Supply Chains

Introduction

Ganesh and Harrison (Ram Ganeshan and Terry P. Harrison. An Introduction to Supply Chain Management. Penn State University) define a supply chain as follows:

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.

Figure 1 shows the flow of materials (raw or finished) in a supply chain.

Figure 1 An example of a supply chain (adapted from Supply Chain Management)

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Decisions in a Supply Chain

There are 3 types of decisions made in a supply chain, shown in Figure 2. As Figure 2 shows there is a hierarchy inherent in these decisions and the upper level decisions (at the top of the pyramid) directly affect the lower level decisions, for example

the monthly production plan at a manufacturing plant is directly affected by the decision about whether to build the plant or not;
the daily production levels at a manufacturing plant are directly affected by the monthly production plan. However, the lower level decisions indirectly affect the upper level decisions, e.g., it is often cheaper to buy land to build a production plant in rural areas, but the day-to-day transportation costs from rural locations may be much higher.

Figure 2 Hierarchy of Supply Chain Decisions (adapted from Supply Chain Management)

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The Supply Chain Tradeoff: Flexibility vs Inventory

When making decisions within a supply chain, managers need to balance the conflicting objectives of increased flexibility vs decreased inventory. By keeping higher inventory at various points along their supply chain, managers can adapt more quickly to changes in demand from customers as lead time and production time are not required. However, the holding cost of keeping inventory is often as high as 30-40% of the inventory value. Managers must keep some safety stock to guard against unusual demand, but they also want to try and keep close to a Just-In-Time (JIT) inventory policy to reduce holding costs.

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Integration and Coordination

Wikitionary defines integration as

The act or process of making whole or entire.

and coordination as

The act of coordinating, making different people or things work together for a goal or effect.

Integration of a supply chain is achieved by coordinating the behaviour of different entities, e.g., manufacturing plants, raw material suppliers, to improve the performance of the supply chain as a whole. General coordination describes the integration of different sectors of the supply chain, e.g., inventory and production planning, sales, distribution. Multi-plant coordination describes the integration of different sectors across several locations, e.g., the inventory and production planning for several different plants is coordinated.

By taking an integrated approach and using both general and multi-plant coordination a supply chain manager can significantly improve the overall performance of the supply chain.

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Optimisation Modelling

Optimisation modelling can be used for many of the decisions in a supply chain. From strategic decisions, e.g., facility location, to tactical decisions, e.g., monthly transportation plans, to operational decisions, e.g., daily production plans. Moreover, these optimisation models can incorporate both general coordination and multi-plant coordination although this often results in large optimisation models which may be difficult to solve.

The OpsRes Web contains many case studies that address various aspects of supply chain optimisation.