Week 3: Supply Chain in Operations

Week 3: Supply Chain in Operations

“Introduction … Supply Chain Management: Components … Design of an Appropriate Supply Chain … Issues in Inventory Planning … Reverse Supply Chain … Wrap-Up”
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  • Week 3: Supply Chain in Operations > 3.0 Introduction > Recap
  • Week 3: Supply Chain in Operations > 3.1 Supply Chain Management: Components > Components of a Supply Chain
  • Week 3: Supply Chain in Operations > 3.2 Design of an Appropriate Supply Chain > Supply Chain Structure & Impact on Businesses
  • Week 3: Supply Chain in Operations > 3.3 Issues in Inventory Planning > Inventory Control System for Demand Uncertainty
  • Week 3: Supply Chain in Operations > 3.4 Reverse Supply Chain > Reverse Supply Chains
  • Week 3: Supply Chain in Operations > 3.5 Week 3 Wrap-Up > Summary

Week 3: Supply Chain in Operations > 3.0 Introduction > Recap

  • If you may recall, in week 1, we broadly identified three flow patterns to organizations.
  • In week 2, we looked at capacity as one of the issue because as we all know, every organization has to address issues… …like capacity, productivity, quality, supply chain and so on.
  • Question is why should we worry about supply chain? No organization operates in vacuum.
  • The question is how do we put these together in a way that we can be competitive? That’s what supply chain is all about from an operations perspective.

Week 3: Supply Chain in Operations > 3.1 Supply Chain Management: Components > Components of a Supply Chain

  • Mother Dairy procures milk from hundreds of cooperatives located in several North Indian states including Punjab, Rajasthan,… …Uttar Pradesh, Haryana and even western states like Gujarat.
  • The milk collected from these cooperatives is transported to the Patparganj plant in East Delhi where the milk is collected,… …homogenized, pasteurized and then stored in special large tanks until it is loaded into the tankers for distribution.
  • Skimmed milk, toned milk, double-toned, full-cream milk, all these are the basic milk products available in half and one-liter… …polythene packs.
  • Mother Dairy offers over 30 flavors of ice-creams and many other products which it processes from the milk.
  • Nearly a hundred of its tankers crisscross the city of Delhi and supply milk to over 600 booths located in the city.
  • It also sells loose milk through 200 manually operated containers set up in shops in congested areas, over 400 delivery agents… …who home deliver milk in some localities and about 850 retail shops which retail these milk in polythene packs.
  • First one is procurement of the raw milk from the milk cooperatives and transporting them to the processing plant which is the… …Patparganj plant which I talked about.

Week 3: Supply Chain in Operations > 3.2 Design of an Appropriate Supply Chain > Supply Chain Structure & Impact on Businesses

  • What we mean by structure is that it denotes the entities involved in delivering the goods and services to the ultimate customer and… …their relative positioning, roles and responsibilities.
  • It also determines the nature and the quantum of information and material flows in a chain across various entities.
  • Here is a-a typical supply chain structure and … what you see here is Customer is on one end and the Supplier is on the other end.
  • In supply chain parlance, there is a flow of material from Supplier to Customer.
  • You have Customers and Suppliers and in between you have one, two, three, four.
  • If you add the Supplier and the Customer we are talking of a supply chain structure with six layers in all.
  • The order reaches Factory Warehouse and the order entry system takes one day to convert it to, let’s say, production order or whatever.
  • Information flows further and … Factory has its own … routine of reviewing the material required in order to fulfil the requirements as… …per the sales order.
  • They also in turn send the information, couple of days they take and then the information is sent to, let’s say, the… …Suppliers of the Raw materials.
  • Once the material is ready, Supplier takes three days to prepare the shipment and it is in transit for two days.
  • Materials received, inspection all those are done, kept in the stores, 26 days required for manufacturing, let’s say,… …that’s the manufacturing lead time and then it is dispatched to the Factory Warehouse.
  • Typically this is what happens in a supply chain and … so, on the upstream information flows and on the downstream material flows.
  • This is … the nature of information and material flow that happens in a typical supply chain structure that we are seeing here.
  • Each layer influences the material and information flow in the chain because they decide to review in a certain frequency.

Week 3: Supply Chain in Operations > 3.3 Issues in Inventory Planning > Inventory Control System for Demand Uncertainty

  • On account of uncertainty in demand which is what we are interested in knowing, how to handle that? We need to introduce another type of inventory called safety stock.
  • Remember, in the first video we talked about different types of inventory in organizations.
  • Let us say that … we review the inventory once in fifteen days.
  • You know, 1st of every month and 16th of every month let us say.
  • Let me call the review period as R. Let me use the word R for review period.
  • As we know there is a certain lead time to receive the material.
  • Let me call it as L. So, there is a minimum threshold, let us say.
  • Let me use a capital S for this and typically we call it as order up to level.
  • We reached the review period and this is the level of inventory in review period.
  • It takes time for the inventory to come because we have lead times.
  • We will continue to consume the inventory and after that lead time, material indeed arrives.
  • That’s why the inventory has depleted and then the new inventory has arrived.
  • You continue to consume anyway and by the time you came for the second review period, this is inventory position.
  • Anyway, again there is a lead time for it to come, so we’ll continue to consume and the material indeed arrives.
  • This is the lead time in the second case, let me call it as lead time 2 and lead time 1 and so on.
  • Again, you review and then order this much and you continue to consume and the order arrives and so on.
  • The blue line, let me call it as Inventory Position because it is not just inventory on hand, part of the inventory is also on order.
  • The blue line indicates that and the black line which I have-is the Physical Inventory.
  • This is the quantity ordered during the second time and this is the quantity ordered the third time.
  • How do we order it? We actually find the inventory on hand or inventory position, both are same here.
  • So you just say, I can order only up to this S. This is the inventory position.
  • As we found in this graph, there are two critical decisions which are to be made in any… …inventory control system.
  • In this case, we took a example of 15 days and “how much to order” is determined by this capital S. Order up to the level and the Inventory Position, these two together determine the “how much to order.
  • Let me call it as mu and standard deviation of the demand, let me call it as sigma.
  • Let’s say some unit time like weekly or daily or whatever.
  • Suppose, let’s say alpha is 95%. So, what are we saying now? We are now drawing a line and saying the line is drawn in such a way that the area covered in this curve is going to be 95%. In other words, we are saying, I want to shift this vertical line from this point to this point.
  • Essentially, for an alpha of 95%, we want to know what is the value of K? And moment we know K, we can actually multiply it with standard deviation and then do our calculation.
  • We should know the current inventory position because remember then only we know how much to order.
  • Then comes Step 1 and what do we do? We calculate the mean of the demand during lead time and standard deviation.
  • Now, review period is 15 days so let’s say R equal to two weeks and lead time is also two weeks let us say or you know four… …weeks, whatever.
  • That is given by this formula which is nothing but standard deviation per unit time, times the square root of this number R plus L. So, Step 1 is to calculate MD and SD. So now, let’s go to Step 2.
  • We can calculate K. And how do you calculate K? You just feed this function into let’s say Microsoft Excel.
  • We calculate the capital S which is order up to level which is … simply, the summation of the mean demand during lead time which… …is called MD and the safety stock which is SS. We just now calculated that.
  • Once you know S, once you know what is the current inventory position, we know how to order it is simply a difference between S and IP. Graphically, I showed this.
  • “When to order” is already decided which is 16th April and then 1st of May, maybe… …15th, 16th of May and so on because review period is two weeks.
  • Step 0, which is alpha, alpha is already there and … let’s say that we have on hand inventory of 475.
  • Let’s say we actually went and found out and it turns out to be that inventory on hand plus inventory on order put together is 475.
  • Now we need to calculate the Mean Demand during lead time.
  • On 16th of April, what should I do? How much should I order? S is 932, on hand inventory is 475 which is what we just now estimated.
  • We have perhaps an ERP system which is telling us this number which is the inventory position.

Week 3: Supply Chain in Operations > 3.4 Reverse Supply Chain > Reverse Supply Chains

  • Now, let’s look at another aspect of supply chain which is … gaining a lot of … importance, gaining a lot of concern among the… …public, among the business people, among the government and so many different entities.
  • Actually, what Cerebra needs is a good reverse supply chain.
  • Cerebra requires what is called a reverse supply chain.
  • If these arise on account of depletion of natural resources, waste generated from production and service systems and waste on account of… …end of the life products.
  • In the future, every organization needs to worry about a reverse supply chain, not just the forward supply chain.
  • There is going to be something called a reverse supply chain.
  • It’s not just about pushing the products on the forward supply chain and forgetting about it.
  • The question is what happens when we take back the used products from the customers? First thing, steps will be required to discover economic value out of them.
  • Otherwise, why are we doing it? Disassembly of used products will be as important as assembly of new products in a manufacturing system.
  • All these will lead us to the notion of what is called a reverse supply chain.
  • Given this discussion, we should be able to construct a-a reverse supply chain and perhaps, identify various components of it.
  • Here is the supply chain in an illustrative fashion and is our traditional forward supply chain is here because you start with… …raw material, it gets into manufacturing, after that it gets into distribution.
  • Product Take-Back regulation will sue the company not the customer.
  • The first thing is we need a Product Take-Back Network.
  • You need to collect the product when the customer says, “I don’t need it anymore.
  • We need to have a used product retrieval.
  • We will call these as Product Take-Back Network.
  • In some situations, a simple repair can be done and then the product goes back to sales and distribution or certain components can be… …remanufactured, it’s little more involved.
  • Liquidate the product, some components may be useful that can be used.
  • One is Product Take-Back Network, let me call it as PTN. Then, you have what is called Product Recovery Network.
  • The question of interest to us is how is it different from traditional understanding of supply chains? Now, we shall first identify who are involved in a typical reverse supply chain? Clearly, multiple entities are involved in a reverse logistics network and all these entities have multiple goals and motivation to… …participate in this reverse supply chain network.
  • First, the customer and the regulatory agencies are important because the regulatory agency sets the agenda for everyone and the… …customer is where the s-supply chain starts because customer says, “end of life, I don’t need this product anymore”.
  • Product take- back network, some people are involved.
  • Product Recovery Network-different players, somebody has to disassemble it.
  • The OEMs, the Original Equipment Manufacturers, may take part in all of the product recovery activities such… …as repair, refurbish, remanufacture, recycle or they may contract these activities to several players.
  • They may collect and recover the used products and sell them to secondary markets, that’s also possible.
  • On account of all these, what one can visualize or start thinking about is that a reverse supply chain planning is a little bit more… …complex than the forward supply chain.
  • The first challenge is the complexity in assessing the inflow of used products because now, customers are spread all over.
  • One is the new component from the forward supply chain and other is the used component that we recovered from a discarded final product.
  • An important question that arise is how are the product recovery activities ultimately organized among all these entities? At the end of the day, the OEM has the ultimate responsibility to satisfy environmental codes and expectations of not only the regulators… …but the society.
  • Certainly we need to reflect on these issues of the supply chain because sustainability is going to be very significant element of doing… …business in the days to come.

Week 3: Supply Chain in Operations > 3.5 Week 3 Wrap-Up > Summary

  • We have now come to the end of module three on supply chain.
  • First of all, every organization will have a supply chain simply because multiple entities get together to create value for the end customer.
  • We need to think about design and operational control aspects of dealing with these multiple entities which make up the… …supply chain.
  • First, design of a supply chain critically depends on the profile of the products and services that we offer to the customers.
  • An innovative product or a service may need a responsive supply chain.
  • There are certain features each of these supply chain may need.
  • Second, the number of layers in a supply chain is an important aspect of supply chain design.
  • Services have three unique characteristics which may influence the supply chain design.
  • All these may call for newer dimensions in supply chain design and operation.
  • You may definitely want to start thinking about various issues that your organization need to address in your journey in setting up the… …reverse supply chain which is an inevitable aspect of any business to profitably operate in the future.

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