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Day-1
Definition, Nature and Principles of Supply Chain Management (SCM)Supply Chain Management (SCM)
Session SpeakerK.M. Sharath Kumar
1M.S Ramaiah School of Advanced Studies - Bangalore
K.M. Sharath Kumar
Session Objectives
• To understand the role of Supply Chain Management inManufacturing and Service OrganisationsManufacturing and Service Organisations
• To critique the impact of Supply Chain in gaining• To critique the impact of Supply Chain in gainingcompetitive advantage
• To assimilate the legal framework and negotiation tacticsin cross-border transactionsin cross border transactions
2M.S Ramaiah School of Advanced Studies - Bangalore
Session Outline
Hi t f l i ti d S l Ch i M t (SCM)• History of logistics and Supply Chain Management (SCM)• Objectives of SCM
Ch ll d i i i M hi T l i d• Challenges and opportunities in Machine Tool industry supply chain
• Kraljic’s matri• Kraljic’s matrix• Cross-border negotiation
L l f k i b d ti ti• Legal framework in cross border negotiation
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Rationale for SCM
Adding Value in Every Thing We DoAdding Value in Every Thing We Do
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5M.S Ramaiah School of Advanced Studies - Bangalore
Rationale for Logistics and Supply Chain Management (SCM)g ( )
• Defeat of the British in the American war of Independence:At the height of war, 12000 troops had to be equipped and fedAt the height of war, 12000 troops had to be equipped and fedfrom the far away Britain.
• Gulf war in 1991: Half a million people and half a milliontones of equipment had to be airlifted 12,000 km with a furthero es o equ p e ad o be a ed ,000 w a u e2.3 million tones of equipment moved by sea- all in impossibletime frames.
6M.S Ramaiah School of Advanced Studies - Bangalore
Supply Chain Management (SCM)-Supply Chain Management (SCM)Definition
Here are two definitions:
h fThe design and management of seamless, value-added process across organisational boundaries to meet the real needs of the end customerneeds of the end customer
- Institute for Supply Management
7M.S Ramaiah School of Advanced Studies - Bangalore
Supply Chain Management (SCM)-Supply Chain Management (SCM)Definition
Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.
-The Supply Chain Council
8M.S Ramaiah School of Advanced Studies - Bangalore
SCM : Schematic
9M.S Ramaiah School of Advanced Studies - Bangalore
Evolutionary Timeline of SCM
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A business process
Cost
Performance
Timeliness
Product Interface
Performance
T h l I t fS i I t fCustomer
S i I t f Technology InterfaceService InterfaceService Interface
O i i P dOrganisation
Individual Society AutomationProcesses
Products
11M.S Ramaiah School of Advanced Studies - Bangalore
Value created and addedValue created and added by outside firm providing
MIS
Value created and delivered by
Value created and delivered by
Value created and
Value created by
purchasing and materials management
by production/ operations management
delivered by Finance, HR and
Total value created and delivered for
created and delivered by supplier
Marketingfor customer
Value created and added by outside firm providing
Logistics
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Logistics
M.S Ramaiah School of Advanced Studies - Bangalore
SUPPLY CHAIN
Customer
SUPPLY CHAIN
Customer
Enterprise Processes
Supplier
Enquiries Quotations
OrdersSupplier Orders Supplies Invoices Money
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Money
M.S Ramaiah School of Advanced Studies - Bangalore
One Variant6,200 Distinct PartsImported from 17 CountriesImported from 17 CountriesFrom 240 Suppliers Assembled in 1 PlantWithin few minutesExported to 34 CountriesSame daySame dayWithout becoming inventory!
Suzuki Grand Vitara
14
Competition is no longer betweenCompetition is no longer betweenCompetition is no longer between Competition is no longer between Companies:Companies:
It is between supply chainsIt is between supply chains
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Value Chain
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1
CostCost
1
P l 2 3
People QualityQuality TechnologyTechnology
Delivery & ServiceDelivery & Service
4
& Service& Service
17M.S Ramaiah School of Advanced Studies - Bangalore
Succeed in Technology bySucceed in Technology by Connecting with People
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19M.S Ramaiah School of Advanced Studies - Bangalore
2010 Onwards
Achieve Competitive Advantage by:p g y
Focusing on both Core and Non-Core CompetenciesCore Competencies
Ford Company Scenario
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Aston Martin
21M.S Ramaiah School of Advanced Studies - Bangalore
Ford India introduces its Roadside Assistance (RSA) service in Agra
- 21 July 2010, Business Line
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Riding Solo, Honda Shifts to Top Gear on 2-Riding Solo, Honda Shifts to Top Gear on 2wheelers
Company to focus on new models, expand p y f , pdealer network
Mr Shinji Aoyama S j oy
Source: Business Line, 5 January 2011
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We have combined the leading edge technology of Nissan
ith A h k L l d Li it d' d li bilit twith Ashok Leyland Limited's delivery capability to
l t th j t i t ff ti "complete the project in a cost effective manner".
Nissan Motor senior vice President and theNissan Motor senior vice President and the JV chairman
Dr. Andy Palmer
24
yM.S Ramaiah School of Advanced Studies - Bangalore
Alto in India is Rs 1 lakhAlto in India is Rs. 1 lakh cheaper than in Chinap
- Shinzo Nakanishi,Shinzo Nakanishi, MD and CEO of MSIL
(09 A 2010 E i Ti )
25
(09 Aug 2010, Economic Times)M.S Ramaiah School of Advanced Studies - Bangalore
Customers get Ambushed
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Ambushed Every Where
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What SCM is not ?What SCM is not ?
SCM is not :SCM is not :• Buying• Developing suppliers o Blind man touchingDeveloping suppliers• Logistics• Warehousing
o Blind man touching elephant
o All these together ?• Inventory Control• Kanban
M k B d i i
g
• Make-Buy decision• Manufacturing• Distribution
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Bottom line SituationBottom-line Situation
SCM l k t th f b i i t d• SCM looks at the process from beginning to endholistically in a seamless way instead of glorifyingunduly/underplaying an in-between event as stand aloney p y g
• The customer does not see, does not have to see, theglorification of any event. He just wants the product/serviceearly and cheap. He is not impressed if you just improve thesituation by working on logistics or shorten the manufacturingsituation by working on logistics, or shorten the manufacturinglead time or you do all and even more, but still do not deliverresults.
29M.S Ramaiah School of Advanced Studies - Bangalore
Some ExamplesSome Examples
– You get Dell laptop in 10 days after ordering. They in turnou ge e p op 0 d ys e o de g. ey uorder all parts to their vendors only after you order.Incidentally the beautiful consignment reaches yourdoorsteps.
– Seven KMs above ground level, on a London bound flightfrom Bangalore at 7 am, when Thames is almost in sight,you get Vada Sambar very tasty more or less so at leastyou get Vada Sambar, very tasty, more or less so at least.
Sitting in Bangalore through internet you book a 2nd class– Sitting in Bangalore, through internet you book a 2nd classticket from Varanasi to Pratabgarh ten days before. Theticket is delivered to your e-mail ID.
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SCM is at play behind all thisSCM is at play behind all this amazing transformation in
Value Chain
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Fit Between Corporate and FunctionalpStrategies (Chopra & Meindl)
Corporate Competitive Strategy
Supply ChainProduct Marketingpp yor Operations
StrategyDevelopment
Strategy
Marketingand SalesStrategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy
32M.S Ramaiah School of Advanced Studies - Bangalore
The primary “drivers” for achieving strategic fitThe primary drivers for achieving strategic fit in Supply Chain Strategy
(adapted from Chopra & Meindl)(adapted from Chopra & Meindl)
Corporate Strategy
Supply Chain Strategypp y gy
Efficiency Responsiveness
Facilities Inventory Transportation Information MarketS t ti
33
y p Segmentation
M.S Ramaiah School of Advanced Studies - Bangalore
34M.S Ramaiah School of Advanced Studies - Bangalore
35M.S Ramaiah School of Advanced Studies - Bangalore
Importance of Supply Chain Management?Importance of Supply Chain Management? –Cont.
Firms with Supply Chain Management:1 Start with key suppliers and move on to1. Start with key suppliers and move on to
other suppliers.2 Similar protocol for customers and2. Similar protocol for customers and
shippers as well.3. Integrate second tier suppliers and3. Integrate second tier suppliers and
customers.(second tier refers to the customer’s (
customers and the supplier’s suppliers)
36M.S Ramaiah School of Advanced Studies - Bangalore
Objectives of SCM
37M.S Ramaiah School of Advanced Studies - Bangalore
Objectives of a Supply Chain• Maximise overall value created
- Supply chain value: difference between what the final pp yproduct is worth to the customer and the effort the supply chain expends in filling the customer’s request
V l i l t d t l h i fit bilit- Value is correlated to supply chain profitability(difference between revenue generated from the customer and the overall cost across the supply chain)pp y )- Supply chain incurs costs (information, storage, transportation, components, assembly, etc.)
• Increase Supply chain profitability (total profit to be shared across all stages of the s ppl chain)across all stages of the supply chain)
• Balance Supply and Demand
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• Balance Supply and DemandM.S Ramaiah School of Advanced Studies - Bangalore
Components of Supply Chain ManagementManagement
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Supply Chain• Organisations must embrace technologies that can
ff i l d h i l h ieffectively manage and oversee their supply chains
Distribution or disposal
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Benefits of SCM
I t d ti Inventory reduction Productivity Improvement P l d ti Personnel reduction Cost reduction High customer satisfaction High customer satisfaction Increased profit On time delivery fulfillment On-time delivery fulfillment Revenue/profit increase Better cash management Better cash management Better order management
41M.S Ramaiah School of Advanced Studies - Bangalore
Past and FuturePast and Future
• GLOBALISATIONG O S ON– Whether for buying or selling, no one confines to his own
country these days.y y• 50% under garments in the world are from Tiruppur, India• In Indian Super markets, imported potato wafers compete with
l l b dlocal brands.• Roses are exported from India daily.• Many international brands of Gadgets to day do not put placeMany international brands of Gadgets to day do not put place
of manufacture any more because they cannot assign any one country for adding maximum value in the supply chain. E.q.,
Philips– Philips– Black and Decker
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Supply Chain Competitiveness
C i• Competitor
• Competition
• Competitiveness
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44M.S Ramaiah School of Advanced Studies - Bangalore
45M.S Ramaiah School of Advanced Studies - Bangalore
Source: Presentation from K.C. Manjunath, GE-Triveni
Supply Chain Competitiveness : Toyota Way
“When Toyota developed Prius hybrid car, a core part of computer system, Insulated Gate Bipolar Transistor had to be developed.
Toyota was not good at semiconductors. But they decided to develop and put up a new plant for Manufacture. Why?
Toyota wanted ‘Self-reliance’ as this Technology would lead to f t & ill i th titi d t “future & will give them competitive advantage “
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SCM : Activities
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Effects of Supply Chain Problems
Problems with the Supply Chain have caused armies to lose wars & companies to go out of business, for example…p g , f p
I WWII G In 1999 ToysRUS
had problems
In WWII, Germany encountered
problems supplying supplying to
holiday shoppers & lost business
problems supplying troops in Russia,
which contributed to their collapse & lost business.their collapse.
48M.S Ramaiah School of Advanced Studies - Bangalore
Sources of Supply Chain Problems
UNCERTAINTY POOR COORDINATION
In demand forecast With Internal units and business partners
In delivery times & production delays
Ineffective customer service
production delays High inventory costs, loss of revenue & extra cost for expediting
iservices.
49M.S Ramaiah School of Advanced Studies - Bangalore
B ll hi D H dBull whip or Dragon Head
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B ll hip EffectBullwhip Effect
Occurs when slight demand variability is magnified asOccurs when slight demand variability is magnified as information moves back upstream
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Equilibrium & Bull whippedInformation
q ppInformation
Suppliers Producers Distributors RetailersProducts & Services
Products & Services
Products & Services
10 Units 10 Units 10 UnitsSuppliers Producers Distributors Retailers
Products & Services
Products & Services
Products & Services
10 Units 10 Units 10 Units
Cash
10 Units 10 Units 10 Units
Cash
10 Units 10 Units 10 Units
Suppliers
Information FlowSuppliersSuppliersSuppliers
RetailersDistributors
ProducersSuppliers
20 Units
Products & Services
40 Units
Products & Services
Products & Services80 Units
ProducersSuppliers
DistributorsProducers
Suppliers
RetailersDistributors
ProducersSuppliers
20 Units40 Units80 Units
Cash Flow
40 Units160 Units 80 Units 40 Units80 Units160 Units 40 Units80 Units
52M.S Ramaiah School of Advanced Studies - Bangalore
Shrinking Uncertainty in SC
Source:
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Buyer-Supplier Relationship
“Exit – Voice – Loyalty”Exit Voice Loyalty
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Sustainability is the WaySustainability is the Way Forward
Mulling new supplier system to g pp yminimise natural disaster: Boeing
Source: 4 July 2011, Reuters
55M.S Ramaiah School of Advanced Studies - Bangalore
Evolution of the Indian Machine ToolEvolution of the Indian Machine Tool Industry
Ph 1 Th E l Y (th l t )• Phase 1: The Early Years (three clusters)
Ph 2 E d f th G ld Y• Phase 2 : End of the Golden Years
Ph 3 1968 1983 A I i l T h l• Phase 3 – 1968 to 1983: Access to International Technology via Collaborations becomes Difficult
• Phase 4 : The 1980s Open General License (OGL)
• Phase 5 – The 1990s: The Liberalisation Years
56M.S Ramaiah School of Advanced Studies - Bangalore
Introduction to Machine Tool Industryy• Indian Machine tool industry grew 13% annually over 2008-11
(TAGMA)(TAGMA)
• Indian Machine tool makers target 67% domestic market share• Indian Machine tool makers target 67% domestic market share by 2020 (IMTMA)
• As per available statistics (4th Census of MSME Sector), thissector employs an estimated 59.7 million persons spread overp y p p26.1 million enterprises
• It is estimated that in terms of value, MSME sector accountsfor about 45% of the manufacturing output and around 40% of
57the total export of the country
M.S Ramaiah School of Advanced Studies - Bangalore
International Comparison of Machine ToolInternational Comparison of Machine Tool Industries
• Japan:• Japan:- Massive and low cost production with higher reliability and flexibility CNC machine toolsy
- Collaborative development of components with li h b id d i b ioversea suppliers has been considered important business
• Germany:Germany:- Associations play an important role in promoting collaborations- Industrial policies have been effective in strengthening upstream, downstream supply chains and collaborations
58M.S Ramaiah School of Advanced Studies - Bangalore
International Comparison of Machine ToolInternational Comparison of Machine Tool Industries Contd.
• Italy:• Italy:- Innovation networks have been in the form of clusters
• USA:- Composed of SMEs- Grappling because of lack of coordination in technology
d di istandardisation- Short term transaction relationship between manufacturer supplier and clientsmanufacturer, supplier and clients
• China:- Picked up from 1995 in the form of scattered SMEs- Further diversified into metal cutting and metal forming i d t
59M.S Ramaiah School of Advanced Studies - Bangalore
industry
Auto sector to drive Die andAuto sector to drive Die and Machine Tool Industry in India y
constitutes 50% of Die & Machineconstitutes 50% of Die & Machine Tool market
TAGMA d IMTMA- TAGMA and IMTMA
60M.S Ramaiah School of Advanced Studies - Bangalore
An Estimate of Potential aboutAn Estimate of Potential about Machine Tool Industry
The two-wheeler industry adding a capacity of700,000 vehicles every year, calls for an overallinvestment of close to Rs 1,000 crore (Rs 10 billion)per annum, of which at least 60 per cent would bein the form of machine tools.
Source:Sou ce:
61M.S Ramaiah School of Advanced Studies - Bangalore
Machine Tool Industry SC Challenges
D t it t i t i I di hi t l i d t i• Due to capacity constraints in Indian machine tool industries,European, Taiwanese and Korean machine tool makers areharvesting the Indian ordersharvesting the Indian orders
• With the need to frequently introduce new models as aWith the need to frequently introduce new models as acompetitive measure, design and supply of such machinetools needs to be intact with high flexibility
• Vendors rarely stick to delivery commitments in comparisony y pwith international counterparts
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Machine Tool Industry SC ChallengesMachine Tool Industry SC Challenges Contd.
N d t i t b t ti ll i IT th b i id• Need to invest substantially more in IT on the business side,such as SCM and CRM in order to handle complaints beforethey become a source of frictionthey become a source of friction
• Change relationships with parts vendors to become partnersChange relationships with parts vendors to become partnersin development rather than not being just customers
• Many critical components of a modern CNC machine toolare not made in the countryy
63M.S Ramaiah School of Advanced Studies - Bangalore
Machine Tool Industry SC ChallengesMachine Tool Industry SC Challenges Contd.
S hi ti t d hi h t d t lif l d• Sophisticated machinery, short product life-cycles, anddemanding user requirements have increased competition inthe machine tool marketthe machine tool market
• Small and medium enterprises (SMEs) face problems inSmall and medium enterprises (SMEs) face problems incoordinating their supply chain due to lack of resources andimproper directions
64M.S Ramaiah School of Advanced Studies - Bangalore
A Case
Bharat Fritz Werner Ltd. was able to develop pand deliver, a complex nine-axis CNC multi-
tasking machine for machining rear axletasking machine for machining rear axle housings of commercial vehicles in a single
tset up
65M.S Ramaiah School of Advanced Studies - Bangalore
Machine Tool Industry SC Opportunities
T h l t i t d i ti l t thi d f• Two-wheeler sector is today importing nearly two-thirds ofits requirements of machine tools
• Improve delivery capability through better internal practicesby maximising in-built capacityby maximising in built capacity
• Scope for exporting machine tools from here to countries• Scope for exporting machine tools from here to countriessuch as Poland, Czechoslovakia and Turkey, which areemerging as major auto component suppliers to westerng g j p ppEurope and west Asia, despite competition from Taiwan andKorea
66M.S Ramaiah School of Advanced Studies - Bangalore
Machine Tool Industry SC OpportunitiesMachine Tool Industry SC Opportunities Contd.
D t h t i f d t' lif l i t• Due to shortening of a product's life cycle, companies are to focus on their service offers in order to ensure an advantage in competitionin competition
• Scope for collaborative design of tools digitalScope for collaborative design of tools, digitalmanufacturing systems, and integrated productionmanagement systems, to augment new products to market
• Strategic collaborations by integrating the upstream,g y g g pmidstream, and downstream parts of their supply chains
67M.S Ramaiah School of Advanced Studies - Bangalore
Machine Tool Industry SC OpportunitiesMachine Tool Industry SC Opportunities Contd.
• Specialisation and coordination mechanism for technological innovation have been dynamically evolvinginnovation have been dynamically evolving
• Export opportunity exists to step up share of exports in the• Export opportunity exists to step up share of exports in the world market due to price competitiveness
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UK Manufacturers Take on the Supply Chain Challenge
Present ScenarioPresent Scenario(12 January 2012)
Source: MTD Website
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Rationale for the Study
SMEs should focus on information flow and t l d t di th bmutual understanding among the members
of supply chain
Source: Rajesh K SinghSource: Rajesh K. SinghIndian Institute of Foreign Trade (IIFT), New Delhi,
Business Process Management Journal, Vol. 17 No. 4, 2011,pp. 619-638
70
g , , ,pp
M.S Ramaiah School of Advanced Studies - Bangalore
Efficient Consumer Response (ECR)
• Consumer: An orientation toward the needs of theconsumer
• Efficient Response: A process orientedoptimisation of the supply chainoptimisation of the supply chain
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Efficient Consumer Response (ECR)
V ti l ll b ti i f t i d• Vertical collaboration in manufacturing andretailing with the objective of an efficient
ti f ti f dsatisfaction of consumer needs
• All efforts should stand towards improved customersatisfaction
Source: Dr Dirk SeifertSource: Dr. Dirk SeifertHarvard Business School
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Concept of ECR in SCM
• Efficient replenishment
• Efficient administration• Efficient administration
• Efficient operating standards
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Collaborative Planning Forecasting Replenishment (CPFR)
Definition:fSharing of forecast and related business information among trading partners in the supply chain to enable automatic product replenishmentreplenishment.
American Production and Inventory Control Society (APICS).Objective of CPFR- optimize supply chain through improved demand forecasts, with the right product delivered at right time to the right location, with reduced inventories, avoidance of stock-the right location, with reduced inventories, avoidance of stockouts, & improved customer service.Value of CPFR- broad and open exchange of forecasting information to improve forecasting accuracy where both the buyerinformation to improve forecasting accuracy where both the buyer and seller collaborate through joint knowledge of base sales, promotions, store openings or closings, & new product introductions
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introductions.
Wal-Mart, Warner-Lambert,SAP
H d i VAATZ CHyundai – VAATZ Concept
Open Standards,Broad Requirements & S t ti I t tiSystematic Integration
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What Collaboration Should Be?
“ D Thi Diff tl ”“ Do Things Differently”
• B2B Extranet Planning Systems• Competitive Advantage-StrategicCompetitive Advantage Strategic
• Competitive Duration-Medium to LongD i C t Eli i ti th h• Drivers-Cost Elimination through
synchronization• Barriers-Medium Technology;Large People
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THE CPFR 9 STEPSTHE CPFR 9 STEPS
•Develop Collaborative Arrangement p g•What info are we going to Share?
•Create Joint Business PlanCreate Joint Business Plan • How are we going to do business?
•Create Sales Forecast –•What does the future look like?
•Identify Exceptions for Sales Forecast –•What we know that the supplier doesn’t•What the supplier knows that we don’t
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THE CPFR 9 STEPS..contd
• Resolve/Collaborate on Exception Items• How are we going to overcome the
exceptions?
C O• Create Order Forecast• What can we live with and move forward
with?
• Identify Exceptions for Order ForecastR l /C ll b t E ti• Resolve/Collaborate on Exception Items
78 M.S Ramaiah School of Advanced Studies - Bangalore• Generate the Orders
BEFORE CPFR – LIMITED COLLABORATIONBEFORE CPFR LIMITED COLLABORATION
O dOrder
1.22
Government Vendor
Characteristics:Characteristics:
•Limited visibility of future demand requirements
Inventories to buffer against unexpected demand
• Both partners forecast independently
• Outages cause adversarial relationships
79 M.S Ramaiah School of Advanced Studies - Bangalore
unexpected demand
POST CPFR
Government
Collaborative Joint Business Sales Forecast Firm Order
Government
Order
Retailer Sales
Forecast
Supplier Sales
ForecastJoint Sal;es
Forecast Display UnitsNeeded On-
Hand On-Hand Receipt Need
0 0 00 0 00 0 00 0 00 0 00 00 0 00 0 00 0 00 0 00 00 0 00 0 00 0 00 0 00 0
OrderOrderOrder
CollaborativeArrangement
Joint Business Plan
Sales ForecastCollaboration
Firm OrderPast Fzn Zone
Order Forecasts with tolerances
0 61 610 989 0 989
2,559 1,855 0 1,8552,993 3,492 2,773 7193,656 7,166 10,845 -3,6799,208 03,848 7,308 15,146 -7,8383,400 10,273 14,840 -4,5673,724 361 15,735 22,124 -6,3893,016 361 14,719 21,803 -7,08413,988 0
Characteristics:•Dual insights provide a better forecast demand
• Long term view of demand requirements
• Both partners jointly forecastVendor
p j y
• Earlier visibility of issues through the exceptions
• Monitor POS data via the private exchange/web portal; compare to forecast
80 M.S Ramaiah School of Advanced Studies - Bangalore
p ; p
• Focus of relationship becomes win-win
Summaryy
In order to smoothen the supply chain “bull whip”, we need pp y p ,accurate visibility of demands:
• CPFR is an industry standard “guideline” for collaboration• Collaboration requires “trust”q• Collaboration is a transformational strategy
–Roles and responsibilities can change–Roles and responsibilities can change• Collaboration facilitates long-term B2B relationships
C ll b ti t hi t b i / i• Collaborative partnerships must be win / win• Collaborative benefits can be huge!
81 M.S Ramaiah School of Advanced Studies - Bangalore
Global Supply ChainsGlobal Supply Chains
Some of the issues involved in global supply chains; global supply chains; legal issues, customs fees
and taxes
Global Supply Chains = Supply
language and cultural differences
fast changes in currency Global Supply Chains = Supply chains that involve suppliers and/or customers in other
fast changes in currency exchange rates
political instabilities.countries.
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Principles and Standards for EthicalPrinciples and Standards for EthicalPrinciples and Standards for Ethical Principles and Standards for Ethical Supply Management ConductSupply Management Conductpp y gpp y g
LOYALTY TO YOUR ORGANISATIONLOYALTY TO YOUR ORGANISATIONJUSTICE TO THOSE WITH WHOM YOU JUSTICE TO THOSE WITH WHOM YOU
DEALDEALFAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION
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Business CultureBusiness Culture
Western• Perfectionist
Indian• Functionalist
• Engineer• Planning
• Businessman• Improvisationg
• Facts matter• Mauls for non-compliance
p• People matter• Bonus for successp
• Single task at a time • Multi-task at a time
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Supplier Negotiation and SourcingSupplier Negotiation and Sourcing Challenges
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Evaluating & Selecting Key Suppliers
Wh l ti li f t t iWhen evaluating suppliers for a strategic partnering, purchase cost becomes relatively less important.less important.
-Tata Nano V/S A-Segment Cars
Key Supplier Selection is conducted by a cross functional team selection approach wherein pppurchasing staff, primary users, product designers, and manufacturing personnel participate.
- Buyer Audit
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Kraljic’s Matrix
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Kraljic’s Matrix
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STRATEGIC SOURCING FOR SUCCESFUL SUPPLY CHAIN MANAGEMENT
Why Strategic Sourcing?
- Lehman Brothers Case
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TYPES OF SUPPLIERS
• TECHNOLOGYMACHINERY/CAPITAL EQUIPMENT• MACHINERY/CAPITAL EQUIPMENT
• RAW MATERIALCOMPONENTS• COMPONENTS
• FINISHED PRODUCTS
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NEED FOR GLOBAL SUPPLIERSNEED FOR GLOBAL SUPPLIERS
• QUALITY• TECHNOLOGY• COST• SERVICE
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GENERALLY NON NEGOTIABLE ITEMSGENERALLY NON-NEGOTIABLE ITEMS
• SPECIFICATIONS• PAYMENT TERMS
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ISSUES IN NEGOTIATIONISSUES IN NEGOTIATION
• CULTURE• EXCHANGE RATE• DEGREE OF TRANSPARENCY REQUIRED – OUR
MINDSET/ OUR MANAGEMENT’S MINDSETMINDSET/ OUR MANAGEMENT’S MINDSET
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Supplier Strategies
Pl t h l hi i i
Supplier Strategies
• Plans to help achieve company mission• Affect long-term competitive position• Strategic options
– Many suppliersy pp– Few suppliers– Keiretsu network– Vertical integration– Virtual company PlV tua co pa y Plan
98
© 1995 Corel Corp.
M.S Ramaiah School of Advanced Studies - Bangalore
Daimler Chrysler’s Supplier Cost Reduction Effort
Supplier Suggestion Model SavingsSupplier Suggestion Model SavingsRockwell Use passenger car door
locks on trucksDodgetrucks
$280,000
Rockwell Simplify design/substitutematerials on manualwindow system
Various $300,000
window system
3M Change tooling for wood-grain panels to allow three
Caravan,Voyager
$1,500,000
from one die
Trico Change wiper-bladeformulation
Various $140,000formulation
Leslie MetalArts
Exterior lighting suggestions Various $1,500,000
99M.S Ramaiah School of Advanced Studies - Bangalore
Many Suppliers StrategyMany Suppliers Strategy
• Many sources per item• Adversarial relationship• Short-term• Little openness• Little openness• Negotiated, sporadic PO’s• High prices• Infrequent, large lots• Delivery to receiving dock
© 1995 Corel Corp.
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Few Suppliers Strategy
• 1 or few sources per item
Few Suppliers Strategy
• 1 or few sources per item• Partnership (JIT)• Long-term, stable• On-site audits & visits• Exclusive contracts• Low prices (large orders) © 1995 • Low prices (large orders)• Frequent, small lots
© 995Corel Corp.
• Delivery to point of use
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Tactics for Close Supplier Relationships
TacticTacticRed ce total n mber of
ResultsResults• Average 20% reduction in 5• Reduce total number of
suppliers• Certify suppliers
• Average 20% reduction in 5 years
• Certify suppliers
• Ask for JIT delivery from key suppliersy pp
• Involve key suppliers in new product design
• Develop software linkages to li
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suppliersM.S Ramaiah School of Advanced Studies - Bangalore
Vertical Integration StrategyVertical Integration Strategy
Raw Material(Suppliers)
• Ability to produce goods previously
BackwardBackwardIntegrationIntegration
purchased– Setup operations
CurrentCurrentTransformationTransformation
– Buy supplier
• Make-buy issueForwardForward
IntegrationIntegration• Major financial
commitmentFinished GoodsFinished Goods
(Customers)(Customers)
commitment• Hard to do all things
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(Customers)(Customers)wellM.S Ramaiah School of Advanced Studies - Bangalore
Forms of Vertical IntegrationForms of Vertical Integration
Iron Ore Silicon Farming Raw Material(Suppliers)
Steel Flour Milling BackwardIntegration
Automobiles IntegratedCircuits
CurrentTransformation
DistributionSystem Circuit Boards Forward
Integration
DealersComputers
WatchesCalculators
Finished Goods(Customers)Baked Goods
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Keiretsu Network Strategy
• Japanese word for ‘affiliated chain’
Keiretsu Network Strategy
• Japanese word for affiliated chain• System of mutual alliances and
hicross-ownership– Company stock is held by allied firms
• Lowers need for short-term profits• Links manufacturers, suppliers, distributors, & pp
lenders– ‘Partnerships’ extend across entire supply chainp pp y
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Virtual Company StrategyVirtual Company Strategy
• Network of independent companies• Network of independent companies– Linked by technology
• PC’s, faxes, Internet etc.– Each contributes core competencies– Typically provide services
• Payroll, editing, designing
• May be long or short-term– Usually, only until opportunity is met
© 1995 Corel Corp.
Usually, only until opportunity is met
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Overview of Global Procurement:Cross Border NegotiationsCross Border Negotiations
Interpretation, Enforcement and Dispute ResolutionResolution
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Precedence's are Referred but notPrecedence s are Referred but not Followed
Sales Act High Court Verdict on S/W CD’sC L (P Ch )Common Law (Prone to Changes)
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Legal System Framework
Category 1 Category 2 Category 3
Supreme Court, FederalApex Judiciary
• II round• Takes 10-12 months• Court of last resort
High Court • I round• Takes 6 months
• 50-60% disputes sortedDistrict/Province/CivilCourt
p• Takes 24 – 30 months
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Legal System Framework
Category 1 Category 2 Category 3
Arbitration – Alternativeto litigation
Special Jurisdiction Place of evidence isvery vital
• Headed by professionalst j dnot judges
• Three member committee• Two Industry Veterans and
one retired judge
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j g
Points to Remember
C t t di t b t t i t i l t• Contract dispute between any two companies cannot violate the Country law
• Law to be referred has to be mentioned in the contract• Law to be referred has to be mentioned in the contractEx: Bombay court may look into Hongkong/Singapore laws to deal with broadcasting rightsto deal with broadcasting rights
• Choice of Forum – Depending on the issue• Choice of Forum Depending on the issue• Choice of Law – Decided by Parties
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Legal System Framework
Category 1 Category 2 Category 3
Regulators
Example:
• TRAI• SEBI• AAI etc.
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Cross Border Negotiations
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What is Negotiation?gIt is the art of creating agreement on a specific issue between two(or more) parties with 4 differing views (Win/Loose, Win/Win,Loose/Loose, Loose/Win) imparting or conveying ideas, views orinformation from the mind of one person to the mind of the other.
What is Purchasing?The activity of acquiring goods or services to accomplish theThe activity of acquiring goods or services to accomplish thegoals of an organisation.
What is Purchasing Negotiation?A process in a finite number of steps consisting mainly ofalternate proposals and counter-proposals or a form of co-operation with both common and opposed interests with two ormore parties.
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more parties.
Golden Rules of Negotiation1 FORM1. FORM
2 People Buy People First2. People Buy People First
3 Buyers’ are liars and Non Buyers’ are bigger liars3. Buyers are liars and Non-Buyers are bigger liars
4 Emotion Sells and Logic solidifies the sale4. Emotion Sells and Logic solidifies the sale
5 N Gi U5. Never Give Up
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6. PMA and Keep SmilingM.S Ramaiah School of Advanced Studies - Bangalore
Role Play
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Session Summary
• Meaning and definition of Supply Chain Management has been explained.
• Special cases with respect to advantages of SCM has been discussed.
• Current trends of Supply Chain and it’s impact haveb l id dbeen elucidated.
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1 M.S Ramaiah School of Advanced Studies - Bangalore
Session Speaker K.M. Sharath Kumar
Manufacturing Logistics and Make or Buy Decisions
Day-2
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Session Objectives
• To ascertain the key factors to optimise logistics process
• To assimilate the factors to be considered for Make or Buy
decisions
• To match supply chain strategies with products
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Session Outline
• Logistics strategies • Make or Buy – Factors to be considered • Span of Process • Push vs. Pull Scheduling • Hybrid approach for supply chain
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Manufacturing Logistics
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CLM DEFINITION OF LOGISTICS
….is that part of the supply chain process that plans, implements, and controls the efficient, effective
flow and storage of goods, services, and related information from the point-of-origin to the point-of-
consumption in order to meet customers' requirements.
Council of Logistics Management, 1998; www.CLM1.org
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Logistics - Science of managing (controlling) the movement and storage of goods (or people) from acquisition to consumption.
Goods: Raw Materials → Final products, and everything in between.
Movement = Transportation (between locations). Storage = Inventory, Warehousing (at locations).
Difference between acquisition and consumption is a matter of space and time.
NOTE: Logistics does not deal with Technology of Production, such as the design of machines, vehicles and the design of finished products.
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Source: Presentation by Mr. K.C. Manjunath, Triveni Engineering Ltd.
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Five Business Systems - Tightly Interconnected within the Organization
Measurement Decisions
Management Systems
Reward Decisions
Strategic Decisions
Transportation Decisions
Sourcing Decisions
Inventory Decisions
Logistics Systems {
Price Decisions
Promotion Decisions
Marketing Systems
Product Decisions
Place (How, where, how
much)
} Production Scheduling Decisions
Production Capacity Decisions
Shop Floor Decisions
Manufacturing Systems }
Product Design
Decisions
Process Design
Decisions Engineering Systems }
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Logistics – Mission [A Bill of “Rights”]
• Logistics embodies the effort to deliver: – the right product – in the right quantity – in the right condition – to the right place – at the right time – for the right customer – at the right cost
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Activities and Logistics Decisions Transportation
rate and contract negotiation mode and service selection routing and scheduling
Inventories finished goods policies supply scheduling short term forecasting
Warehousing private vs. public space determination warehouse configuration Stock layout and dock design stock placement Cross-docking
Facility Location determining location, number
and size of facilities allocating demand to facilities
Customer Service determining customer wants determining customer response to service changes
Materials Handling equipment selection equipment replacement order picking procedures
Packaging design Order Processing
order procedure determination
Coordinating Production Schedule
aggregate production quantities sequencing and timing of production runs
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Manufacturing Logistics
Physical Distribution
Recycling/ Returns/ Waste Disposal
Location
Communication
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Inbound & Outbound Logistics
MANUFACTURING PROCESSES
INBOUND LOGISTICS
OUTBOUND LOGISTICS
SUPPLIER CUSTOMER
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Reverse Logistics • To manage the flow & Storage of products and services,
moving backwards through the supply chain • Supply chains create waste due to packing • New development in SCM includes the recycling of products and packing materials, “disassembly” of products for reuse, product returns for warranty claims
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TVS Logistics Case
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Air Asia Case
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Freight management goes online in Thiruvananthapuram Railway division
(August 24, 2010)
Freight Operating Information system will enable traders to monitor arrival of the freight train, plan out the receipt and dispatch of consignments to the intended locations, besides
providing adequate time to arrange for labour. M.S Ramaiah School of Advanced Studies - Bangalore
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Importance of Logistics
• Essential & Expensive - ( GDP ) 10 to 13% in India 8% in USA • Bigger than the profit margin on goods • Affects Financial Performance
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Logistics for life sciences still out in the cold • A goods carrier crossing a State border in India may have to wait
anywhere between two to 24 hours to get the necessary clearances before it can enter the next State. Compare this to transit across borders in China, which takes between 15 minutes to two hours. Or in the EU, where the carrier usually does not have to wait for more than a few minutes.
• According to World Bank's Logistics Performance Index ranked India 47 with a score of 3.1 (world average 2.5) in 2010, dropping from 39 in 2007. The index evaluates the logistics performance of countries on the basis of following key dimensions such as Customs clearances, infrastructure, ease of shipment and tracking.
Source: Joint Study by DHL and Organisation of Pharmaceutical
Producers of India , October 2011 M.S Ramaiah School of Advanced Studies - Bangalore
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Role of logistics managers in strategic decision
OTHER MANAGERS
BUSINESS STRATEGY
LOGISTICS STRATEGY
ROUTINE LOGISTICS DECISIONS
LOGISTICS MANAGER
DISCUSSIONS & AGREEMENTS
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Volvo-Case
Multi Axle Transport Solution
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Benefits
• Equivalent to 5 : 2-Axle trucks • Higher Average speed • Less Breakdowns • Transportation cost saving of 20-40% to Fleet owners • Takes 16 m road space but the latter take 90 m • Cut in fuel consumption by 50% • Environmental safety
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Consolidation
• Smaller Operator’s are shrinking • Large players are outsourcing • Shift towards bagging quality orders • Warehousing etc.
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Volvo’s Fuel Cost
Typical Trucks Volvo Trucks
Fuel Consumption 3.5 kmpl 2.5 kmpl
Cost/Tonne KM Rs. 4.60 Rs. 6.40
Load Carried 10 Tonnes 30 Tonnes
Fuel cost/Tonne KM
Re 0.46 Re 0.21
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Conclusion “Big is Better”
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Indian Government Initiatives
Allowing 100% FDI Eliminating CST and IT exemptions on Port
development Projects Improving Multi Modal Transport and PPP
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Plan for multi-modal venture by 3 logistics PSUs
SCI, Concor, Central Warehousing
Corporation would be equity partners
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Source: BL, 5 January 2011
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Delhi may soon levy congestion fee on vehicles
08 April 2010
Source: ET
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Railways sees scope for greater logistics play
Source: ET, September 2011
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Make or Buy Decisions
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Make or Buy Choice
• One of the key strategic issue in manufacturing is the decision regarding
“what to make and what to buy”.
• Companies rarely make their own products/services from start to end.
• Mostly these decisions have been taken on an ad-hoc
manner and lack adequate scientific consideration.
34 M.S Ramaiah School of Advanced Studies - Bangalore
Make or Buy Choice
• Inability to make in-house (Technical capability High-Investment Low Utilisation) • Retaining Core Technology
L & T Komatsu-Welding Robot
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Make or Buy Choice
• BREAK EVEN ANALYSIS
TOTAL COST -BUY
TOTAL COST - MAKE
MAKE-VARIABLE COST
MAKE-FIXED COST
VOLUME
COST
BREAK-EVEN
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Span of Process
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Make-or-Buy Decisions
1. Maintain core competence 2. Lower production cost 3. Unsuitable suppliers 4. Assure adequate supply (quantity or delivery) 5. Utilize surplus labor or facilities 6. Obtain desired quality 7. Remove supplier collusion 8. Obtain unique item that would entail a prohibitive
commitment for a supplier 9. Protect personnel from a layoff 10. Protect proprietary design or quality 11. Increase or maintain size of company
Reasons for Making
38 M.S Ramaiah School of Advanced Studies - Bangalore
Make-or-Buy Decisions
1. Frees management to deal with its core competence
2. Lower acquisition cost 3. Preserve supplier commitment 4. Obtain technical or management ability 5. Inadequate capacity 6. Reduce inventory costs 7. Ensure alternative sources 8. Inadequate managerial or technical resources 9. Reciprocity 10. Item is protected by a patent or trade secret
Reasons for Buying
39 M.S Ramaiah School of Advanced Studies - Bangalore
Framework for Make/Buy Decisions
• Which component to Manufacture and what to Outsource? • Identify Core Competencies and it should be made
internally. Fine & Whitney Framework for Outsourcing
• Dependency on Capacity • Dependency on Knowledge Toyotas outsourcing strategies
40 M.S Ramaiah School of Advanced Studies - Bangalore
Make/Buy Decisions
Product Dependent on knowledge and capacity
Independent of knowledge, Dependent on capacity
Independent of knowledge and capacity
Modular
Outsourcing is risky
Outsourcing is an opportunity
Opportunity to reduce cost through outsourcing
Integral
Outsourcing is very risky
Outsourcing is an option
Keep production internal
41 M.S Ramaiah School of Advanced Studies - Bangalore
Push and Pull Scheduling
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• Efficient integration of suppliers, manufacturers, warehouses, and stores. • Coordinating activities across the supply chain
• Improve performance through cost reduction, increasing service level, reducing the bullwhip effect, better utilising resources, and effectively responding to changes
Effective SCM Pre-requisites
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Challenges can be met by Integration
– Linking front-end customer demand and back-end
production and manufacturing portion of the supply chain.
• Various supply chain integration strategies: – Push, pull, push–pull strategy. – Matching products and industries with supply chain strategies. – Demand-driven supply chain strategies. – The impact of the Internet on supply chain integration.
44 M.S Ramaiah School of Advanced Studies - Bangalore
What is Push and Pull? • MRP is the classic push system. The MRP system
computes production schedule for all levels based on forecasts of end items sale. Once produced, subassemblies are pushed to next level whether needed or not.
Typical PC Manufacturing • JIT is the classic pull system. The basic mechanism is that
production at one level only happens when initiated by a request at the higher level. That is, units are pulled through the system by request.
Dell’s PC Manufacturing
45 M.S Ramaiah School of Advanced Studies - Bangalore
Comparison
• These methods offer two completely different approaches to basic production planning
• Each has advantages over the other, but neither seems to be sufficient on its own.
• Both have advantages and disadvantages, suggesting
that both methods could be useful in the same organisation.
46 M.S Ramaiah School of Advanced Studies - Bangalore
Push Vs. Pull Scheduling in SCM
• Push Scheduling
- Traditional Approach - Move the Job when finished - Creates Excessive Inventory
• Pull Scheduling - Coordinated Production - Driven by Demand( Pulled thru system ) - Extensive use of visual triggers
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Customer
D1 D2 D3
D4
RDC1 RDC2
Factory Warehouse
Factory Warehouse
Vendors/Suppliers
Finished products, Demand
forecast level
Finished products
Finished products
WIP
Sub Assemblies
Components
Demand Pull
Product Push
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Push-Pull Scheduling in Supply Chain
A Hybrid Approach in Todays Scenario
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Toyota’s Manufacturing Strategy Dell’s PC Manufacturing Strategy
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Push-Pull Supply Chain
• Initial Stages are operated in a push based manner whereas
the remaining stage are operated in a pull based manner. • Interface between the push based stage and pull based stage
is known as the push-pull boundary
Supply Chain Time Line
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Supply Chain Timeline
Push-pull supply chains
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General Framework for Time Line
• Make a part of the product to stock – generic product • The point where differentiation has to be introduced is the
push-pull boundary • Based on extent of customisation, the position of boundary
on the timeline is decided
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Matching Supply Chain Strategies with Products
Push-pull supply chains
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GM’s Case
Failure of Make to Order Strategy
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Characteristics of Push & Pull in Supply Chain
Push Pull
Objective Minimize Cost Maximize Service Level
Complexity High Low
Focus Resource Allocation
Responsiveness
Lead Time Long Short
Processes Supply chain Planning
Order Fulfillment
57 M.S Ramaiah School of Advanced Studies - Bangalore
Implementing a Push–Pull Strategy
• Achieving the appropriate design depends on many factors: – product complexity – manufacturing lead times – supplier–manufacturer relationships.
• Many ways to implement a push–pull strategy – location of the push–pull boundary.
• Dell locates boundary at the assembly point • Furniture manufacturers locate the boundary at the
production point
58 M.S Ramaiah School of Advanced Studies - Bangalore
The Impact of Lead Time
• Longer the lead time, more important it is to
implement a push based strategy. • Typically difficult to implement a pull strategy when
lead times are so long that it is hard to react to demand information.
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Cases
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Grocery Industry • Typical supermarket employs a push-based strategy • Peapod was built on pure pull strategy with no inventory and
no facilities. – Significant service problems with high stock-out rates – Changed to a push–pull strategy by setting up a number of warehouses – Warehouse covers a large geographical area
• Aggregated demand
• Other challenges: – Reducing transportation costs – Short response time – Low customer density
• Products having low demand uncertainty were treated with – high economies of scale in transportation cost – push-based strategy more appropriately.
61 M.S Ramaiah School of Advanced Studies - Bangalore
Book Industry • Initial model of Amazon.com a pure pull system with no
warehouses and no stock. – Ingram Book Group supplied most of Amazon’s customer demand.
• As volume and demand increased: – Amazon.com’s service level was affected by Ingram Book’s
distribution capacity – Using Ingram Book in the first few years allowed Amazon.com to
avoid inventory costs but significantly reduced profit margins. • As demand increased distributor no longer required.
• Current Amazon.com: – Several warehouses around the country where most of the titles are
stocked. – Inventory at the warehouses is managed using a push strategy – Demand satisfied based on individual requests, a pull strategy.
• Slow moving low volume books and CDs are not stocked at Amazon distribution centers – Amazon orders those when demand arrives.
62 M.S Ramaiah School of Advanced Studies - Bangalore
Session Summary
• Meaning of Logistics, components of Logistics management
have been explained.
• Factors influencing the make or buy decision has been elucidated.
• Cases with respect to Push-Pull supply chain have been discussed.
1 M.S Ramaiah School of Advanced Studies - Bangalore
Session Speaker K.M. Sharath Kumar
Supply Chain (SC) Design
Day-2
2 M.S Ramaiah School of Advanced Studies - Bangalore
Session Objectives
• To identify the role of aggregate planning in supply chain to
manage supply and demand
• To examine the key factors ‘to be’ considered when designing a distribution network
• To apply optimisation techniques to evaluate trading partners
3 M.S Ramaiah School of Advanced Studies - Bangalore
Session Outline
• Introduction to SC modelling • Managing supply through Aggregate planning • Gravity Model • Supply Chain Benchmarking • Data Envelopment Analysis
4
Supply chain Networks
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Integrated Supply Chain
• Functional Integration - Purchasing, M anufacturing, Transportation, Warehousing • Spatial Integration - Geographically dispersed vendors, - Facilities & Markets •Inter-temporal Integration - Strategic, Tactical & Operational •Integration of SC & Demand Management
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Overview of SC Models and Modelling System
• Need to augment Transactional IT with Analytical IT
- “Metrics is very important” • Analytical IT involves - Descriptive Method - Normative Method or Optimisation method
or Mathematical Programming method
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Descriptive Method
• Forecasting Models - predict demand for company’s finished products, cost of
raw materials etc. • Cost Relationship -describes how direct and indirect costs vary • Resource Utilisation -how manufacturing activities consume scarce resources • Simulation Models -describes parts or all the company’s supply chain that will
operate over time as function of parameters and policies
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Normative or Optimisation Method
- Helps managers to make better decisions - Requires descriptive data & models as inputs
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The primary “drivers” for achieving strategic fit in Supply Chain Strategy
(adapted from Chopra & Meindl)
Corporate Strategy
Supply Chain Strategy
Efficiency Responsiveness
Facilities Inventory Transportation Information Market Segmentation
M.S Ramaiah School of Advanced Studies - Bangalore
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Introduction to Linear Programming Problem (LPP)
The most important function of management is effective decision making.
11 M.S Ramaiah School of Advanced Studies - Bangalore
Definition of LPP Linear Programming (LP) is a versatile technique for assigning a
fixed amount of resources among competing factors. A mathematical technique used to obtain an optimal solution in
resource allocation problems, such as production planning, scheduling, advertising, cost analysis etc.
It is basically used for efficient and effective utilisation of limited
resources to achieve organization objectives (Maximise profits or Minimise cost).
12 M.S Ramaiah School of Advanced Studies - Bangalore
The General LP Formulation
nix
bxaxaxa
bxaxaxabxaxaxa
tSxcxcxcZMinMax
i
mnmnmm
nn
nn
nn
,...,2,1,0
//...........................................................
//...//...
..... /
2211
22222121
11212111
2211
=≥
=≥≤+++
=≥≤+++=≥≤+++
+++=
•There are n variables in m constraints to be solved
Max / Min Z = C1x1 + C2x2 + …….Cnxn Subject to a11 x1 + a12x2 + …. + a1nxn < /> = b1 a21 x1 + a22x2 + …. + a2nxn < /> = b2 …………………………………… am1 x1 + am2x2 + …. + amnxn < /> = bm where xi >= 0, i = 1,2,……….n
13 M.S Ramaiah School of Advanced Studies - Bangalore
Formulation of LPP (Production allocation problem)
Case: 1 A manufacturer produces two models M1 and M2 . Each unit
of model M1 requires 4 hours grinding and 2 hours polishing. Each unit of model M2 requires 2 hours grinding and 5 hours of polishing. The manufacturer has 2 grinding wheels wherein each is available for 40 hours per week only. Similarly there are 3 polishing machines wherein each is available for 60 hours per week only. Profit on model M1 is Rs. 300 per unit and profit on model M2 is 400 per unit. The manufacturer has to allocate his production capacity so as to maximize his profit.
Formulate the LPP.
14 M.S Ramaiah School of Advanced Studies - Bangalore
Formulation of LPP (Production allocation problem)
Solution: Let X: Number of units of model M1 to be produced. Y: Number of units of model M2 to be produced. Model
M1
Model M2
Requirement
Number of units X Y Maximize Grinding time(hrs.) 4 X 2 Y < 80 Polishing time(hrs.) 2 X 5 Y < 180 Profit (Rs) 300 X 400 Y
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Conversion to LPP (Production allocation problem) (cont..d)
Maximum Z = 300X + 400Y Subject to (S.t) 4 X + 2Y < 80 2X + 5Y < 180 and X > 0, Y > 0
Objective Function
Constraints
Decision variable (non negative)
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Formulation of LPP
Case: 2 A firm produces two home products viz. model A and model B. The production involves three operations-assembly, painting and testing. The relevant data are as follows:
Hours required for each unit
Unit selling price
Assembly Painting Testing
Model A Rs.40
10 2 1
Model B Rs.60
18 5 2
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Case-2 Formulation of LPP (Cont…d)
Total number of hours available each week are as follows:
Assembly 400 Painting 100 Testing 60 The firm wishes to determine its weekly
product mix so as to maximize profit. Formulate the problem as a linear
programming problem(LPP).
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Case-2 Formulation of LPP (Cont…d)
Solution: Let X: Number of units of model A to be produced. Y: Number of units of model B to be produced.
Model
A
Model B
Requirement
Number of units X Y Assembly time(hrs.) 10 X 18 Y < 400 Painting time(hrs.) 2 X 5 Y < 100 Testing time (hrs.) 1 X 2 Y < 60 Profit (Rs) 40 X 60 Y
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Case- 2 Conversion to LPP (cont..d)
Maximize Z = 40X + 60Y Subject to (S.t) 10X +18Y < 400 2 X + 5Y < 100 1X + 2 Y < 60 and X > 0, Y > 0
Objective Function
Constraints
Decision variable (non negative)
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Methods for Solving Linear Programming Problems (LPP)
Important method of solving LPPs
Simplex method using Solver
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Managing Supply in a Supply Chain
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Aggregate Planning in Supply Chain
• Aggregate planning is a process by which a company determines ideal levels of
capacity, production, subcontracting, inventory stock outs and pricing over a specified time horizon • Goal is to satisfy demand while maximising profit.
Premium Paper Mill Case Spring – Annual Reports Fall - Car Brochure
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Aggregate Planning Strategies
• The planner should make trade-off’s among capacity, inventory and backlog costs/ lost sales.
• If one increases the other two decreases. • Trade off Strategies (tailored strategies) - Chase strategy - using capacity as lever - Time flexibility from workforce or capacity strategy -
using utilisation as a lever - Level strategy – using inventory as the lever
24
Red Tomato Gardening Tool Case • Demand for Red Tomato’s
gardening tools is highly seasonal in spring.
• The first step towards
aggregate planning is to arrive at effective demand forecasting.
• Demand forecast for Red Tomato tools
Month Demand Forecast
Jan 1600
Feb 3000
Mar 3200
Apr 3800
May 2200
Jun 2200
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Red Tomato Tools Case Contd…
• Red Tomato sells each tool at $40. • The company has a starting inventory of 1000 tools in January. • At the beginning of January, company has a workforce of 80 employees. • Plant works 20 days in each month with 8 hrs per day. • Each employee earns $4 per hour on regular time.
• Capacity of the plant is determined by total labour hours worked. • As per labour rules, no employee works more than 10 hrs overtime per
month. • SC manager goal is to have 500 units at the end of june as inventory. • Minimising cost over the planning horizon is equal to maximising profit
as all demand has to be met.
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Various Costs for Red Tomato Case
Item Cost Material Cost $10/unit
Inventory holding cost $2/unit/month Marginal cost of stock-out/backlog $5/unit/month
Hiring and training costs $300/worker Layoff cost $500/worker
Labor hours required 4/unit Regular time cost $4/hour
Overtime cost $6/hour Cost of subcontracting $30/unit
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Decision Variables
• Wt = Workforce size for month t • Ht = number of employees hired at the beginning of month t • Lt = number of employees laid off at the beginning of month t • Pt = number of units produced in month t • It = Inventory at the end of month t • St = number of units stocked out/backlogged at the end of
month t • Ct = number of units sub-contracted at the end of month t • Ot = number of overtime hours worked in month t where t = 1, 2, ........ , 6
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Table Containing Decision Variable
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Table containing Constraints
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Formulae
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Cell Cell Formula Equation M5
(Wt Constraints)
= D5-D4-B5+C5
Wt = Wt-1 + Ht -Lt
N5 (Capacity
Constraints)
= 40*D5+E5/4-I5
Pt ≤ 40 Wt + Ot /4
O5 (Inventory
Constraints)
= F4-G4+I5+H5-J5-
F5+G5
It-1 + Pt + Ct = Dt +St-1 +It - St
P5 (Over-time
Constraints)
= -E5 + 10 * D5
Ot ≤ 10 Wt
Here, M5 = 0; N5 ≥ 0; O5 = 0; P5 ≥ 0
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Table containing Objective function
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[ ]∑=
+++++++6
13010525003006640
itttttttt CPSILHoW
We need to arrive at minimised solution
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Invoking Solver Tool and following Constraints
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Solver Steps • Set Target Cell: C22, • Equal to : Select Min • By Changing Cells : B5 : I10 • Subject to Constraints B5 : I10 ≥ 0 (All decision variables are non-negative) F10 ≥ 500 ( Inventory at end of period 6 is at least 500) G10 = 0 (Stock-out at the end of 6 months equals 0) M5 : M10 = 0 (workforce constraints) N5 : N10 ≥ 0 (capacity constraints) O5 : O10 = 0 (inventory constraints) P5 : P10 ≥ 0 (over-time constraints) Assume linear model in options and press solve
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Final Solution
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Gravity Models in Supply Chain
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Steel Appliances (SA) • Gravity location models are used to find locations that
minimises the transportation cost.
• SA manufactures high quality refrigerators and cooking ranges
- currently one plant in Denver which supplies entire US - Three parts plant located at Buffalo, Memphis and St. Louis
will supply parts for new factory which will serve Atlanta, Boston, Jacksonville, Philadelphia and Newyork.
- The coordinates, demand, required supply and shipping cost
has been collected.
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Supply sources and Markets for SA
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Gravity Model
• This model assumes that both markets and supply sources
can be located as grid points on plane.
• All distances are calculated as the geometric distance between two points on the plane.
• Assumes transportation cost linearly grows with quantity shipped.
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Input Parameters
• xn, yn : coordinate location of either a market or supply source n
• Fn: Cost of shipping one unit for one mile between facility and either market or supply source n
• Dn: Quantity to be shipped between facility and market or supply source n
• If (x,y) is the location selected for the facility, the distance
dn between the facility at location (x,y) and the supply source or market n is given by:
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Formulae
( ) ( )
−+−=
22 yxd nnn yx
FDd nn
k
nnTC ∑
=
=1
Total Cost (TC) is given by:
The optimal location is one that minimises the total TC
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Equations
Cell Cell formula Equation Copied to
G5
=SQRT($B$16-E5)^2+($B$17-F5)^2
1
G5:G12
B19
=SUMPRODUCT(G5:G12,D5:D12,C5:C12)
2
-
After entering these formulae, invoke solver to solve the problem
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Results
• The coordinates (x, y) = ( 681, 882) has been identified as the location of the new factory which minimises the total transportation cost.
• From the map, these coordinates are close to the border of North Carolina and Virginia.
• The manager should look for desirable sites close to optimal coordinates that have the required infrastructure and appropriate worker skills.
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SC Trading Partners - Benchmarking
using Data Envelopment Analysis (DEA)
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Non-Parametric Analysis Tool
- Data Envelopment Analysis (DEA)
Analyses multiple outputs and inputs simultaneously to arrive at single overall performance index
Uses Linear Programming technique to objectively derive individual weights under MCDM
Organisation under study is called as DMU Limitations
• Dependent on data
X $
1,0
0,00
0
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Contd.
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Motivations to use DEA
• Simplicity and ease-of-use • No need to specify relationships or trade-offs among
performance measures prior to computation • The frontier principle suits benchmarking goal
• Evaluate multiple outputs and multiple inputs simultaneously • Addresses quantitative and qualitative data together • Weights obtained by solving LPP from the data objectively
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Inferences after using DEA
• Measures operational performance relative to peer groups
• Identify performance gaps in inefficient DMUs
• Evaluate improvement opportunities
• Assess operational progress over time
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Methodology - Identification of input (X) and output (Y) variables of DMUs for
performance evaluation through DEA. - In general, radial efficiency (θ) measure takes the form of ratio - Considering all ‘m’ inputs and ‘s’ outputs portraying total factor
productivity measure of a DMU, the unknown variable weights will be represented as vi and ur
Virtual Input = v1x1o + ............... + vmxmo Virtual Output = u1y1o + ............... + usyso - Finally the linear programming technique will be used to maximise the
ratio and to determine weights individually
InputOutput
=θ
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Input and Output Consideration Consideration
• Principle to be adapted for selecting inputs/outputs: lower the better for input value higher the better for output value • n = max { (m*s), (3*(m+s)) } condition has to be satisfied
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Basic Charnes Cooper and Rhodes (CCR) Model
FPo = Fractional Programme
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Converting FP into LPP
LPo = Linear Programme
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Inference after Solving LPP
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Taking Dual* of the LPP (DLP)
Where, λ is the non-negative Column Vector of Variables Θ is radial efficiency X is Input vector and Y is Output vector xo, yo is DMU under study
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Example
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Mathematical Formulation
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Optimal Solution
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Reference Set
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Consolidated Results
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Output Oriented Model
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Example-Case (1 Input and 1 Output Case)
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Graphical Representation
X $
1,0
0,00
0
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Demo Session
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References
1. Chien-Ming Chen, Evaluation and Design of Supply Chain Operations using DEA, Ph.D. Thesis, Erasmus University Rotterdam, 2009.
2. William W. Cooper, Lawrence M. Seiford, Kaoru Tone, Introduction to Data Envelopment Analysis and Its Uses, Springer, 2006.
3. William W. Cooper, Lawrence M. Seiford, Kaoru Tone, Data Envelopment Analysis, 2nd edition, Springer, 2007.
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Session Summary
• Strategies adapted in aggregate planning with trade-off’s
has been elucidated.
• Facility location model in the form of gravity model has been applied.
• DEA models to evaluate the trading partners has been demonstrated.