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49 Cards in this Set

  • Front
  • Back
Cycle inventory
Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by an upstream partner.
Safety inventory
Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time.
Anticipation inventory
Inventory that is held in anticipation of customer demand
Hedge inventory
A form of inventory buildup to buffer against some event that may not happen.
Transportation inventory
Inventory that is moving from one link in the supply chain to another.
Smoothing inventory
Inventory that is used to smooth out differences between upstream production levels and downstream demand.
Independent demand inventory
Inventory items whose demand levels are beyond a company’s complete control.Kitchen table – Need 500 tables five weeks from now
Dependent demand inventory
Inventory items whose demand levels are tied directly to a company’s planned production of another item.Kitchen table legs – Need 4 per table or 2,000 legsDependent demand inventory systems in supply chains are different than the independent demand inventory systems
Calculating the order quantity (Q)
Q = R-I

R = restocking level

I = inventory level at the time of review

Calculating the restocking level (R)

R = URP+L+z0RP+L

URP = average demand during the reorder period and the order lead time

ORP= standard deviation of demand during the reorder period and the order lead time

z= number of standard deviations above the average demand (higher z values increase the restocking level, thereby lowering the probability of a stockout)

Service Level
A term used to indicate the amount of demand to be met under conditions of demand and supply uncertainty.

Assumes that the demand during the reorder period and the order lead time is normally distributed.

When the demand rate and lead time are constant:
Reorder point = demand x lead time R = dL
Economic Order Quantity (EOQ)
The order quantity that minimizes annual holding and ordering costs for an item.
Economic Order Quantity (EOQ) Model’s Assumptions
Constant demand rate and lead time

Holding and Ordering costs are known and fixed

Price of each unit is fixed.

Only one product is involved.

Ordering in batch from the supplier.

Single delivery for each order.

Holding costs (H)
The cost to hold (carry) a single unit in inventory for a year.
Ordering costs (S)
The cost of placing an order regardless of the order quantity.

EOQ Model

How much to order?

When to order?

Answer:EOQ = Square Root of 2DS/H

where D = annual demand, H = annual unit holding cost, S = order cost

Instantaneous replenishment, i.e. lead time = 0•Answer: when the inventory = 0Constant replenishment lead time = L•Answer:


Quantity Discounts
Price reductions for ordering larger quantities.

(Q/2)H + (D/Q)S + DP

Q=order quantity

H=Holding costs

D=Annual demand

P=Price per unit

S=Ordering cost

Quantity Discounts

Two-step process

1.Calculate the EOQ. If the EOQ represents a quantity that can be purchased for the lowest price, stop – we have found the lowest cost order quantity. Otherwise, go to Step 2.

2.Compare total holding, ordering, and item costs at the EOQ quantity with total costs at each price break above the EOQ. There is no reason to look at quantities below the EOQ, as these would result in higher holding and ordering costs, as well as higher item costs.

Single-Period Inventory System
A system used when demand occurs in only a single point in time.


Determine a target service level (SLT) that strikes the best balance between shortage costs and excess costs.

Use the target service level to determine the target stocking point (TS) for the item.

Single-Period Model


1. Only one product is involved.

2. Uncertain bulk demand realizes in a selling season. We have a demand distribution estimated from past pattern and belief of future trend.

3. A single order arrives before selling season.

4. Excess inventory is salvaged after selling season.

Item Fill Rate and Order Fill Rate
As the number of items per order increases, the order fill rate drops significantly.

If customers of a particular firm tend to order many items at a time, the firm could have reasonable item fill rates but rather poor order fill rates.

Sources of Risk That Impact Global Supply Chain Performance
Risk FactorsPercentage of Supply Chains

ImpactedNatural disasters35

Shortage of skilled resources24

Geopolitical uncertainty20

Terrorist infiltration of cargo13

Volatility of fuel prices37

Currency fluctuation29

Port operations/custom delays23Customer/consumer preference shifts23Performance of supply chain partners38Logistics capacity/complexity33Forecasting/planning accuracy30

Supplier planning/communication issues27Inflexible supply chain technology21

The Offshoring Decision: Total Cost
Comparative advantage in global supply chains drives the decision

Challenge: Quantify the benefits of offshore production along with the reasons for comparative advantage

Two reasons offshoring fails

1.Focusing exclusively on unit cost rather than total cost

2.Ignoring critical risk factors

Risk Management In Global Supply Chains
Risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations

Critical for global supply chains to be aware of the relevant risk factors and build in suitable mitigation strategies

SC Risks to Be Considered During Network Design
CategoryRisk DriversIntellectual property riskVertical integration of supply chainGlobal outsourcing and markets

Procurement riskExchange-rate riskPrice of inputsFraction purchased from a single sourceIndustry-wide capacity utilization

Receivables riskNumber of customersFinancial strength of customers

Inventory riskRate of product obsolescenceInventory holding costProduct valueDemand and supply uncertainty

Capacity riskCost of capacityCapacity flexibility

Tailored Risk Mitigation Strategies During Network Design
Increase capacityFocus on low-cost, decentralized capacity for predictable demand. Build centralized capacity for unpredictable demand. Increase decentralization as cost of capacity drops.

Get redundant suppliersMore redundant supply for high-volume products, less redundancy for low-volume products. Centralize redundancy for low-volume products in a few flexible suppliers.

Increase responsivenessFavor cost over responsiveness for commodity products. Favor responsiveness over cost for short–life cycle products.

Increase inventory
Increase inventoryDecentralize inventory of predictable, lower value products. Centralize inventory of less predictable, higher value products.

Increase flexibilityFavor cost over flexibility for predictable, high-volume products.

Favor flexibility for unpredictable, low-volume products. Centralize flexibility in a few locations if it is expensive.

Pool or aggregate demandIncrease aggregation as unpredictability grows.

Increase source capabilityPrefer capability over cost for high-value, high-risk products. Favor cost over capability for low-value commodity products. Centralize high capability in flexible source if possible.

Flexibility, Chaining, and Containment

Three broad categories of flexibility

New product flexibility: Ability to introduce new products into the market at a rapid rate

Mix flexibility: Ability to produce a variety of products within a short period of time

Volume flexibility: Ability to operate profitably at different levels of output

Flexibility, Chaining, and Containment

As flexibility is increased, the marginal benefit derived from the increased flexibility...


With demand uncertainty, longer chains pool available capacity

Long chains may have higher fixed cost than multiple smaller chains

Coordination more difficult across with a single long chain

Flexibility and chaining are effective when dealing with demand fluctuation but less effective when dealing with supply disruption

Supply Chain Coordination
All stages of the chain take actions that are aligned and increase total supply chain surplusRequires that each stage share information and take into account the effects of its actions on the other stages

Lack of coordination results when:

Objectives of different stages conflictInformation moving between stages is delayed or distorted

Lack of Coordination: Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers

Distorts demand information within the supply chain

Results from a loss of supply chain coordination

The Impact of Lack of Coordination on Performance
Performance MeasureImpact of the Lack of Coordination

Manufacturing cost - Increases

Inventory cost - Increases

Replenishment lead time - IncreasesTransportation cost - Increases

Shipping and receiving cost - Increases

Level of product availability - DecreasesProfitability - Decreases

Obstacles to Coordination in a Supply Chain

- Incentive Obstacles: (e.g. Sales force incentives)

- Information Processing Obstacles: (e.g. Lack of sharing)

Incentive Obstacles:

(e.g. Sales force incentives)

Occur when incentives offered to different stages or participants in a SC lead to actions that increase variability and reduce total supply chain profits

Local optimization within functions or stages of a SC

Information Processing Obstacles:

(e.g. Lack of sharing)

When demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain

Forecasting based on orders, not customer demand

Obstacles to Coordination in a Supply Chain

Operational Obstacles:

Occur when placing and filling orders increases variability

Ordering in large lots

Large replenishment lead times

Rationing and shortage gaming

Obstacles to Coordination in a Supply Chain

Pricing Obstacles

When pricing policies for a product lead to an increase in variability of orders placed

Lot-size based quantity decisions

Price fluctuations

Obstacles to Coordination in a Supply Chain

Behavioral Obstacles

1.Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages

2.Different stages of the supply chain react to the current local situation rather than trying to identify the root causes

3.Different stages of the supply chain blame one another for the fluctuations

4.No stage of the supply chain learns from its actions over time

5.A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performance

Continuous Replenishment and Vendor-Managed Inventories
A single point of replenishment

CRP – wholesaler or manufacturer replenishes NOT based on POS data

VMI – manufacturer or supplier is responsible for all decisions regarding inventory


Key Metrics for Sustainability
1.Energy consumption

2.Water consumption

3.Greenhouse gas emissions

4.Waste generation

•Challenges with scope•Absolute or relative measures of performance

Closed-Loop Supply Chains
Supply chains cause significant harm to the environment when their output ends up in a landfill

Improve sustainability by designing products that can be reused and recycled

Must be supported by a supply chain that ensures recycling

Economic interests of all the parties must be understood and aligned for the activities to be performed

Major difference between closed-loop supply chains and traditional forward supply chains:For a forward supply chain, the customer is at the end of the processes.

For a closed-loop supply chain, there is value to be recovered

Managing Returns – Closed Loop Supply Chains
Closed-loop supply chains have traditional forward supply chain activities and additional activities such as:

–Product acquisition (obtain products from end-users)

–Reverse logistics (activities required to move the returned products from the points of use to points of disposition)

–Test, sort and disposition (activities to determine the condition of products)


–Distribution and Marketing (of refurbished/rebuilt/remanufactured products)

Managing Returns – Closed Loop Supply Chains
Products are returned to companies or third party handlers for a variety of reasons and in a variety of conditions

–Elements of return management


–Screening returned goods to prevent incorrect acceptance of goods


–Finding ways to minimize the number of items that are returned

Closed-Loop Supply Chains

Remanufactured, Rebuilt or Refurbished

Remanufactured: Everything should be new parts except the engine block, usually comes with a new engine warranty.

Rebuilt: Replaces all worn parts, usually with aftermarket parts, usually less than new engine warranty.

Refurbished: There was something wrong from the manufacturer and it was sent back to the manufacturer. Whatever was wrong is fixed and everything else is checked. Usually comes with a new engine warranty.

Supply Chain Information Systems
Customer Relationship Management (CRM): Planning and control activities and information systems that link a firm with its downstream customers.

Market analysis, sell process, order management, call/service center management

Internal Supply Chain Management: Information flows between higher and lower levels of planning and control systems within an organization.

Supplier Relationship Management (SRM): Planning and control activities and information systems that link a firm with is upstream suppliers.

Design collaboration, sourcing decisions, negotiations, buy process, supply collaboration

Enterprise Resource Planning (ERP) systems:
Large, integrated, computer-based business transaction processing and reporting systems.

ERP systems pull together all of the classic business functions such as accounting, finance, sales, and operations into a single, tightly integrated package that uses a common database.

Traditional strengths in routine decision making and in execution and transaction processing.

Captures data to support higher-level decision support systems (DSS).

Decision support systems (DSS)
Computer-based information systems that allow users to analyze, manipulate, and present data in a manner that aids higher-level decision making
Cloud Computing
Cloud computing: A model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction.

Cloud Model

On-demand self-service

Broad network access

Resource pooling

Rapid elasticity

Measured service


Makes it easier for firms to outsource key portions of business process information flows to outside firms.Allows individual or computer systems to upload and retrieve information through a wide range of devices virtually anywhere.Makes supply chain information flows faster, more flexible, and cheaper than ever.