Decision models in global supply chain management

Ram Narasimhan
*
, Santosh Mahapatra
Department of Marketing and Supply Chain Management, Eli Broad College of Business, Michigan State University,
N370 Business Complex, East Lansing, MI 48824, USA
Abstract
Integrative decision making is key to effective supply chain management (SCM). This article examines five illustrative supply chain
decision models that demonstrate the importance of integrating the decisions across the supply chain. The models that are discussed illustrate
the diversity of analytical approaches and their usefulness in managing global supply chain issues. The paper identifies potential areas of
additional research where analytical modeling can generate useful insights. The paper also presents a short categorization of decision models
from literature.
D 2003 Elsevier Inc. All rights reserved.
Keywords: Decision models; Supply chain management; Analytical modeling
1. Introduction
The key concept that distinguishes a supply chain from
its constituent entities is the integration of operations
across the chain. Supply chain management (SCM) goes
beyond mere interface coordination across firms in which
firms optimize firm-level objectives. SCM explicitly rec-
ognizes interdependencies and requires effective relation-
ship management. The challenge in global SCM is the
development of decision-making frameworks that accom-
modate diverse concerns of multiple entities across the
supply chain.
SCM has been the dominant research paradigm of the
last decade. Considerable efforts have been expended in
developing decision models for supply chain problems.
These have been supported by the integration of these
models into decision support systems. These models have
adopted conventional techniques, including mathematical
programming, simulation, heuristics, and statistical and
probability tools.
Developing models for complex SCM issues is a chal-
lenge. This has motivated researches to continue to develop
improved models. Thus, the literature on decision models in
SCM is vast, varied, and evolving. Yet, there has not been
any systematic examination of the models in SCM research.
This paper is an attempt to illustrate the usefulness of SCM
decision models, illustrate their applications in global SCM,
and identify areas of potential research.
2. Literature on decision models in SCM
The literature dealing with decision models in SCM is
extensive. It is difficult to create a typology of models in the
limited space that we have available. In the interest of
reserving space for highlighting a few interesting models,
we organize a selection of papers in Table 1, according to the
decision problem considered, i.e., strategic, tactical, and
operational SCM decisions. The list is not meant to be ex-
haustive. Table 1 provides a short description of the decision
context and the principal issues studied by the authors.
3. Illustrative decision models
Five illustrative models are discussed in this section to
demonstrate the usefulness of models in managing buy-
er supplier behavior, sourcing, integrated operations, and
marketing and logistics in global SCM. We focus our
attention on these models because they address the
upstream and downstream aspects of SCM and illustrate
different modeling approaches. Specifically, the models
relate to (a) investment implications of innovation-based
competition between buyer and supplier, (b) bidding by a
prospective supplier of a product, (c) bid evaluation and
0019-8501/$ see front matter D 2003 Elsevier Inc. All rights reserved.
doi:10.1016/j.indmarman.2003.08.006
* Corresponding author. Tel.: +1-517-353-6381; fax: +1-517-432-1112.
E-mail address: narasimh@msu.edu (R. Narasimhan).
Industrial Marketing Management 33 (2004) 2127
Table 1
Decision models in SCM
Investigations in SCM Authors and year of investigation
Problem area Issues addressed
Strategic decision making
Capacity planning Robust capacity planning against demand uncertainty by
minimizing an augmented objective function that penalizes
the sensitivity for various types of uncertainty
Paraskevopoulos, Karakitsos,
and Rustem (1991)
Global supply chain Modeling for global multistage and multiproduct
manufacturing and distribution
Arntzen, Brown, Harrison,
and Trafton (1995)
Supply chain redesign Quantifying the performance improvements in a PC supply
chain due to supply chain redesign
Berry and Naim (1996)
Supply chain configuration Supply base configuring towards quick and accurate response
for fashion products
Fisher and Raman (1996)
Facility location Maximizing ROI while considering capacity constraints,
multiple products, fixed transportation charge, and spatial
interaction among facilities
Revelle and Laporte (1996)
Supply chain restructuring Optimizing plant location and scale of operation for
different products
Camm et al. (1997)
Locating point of
differentiation
Examining relative merits of alternative points of differentiation Garg and Tang (1997)
Service facility location Solving for optimal location while incorporating both qualitative
and quantitative objectives; simultaneously solves for demand
allocation across different customer zones
Jayaraman (1999)
Tactical aspects of SCM
Incentive compatibility
in a decentralized
supply chain
Proposing a performance measurement scheme that is effective
in aligning the incentives across a supply chain
Managing decentralized
supply chain
Demonstrating incentive-compatible measurement scheme and
communication of accurate customer demand information to the
upstream members in a supply chain facilitates coordination
Chen (1999)
Contracts Joint optimization of contract parameters and inventory control
policies in uncertain demand environments
Henig, Gerchak, Ernst,
and Pyke (1997)
Contracts Analysis of the efficacy of supply contract for a single product
with demand uncertainty
Bassok and Anupindi (1997)
Buyer supplier
relationship
Interfirm incentives between collaborating partners can be
effective in strategic management of innovation
Nair and Narasimhan (2003)
Outsourcing Exploring the relationship between vendors quality cost, the vendors
input quality, and the imperfections of the manufacturing process
Tagaras and Lee (1996)
Bidding Designing effective bids by an unselected bidder on the basis
of historical information
Bid selection Selecting an optimal set of bids and proposing effective negotiation
strategies for unselected bids in order to make them competitive
Talluri (2002)
Supplier selection Supplier selection for strategic and tactical outsourcing Narasimhan et al. (2003a, 2003b)
Supplier evaluation Evaluating suppliers while incorporating performance variability
measures
Talluri and Narasimhan (2003)
Collaborative Planning Assessment of the impact of collaborative forecasting Raghunathan (1999)
and replenishment in a supply chain with random demand Moinzadeh (2002)
Operational aspect of SCM
Integrated operations Development of a comprehensive framework for linking decision
and performance throughout the material productiondistribution
supply chain using a series of linked,
approximate submodels and heuristic optimization procedure
Cohen and Lee (1988)
Integrated distribution Development of an integrated framework that considers the
interactions among a firms distribution strategy, market share,
and distribution costs while designing a profit maximizing
distribution networks
Robinson and Satterfield (1998)
Responsive capacity
planning and scheduling
Allocating capacity, and scheduling shipments for an assortment
of products produced by multiple vendors with varied capabilities
under demand uncertainty
Agrawal, Smith, and Tsay (2002)
Procurement Determination of the optimal purchasing quantities for a
multiechelon inventory system
Clark and Scarf (1960)
R. Narasimhan, S. Mahapatra / Industrial Marketing Management 33 (2004) 2127 22
supplier selection by a buyer dealing in multiple prod-
ucts, (d) integrated operations in a supply chain, and (e)
market integrated distribution. These models encompass
various issues of importance in global SCM.
3.1. Buyersupplier behavior
Nair and Narasimhan (2003) investigate the investment
behavior of collaborating supply chain partners engaged in
product development/innovation based competition. The
model has strategic implications in the context of global
supply chain when a buyer deals with a highly innovative,
nondomestic supplier.
The model considers the investment in product devel-
opment and innovation in a collaborative setting of a
supplier firm, with a near monopoly (e.g., Intel) and a
buying firm (which invests in a substitute technology to
become less dependent on its supplier) as a stochastic
differential game. The principal objective in the problem
is to evaluate (a) the incentive for each firm to invest in
innovation effort, and (b) the strategic interdependence
between the firms with respect to suppliers production
rate, cost structure, and price that impact the buying
companys innovation efforts.
The objective functional of supplier S until the buyer B
successfully innovates is given by:
J
s
u
s
E
u
s
:
Z
s
0
e
rt
pu
s
t c
s
u
s
tdt 1
where, u
s
(t) denotes the production rate at time t; p(.)
denotes the price function of the buyer firm B; and c
s
denotes the unit cost for production of the supplier S.
The objective functional of buyer B is the expected gain
from innovation, given by:
J
B
u
B
E
u
B
:
(
Z
s
0
e
rt
ru
s
t c
u
u
B
tdt
e
rt
rp
1
c
B
=r
)
2
where, r(u
s
), is the net gain in demand for firm Bs product;
c
B
denotes the unit production cost of the firmBfor achieving
Table 1 (continued)
Investigations in SCM Authors and year of investigation
Problem area Issues addressed
Operational aspect of SCM
Procurement Assessment of inventory implications of quantity allocation when
the raw material or component is dual sourced by the buyer and
the supply process is uncertain
Anupindi and Akella (1993)
Replenishment policy Determinations of optimal policy parameters for a multiechelon
inventory system with an option to replenish their inventory through
either a normal or a more expensive emergency resupply channel
Moinzadeh and Aggarwal (1997)
Competitive inventory
policy in supply chain
Game theoretic investigation of the negative effect of competition
in a two-stage serial supply chain with stationary stochastic demand
Cachon and Zipkin (1999)
Replenishment policy in
vendor managed
inventory systems
Renewal-theoretic optimum replenishment quantity and dispatch
frequency in case of Poisson demand in VMI systems
Cetinkaya and Lee (2000)
Inventory management Analysis of the (de)stabilizing effect of inventories in multiechelon
manufacturing/distribution supply chains
Bagahana and Cohen (1998)
Production, planning
and scheduling
Analysis of the impact of uncertainties of production and demand
for the finished product on the production planning, inventory control,
quality improvement, and capacity planning
Tang (1990)
Multistage production
system
Study of requirement planning in multistage production-inventory
systems taking into account stability of production, trade-off between
capacity and the inventory requirements
Graves, Kletter,
and William (1998)
Production planning Production planning for variable production capacity, random yields,
and uncertain demand in a periodic review environment to minimize
the total discounted expected costs of production, inventory holding,
and shortage
Wang and Gerchak (1996)
Production scheduling Evaluation of merit of integrated production schedules for reducing
the negative effects of schedule revisions
Lee and Wei (2001)
Logistics postponement Evaluating the cost of various postponement strategies Zinn and Bowersox (1988)
Delivery reliability Analysis of the impact of buyer-specified delivery windows on the
suppliers delivery performance
Grout (1998)
Lateral shipment Effect of lateral transshipments and direct deliveries on inventory cost Alfredsson and Verrijdt (1999)
Supply chain coordination Analysis of efficacy of quantity discount as coordinating mechanism in
purchasing and production
Munson and Rosenblatt (2001)
Information sharing Analysis of relation between supply-chain profits and
information sharing
Kulp (2002)
R. Narasimhan, S. Mahapatra / Industrial Marketing Management 33 (2004) 2127 23
successful innovation; c
U
denotes the cost of the R&D effort
of firm B; and u
B
s
(t) denotes the innovation rate by firm B.
The model provides insights about the incentive for each
firm to manage investments in innovation and highlights
the significance of coordinated efforts among marketing,
R&D, and operations for successful product development
activities.
3.2. Sourcing
Competitive bidding is one of the most common
approaches in sourcing. With the emergence of e-commerce,
it is relatively easy for suppliers anywhere in the world to
respond to RFQs. Promotion of effective bidding and
careful evaluation of bids are essential aspects of compet-
itive bidding-based global sourcing.
3.2.1. Effective bidding by a supplier
From the perspective of an international supplier, suc-
cessful bidding is complex due to competition, growing
importance of nonprice factors, and the difficulty in dis-
cerning the buyers preference structure across attributes.
Narasimhan, Talluri, and Mahapatra (2003a) propose multi-
attribute bidding models for effective bidding strategies by a
supplier. These indirectly capture the buyers relative pref-
erence for various attributes by analyzing the data on
historical winning and losing bids, and suggest required
levels for the attributes to be successful in the next period.
We discuss here the case wherein there is a single winner.
The model considers n periods with multiple bidders in
each time period, but a single winner in each period. It
maximizes the difference between the values of the
winning and losing bids subject to the restrictions that
each of these values cannot exceed a score of 1, which are
normalization constraints that bound the problem without
changing the fundamental nature of the problem. It then
derives buyers preference weights for attributes, maximiz-
ing the difference between the winning and test bid. The
relative values of bids are determined with respect to
buyers preference weights. Thus, the model identifies
what makes the winning bid different from the test bid,
which helps modify the test bid to be more competitive in
future time periods. The model is shown below:
bi
max
v
1
Q
W
i
v
2
D
W
i
u
1
P
W
i

v
1
Q
L
i
v
2
D
L
i
u
1
P
L
i

s:t
v
1
Q
W
i
v
2
D
W
i
u
1
P
W
i
V1
v
1
Q
L
i
v
2
D
L
i
u
1
P
L
i
V1
k
1
v
1
Vv
2
Vk
2
v
1
v
1
; v
2
; u
1
z0
g
3
where, Q
i
W
, D
i
W
, and P
i
W
are the quality, delivery, and price
for the winning bid in ith time period, respectively; Q
i
L
,
D
i
L
, and P
i
L
are the quality, delivery, and price for the test
bid in ith time period, respectively; v
1
, v
2
, and u
1
are the
weights attached to quality, delivery and price, respective-
ly; k
1
and k
2
are scalars based on broad buyer-based
preferences.
This model is a nonlinear programming problem that can
be linearized by normalizing, i.e., setting the least common
multiplicator (LCM) of the denominators in objective func-
tion to 1, and rewriting the nonlinear constraints in a linear
form. The model is solved n times in determining the
optimal attribute preference weights that discriminate be-
tween the winning and the test bid in each period. The
weights obtained in each time period may be exponentially
smoothed in order to estimate the weights and utilized in
designing the bid attributes by the bidder in the (n + 1)th
period, by comparing those with the winning bid in the nth
time period, potentially the most competitive bid in the
(n + 1)th period. Alternatively, the bidder may design bid
attributes by comparing those against the potentially most
competitive (target) bid of (n + 1)th period. Expression (4) is
utilized in obtaining the bid attributes of the bidder in
question for the (n + 1)th period.
v
1
Q
T
n1
v
2
D
T
n1
u
1
P
T
n1
z
v
1
Q
W
n
v
2
D
W
n
u
1
P
W
n
4
where Q
n + 1
T
, D
n + 1
T
, and P
n + 1
T
are the quality, delivery, and
price attributes of the test bid in the (n + 1)th time period,
respectively; Q
n
W
, D
n
W
, and P
n
W
are the quality, delivery, and
price attributes of the winning bid in the nth time period,
respectively; v
1
, v
2
, and u
1
are the smoothed quality,
delivery, and price weights, respectively. In expression (4),
each of three factors for the test bid are sequentially kept
constant and the other two factors are varied in determining
the necessary adjustments to make the test bid competitive
in the (n + 1)th period. Such analysis provides a range of
options for the bidder that are economically and technolog-
ically feasible.
3.2.2. Supplier selection
Evaluating bids is complex when a firm has to evaluate
multiproduct, multiattribute bids for procuring multiple
products with varied competitive priorities. Narasimhan,
Talluri, and Mahapatra (2003b) propose a model for eval-
uating competitive bids by a firm, which deals in a portfolio
of products with varied competitive priorities and requires
that suppliers meet specific supply arrangements.
The modeling scenario is the following: a buyer solicits
bids for multiple products from domestic and international
suppliers with product-specific capacity constraints. Each
supplier may bid for a single or multiple products in the
same bid, and may submit multiple bids that differ across
cost, quality, delivery, and other considerations. The buyer
R. Narasimhan, S. Mahapatra / Industrial Marketing Management 33 (2004) 2127 24
has product-specific preference for various attributes. In
each period, the buyer incurs variable direct cost and
indirect fixed cost of procurement. The buyer seeks to
maximize cost, quality, and delivery performance with
acceptable transaction complexity measured by the total
number of bids selected. The model uses multi objective
linear programming (MOLP) approach with minmax ob-
jective for obtaining Pareto-optimal solution. It identifies
strategic and tactical supply arrangements.
3.2.2.1. Notations used in the mathematical model. C is
direct cost of procurement; Q is quality level (above the
minimum requirement) of all procurements; D is delivery
level (percent on-time delivery above the minimum require-
ment) of all procurements; X is quantity of product i
procured by a bid r from a supplier j; Q
irj
is quality of
product i from supplier j through bid r; QL
i
is threshold
quality level for product i; D
irj
is delivery standard of
product i from supplier j through bid r; DL
i
is threshold
delivery level for each product i; P is the price of a product;
V is the minmax variable; ia[1,N] is the product identifier;
r
s
a[1,R
s
] is the bid identifier for bids having a single
product; r
m
a[1,R
m
] is the bid identifier for bids having
multiple products; ja[1,J] is the supplier identifier;
b
irj
a[0,1], represents allocation of product i to supplier j;
via bid r; b
j
a[0,1], represents selection of supplier j; x
1i
,
x
2i
, x
3i
, x
4
, and x
5
are the buyers preference weights for
direct cost, quality, delivery performance, number of bids
(transaction complexity), and indirect (coordination) cost;
C
irj
=variable (direct) cost of sourcing product i from
supplier j through bid r; and is given by:
C
irj
P
irj
X
irj
bi; br; bj
and f(AC
j
) = indirect cost (due to ordering, coordinating, and
managing the relationship with supplier) due to sourcing
products from supplier ( j).
3.2.2.2. Optimization objectives. The model optimizes
cost, quality, delivery, transaction complexity, and max
min objectives subject to threshold quality, delivery perfor-
mance, demand, supply and capacity constraints, and min-
imum order size.
3.2.2.3. Cost minimization. Two cost-minimization objec-
tives are used to minimize the direct and indirect costs of
procurement, respectively.
Min C
i

X
R
s
r
s
1
X
J
j1
C
ir
s
j
b
ir
s
j
X
R
m
r
m
1
X
J
j1
C
ir
m
j
b
ir
m
j
bi 5
Min AC
X
J
j1
f AC
j
b
j
6
3.2.2.4. Transaction complexity minimization (minimize the
number of selected bids)
Min b
X
N
i1
X
R
s
r
s
1
X
J
j1
b
ir
s
j

X
N
i1
X
R
m
r
m
X
J
j1
b
ir
m
j
7
3.2.2.5. Quality and delivery performance maximization
Max Q
i

X
R
s
r
s
1
X
J
j1
Q
ir
s
j

QL
i
b
ir
s
j

X
R
m
r
m
1
X
J
j1
Q
ir
m
j
QL
i
b
ir
m
j
; bi 8
Max D
i

X
R
m
r1
X
J
j1
D
ir
s
j
DL
i
b
ir
s
j

X
R
m
r
m
1
X
J
j1
D
ir
m
j
DL
i
b
ir
m
j
bi 9
The above optimal values are used as target (ideal) values
for selecting bids and suppliers while obtaining Pareto-
optimal solution.
3.2.2.6. Minimizing the maximum difference from ideal level
of performance across relevant attributes
Min V
Subject to Minimax constraints that limit the acceptable
percentage deviation from the target (ideal) cost, quality,
delivery performance, and transaction complexity levels
according to the subjective preference structure of the buyer
for the above attributes.
For illustration, the Minimax constraints for cost and
quality are presented here.
x
1i
C
i
C
imin
=C
imin
100 V V; bi 10
x
2i
Q
imax
Q
i
=Q
imax
100 V V; bi 11
The model is implemented in two stages in each pro-
curement period.
3.3. Integrated operations
Integrated operations aims at synergy across the supply
chain composed of domestic and international entities by
linking local target performance with overall performance
considerations. For example, a leading automotive manu-
facturer sourced (micro) electric motors from Hong Kong
and electronic control panels from a supplier in Japan. The
R. Narasimhan, S. Mahapatra / Industrial Marketing Management 33 (2004) 2127 25
supplier from Hong Kong was chosen for its unique design
capabilities and ability to supply globally high-quality
motors at a low cost. The supplier of control panels in
Japan was chosen for reliability and quality.
3.3.1. Strategic analysis of integrated productiondistribu-
tion systems
Cohen and Lee (1998) in a seminal work developed an
integrated framework to analyze parallel multistage discrete
batch manufacturing operations. The model predicts the
performance of a firm with respect to inventory cost, fixed
and variable cost of operation, customer service level, and
flexibility of operations. The equations in the framework are
large in number and a complete discussion of the model is
not presented here due to space constraint.
The analytic framework considers four linked submo-
dels: (a) material control, (b) production control, (c)
finished goods storage, and (d) distribution network con-
trol. Since optimizing the whole system is computationally
infeasible, they adopt a decomposition approach in which
each submodel is solved for optimal operating policy with
respect to a set of control parameters. The control param-
eters set at one submodel serve as linkages to another
submodel. The above submodels are implemented in a
given sequence with the output of one acting as input to
other subproblems for computing the feasible optimal
operating policies while satisfying the service levels for
individual submodels.
3.4. Market integrated distribution
Robinson and Satterfield (1998) propose an integrated
planning framework that considers the interactions among a
firms distribution strategy, market share, and distribution
costs while designing the profit maximizing distribution
networks. It has three components: (a) a logit model for
estimating market share for various demand-influencing
parameters such as product price, distribution service, pro-
motion, and lead time, b) a mixed-integer programming
model for finding optimal distribution network designs for
specific cost and demand parameter values, and (c) sensi-
tivity analysis of the design. The structure of the framework
is discussed below.
3.4.1. Assessing market share
The market share for a particular distribution facility
serving a product family in a market zone is estimated using
the following logit model.
P
ijk

e
a
jk

P
S
s1
b
sjk
X
sjk
1 e
a
jk

P
S
s1
b
sjk
X
sjk
12
where P
ijk
= estimated market share in market zone k for
product family j when served from facility i; s represents the
performance level on a particular attribute (such as price)
that is offered from facility i to customers of product family
j in market zone k; b
sjk
is a coefficient describing the market
zone ks attractiveness to attributes when purchasing product
family j from facility i; X
sjk
is a binary variable describing
the presence or absence of attributes when product j is
supplied to market k from facility i; and a
jk
is the logit
model intercept for purchases of product family j from
market zone k at facility i.
3.4.2. Optimal network design
The optimal network maximizes the total net profit of
serving various market zones while satisfying facility,
product, and market allocation constraints. Thus, the
objective is:
Maximize; Z
X
m
i1
F
i
Z
i

X
m
i1
X
n
j1
F
ij
Y
ij

X
m
i1
X
n
j1
X
q
k1
R
jk
C
ijk
P
ijk
d
jk
X
ijk
13
where n = number of product families; Y
ij
= decision vari-
able for assigning product family to j to facility I;
F
ij
= annual fixed cost for assigning product family j to
facility i; C
ijk
= unit variable cost of supplying market zone
k with product family j from facility i that includes all
costs for inbound material processing, packaging, and
customer delivery; X
ijk
= decision variable for serving zone
k with product family j from facility i; R
jk
=unit revenue
for product family j in zone; d
jk
= total annual demand for
product family j in zone k; P
ijk
= market share for serving
zone k from facility i with product family j; Z
i
= decision
variable for assigning a facility i and F
i
= annual fixed cost
for establishing facility i.
Sensitivity and what if analyses assess robustness
of the proposed design against error in market share
estimation, and making allocations decisions on estimated
profit.
4. Conclusion
We have attempted to illustrate the usefulness of decision
support models in the global supply chain context. The
models presented are a convenience sample representing
the work that the authors have recently completed and that
of others. Due to space limitation, it is impossible to do
justice to the topic. We were guided in the choice of models
by a desire to indicate the usefulness of dynamic (e.g.,
dynamic game theory) and static (e.g., network optimiza-
tion) as well as single-objective and multiple-objective
models.
Decision models in global SCM can be developed using
well-established, analytical techniques. While operational
R. Narasimhan, S. Mahapatra / Industrial Marketing Management 33 (2004) 2127 26
areas in SCM have been investigated in the extant literature,
strategic and tactical aspects of global SCM that focus on
interorganizational interactions and arrangements have not
been investigated adequately. A number of research issues
pertinent to global supply chains can be identified: buyer
supplier relationship and information exchange, supply
chain agility, and value partitioning and value positioning.
In this context, analytical modeling in SCM can benefit
from techniques from other disciplines such as auction
theory, real-options, and game theory in analyzing the
decisions.
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Ram Narasimhan is a University Distinguished Professor in Operations
Management in the Department of Marketing and Supply Chain Manage-
ment at The Eli Broad Graduate School of Management, Michigan State
University, USA.
Santosh Mahapatra is a PhD candidate in Operations and Sourcing
Management area in the Department of Marketing and Supply Chain
Management at The Eli Broad Graduate School of Management, Michigan
State University, USA.
R. Narasimhan, S. Mahapatra / Industrial Marketing Management 33 (2004) 2127 27