitoring

Adaptation

Execution

(real-time decisions)

Supply Chain Event Management

APS Systems and Real-Time Control

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

46 of 223

RFID

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

47 of 223

RFID in practice

International Supply Chains
Trade: movements of goods
Warehousing
Traceability (food!)

+	-
Up-to-date data	Costs
Contact-free	Technical issues
„Bulk“-reading	Privacy issues
Protection / Security

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

48 of 223

Future IT for SCOM

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

49 of 223

Future IT for SCOM: Industry 4.0

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

50 of 223

IT: Communication

Example: SupplyOn

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

51 of 223

Basic quantitative optimization methods in SCOM

Simulation (e.g.,

system dynamics

Sourcing

Production

Distribution

SCM

Strategy

Planning

Execution

Linear Programming
Queuing theory

MILP
Game theory
System dynamics

Statisitical methods
Probability theory
Simulation

Linear Programming
Goal Programming

Linear Program.

Statisitics
Probability th.
System dynamics

Simulation (e.g.,

system dynamics

Integer programming
Genetic algorithms/ACO
Control theory

Integer programm.
Genetic algorithms
ACO

System dynamics
Control theory

Linear Programming

- Geometrical methods

Project management

Graph theory

Fuzzy / Robust / Stochastic optimization

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

52 of 223

Decision-making principles

Each management decision has two components. The first one is an analytical component and the second one is the behavioral component. The analytical part of the decisions is supported by the quantitative analysis business analytics methods. The behavioral part of the decisions is based on the intuition and leadership qualities of the decision-maker as well as on the external environment behavior prediction and reaction in regard to the decisions of suppliers, retailers, and customers.

Decision

Analytical component

Behavioral component

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

53 of 223

Model-based decision making principle

How to achieve a desirable goal with limited resources?

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

54 of 223

What is a problem?

For a problem to exist there must be an individual (or a group of individuals), referred to as the problem owner (decision maker):

is dissatisfied with the current state of affairs within a real-life context, or has some unsatisfied present or future needs, i.e. has some goals to be achieved or targets to be met;
is capable of judging when these goals, objectives, or targets have been met to a satisfactory degree; and
has control over some aspects of the problem situation that affect the extent to which goals, objectives, or targets can be achieved.

The elements of a problem: (1) the decision maker, (2) the decision maker's objectives and (3) the associated decision criterion, (4) the performance measure, (5) the control inputs or alternative courses of action, and (6) the context in which the problem occurs.

A problem is not an objective unit a priori – it has objective components and subjective treatment 🡪 objective problem and its model to make decision.

Note! – problems exist in systems: different interests, different criteria, etc.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

55 of 223

What is a decision?

Decisions are subject to constraints which limit decision choices and objectives making some decisions preferred to others.

Objective and criterion:

Objective – the end towards which effort is directed, a goal or end of action.

Criterion – principle on which a judgement is based 🡪 how well the objective has been achieved

Decision is a selection of an activity (or a set of activities) to handle from several alternatives.

The first step in the analysis of organizational systems and decision-making is to define the interests and how they are interrelated!

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

56 of 223

Decision-making

A selection of a managerial decision leads the system goal-oriented to the output performance. The decisions shape the system behaviour with regard to a certain goal (or multiple goals).

Basic problems in decision-making

optimality,
multiple objectives (most preferred solutions),
risk and uncertainty, and
system and model complexity.

The leading role in decision-making assurance in SCM belongs to the decision-support information systems and to their core, special software and mathematical tools for decision support.

Supply chains and operations are organizational systems 🡪 decisions are taken by managers (not by automatics) 🡪 Subjectivism, individual risk perceptions, delays in decisions

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

57 of 223

COSTS

QUALITY

TIME

Robustness

Stability

Security

Resilience

Flexibility

Sustainability

Agility

Adaptability

Multiple objectives

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

58 of 223

Risk and uncertainty

Uncertainty

Risk

Disturbance

Deviation

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

59 of 223

Risk and uncertainty

Uncertainty

Risk

Disturbance

Deviation

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

60 of 223

Risk and types of uncertainty

random uncertainty (demand fluctuations)
hazard uncertainty (unusual events with high impact)
deep uncertainty (severe disruptions)

(Knight 1921) classified under ‘risk’ the ‘measurable’ uncertainty.
From the financial perspective of Markowitz (1952), risk is the variance of return.
From the project management perspective, risk is a measure of the probability and consequence of not achieving a defined project goal.
According to March and Shapira (1987), risk is a product of the probability of occurrence of a negative event and the resulting amount of damage.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

61 of 223

Uncertainty and complexity

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

62 of 223

Deviations may occur subject to events which have not been considered in the plan

Plan robustness is not sufficient

Improbable event

Uncertainty and complexity

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

63 of 223

Risk management and SCOM

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

64 of 223

Trade-offs

COSTS

Flexibility

Resilience

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

65 of 223

Trade-off example

Capacity Utilization vs Lead Tiime

Utilization

Lead Time

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

66 of 223

Supply chain flexibility

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

67 of 223

Supply chain resilience

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

68 of 223

Models and Real World

Source: Grigoryev I. (2015). AnyLogic In Three Days

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

69 of 223

Models

A model is:

an image of reality:
a system whose investigation is a tool for obtaining information about another system;
a method of knowledge existence; and
a multiple system map of the original object that, together with absolutely true content, contains conditionally true and false content, which reveals itself in the process of its creation and practical use.

Model (М)

Environment

Объект

Object

Subject

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

70 of 223

Modelling

Modelling is one of the stages of cognitive activity of a subject, involving the development (choice) of a model, conducting investigations with its help, obtaining and analysing the results, the production of recommendations on the further activity of the subject and the estimation of the quality of the model itself as applied to the solved problem and taking into account specific conditions.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

71 of 223

Source: Render et al. (2012). Quantitative Analysis for Management, Pearson.

Conflicting viewpoints and impacts of other departments;

„Good“ solution to the right problem is better than optimal solution to the wrong problems

Complexity-understand; textbook-reality

„Garbage in – garbage out“

Understanding mathematics; not just one answer but a range of options

Validity of results, assumptions review

Identification of necessary changes; impact of changes; sensitivity analysis

Management fear - the use of formal analysis processes will reduce their decision-making power.

Action-oriented managers may want “quick and dirty” techniques.

Analysts should be involved with the problem and care about the solution.

Practical implementation

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

72 of 223

Modelling framework

Source: ORMS Today, December 2015, p.23.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

73 of 223

Models

Heuristics

Optimization

Optimal solutions
Time-consuming calculations

Special problems
Short calculation time
Quality of soultion is unknown

⇨ Application in practice!

Simulation

Expert knowledge and Visualisation

Modelling options

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

74 of 223

Optimization

Simulation

Heuristics

Linear Programm

Stochastic Prog.

Robust Optimiz.

Goal Programm.

Optimal Control

System Dynamics

Agent Systems

Genetic algorithm

ACO algorithm

SNO heuristic

Adaptive control

Solving equations

What

happens, if..?

Algorithm

Methods

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

75 of 223

Problem, model, and decision

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

76 of 223

Simulation as a method for SCOM decision support

Source: Popkov T. (2015). Presentation on AnyLogistix, INFORMS, Nov. 4. 205, Philadelphia, PA.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

77 of 223

Modelling method selection

Source: anyLogistix

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

78 of 223

Modelling method selection: example supply chain design

Source: anyLogistix

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

79 of 223

Modelling method selection: example omnichannel supply chain

Source: anyLogistix

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

80 of 223

Optimization

Optimization is the finding the best decision through representing problem choice as decision variables and seeking values that extremized objective functions of the decision variables subject to constraints on variable values expressing the limits on possible decision choice.

This is a technical treatment 🡪 Supply chains are organizational systems 🡪 decisions are taken by managers (not by automatics) 🡪 Subjectivism, individual risk perceptions, delays in decisions, decentralization.

The drawback of using optimization is difficulty in developing a model that is sufficient detailed and accurate in representing problem complexity and uncertainty, while keeping the model simple enough to be solved. Furthermore, most of the optimization models are deterministic and static.

Unless mitigating circumstances exist, optimization is the preferred approach. However, in reality, mostly the problems of strategic nature may be correctly addressed by optimization.

Examples: 🡪 Oracle SNO; SAP APO; ILOG, Excel Solver

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

81 of 223

Linear programming

A mathematical technique to help plan and make decisions relative to the trade-offs necessary to allocate resources
Will find the minimum or maximum value of the objective
Guarantees the optimal solution to the model formulated

LP problems seek to maximize or minimize some quantity (usually profit or cost) expressed as an objective function
The presence of restrictions, or constraints, limits the degree to which we can pursue our objective
There must be alternative courses of action to choose from
The objective and constraints in linear programming problems must be expressed in terms of linear equations or inequalities

Solution algorithm: Simplex-Method
Implemented in industrial solvers

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

82 of 223

Spreadsheet Modelling

Book recommendation: Baker K.R. (2015). Optimization Modeling with Spreadsheets,. Wiley, 3rd Edition

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

83 of 223

Spreadsheet Modelling

Book recommendation: Baker K.R. (2015). Optimization Modeling with Spreadsheets,. Wiley, 3rd Edition

The technology behind spreadsheet-based modeling is simple: you enter the data inputs in some cells and you view the data outputs in others. Formulas – and in more complex models, scripts – link the input and output values. Various add-ons allow you to perform parameter variation, Monte Carlo, or optimization experiments.

However, there's also a large class of problems where the analytic (formula-based) solution is either hard to find or simply doesn’t exist. This class includes dynamic systems features

Consider a problem that requires you to optimize a rail or truck fleet. It’s difficult to use an Excel spreadsheet to manage factors such as travel schedules, loading and unloading times, delivery time restrictions, and terminal point capacities. A vehicle’s availability at a given location, date, and time depends on a sequence of preceding events, and determining where to send the vehicle when it’s idle requires us to analyze future event sequences.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

84 of 223

Heuristics

Heuristics are intelligent rules that often lead to good, but not necessarily the best, solutions. Heuristic approaches typically are easier to implement and require fewer data. However, the quality of the solution is usually unknown. Unless there is a reason not to use the optimization, heuristics is an inferior approach.

Trends: nature-based heuristics such as genetic algorithms and ACO (Ant Colony Optimization).

Example: in supply chains, the concurrent open shop problems are encountered most frequently. It is well known that most scheduling problems of this class are hard to solve with optimization due to high dimensionality. That is why heuristics (e.g. genetic algorithms) are usually applied instead of optimization. They do not guarantee the optimal solution but allow a permissible result to be found within an acceptable period of time. The quality of this solution with regard to the potential optimum, however, remains unknown. Second, the multiple objective problems are still a “bottleneck” of the heuristics.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

85 of 223

Simulation

Formulas that are good at expressing static dependencies between variables typically don't do well in describing systems with dynamic behavior. It’s why we use another modeling technology - simulation modeling - to analyze dynamic systems.

Simulation is imitating the behaviour of one system with another. By making changes to the simulated SC, one expects to gain understanding of the dynamics of the physical SC.

Rather than deriving a mathematical analytical solution to the problem, experimentation with the model is done by changing the parameters of the system in the computer, and study the differences in the outcome of the experiments.

Simulation is an ideal tool for further analysing the performance of a proposed design derived from an optimization model.

One promising area is the study of combining simulation methods with optimization methods in an iterative way 🡪 Optimization-based simulation.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

86 of 223

Simulation

Approaches:

discrete-event simulation
system dynamics
agent-based simulation

Each method serves a specific range of abstraction levels.

System dynamics assumes very high abstraction, and it’s typically used for strategic modeling.

Agent based models can vary from very detailed models where agents represent physical objects to the highly abstract models where agents represent competing companies or governments.

Discrete event modeling supports medium and medium-low abstraction.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

87 of 223

Simulation: example AnyLogic

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

88 of 223

Optimization vs Simulation ?

Advantages	Possible limitations
Optimal solution	Dimensionality and complexity of real problems
Methodical basics	Dynamics and uncertainty of system and model evolution
Easy accessibility	Poor flexibility
	Linearity and discreteness

Optimization

Simulation

Advantages:

1. to analyze systems and find solutions where methods such as analytic calculations and linear programming fail.

2. you can measure values and track entities within the level of abstraction, and you can add measurements and statistical analysis at any time.

3. The ability to play and animate the system behavior in time is one of simulation’s great advantages.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

89 of 223

Simulation + Optimization: Example Supply Chain Risk

Simulation

Randomness in disruption

and recovery policies

Real-time analysis
Real problem complexity
Inventory control policies
Dynamic recovery policies
Gradual capacity degradation and recovery
Impact of changes in operational policies on the ripple effect and operational parameter dynamics in time
Multiple performance impact dimensions including financial, service level, and operational performance in time

Optimization

Supply chain structure with back-ups
Discrete number of periods
Demand (distribution) in periods
Production capacities in periods
Beginning and ending inventory in periods
Production quantities in periods
Sourcing quantities in periods
Shipment quantities in periods
Backorder quantities in periods
Operational costs
Disruption duration, in periods
Recovery duration, in periods
Individual impact on service level, costs, and lost sales at the end of planning horizon

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

90 of 223

Example: Modelling with anyLogistix

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

91 of 223

�Chapter 4��Operations and Supply Chain Strategy�

Free companion web site:

http://global-supply-chain-management.de

92 of 223

Learning objectives

Learning objectives for this Chapter:

Operations strategies and “strategic fit”
Efficient and effective supply chain strategies
Bullwhip-effect
Vendor-managed Inventory (VMI)
Collaborative Planning, Forecasting, and Replenishment (CPFR)
Ripple-effect
Supply chain resilience and sustainability

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

93 of 223

Introductory case-study

“Quick and affordable”:

Zara, UNIQLO & Primark

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

94 of 223

Supply Chain Strategies

Strategy	Application	Competion basis	Supply Chain Contribution
Innovation	Unique technology	Innovative products	Fast new product development
Costs	Cost-efficient organisation	The lowest prices	Efficient supply chain
Service / Response	Flexibility, customer service	Customer satisfaction	Customer is central point of the supply chain
Quality	High-quality products	Highest quality standards	Quality control stages in the supply chain

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

95 of 223

Performance improvement

Service Level

Costs

Inventory Optimization

Uncertainty of Demand and Supply

Supply Cycle Time

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

96 of 223

„Strategic fit“: The Logistics/Marketing Interface

Strategic fit presumes alignment of objectives in different departments with the overall SC objectives. For example, typical decisions in marketing relate to product mix and pricing. This should be brought into correspondence with logistics decisions such as transportation, packaging, and transshipment.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

97 of 223

Value and cost adding

Reducing non-value-adding time improves service level and reduces cost

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

98 of 223

„Strategic fit“ and SCOM Strategy

	Efficient Supply Chains	Responsive Supply Chains
Primary Goal	Supply demand at the lowest cost	Respond quickly to demand
Product design strategy	Maximize performance at minimum product cost	Create modularity to allow postponement of product differentiation
Pricing Strategy	Lower margins because price is a prime customer driver	Higher margins because price is not a prime customer driver
Manufacturing Strategy	Lower costs through high utilization	Maintain capacity flexibility to buffer against demand/supply uncertainty
Inventory Strategy	Minimize inventory to lower cost	Maintain buffer inventory to deal with demand/supply uncertainty
Lead time strategy	Reduce, but not at the expense of costs	Reduce aggressively, even if the costs are significant
Supplier Strategy	Select based on cost and quality	Select based on speed, flexibility, reliability and quality

Reference: Fisher ML (1997) What is the right supply chain for your product? Harv Bus Rev march–april: 83–93

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

99 of 223

Risks in SCOM

Disruption risks : Ripple Effect

Operational risks : Bullwhip Effect

Disruption Frequency

Low

High

Low

High

Performance Impact

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

100 of 223

Bullwhip effect

100

The magnification of variability in orders in the supply chain: little variability in retail orders….can lead to greater variability for a fewer number of wholesalers, and……can lead to even greater variability for a single manufacturer.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

101 of 223

101

Bullwhip effect

Behavioural causes

misuse of base-stock policies
misperceptions of feedback and time delays
panic ordering reactions after unmet demand
perceived risk of other players' bounded rationality.

Operational causes

dependent demand processing (demand is non-transparent and causes distortions in information)
lead time variability
lot-sizing/order synchronization
quantity discount
trade promotion and forward buying
anticipation of shortages.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

102 of 223

102

Bullwhip effect

The tendency for larger order size fluctuations as orders are relayed through the supply chain

Creates unstable production schedules, expensive capacity change costs, longer lead times, obsolescence
Damage can be minimized with supplier coordination and planning

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

103 of 223

103

Bullwhip effect analysis

If BWE measure is:

> 1 – Variance amplification is present

= 1 – No amplification is present

< 1 – Smoothing or dampening is occurring

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

104 of 223

104

Bullwhip effect: Task 1

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

105 of 223

105

Bullwhip effect: Task 2

Imagine we have four different retailers for new iPhone 7 cases. They are all ordering the cases from a production company in Atlanta. We assume that weekly demand is nearly constant. Consider the following data for order quantity, frequency and customer demand

Retailer	Order quantity	Order frequency	Customer demand/week
W	570	every 2 weeks	285
X	120	every week	120
Y	525	every 3 weeks	175
Z	600	every 3 weeks	200
∑			780

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

106 of 223

106

Bullwhip effect: Task 2

Week	1	2	3	4	5	6	7	8	9	10	11	12
Retailer W	-	570	-	570	-	570	-	570	-	570	-	570
Retailer X	120	120	120	120	120	120	120	120	120	120	120	120
Retailer Y	-	525	-	-	525	-	-	525	-	-	525	-
Retailer Z	-	-	600	-	-	600	-	-	600	-	-	600
Demand Atlanta	120	1215	720	690	645	1290	120	1215	720	690	645	1290
Demand customer/week	780	780	780	780	780	780	780	780	780	780	780	780

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

107 of 223

107

Bullwhip effect: Task 2

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

108 of 223

108

Bullwhip effect

Reason for bullwhip effect	Countermeasures
Demand non-transparency	Information coordination
Neglecting to order in an attempt to reduce inventory	Automated ordering and monitoring of inventory in order to avoid overstock or shortage
Order batching	Coordinated and accurate lot size definition
Promotions	Use of everyday low prices (EDLP) instead of promotions
Shortage gaming	Validation of customer demand through historical data of customer ordering
Product returns	Policies to control returns or canceled orders.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

109 of 223

Vendor-Managed Inventory (VMI)

Vendor control inventory at the buyer side
Buyer provides information on inventory and sales

109

no VMI

with VMI

Responsibility

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

110 of 223

Vendor-Managed Inventory (VMI)

110

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

111 of 223

Vendor-Managed Inventory (VMI)

VMI (Vendor-Managed Inventory)

the buyer provides certain information to a supplier of that product ,
the supplier takes full responsibility for maintaining an agreed inventory level of the material, usually at the buyer's consumption location (usually a store).
a third party logistics provider (3PL) can also be involved to control that the buyer has the required level of inventory by adjusting the demand and supply gaps.

111

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

112 of 223

112

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

113 of 223

VMI Example

113

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

114 of 223

VMI Example

114

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

115 of 223

VMI Technology: SupplyOn

115

agree on min. and max. stock limits
demand and inventory is transmitted from ERP to SupplyOn
demand and inventory is shown in the Inventory Monitor, thus the supplier can plan deliveries based on the agreed limits
ASN is entered by the supplier and transmitted to the ERP system
Inventor Monitor shows in-transit quantities
goods are booked into the system upon delivery and are visible in the Monitor
invoice or credit note is generated as soon as the goods have been booked

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

116 of 223

Vendor-Managed Inventory (VMI): Advantages

116

For vendor:

Early recognition of fluctuation in demand
Optimization of production planning; increased volume
Forces disciplines: measurements and communication
Better planning and resource use via visibility
Improved market analysis and elimination of “waste“ activities
Closer customer ties and preferred status

For buyer:

Increase of inventory availability
Reduction of procurement activities
Fewer stock-out with higher inventory turnover
Lower operating, purchasing and administrative costs
SC relationship strategic strength
Greater customer satisfaction and increased sales

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

117 of 223

Vendor-Managed Inventory (VMI): Advantages

117

For overall SC:

Optimization of inventory management and cost reduction
Decrease of fixed capital (stocks)
Improvement of financial planning
Supports long-term collaboration

For end-user:

Increased service level and reduced stock outs

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

118 of 223

Vendor-Managed Inventory (VMI): Limitations

118

Limitations of VMI

Trust in the supply chain should be high
High costs of implementation and investments in IT
Customer loss risk
Non-foreseeable risks: employee strikes
VMI mostly benefits end user and seller while vendor does most of the work
Additional processing activities for vendor (costs)
Supplier dependent buyer

Application

Items with high a consumption amount
Items with a high consumption value (A- and B-items)
Traditional procurement activities should be changed

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

119 of 223

SCOM: Collaboration Strategy

119

Front-end agreement

Joint-business plan

Sales-forecast collaboration

Order-forecast collaboration

Order generation

Planning

Forecasting

Replenishment

CPFR (Collaborative Planning, Forecasting, and Replenishment)

VMI (Vendor-managed Inventory)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

120 of 223

Risks in SCOM

120

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

121 of 223

Operational and disruption risks

121

Feature	Ripple-Effect	Bullwhip-Effect
Risks	Disruptions (e.g., a plant explosion)	Operational (e.g., demand fluctuation)
Affected areas	Structures and critical parameters (such as supplier unavailability or lost sales)	Operational parameters such as lead-time and inventory
Recovery	Middle- and long-term; coordination efforts and investments	Short-term coordination to balance demand and supply
Affected Performance	Output performance such as annual revenues or profits	Current performance such as daily or weekly stock-out/overage costs

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

122 of 223

122

Disruptions in the Supply Chain

Tsunami and Earthquake in Japan in 2011
One of the most severe natural disasters with the highest economic damages

Impact on the Supply Chain Performance:

Toyota’s global sales reduced by 4% 🡪 market leadership lost in 2011
Honda’s global sales reduced by 9%

Explosion at BASF plant in Ludwigshafen in 2016

Impact on the Supply Chain Performance:

15% of raw materials for global supply chain are missing
Some production facilities are out of operation for many weeks

Image Sources:

http://www.zeit.de/gesellschaft/zeitgeschehen/2016-10/ludwigshafen-basf-chemiekonzern-explosion

http://www.motortrend.com/news/japan-earthquake-tsunami-hit-parts-supplies/

http://wheels.blogs.nytimes.com/2011/03/24/toyota-to-resume-production-of-prius-and-two-lexus-hybrids/

http://www.reuters.com/article/us-japan-quake-supplychain-idUSTRE72D1FQ20110314

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

123 of 223

123

Disruptions in the Supply Chain

Disruptions cause supply chain structural dynamics. They may affect the supply chain structure locally or spread out through the supply chain network

Disruption: An event which is not planned or anticipated and may affect the structure or dynamics of systems.

Economic and political shocks or changes, Terrorist attacks, Natural disasters, Epidemics, Labor strike, Legal disputes

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

124 of 223

Examples of disruptive risks

124

Factor	Example	Impacts
Terrorism Piracy	September 11 Somali, 2008	Five Ford plants have been closed for a long time Breaks in many supply chains
Natural disasters	Earthquake in Thailand, 1999 Flood in Saxony, 2002 Earthquake in Japan, 2007	Apple computers’ production in Asia has been paralysed Significant production decrease at VW, Dresden Production breakdown in Toyota’s supply chains amounted to 55.000 cars
	Hurricane Katrina, 2006	This storm halted 10%–15% of total US gasoline production, raising both domestic and overseas oil prices
	Earthquake and tsunami in Japan, 2011	Massive collapses in global automotive and electronics supply chains; Toyota lost its market leadership position

	Floods in Chennai, India in 2015	Production of academic literature has been stopped at many international publishing houses

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

125 of 223

Examples of disruptive risks

125

Man-made disasters	Explosion at BASF plant in Ludwigshafen in 2016	15% of raw materials were missing for the entire supply chain Production of some products at BASF has been stopped for many weeks
	Fire at distribution center of e-commerce retail company ASOS in 2005	Delivery stop for a month
	A fire in the Phillips Semiconductor plant in Albuquerque, New Mexico in 2000	Phillips’s major customer, Ericsson, lost $400 million in potential revenue
Political crises	“Gas” crisis 2009	Breaks in gas supply from Russia to Europe, billions of losses to GAZPROM and customers

Strikes	Strikes at Hyundai plants in 2016	Production of 130,000 cars has been affected
Legal contract disputes	Volkswagen and Prevent Group contract dispute in summer 2016	Six German factories face production halt on parts shortage; 27,700 workers are affected, with some sent home and others moved to short-time working

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

126 of 223

Performance and Resilience

126

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

127 of 223

Supply chain resilience

127

Resilience is the ability to maintain, execute and recover (adapt) the planned execution along with achievement of the planned (or adapted, but yet still acceptable) performance. Building the resilient supply chain is based on mitigating risks, preparedness to disruptions, stabilization and recovery,

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

128 of 223

Supply chain resilience vs. efficiency

128

Criteria	Efficient Supply Chains	Resilient supply chain
Primary Goal	Supply demand at the lowest cost	Ensure demand fulfillment in the presence of disruptions
Network organization	Centralized, global	Decentralization, diversification, localization, segmentation, fortification
Product design strategy	Standardization, maximize performance at minimum product cost	Postponement to ensure product flexibility, product substitution, capacity pooling
Pricing strategy	Lower margins because price is a prime customer driver	Higher prices caused by the costs of resilience
Manufacturing strategy	Lower costs through high utilization	Capacity reservations
Inventory strategy	Minimize inventory to lower cost	Risk mitigation inventory
Lead time strategy	Reduce, but not at the expense of costs	Lead time reservations
Sourcing strategy	Select suppliers based on cost and quality; single sourcing	Supplier risk exposure analysis; backup suppliers and dual sourcing

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

129 of 223

Resilience and robustness

129

Robustness is based on redundancy to guarantee some performance over a wide range of uncertainty. Resilience is based on redundancy and flexibility. In this setting, flexibility is a system ability to situational process and structural changes as an adjustment reaction to internal and external disturbances.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

130 of 223

Ripple Effect in the Supply Chain

130

Ripple effect: propagation of disruptions in the supply chain

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

131 of 223

Ripple Effect in the Supply Chain

131

Ivanov D., Dolgui, A., Sokolov, B. (2014) The Ripple-Effect in Supply Chains: Trade-off “efficiency-flexibility-resilience” in supply chain disruption management. International Journal of Production Research, 52:7, 2154-2172.

Ripple effect describes the impact of a disruption on SC performance, disruption propagation, and disruption-based scope of changes in the SC structures and parameters.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

132 of 223

External reasons for disruptive risks

132

External reasons

Financial and political crises

Demand

Natural and man-made disasters, strikes, piracy

Supply

Demand disruption

Supplier and logistics service provider bankruptcy

Currency exchange rates fluctuations

Production facility disruption

Transportation disruption

Supply disruptions

Information system disruptions

Demand

Supply chain structure

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

133 of 223

Internal reasons for disruptive risks

133

Internal reasons

Low safety stocks

No contingency plans

Single Sourcing

100% capacity utilization

Sourcing Strategy

Production Planning

Inventory Management

Control

Batching

Low-level safety technologies

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

134 of 223

How to protect the supply chain?

134

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

135 of 223

Supply chain capabilities

135

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

136 of 223

Improving performance through resilience

136

Adopted with changes from Pettit et al. (2010)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

137 of 223

Resilience framework

137

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

138 of 223

Three decision levels

138

Proactive planning

Reactive control

Structural Supply Chain Design Stage

Supply chain design in regard to efficiency and effectiveness

Resilient Supply Chain Structural Design

Robustness and flexibility analysis of the supply chain design

Resilient Supply Chain Control

Supply chain recovery in the case of disruptions

Creating supply chain flexibility by redundancy

back-up facilities and links
risk mitigation inventory
capacity flexibility

Supply chain recovery by using flexibility

system flexibility
structural flexibility
process flexibility

Supplier

Factory

Market

Supplier

Factory

Supplier

Factory

Market

Efficient supply chain design

efficient production
efficient logistics
efficient inventory

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

139 of 223

Role of proactive strategies

139

Factory

Warehouse

Retailer

Order of 100 units per day

Risk Mitigation Inventory 700 units

Daily shipments

Capacity 100 units per day

Service Level, %

Time, days

Factory is disrupted for 7 days

100

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

140 of 223

140

Factory

Warehouse

Retailer

Order of 100 units per day

Risk Mitigation Inventory 700 units

Daily shipments

Capacity 100 units per day

Service Level, %

Time, days

Factory is disrupted for 14 days

100

Role of proactive strategies

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

141 of 223

141

Factory

Warehouse

Retailer

Capacity 100 units per day

Service Level, %

Time, days

Factory is disrupted for 14 days

100

Factory

Warehouse

Retailer

Order of 100 units per day

Risk Mitigation Inventory 700 units

Daily shipments

Capacity 100 units per day

Service Level, %

Time, days

Factory is disrupted for 14 days

100

Role of proactive strategies

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

142 of 223

142

Factory

Warehouse

Retailer

Order of 100 units per day

Capacity 100 units per day

Service Level, %

Time, days

Factory is disrupted for 14 days

100

Back-Up Factory

BUT: both higher safety stock and back-up factory increase costs!

Role of proactive strategies

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

143 of 223

Role of Recovery Policies

143

Adapted from: Sheffi Y., Rice J.B. (2005). A Supply Chain View of the Resilient Enterprise. MIT Sloan Management Review

Time-to-Survive vs Time-To-Recover

Recovery Costs vs Recovery Time

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

144 of 223

Reactive control

144

Proactive and reactive resilience actions increase costs!

Total costs = operational supply chain costs

+ proactive costs of redundancy

+ reactive costs of recovery

Time

Performance

time for recovery

recovered performance

Disruption

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

145 of 223

Research Framework

145

Introduction

We are interested to investigate the supply chain performance impact of different combinations of disruptions, proactive mitigation strategies and reactive recovery policies.

Example:

Two disruption scenarios I and II

Four combinations of proactive and reactive policies A, B, C, and D

Service Level

Costs

Scenario I

Service Level

Costs

Scenario II

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

146 of 223

Supply chain resilience and ripple effect control

146

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

147 of 223

Supply chain sustainability

147

Supply chain sustainability is based on triple-bottom-line “economy-ecology-society”.
Joint consideration of all these elements is crucial for SCOM in long-term perspective.
In SCOM such concepts like “Closed-Loop Supply Chain” and “Reverse Logistics” have been developed.
They are based on the idea that supply chain does not end at the point of sale but can be seen as a cycle including the after-sale area.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

148 of 223

Supply chain viability

148

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

149 of 223

Supply chain viability

149

Viability is the ability of a supply chain to maintain itself and survive in a changing environment through a redesign of structures and replanning of performance with long-term impacts.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

150 of 223

Adaptable Supply Chain Designs

150

Viable Supply Chain model - adaptable structural SC designs for supply-demand allocations and, most importantly, establishment and control of adaptive mechanisms for transitions between the structural designs.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

151 of 223

Supply chain ecosystem viability

151

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

152 of 223

Viability of Intertwined Supply Networks

152

An intertwined supply network (ISN) is an entirety of interconnected supply chains, which, in their integrity, secure the provision of society and markets with goods and services.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

153 of 223

�Chapter 5��Sourcing Strategy�

Free companion web site:

http://global-supply-chain-management.de

154 of 223

Learning objectives

154

Learning objectives for this Chapter:

Role of purchasing, procurement, and sourcing in SCOM
Basic elements of sourcing process
Make-or buy vs outsourcing
Organization issues in sourcing
Sourcing strategies according to number of suppliers, geographical supplier distribution, and sourcing principles
Methods of spend analysis and supplier selection
Elements of supplier relationship management (SRM)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

155 of 223

Introductory case-study

155

“Sustainable Supplier Management at Samsung”

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

156 of 223

Basic definitions

156

Supplier Scoring

And Assessment

Supplier

Selection

And

Contract

Negotiation

Collaboration Design

Replenishment planning

Purchasing

Sourcing

Procurement

Purchasing

Purchasing is the process of procuring the proper requirement, at the time needed, for the lowest possible costs from a reliable source. Purchasing deals mostly with commercial activities and is related to transactional, ordering processes.

Procurement covers a broader scope than purchasing and covers both acquisitions from third parties and from in-house providers. It also involves options appraisal and the critical “make or buy” decision.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

157 of 223

Sourcing

157

Sourcing needs to be understood to be the entire set of business processes required to purchase goods and services.

Sourcing activities range e. g., from the selection of suppliers, to drawing up contracts, product design and collaboration, to evaluation of supplier performance. Broadly speaking, sourcing is the process of establishing and managing the supplier relationships in the SC. In the narrow sense, sourcing is related to the activities and processes to provide the enterprise with materials, services, capital equipment, means of production, tools and supplies for work, etc. from external suppliers or partners.

Sourcing is a very important activity in the SC. The purchased parts and materials can account for over 60% of the cost of finished goods; for retail companies within the SC this can be as high as 90%.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

158 of 223

Sourcing process

158

Based on: Kummer S, Jammernegg W, Grün O (2013) Grundzüge der Beschaffung, Produktion und Logistik. 2nd edn. Pearson, Harlow

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

159 of 223

Sourcing process

159

Determination of material requirements:�i.e., the type, composition, configuration, quality, volume, location and timing for the delivery of the sourcing objects;
Order management:�i.e., determination of order volumes, frequencies, times and specification of logistical conditions. Also the supervision of accurate deliveries, goods reception, invoice control and approval;
Supplier base research, observation and analysis: �i.e., analysis and evaluation of the supplier base, assessment of potential new partnerships and elaboration of (strategic sourcing) recommendations, preparation of negotiations, contracts, etc.
Make or buy decisions:�Identification of internal/external value adding scope depending on the core competencies, but also comparison of capacities, lead times, costs, etc.
Supplier management:�i.e., auditing suppliers, running performance management assessments e.g., regarding on-time deliveries, quality , reliability, flexibility, etc. This is also related to supplier development or can initiate a substitution of suppliers.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

160 of 223

Make-or-Buy vs Outsourcing

160

“Make or buy” is a strategic decision that determines if the sourcing objects are internally made or externally sourced.

Such strategic decisions are related to the question of core competencies.

If the relevant value adding processes have historically been performed by an organizational unit’s own people and the decision has been made to externalize certain processes (i. e., to buy), the so-called “outsourcing” takes place. That means that outsourcing is a result of a make or buy decision.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

161 of 223

Outsourcing analysis

161

lower production cost
better use of available resources
focusing on core competencies
cost restructuring
reduction of time-to-market
risk sharing
know-how sharing
quality issues
flexibility
tax benefits.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

162 of 223

Make or Buy analysis

162

Core competence/strategic fit�What are the unique capabilities that are very difficult to imitate?�What are the strategic objectives the company needs to meet?�Does the focus on lean production require an adaptation of the production depth?�Is it necessary to buy more in new markets because of local content requirements?
Variety and/or stability on the demand side�What is the stable level of demand we can fulfil with our existing capacity and when is it recommended to increase peak capacity needs by temporary supplementary external sourcing?

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

163 of 223

Make or Buy analysis

163

Production capacity on the sourcing side�Are there existing contracts (e. g. purchasing agreements or sales orders) that need to be fulfilled and which will impact the make or buy decision?
Autonomy�Do we jeopardize our competitive position by providing external parties with confidential drawings, intellectual property rights, new research results, etc.? Is there a risk that we might even create a future competitor by going for a buy decision that will lead to a know-how transfer?
Dependency on suppliers�With the increasing level of external purchases, dependency on suppliers, their quality, reliability and also punctuality can significantly influence the organization’s own reputation. �Do we have a strong or weak market position and how does it look in the case of suppliers?

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

164 of 223

Make or Buy analysis

164

Evaluation of the cost structure�In the case of “make” decisions, the corresponding costs are linked to e. g., material and labour costs, salaries or the depreciation cost of the equipment in use. In the case of “buy”, the decision will be related to the purchasing, transportation, handling, storage or transportation costs.
Financial shortage or need for capital�Especially at times of financial shortages, the decision to externally source parts, modules or services is an important factor, as it relieves the cost pressure.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

165 of 223

Sourcing strategy classifications

165

Number of suppliers

single sourcing
dual sourcing
multiple sourcing

Sourcing principles

sourcing on-stock
Just-in-time (JIT) sourcing
supply chain coordination (e.g., VMI)
particular sourcing

Geographical aspects

local sourcing
national sourcing
international sourcing
global sourcing

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

166 of 223

Sourcing strategy classifications

166

Number of suppliers

single sourcing
dual sourcing
multiple sourcing

Sourcing principles

sourcing on-stock
Just-in-time (JIT) sourcing
supply chain coordination (e.g., VMI)
particular sourcing

Geographical aspects

local sourcing
national sourcing
international sourcing
global sourcing

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

167 of 223

Single vs Multiple Sourcing

167

volume
product variety
demand uncertainty
lead time importance
disruption and other risks
transportation costs
manufacturing complexity
coordination complexity
post-sales issues

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

168 of 223

Single Sourcing

168

long-term agreements
price stability
suppliers included in the product development process at a very early stage
low transactional costs
scale effects

inefficient price policy
lead time, quality and service issues
lack of collaboration with many suppliers

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

169 of 223

Local vs Global Sourcing

169

Costs

labour, taxes, transportation, insurance, transshipment, duties, and transactions

Quality

bill-of-materials, quality control, after-sales service, certifications

Service

on-time delivery, responsiveness, flexibility, technical equipment, image, reliability

Sustainability

political, economic, social issues

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

170 of 223

Local vs Global Sourcing

170

	Local Sourcing	Global Sourcing
Advantages	Same norms / standards Easy to reach / short distances Same culture, same currency, same political climate Good basis for JIT deliveries Lower disruption risks for overall supply chain	Broadest variety of available vendors Largest portfolio of products or services Best opportunities to compare and negotiate with suppliers due to broadest supplier base
Disadvantages	(Very) limited supplier base or there could be even no supplier base Possibly limited bargaining power of buyer because of limitations on supplier side	Longer travel and transportation time Longer response time in case of changes Possibly larger lot sizes Potentially different norms / standards Different cultures, currencies and political uncertainty Higher disruption risks for overall supply chain

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

171 of 223

Global sourcing: impact analysis

Costs

Quality

Service

Politics / Society / Nature

171

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

172 of 223

Examples

172

Make-to-Order
Production flexibility
Global organisational structure:
Production facility (Assembly)
Supplier network
Distribution Hubs
Call Centres
Sales & service
IT and Data centres

Make-to-Stock
Production efficiency
Global organisational structure:
Product development
Production facilities
Assembly
Dispatch

Make-to-Stock
Ban on supply IKEA by the Swedish furniture trade organisation
International purchase showed the opportunity for local development
Global organisational structure:
IKEA acted as a dominant entity over its suppliers

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

173 of 223

173

JIT: just-in-time

“JIT is a philosophy of manufacturing based on planned elimination of all waste and continuous improvement of productivity.

The primary elements include having only the required inventory when needed; to improve quality to zero defects; to reduce lead time by reducing set-up times, queue length and lot sizes; to incrementally revise the operations themselves; and to accomplish these things at minimum cost”.

Based on: American Production and Inventory Control Society

JIT allows reducing inventory at the production site, cutting lead times, increasing productivity and responsiveness.

High-value materials with good demand predictability and quite steady demand especially can be recommended for JIT.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

174 of 223

Just-in-Time / Just-in-Sequence Example Volkswagen Saxony

174

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

175 of 223

SRM: Supplier Relationship Management

175

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

176 of 223

Supplier assesment methods

176

Spend analysis

What categories of products or services significantly influence the company spending?
How much are we spending with various suppliers?
What are our spending patterns at different locations?

Supplier industry analysis

Cost and performance analysis

Supplier role analysis

Business process analysis

Business benefit analysis

Commodity plan implementation and execution

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

177 of 223

Supplier selection: factor ranking method

177

Popular because a wide variety of factors can be included in the analysis

Six steps in the method

Develop a list of relevant factors called key success factors
Assign a weight to each factor
Develop a scale for each factor
Score each location for each factor
Multiply score by weights for each factor for each location
Recommend the location with the highest point score

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

178 of 223

Supplier selection

178

Sensitivity analysis should be performed in the case of any quite similar evaluations of some suppliers. Such an analysis will help to identify the impact of changes in weights and scores on the overall supplier evaluation.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

179 of 223

Supplier integration and development

179

identify the critical products
identify the critical suppliers�(assess their current and future capabilities)
appraise the performance of the suppliers�(usage of a standardized KPI framework)
determine the gap between current and desired supplier performance
form a cross-functional supplier development team
meet with supplier’s top management team
agree how the identified gaps can be bridged;
set deadlines for the achievement of the improvements
monitor improvements�

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

180 of 223

Key Points from This Chapter

180

What to source? 🡪 Make or Buy and outsourcing decisions.

How to source? 🡪 What is the sourcing tool or process that needs to be applied (e. g. do we consider manual sourcing or do we use IT tools such as portals, EDI? How well are business processes aligned between the supplying and the buying parties?) What is the appropriate sourcing organization, to purchase individually or to establish an alliance and thus follow the idea of collaborative sourcing?

From whom to source? 🡪 With how many suppliers or partners do we cooperate? Which supplier demonstrates good performance or has further potential –who should be developed and who should be substituted?

From where to source? 🡪 local vs global sourcing?

When to source? 🡪 how to schedule the sourcing (e.g. JIT) Alternatively the strategy of sourcing on-stock might be applied.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

181 of 223

181

Identify the problems with this process and suggest solutions!

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

182 of 223

�Chapter 6��Production Strategy�

Free companion web site:

http://global-supply-chain-management.de

183 of 223

Learning objectives

183

Learning objectives for this Chapter:

Push and pull views of the supply chain
Mass customization and modularization
Order penetration point and postponement
Basic production strategies in the supply chain
Analysis of order penetration point location

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

184 of 223

Introductory case-study

184

DELL vs Lenovo

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

185 of 223

With pull processes, execution is initiated in response to a customer order. With push processes, execution is initiated in anticipation of customer orders.

Therefore, at the time of execution of a pull process, customer demand is known with certainty, whereas at the time of execution of a push process, demand is not known and must be forecast.

185

Production Strategy

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

186 of 223

The push/pull view

186

The push/pull view of the supply chain divides supply chain processes into two categories based on whether they are executed in response to a customer order (downstream part) or in anticipation of customer orders (make-to-stock, upstream part).

Pull processes are initiated in response to a customer order. The advantages of the downstream part are responsiveness, and high degree of customer-oriented product individualization.

Push processes are initiated and performed in anticipation of customer orders. The advantages of the upstream part are the economy of scale (low manufacturing and transportation costs), flexibility (high level of inventory),and the short supply times.

This view is very useful when considering strategic decisions relating to supply chain design, because it forces a more global consideration of supply chain processes as they relate to the customer.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

187 of 223

Order penetration point (OPP) and postponement (1)

187

The push/pull boundary is called OPP that separates push processes from pull processes.

A product is kept as long as possible in a generic state. Differentiation of the generic product into a specific end-product is shifted closer to the consumer by postponing identity changes, such as assembly or packaging, to the last possible supply chain location.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

188 of 223

Order penetration point and postponement (1)

188

Van Hoek (2001) defines postponement as “an organizational concept whereby some of the activities in the SC are not performed until customer orders are received”.

The postponement concept was first time introduced in the literature by Alderson (1950), where it was observed that products tend to become differentiated as they approach the point of purchase.

Especially useful for:

Significant number of variants of an end product with an uncertain split of demand on variants.
Delivery time requested by customers must allow value-adding steps after receipt of customer orders (or reliable demand forecast).

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

189 of 223

Order penetration point and postponement (2)

189

Differentiation of the generic product into a specific end-product is shifted closer to the consumer by postponing identity changes, such as assembly or packaging, to the last possible supply chain location.

This allows keeping safety stock of one generic product instead of multiple specific end-products. Especially in cases where the split of demand into specific end-products is uncertain, postponement with its risk pooling effect leads to less safety stock required and to a lower risk of obsolescence of end-products.

Furthermore, as less value has been added to the generic product than to the specific end-product, less capital is bound in each stocked unit.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

190 of 223

Case-study and company video

190

AirSupply

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

191 of 223

Case-study and company video

191

AirSupply

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

192 of 223

Case-study and company video

192

AirSupply

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

193 of 223

Task

193

This task investigates the issue of how to determine right production strategy and OPP location in the supply chain. Consider two strategies:

MTS and delivering from a general inventory holding unit and
introducing the MTO agile part downstream the general inventory holding unit.

We assume that the introduction of the agile supply chain part downstream the OPP leads to an increase in both flexibility and costs. We propose the “lost-sales”-based treatment of the OPP location determination: OPP location can be determined through a comparison of financial results of the two strategies (with and without OPP).

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

194 of 223

Task

194

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

195 of 223

Example

195

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

196 of 223

Re-Purposing Production Strategy

196

Repurposing is a concept of utilizing the existing manufacturing and logistics capacities for the production of a new, untypical product in an SC. The concept of repurposing has been used extensively during the COVID-19 pandemic in 2020. Healthcare SCs for PPE (personal protection equipment) items have not been able to cope with increased demand due to the COVID-19 outbreak. Numerous cases have been observed of production systems and SCs being repurposed during the COVID-19 pandemic to meet the demand for such critical items. Utilizing an existing manufacturing line for a purpose other than its intended use is called ‘Repurposing’. This is typically a short-term strategy to overcome the shortage of critical resources, such as PPEs, diagnostic equipment, and clinical care equipment.

For example, luxury goods manufacturers in Italy and France have re-designed their operations in order to produce urgently needed items during the COVID-19 virus outbreak. Within 72 hours of the French government‘s call for business to pitch in, LVMH‘s perfume factories were able to produce hand sanitizer. Giorgio Armani, Gucci and Prada repurposed their designer clothing factories in Italy to churn out medical overalls, and Burberry harnessed a trench coat plant to make face masks and nonsurgical gowns.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

197 of 223

�Chapter 7��Facility Location Planning and Network Design

Free companion web site:

http://global-supply-chain-management.de

198 of 223

Learning objectives

198

Learning objectives for this Chapter:

Understand the importance of selecting the right facility locations
Describe the main phases of location-related decision-making processes
Apply quantitative analysis techniques to solve supply chain design problems
Compute solutions to different settings of the warehouse location problem
Use centre-of-gravity methods and the Miehle algorithm
Apply factor-ranking method to facility location decisions

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

199 of 223

Introductory case-study

199

Power Pong Sports, China

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

200 of 223

Importance of location decision

200

One of the most important decisions a firm makes
Increasingly global in nature
Significant impact on fixed and variable costs
Decisions made relatively infrequently
Costs is not the only factor to be considered
Innovations, supplier market, infrastructure, qualified people, political issues, currency exchange risks,…
Once in place, location-related costs are fixed in place and difficult to reduce
Capacity expansion aspects should be considered
Determining optimal facility location is a good investment
The objective is to maximize the benefit of location to the company

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

201 of 223

201

Supply Network Design Framework

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

202 of 223

Global Supply Chain Design: Warehouse location problem (WLP)

202

Given (parameters):

Set S of potential facility locations
Set M of markets
Set T := S · M of all possible transportation links
Link transportation costs c_sm
Fixed costs f_s

Find (variables):

Facility locations: if a facility is opened in region s∈S, then y_s=1 and the annual fixed costs rise by the amount f_s;otherwise y_s=0

Transportation links: if a transportation link (s,m)∈T is used, then x_sm=1

and the annual costs increases by amount c_sm ; otherwise x_sm=0

Satisfy (constraints):

Single sourcing constraints
Binary constraints

Extremize (objective function):

Minimize total costs

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

203 of 223

203

Spreadsheet Modelling: data and objective function

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

204 of 223

204

Excel Solver setup

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

205 of 223

205

Spreadsheet Solution

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

206 of 223

206

How Excel-Solver works: Branch & Bound method

For small instances, b&b is a suitable method. However, the solution of real-life problems involves a higher complexity. This makes it necessary to apply solving the WLP by different heuristic methods rather than exact algorithms. The reason for that is the high number of integer variables.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

207 of 223

Capacitated warehouse location problem (CWLP)

Differencies to WLP problem

207

we know the quantities q_s (s∈ S) that can be handled by each reseller per year (i.e., supply capacity is restricted)
in order to assign a sufficient quantity to each reseller we need to have the demand d_m of each market m∈M
we use the family of non-negative decision variables z_sm ≥ 0 in order to represent decisions about the installation and usage of transportation links. If z_sm = 0 then there is no link installed to connected supplier s with market m. If z_sm > 0 then the value of z_sm is interpreted as the shipment quantity along the transportation link originating from supplier s and terminating in market m∈M.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

208 of 223

CWLP model

208

Given (parameters):

Set S of potential facility locations
Set M of markets
Market demand d_m
Market sale quantitiy q_s
Set T := S · M of all possible transportation links
Unit transportation costs c‘_sm
Fixed costs f_s

Find (variables):

Facility locations: if a facility is opened in region s∈S, then y_s=1 and the annual fixed costs rise by the amount f_s;otherwise y_s=0

Transportation links: usage of the transportation link (s,m)∈T increases the annual costs by amount c_sm· z_sm

Shipment quantities z_sm

Satisfy (constraints): Logical constraint:

Demand constraint Capacity constraint Binary and non-negativity cons.

Extremize (objective function):

Minimize total costs

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

209 of 223

Formulate the CWLP model!

2. What can you say about sensitivity of the goal function to changes in (a) fixed costs and (b) variable transportation costs?

3. How could you use the CWLP to explain to your CEO:

(a) why would the total supply chain costs increase or decrease if change our locational decision?

(b) how can you use the optimization results and the costs of optimal solution to negotiate with logistics companies and suppliers?

(c) what would it make more sense to reduce the new costs: to negotiate with (i) freight careers to reduce transportation costs or (ii) with engineering company that builds your new facilities?

CWLP Model: analysis

209

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

210 of 223

The CWLP-based approach helped us with identification of regions that should be considered for setting up a supply chain. These regions might be continents, countries, states or even farms or growing areas or plantations supplying or consuming products.
The outcome of phase I (the regions to be considered in the prospective supply chain) are now forwarded into phase II where one or several locations have to be identified and compared for each region as network node.

Stage II: Regional facility location

210

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

211 of 223

Center-of-gravity method (also known as greenfield analysis (GFA)) helps to find location of a distribution center or a warehouse that minimizes total transportation costs

It considers:

Location of markets expressed by two coordinates
Volume of goods shipped to those markets, i.e., market demand
Shipping cost (or distance)

It assumes that cost is directly proportional to distance and volume shipped

Placing the existing locations on a coordinate grid, we calculate X and Y coordinates for ‘center of gravity’ which implies finding the optimal location

Center-of-gravity method: principle

211

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

212 of 223

Objective function:

Center-of-gravity method: formalization

212

Notation	Meaning
Z	Total transportation costs
p_x	X-coordinate of optimal location
p_y	Y-coordinate of optimal location
x_i	X-coordinate of i-market
y_i	Y-coordinate of i-market
D	Demand in the i-market
i	Running index of market numbers

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

213 of 223

How to compute distance and coordinates?

direct line method: corner method:

Center-of-gravity method: computation

213

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

214 of 223

How to compute distance and coordinates?

direct line method: corner method:

Center-of-gravity method: computation

214

If costs is different for different transportation links, then:

∙ costs

∙ ∙ costs

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

215 of 223

Center-of-gravity method: example

215

i	Name	Coordinates		Annual demand
		x_i	y_i	D_i
1	Sport 1-2-3 KG	10	-80	3t
2	TT direct	-45	-30	1t
3	Sports and Fun	60	50	1.5t
4	Leisure Outlet	45	-75	3.5t
5	Raquets & More	-75	80	2t

German customers of TT Profi

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

216 of 223

Center-of-gravity method: solution using corner method

216

I	Name	Coordinates		Distances	Demand
		x_i	y_i	d(p_x;p_y)	D_i
1	Sport 1-2-3 KG	10	-80	55.5	3t
2	TT direct	-45	-30	55.5	1t
3	Sports and Fun	60	50	129.5	1.5t
4	Leisure Outlet	45	-75	85.5	3.5t
5	Racquets & More	-75	80	189.5	2t

Note: here we assume that cost factor per km and weight unit is 1 euro. If not, we need to multiply (distance by volume by cost factor)

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

217 of 223

Improvement by Miehle algorithm

217

Replace: p_x=a and p_y=b

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

218 of 223

Improvement by Miehle algorithm: procedure

218

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

219 of 223

Improvement by Miehle algorithm: procedure

219

… if Rackets & More demands 8 tons:

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

220 of 223

Stage III: Location selection and factor-rating method

220

A wide variety of factors can be included in the analysis
Seven steps in the method
Identify location options.
Determine decision criteria (location factors) and their measurement.
Determine weighting totaling 100% for the different criteria.
Evaluate every location option on a normalized scale to achieve “partial utility values”, e.g., usage of a scale from 1-10 points (in which 10 = best).
Calculate the “total utility value” of a location option by multiplying “partial utility values” with weights and adding these values.
Compute weighted average if many experts are involved
Choose the option with the highest “total utility value”.

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition

221 of 223

Qualitative and quantitative factors

221

Quantitative criteria	Qualitative criteria
Transportation costs Building and construction costs Rental costs Labour costs Material costs Taxes Financial support from local governments	Infrastructure Quality of labour Transportation development Purchasing power Options for financing (free trade zones, etc.) Suppliers Political risks Natural disaster risks Proximity to customers and suppliers Business climate Environmental regulations Competitive advantage Government and trading barriers

Ivanov D., Tsipoulanidis A., Schönberger J. (2021). Global Supply Chain and Operations Management, Springer, 3rd Edition