LESSON 6: SUPPLY CHAIN MANAGEMENT

Outline

Supply Chain and Supply Chain Management

Supply Chain Database and Planning
Supply Chain Management and Competitive
Advantage
Investment in Supply Chain
Transportation Problem

1
 Supply Chain

A supply chain represents all the stages at which value is

added in producing and delivering a product or service from
suppliers (and their suppliers) to customers (and their
customers).
A conceptual view of the supply chain network is shown on
the next slide. In practice, the supply chain network can be
quite large and complex.

2
 Supply Chain

C u s to m e r C u s to m e r C u s to m e r C u s to m e r

D is t r ib u t io n D is t r ib u t io n
C e n te r C e n te r

M a n u fa c tu re r

S u p p lie r S u p p lie r T ie r 1

S u p p lie r S u p p lie r S u p p lie r T ie r 2

3
 Supply Chain Management

Supply chain management is the coordination of the following

functions and activities along the supply chain:
Planning and managing of supply and demand
Acquiring material
Warehousing
Inventory control and distribution
Producing and scheduling the product or service
Delivery and customer service

4
 Supply Chain Database and Planning

A supply chain database contains information on flow of items

through the supply chain and cater to other planning decisions.
5
Supply Chain Management and Competitive
Advantage

Competitive advantage may be obtained with a total

systems approach to managing flow of information,
materials and services along the supply chain
Text p. 307 discusses how Wal-Mart obtained a
competitive advantage and won market-share over K-
Mart with an investment in information technology
towards an efficient supply chain management.

6
 Investment in Supply Chain

For high profit margin (high tech products, innovative

products) products, its important to create a responsive
supply chain. The goals of investment are:
Reduce stockout
Reduce lead time along the supply chain

7
 Investment in Supply Chain

For low profit margin (staple products, functional products)

products, its important to create an efficient supply chain.
The goals of investment are:
Reduce cost
Increase resource utilization, minimize inventory,
select vendors on the basis of cost and quality, design
products that can be produced depending on such
vendors

8
 Investment in Supply Chain

Functional Innovative
Products Products
Efficient
Supply- Match Mismatch
Chain

Responsive
Mismatch Match
Supply-Chain

9
 Transportation Problem

The transportation problem minimizes the total

shipping costs of transporting goods from m origins
(each with a supply si) to n destinations (each with
a demand dj), when the unit shipping cost from an
origin, i, to a destination, j, is cij.
The network representation for a transportation
problem with two sources and three destinations is
given on the next slide.

10
 Transportation Problem

Network Representation 1 d1
c11
s1 1 c12
c13
2 d2
c21 c22
s2 2
c23
3 d3

SOURCES DESTINATIONS

11
 Transportation Problem
Example
The Riverside Disk Drive Corporation produces
Ambassador drives for personal computers in two
plants located in Waterloo and Toronto. Periodically,
shipments are made from these production facilities
to three warehouses located in Windsor, London, and
Ottawa.

12
 Transportation Problem
Example
Over the next month, the production quantities of the
80 GB drives are expected to be (in thousands of
units)

Plant Anticipated Production (000 units)

Waterloo 70
Toronto 110
So, the total production = 70+110 = 180 (000 units)

13
 Transportation Problem
Example
The amounts shipped to the three warehouses will be
Warehouse Shipment Quantity (000 units)
Windsor 35
London 55
Ottawa 90
So, the total shipment = 35+55+90 = 180 (000 units)
= total production.
As it is here, transportation problems generally require total
production (supply) = total shipment (demand).In case of
inequality a dummy plant or warehouse can be used.
14
 Transportation Problem
Example
The unit costs for shipping 1,000 units from each plant
to each warehouse is given below:
Plant Windsor London Ottawa
Waterloo 420 280 580
Toronto 990 640 820
Determine a pattern of shipping that minimizes total
transportation cost.

15
 Transportation Problem
Example: Network Representation

35 Windsor
420
Waterloo 70 280
580
55 London
990 640
Toronto 110
820
90 Ottawa

SOURCES DESTINATIONS
16
 Transportation Problem
A Greedy Heuristic

The transportation problem will be solved using a

greedy heuristic and Excel Solver.
The heuristic is easy to use, but does not
guarantee an optimal solution. The heuristic
provides an intuition on the structure of the
problem.
An optimal solution can be obtained by solving the
problem as a linear programming problem. Excel
Solver will be used to solve the linear programming
problem.

17
 Transportation Problem
A Greedy Heuristic

The greedy heuristic discussed here is an iterative

approach.
In each iteration, a minimum unit cost
transportation alternative is chosen and the
maximum possible units is transported using that
alternative.
Note that the maximum units to transport is
actually minimum of production available and
shipment required.

18
 Transportation Problem
Example: Greedy Heuristic

Windsor London Ottawa

420 280 580
Waterloo 70
990 640 820
Toronto 110

90 55 35
The initial tableau shows all production volumes (70, 110),
shipments required (90, 55, 35) and all unit costs (in boxes)
19
 Transportation Problem
A Greedy Heuristic

Final solution and cost:

From Waterloo transport
15 units to Windsor, cost = 15(420) = $6,300
55 units to London, cost = 55(280) = $15,400
From Toronto transport
75 units to Windsor, cost = 75(990) = $74,250
35 units to Ottawa, cost = 35(820) = $28,700
Total cost =$124,650
As you will see in the next few slides, linear programming
technique provides a better solution with a cost of
$113,100 when the problem is solved using Excel Solver.
20
 Excel Solution

Set up the spreadsheet as shown on the next slide.

The cells with question marks are the decision variables.
Excel will find numbers to these cells.
The cells with numbers are input cells.
Blank cells B10, C10, D10, E8 and E9 are to be filled up by
formula. Cell B10 will contain total amount shipped to
Windsor as suggested by the Excel solution. So, the formula
for this cell is =B8+B9. Similarly, C10 and D10 will contain
total amount shipped to London and Ottawa respectively.
Cells E8 and E9 will contain total amount shipped from
Waterloo and Toronto respectively. All the formula of these
cells are listed on Slide 27.

21
 Excel Solution

A B C D E F
1 Costs
2 Windsor London Ottawa
3 Waterloo 420 280 580
4 Toronto 990 640 820
5
6 Shipment
7 Windsor London Ottawa Shipped Production
8 Waterloo ? ? ? 70
9 Toronto ? ? ? 110
10 Received
11 Demand 90 55 35
12
13 Total Cost
22
 Excel Solution

Cell Formula
E8 =SUM(B8:D8)
E9 =SUM(B9:D9)
B10 =SUM(B8:B9)
C10 =SUM(C8:C9)
D10 =SUM(D8:D9)
B13 =SUMPRODUCT(B3:D4,B8:D9)

23
 Excel Solution
After the Excel spreadsheet is set up with input values,
formula and blank cells (or, ? cells) for the decision
variables,
click Tools, Solver.
complete the
Solver Parameter dialog box,
Add Constraint dialog box (to access this dialog
box, click Add button) and
Solver Options dialog box (to access this dialog
box, click Options button) as shown in the next
three slides and
click Solve button.
24
Excel Solution

25
Excel Solution

26
Excel Solution

27
 Transportation Problem
A Greedy Heuristic

As shown on the next slide, the Excel solution and costs

are as follows:
From Waterloo transport
70 units to Windsor, cost = 70(420) = $29,400
From Toronto transport
20 units to Windsor, cost = 20(990) = $19,800
55 units to London, cost = 55(280) = $35,200
35 units to Ottawa, cost = 35(820) = $28,700
Total cost =$113,100
This solution is better than the $124,650 solution given by
the heuristic. 28
 Excel Solution

A B C D E F
1 Costs
2 Windsor London Ottawa
3 Waterloo 420 280 580
4 Toronto 990 640 820
5
6 Shipment
7 Windsor London Ottawa Shipped Production
8 Waterloo 70 0 0 70 70
9 Toronto 20 55 35 110 110
10 Received 90 55 35
11 Demand 90 55 35
12
13 Total Cost 113100
29
 READING AND EXERCISES
Lesson 6

Reading:
Section 6.1 pp. 305-312 (4th Ed.), pp. 294-303 (5th Ed.)

Exercises:
6.1 pp. 319-320 (4th Ed.), p. 310 (5th Ed.)

30
 LESSON 7: VEHICLE SCHEDULING

Outline

Vehicle Scheduling Problem

Savings Matrix Method
Identify Distance Matrix
Identify Savings Matrix
Rank Savings
Assign Customers to Vehicles
Sequence Customers within Routes
Construction and Improvement Procedures
Example

31
 Vehicle Scheduling Problem
Goods and items are delivered from one city to
another, one province to another and one country to
another. In this lesson, we shall discuss a procedure
used to deliver items by a fleet of vehicles.
Suppose that a company owns several trucks. The
company needs to deliver items to various customers
within the Windsor City. The manager takes a map of
the city, plots all the customers on the map and finds
that the customers are scattered over the entire
Windsor area.

32
 Vehicle Scheduling Problem
The manager finds that two vehicles will provide a
sufficient capacity for all orders. One vehicle will
serve the East side and the other the West side. To
find out if each vehicle will be able to finish all the
deliveries before their due dates, the manager first
needs a possible route of each vehicle. Different
route provides a different speed limit and risk levels.
The manager draws a fast and safe route for each
vehicle and estimates delivery times. It turns out that
a large number of customers would receive their
orders late.

33
 Vehicle Scheduling Problem
The manager then repeats the process with three
vehicles, one to the South side, one to the East side,
and one to the West side. This plan appeared
suitable to meet all the due dates.
Such problems may appear in case of e.g., an on-line
grocery stores such as http://www.peapod.com. See
the next slide for a picture of their website. The
orders are taken 24 hours on-line. When the
manager starts working in the morning, the manager
has to decide number of vehicles and their routes.

34
35
 Vehicle Scheduling Problem
Assume that
There are orders from 5 different customers
There are 2 trucks each capable of carrying 200
units

36
 Vehicle Scheduling Problem
The manager must solve two sub-problems
1. Split the city into several smaller regions, each of
which will be served by one vehicle. This can be
done by considering a customer first, assigning
the customer to a vehicle, and then assigning
other nearby customers to the same vehicle. So,
this sub-problem will be called assigning
customers to vehicles.
2. Sequence customers served by the same vehicle.

37
 Vehicle Scheduling Problem
The objectives of the vehicle scheduling problem can
be many.
Following are some examples:
Minimize number of vehicles required
Minimize total distance traveled
Minimize total travel time
Minimize cost
We shall consider the problem with the objective of
minimizing total distance.

38
 Vehicle Scheduling Problem

X Coordinate Y Coordinate Order Size

W 0 0
1 0 12 48
2 6 5 60
3 7 15 43
4 9 12 92
5 15 3 80

Assume that the customer locations and order sizes

are as shown above. The locations are plotted on the
next slide. 39
 Vehicle Scheduling Problem

1 4

5
2
W
L o c a t io n o f W a r e h o u s e a n d C u s to m e r s
The customer locations shown on the previous slide
are plotted above.
40
 Savings Matrix Method
Following are the steps of the Savings Matrix
Method:
1. Identify distance matrix
2. Identify savings Matrix
3. Rank savings
4. Assign customers to vehicles
5. Sequence customers within routes

41
 Identify Distance Matrix
First, the Euclidean distances are computed. The
formula and a sample computation is shown below.
The other distances are computed similarly and
shown on the next slide.

Dist ( A, B ) x A xB 2 y A y B 2

Example :
Dist (1,2)

42
 Identify Distance Matrix

Distance Matrix
W Cust 1 Cust 2 Cust 3 Cust 4 Cust 5
Warehouse 0 12.0 7.8 16.6 15.0 15.3
Customer 1 0 9.2 7.6 9.0 17.5
Customer 2 0 10.0 7.6 9.2
Customer 3 0 3.6 14.4
Customer 4 0 10.8
Customer 5 0

43
 Identify Savings Matrix
Instead of serving two different customers by two
different vehicles, if a single vehicle is used to serve
both the customers, then some traveling distance is
saved.
Savings S(A,B) represents the savings in traveling
distance obtained by assigning Customers A and B
to the same vehicle instead of assigning them to
two different vehicles.
The capacity constraint is not considered at the
time of computation of savings. In other words,
when computing savings, assume an infinite
capacity of the vehicles.

44
 Identify Savings Matrix
The savings are computed for all pairs of
customers using the data from the distance matrix.
The formula and a sample computation is shown
below. The other savings are computed similarly
and shown on the next slide.

S ( A, B ) Dist ( A, W ) Dist( B,W ) Dist ( A, B)

Example :
S (1,2)

45
 Identify Savings Matrix

Savings Matrix
Cust 1 Cust 2 Cust 3 Cust 4 Cust 5
Customer 1 0 10.6 20.9 18.0 9.8
Customer 2 0 14.3 15.2 13.9
Customer 3 0 27.9 17.4
Customer 4 0 19.5
Customer 5 0

46
 Rank Savings
The next step is to rank the savings.The idea is to
merge those two customers to the same vehicle,
whose merging gives the highest savings.
The savings are ranked from high to low.
From the savings matrix shown on the previous
slide, the highest savings of 27.9 is obtained by
merging Customers 3 and 4 to the same vehicle.
Next highest savings of 20.9 is obtained by merging
Customers 1 and 3 to the same vehicle.
Similarly the other savings are ranked and shown
on the next slide.

47
 Rank Savings

Savings Matrix
Cust 1 Cust 2 Cust 3 Cust 4 Cust 5
Customer 1 0 10.6 20.9 18.0 9.8
Customer 2 0 14.3 15.2 13.9
Customer 3 0 27.9 17.4
Customer 4 0 19.5
Customer 5 0

Rank (3,4) (1,3) (4,5) (1,4) (3,5)

(2,4) (2,3) (2,5) (1,2) (1,5) 48
 Assign Customers to Vehicles
Next, merge
the customers.
The pair giving 3 O rd e r
C u s to m e r
S iz e
the highest
1 4 1 48
savings is
2 60
merged first if
3 43
the capacity is
5 4 92
available. 2 5 80
W
L o c a t io n o f W a r e h o u s e a n d C u s t o m e r s

Rank (3,4) (1,3) (4,5) (1,4) (3,5)

(2,4) (2,3) (2,5) (1,2) (1,5) 49
 Assign Customers to Vehicles
To merge the
lowest ranked
pair (3,4), the 3 O rd e r
C u s to m e r
S iz e
capacity
1 4 1 48
required =
2 60
43+92= 135 <
3 43
200 = capacity
5 4 92
available. So,
2 5 80
merge 3 and 4.
W
L o c a t io n o f W a r e h o u s e a n d C u s t o m e r s

Rank (3,4) (1,3) (4,5) (1,4) (3,5)

(2,4) (2,3) (2,5) (1,2) (1,5) 50
 Assign Customers to Vehicles
To merge the
next pair (1,3),
capacity 3 O rd e r
C u s to m e r
S iz e
required =
1 4 1 48
43+92+40=
2 60
175 < 200 =
3 43
capacity
5 4 92
available. So, 2 5 80
merge 1 and 3 W
(and 4).
L o c a t io n o f W a r e h o u s e a n d C u s t o m e r s

Rank (3,4) (1,3) (4,5) (1,4) (3,5)

(2,4) (2,3) (2,5) (1,2) (1,5) 51
 Assign Customers to Vehicles
Merging (4,5),
(3,5), (2,4) and
(2,3) requires 3 O rd e r
C u s to m e r
S iz e
more capacity
1 4 1 48
than available.
2 60
The pair (1,4)
3 43
is already
5 4 92
merged. So, 2 5 80
the pairs are W
crossed out.
L o c a t io n o f W a r e h o u s e a n d C u s t o m e r s

Rank (3,4) (1,3) (4,5) (1,4) (3,5)

(2,4) (2,3) (2,5) (1,2) (1,5) 52
 Assign Customers to Vehicles
The next pair
(2,5) are
merged and 3 O rd e r
C u s to m e r
S iz e
assigned to a
1 4 1 48
new vehicle as
2 60
the capacity
3 43
available =
5 4 92
200 > 60 + 80 2 5 80
= 140 = W
capacity
required. L o c a t i o n o f W a r e h o u s e a n d C u s t o m e r s

Rank (3,4) (1,3) (4,5) (1,4) (3,5)

(2,4) (2,3) (2,5) (1,2) (1,5) 53
 Sequence Customers
The next step is sequencing customers assigned to
the same vehicle. A question is in what sequence will
the first vehicle visit customers 1, 3 and 4 and return
to the warehouse? Similarly, another question is in
what sequence will the other vehicle visit customers 2
and 5.
This problem is popularly called the traveling
salesman problem.
We shall use the nearest neighbor rule which states
that always visit the customer that is nearest.

54
 Sequence Customers
3
First, consider the problem of
sequencing customers 1, 3 and 1 4
4 who are assigned to the
same vehicle. The relevant
distances are copied from the 5
distance matrix and shown 2
below. W
L o c a tio n
Distance Matrix
W Cust 1 Cust 3 Cust 4
Warehouse 0 12.0 16.6 15.0
Customer 1 0 7.6 9.0
Customer 3 0 3.6
55
Customer 4 0
 Sequence Customers
Among 1, 3 and 4 is 1 is the 3
nearest to Warehouse. So, the
1 4
vehicle will first travel from
Warehouse to customer 1. The
row (=from) corresponding to
5
Warehouse and the column (=to) 2
corresponding to customer 1 are W
crossed out.
L o c a t io n
Distance Matrix
W Cust 1 Cust 3 Cust 4
Warehouse 0 12.0 16.6 15.0
Customer 1 0 7.6 9.0
Customer 3 0 3.6
56
Customer 4 0
 Sequence Customers
3
Between 3 and 4 is 3 is the
nearest to 1. So, the vehicle will 4
1
travel from 1 to 3. The row
(=from) corresponding to
customer 1 and the column 5
(=to) corresponding to 2
customer 3 are crossed out. W
L o c a t io n
Distance Matrix
W Cust 1 Cust 3 Cust 4
Warehouse 0 12.0 16.6 15.0
Customer 1 0 7.6 9.0
Customer 3 0 3.6
57
Customer 4 0
 Sequence Customers
The only possible tour is then W- 3
1-3-4-W. Next, consider the
4
problem of sequencing customers 1
2 and 5 who are assigned to the
same vehicle. The relevant
5
distances are copied from the 2
distance matrix and shown below. W
L o c a t io n
Distance Matrix
W Cust 2 Cust 5
Warehouse 0 7.8 15.3
Customer 2 0 9.2
Customer 5 0
58
 Sequence Customers
Between 2 and 5 is 2 is the 3
nearest to the Warehouse. So,
1 4
the vehicle will travel from the
Warehouse to customer 2. The
only tour is then W-2-5-W. Note:
5
due to symmetry both W-2-5-W 2
and W-5-2-W have the same W
distance traveled.
L o c a t io n
Distance Matrix
W Cust 2 Cust 5
Warehouse 0 7.8 15.3
Customer 2 0 9.2
Customer 5 0
59
Construction and Improvement Procedures
The nearest neighbor rule just discussed is a tour
construction procedure which can construct a tour
when there is no tour.
The nearest neighbor rule is only a heuristic and
does not guarantee optimality. The tour obtained by
the heuristic may provide improvement opportunities.
If a tour intersects its own path, the tour can be
improved. An improvement procedure will be
discussed now.

60
Construction and Improvement Procedures
For example, consider the
locations and the tour
shown on the right. 4
From the Warehouse, 1 is
the nearest. From 1, 2 is
the nearest, etc. So, the
nearest neighbor rule
produces the tour W-1-2-3- 1 3
4-W. 2
However, the tour W
intersects itself. The arc
(1,2) intersects arc (4,W).

61
 Construction and Improvement Procedures
The improvement
procedure has three
steps. 4

Step 1: Remove the

intersecting arcs. The
result is two disjointed
paths 1 3
2
W

62
 Construction and Improvement Procedures
Step 2: Arbitrarily choose
one of the two disjointed
paths and reverse the 4
path. In this picture, 2-3-4
is reversed to get 4-3-2.
One could as well
reversed 1-W to W-1.
1 3
2
Step 3: There is only one
way to get a tour from the W
two resulting paths.
Construct the tour.
(continued..)
63
 Construction and Improvement Procedures
Step 3 continues: For
example, here the tour is
constructed by adding 4
arcs (1,4) and (2,W)

Note: The resulting tour

may include a new
intersection. In such a 1 3
2
case, apply the procedure
again!. W

64
 READING AND EXERCISES
Lesson 7

Reading:
Section 6.6 pp. 325-330 (4th Ed.), pp. 315-320 (5th Ed.)

Exercises:
6.16 p. 331 (4th Ed.), p. 321 (5th Ed.)

65