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Supply chain management

1. a. Name the six distribution network design II-13 (3marks)

1. manufacturer storage with direct shipping 2. manufacturer storage with direct shipping and in-transit merge 3. distributor storage with package carrier delivery 4. distributor storage with last-mile delivery 5. manufacturer/distributor storage with customer pick up 6. retail storage with customer pickup

b. Write a note on factors influencing distribution network design II- 6 to 10 (7 marks)

Factors influencing distribution network design: at the highest level performance of distribution network should be evaluated along two dimensions; 1. Customer needs that are met 2. Cost of meeting customer needs Thus a firm must evaluate the impact on customer service and cost as it compares different distribution network options The customer needs that are met influence the companys revenues, which along with cost decide the profitability of the delivery network Issues that are influenced by structure of distribution network: 1. response time 3. product availability 7. returnability Response time is the amount of time it takes for a customer to receive an order Product variety is number of different products/ configuration that are offered by distribution network Product availability is the probability of having a product in stock when a customer order arrives 2. product variety 4. customer experience, 5. time to market , 6. order visibility

Customer experience includes ease with which customers can place and receive orders and to the extent to which this is customized. It includes purely experiential aspects, such as possibility of getting a cup of coffee and the value that the sales staff provides Time to market is the time it takes to bring a new product to the market Order visibility is the ability of customer to track their orders from placement to delivery Returnability is the ease with which a customer can return unsatisfactory merchandise and the ability of the network to handle such returns It may seem that a customer always wants the highest level of performance along all these dimensions In practice this is not the case. Customers ordering book at amazon.com are willing to wait longer than those who drive to a nearby Borders store to get the same book In contrast customers find a much large variety of books at amazon compared to Borders store Thus amazon customers trade off fast response time for high levels of variety

c. Write a note on Distributor storage with last-mile delivery II-28 to31 (10 marks) Distributor storage with last-mile delivery: last mile delivery refers to the distributor/ retailer delivering the product to the customers home instead of using a package carrier Last mile delivery is suitable for relatively fast-moving items for which disaggregation does not lead to a significant increase in inventory (grocery in thickly populated cities) Last mile delivery is hard to justify if labour costs are high Diagram in slide(2 slides)many slides there 3.a State the two key decisions when designing a distribution network II-12 (3 marks) Managers must make two key decisions when designing a distribution network: 1. will product be delivered to the customer location or picked up from a preordained site? 2. will product flow through an intermediary (or intermediary location)

b. Write a note on macro-economic factors influencing network design decisions II-(91 to 99 (7 marks) Macroeconomic factors: these include taxes, tariffs, exchange rates, and other economic factors that are not internal to an individual firm. As global trade increased macroeconomic factors have significant influence on the success or failure of supply chain networks Tariffs and Taxes incentives: tariff refers to any duties that must be paid when products and/or equipment are moved across international, state or city boundaries Tariffs have a strong influence on location decisions with a supply chain if a country has high tariff, companies either do not serve local market or setup manufacturing plants within the country to save on duties High tariff lead to more production locations within a supply chain network, with each location having a lower allocated capacity As tariffs come down due to WTO, NAFTA (north american free trade agreement) etc firms can now supply the market within the country from a plant located outside that country without incurring high duties Firms have begun to consolidate their global production and distribution facilities For global firms decrease in tariffs has led to decrease in number of manufacturing facilities and an increase in capacity of each of the facility Tax incentives: are a reduction in tariffs or taxes that countries, states and cities often provide to encourage firms to locate their facilities in specific areas Many countries vary incentives from city to city to encourage investments in areas with lower economic development Such incentives are often a key factor in the final location decision for any plant Developing countries often create free trade zones in which duties and tariffs are relaxed as long as production is used primarily for export This creates a strong incentive for global firms to set up plants in these countries to be able exploit their low labor costs

A large number of developing countries also provide additional tax incentives based on training, meals, transportation, and other facilities offered to work force. Tariffs may also vary based on level of technology. China has waived tariffs for high technology products Many countries also place minimum requirements on local content and limits on imports Such policies lead companies to set up many facilities and source from local suppliers Ex. Until 2004 US limited import of apparel from various countries. As result companies developed suppliers in many countries to avoid reaching the limit from any one company. The end of quota system in 2005 has led to some consolidation of apparel manufacturing in China, India and handful of other countries Exchange rate and demand risk: fluctuations in exchange rates are common and have a significant impact on the profits of any supply chain serving global markets Ex. Dollar fluctuated between102 and 132 yen during 2002 and 2004. A firm selling to US with production in Japan is exposed to risk of appreciation of yen. The cost of production is incurred in yen and revenues obtained in dollars Thus increase in the value of yen increases production cost in dollars, decreasing the firms profits. In 1980 many Japanese manufacturers faced this problem and responded by building production facilities all over the world Exchange risk can be handled by using financial instruments that limit or hedge against, the loss due to fluctuation Suitably designed supply chain networks offer opportunity to take advantage of exchange rate fluctuations and increase profits An effective way is to build overcapacity into the network and make the capacity flexible, so that it can be used to supply different markets to maximize profits by altering the production flows

Companies must take into account fluctuation in demand caused by changes in the economies of different countries When there was recession in Asian countries, companies who had flexibility in their manufacturing system were able meet demand from other countries When designing supply chain network companies must build appropriate flexibility to help counter fluctuations in demand across different countries

c. Write a note on strategic factors influencing network design decisions II-79 to 88 (\10 marks). Strategic factors: a firms competitive strategy has a significant impact on network design decisions with in the supply chain Firms that focus on cost leadership tend to find the lowest-cost location for their manufacturing facilities, even if it is located very far from market they serve Ex. In 1980, US apparel manufacturers moved their manufacturing to low labor cost countries to reduce costs With drop of apparel quotas in 2005, most of the manufacturing is now moving into low-cost countries such as China Firms focusing on responsiveness locate their facilities near to the market and may select high cost location incase firm can react to changing needs of market Ex. Zara a Spanish apparel manufacturer has large part of its production facility in Portugal and Spain in spite of high costs Zara is one of the fastest-growing apparel retailers in the world, mainly because its local capacity allows it to respond quickly to changing fashion trends in Europe Convenience store chain aim to provide easy access to customers as apart of their competitive strategy and have many small stores to cover an area. In contrast Sams club a discount store use competitive strategy to provide low prices and have large stores and customers have to travel miles to reach Sams club. The geographic area covered by Sams club may include a dozen of Convenience stores

Global supply chain networks can best support their strategic objectives with facilities in different countries playing different roles Nike has production facilities at China and Indonesia to focus on cost and produce massmarket lower priced shoes and has facilities at Korea and Taiwan to focus on responsiveness and produce higher priced new designs This allows Nike to satisfy a wide variety of demands in most profitable manner A firm has to identify the mission or strategic role of each facility when designing its global network Kasra Fedrows (1977) suggests following classification of possible strategic roles for various facilities in global supply chain network: 1. Offshore facility: low-cost facility for export production: an offshore facility serves the role of being a low-cost supply source for markets located outside the country where the facility is located The location selected should have low labor cost etc to facilitate low cost of production Many Asian developing countries waive import tariffs if all the output from a factory is exported, they are preferred sites for offshore manufacturing facilities 2. Source facility: low-cost facility for global production: a source facility has low cost as its primary objective, but its strategic role is broader than that of an offshore facility A source facility is often a primary source of product for the entire global network Source facilities tend to be located in places where production costs are relatively low, infrastructure is well developed and skilled work force is available Good offshore facilities migrate over time into source facilities Many Chinese & Indian apparel manufacturers are attempting to transform into source facilities since the drop in apparel quota in 2005 3. Server facility: regional production facility: a server facilitys objective is to supply the market where it is located A server facility is built because of tax incentives, local content requirement, tariff barriers, or high logistics cost to supply the region from elsewhere. In late 1970s, Suzuki partnered with Indian government to set up Maruti udyog.

Initially Maruti was set up as a server facility and produced cars only for Indian market. The Maruti facility allowed Suzuki to overcome high tariffs on imported cars in India 4. contributor facility: regional production facility with development skills: a contributor facility serves the market where it is located but also assumes responsibility for product customization, process improvements, product modifications or product development. Most well-managed server facilities become contributor facilities over time The Maruti facility in India today develops many new products for the Indian and the overseas markets and has moved from being a server to a contributor facility in Suzuki network Out post facility: regional production facility built to gain local skills: an out-post facility is located primarily to obtain access to knowledge or skills that may exist within a certain region. Given its location, it also plays the role of a server facility The primary objective remains one of being a source of knowledge and skills for the entire network. Many global firms have set up outpost production facilities in Japan despite the high operating cost Lead facility: facility that leads in development and process technologies: A lead facility creates new products, processes, and technologies for the entire network. Lead facilities are located in areas with good access to a skilled workforce and technological resources

5 a. What do you understand by transportation Role of transportation in a supply chain:

(3 marks) III-2

Transportation refers to the movement of product from one location to another as it makes its way from the beginning of the supply chain to the customer Transportation is an important supply chain driver because products are very rarely produced and consumed in the Same location

Transportation is a significant component of the costs incurred by most supply chains

b. State the characteristic of air as mode of transport in supply chain management (7 marks) III-16 to 18 Air: airlines have a high fixed cost in infrastructure and equipment Labour and fuel costs are largely trip related and independent of the number of passengers or amount of cargo carried on a flight An airline goal is to maximize the daily flying time of a plane and revenue generated per trip Given the large fixed costs and relatively low variable costs, revenue management is done by varying seat prices and allocation of seats to different price classes Presently airlines practice revenue management for passengers and much less for cargo Air carriers offer a very fast and fairly expensive mode of transportation Small high-value items or time-sensitive emergency shipments that have to travel a long distance are best suited for air transport Air carriers normally move shipments under 500 pounds including high-value but light weight high-tech products Given the growth in high technology, the weight of freight carried by air has diminished over the last two decades even as the value of freight has increased somewhat Key issues that air carriers face include identifying the location and number of hubs, assigning planes to routes, setting up maintenance schedules for planes, scheduling crews, and managing prices and availability at different prices

c. Write a note on package carriers (10 marks) III-19 to 23 Package carriers: package carriers are transportation companies such as FedEx, UPS and the US Postal Service, which carry small packages ranging from letters to shipments weighing about 150 pounds Package carriers use air, truck, and rail to transport time-critical smaller packages.

Package carriers are expensive and cannot compete on price for large shipments They offer shippers rapid and reliable delivery Shippers use package carriers for small and time sensitive shipments. Package carriers also provide other value-added services that allow shippers to speed inventory flow and track order status With increase in JIT deliveries and focus on inventory reduction, demand for package carriers has grown Package carriers are preferred mode of transport for e-business such as Amazon.com, Dell etc., to send small packages to customers Package carriers seek out smaller and more time-sensitive shipments than air cargo especially where tracking and other value added services are important Companies use air-cargo carriers for larger shipments and package carriers for smaller and time-sensitive shipments Given small size of packages and several delivery points, consolidation of shipments is a key factor in increasing utilization and decreasing cost for package carriers Package carriers have trucks that make local deliveries and pick up packages Packages are then taken to large sorting centers from which they are sent by full truck load, rail, or air to sorting centers closest to the delivery point From the delivery point sorting center, the package is sent to customers on small trucks making short runs (milk runs) Key issues in this industry include the location and capacity of transfer points as well as information capability to facilitate and track package flow For final delivery to a customer, an important consideration is the scheduling and routing of the delivery trucks

7.a Name the modes of transportation (3 marks )


Modes of transportation and their performance characteristics :

Supply chain uses a combination of following modes of transportation Air Package carriers Truck Rail Water Pipeline intermodal

b. Write a note direct shipment network (7 marks) III-49 to 53 Design options for transportation network: The design of transportation network affects the performance of a supply chain by establishing the infrastructure with in which operational transportation decisions regarding scheduling and routing are made Direct shipment network: with direct shipment network, the buyer structures his transportation network so that all shipments come directly from each supplier to each buyer location as shown in figure

Diagram slide With direct shipment network, the routing is specified and supply manager only need to decide on the quantity to ship and the mode of transportation to use The major advantage is elimination of intermediate warehouses and its simplicity of operation and coordination The shipment decision is completely local and does not affect other shipping decisions The transportation time from supplier to buyer location is short because each shipment goes direct The direct shipment network is justified if demand at buyer locations is large enough that optimal replenishment lot sizes are close to a TL from each supplier to each location With small buyer locations, a direct shipment network tends to have high cost

If TL is used for transportation, the high fixed cost of each truck results in large lots moving from suppliers to each buyer location resulting in high inventory in supply chain If a LTL is used the transportation cost and delivery time increase, though inventories are lower If package carriers are used transportation costs are very high With direct deliveries from each supplier, receiving costs are high because each supplier must make a separate delivery

c. Write a note on rail as a mode of transport in supply chain (10 marks) III- 29 to 32 Rail: in 2002, rail carried about 4% of US shipments by value, 12% by weight, and over 25% of total ton-miles These figures reflect the use of rail to move commodities over large distances Rail carriers incur a high fixed cost in terms rails, locomotives, cars, and yards There is also a significant trip related labor and fuel cost that is independent of the number of cars but does vary with the distance traveled and the time taken Any idle time, once a train is powered is very expensive because labor and fuel costs are incurred even though trains are not moving Idle time occurs when trains exchange cars for different destinations It also occurs because of track congestion Labor and fuel together account for over 60% of railroad expense It is necessary for railroads to keep locomotives and crew well utilized The price structure and heavy load capability makes rail an ideal mode for carrying large, heavy or high-density products over long distances Transportation time by rail can however be long Rail is thus suitable for very heavy, low value shipments that are not time sensitive. Ex. coal Small time sensitive, short distance or short lead time shipments rarely go by rail

Major operational issues at railroads include vehicle and staff scheduling, track and terminal delays and poor on-time performance Railroad performance is hurt by transition delays Travel time is small fraction of total time for rail shipment Delays get exaggerated because trains are not scheduled but built as and when cars are constituted Cars wait for train to build, adding uncertainty to delivery time Railroad performance can be improved by scheduling some trains instead of building them

10. Discuss transportation infrastructure and policies (20 marks) III-39 to 48

Transportation infrastructure and policies: Roads, seaports, airports, rail and canals are some of the major infrastructure elements that exist along nodes and links of a transportation network In almost all countries government has played a significant role in building and managing these infrastructure elements Improved infrastructure has played a significant role in the development of transportation and the resulting growth of trade Economists such as Vickrey have argued for public ownership of these assets but the setting quasi-market prices to improve overall efficiency Quasi-market prices need to take into account the discrepancy between the incentives of an individual using the transportation infrastructure and public as a whole that owns infrastructure.

This discrepancy is illustrated in figure Diagram slide The user bases his decision to use a highway on the cost and benefit of doing so The figure assumes that different people have different value for making the trip and this value is uniformly distributed over an interval The number of users whose value from a trip, exceeds a particular cost is thus defined by the demand curve

The costs incurred by a motorist include the cost of time spent on the highway and the cost of operating and maintaining the vehicle It is known that time spent increases nonlinearly with congestion on highway Thus the average cost to each motorist increases with traffic flow as shown in fig. Given peoples valuation of the trip, the number of motorists using the road is determined by the intersection of the demand curve with the average cost curve at point A This results in an average cost to motorists of P0 and a traffic flow Q0 From the perspective of public, it is more appropriate to consider how each additional motorist impacts the total cost Observe that an additional motorist increases the average cost by small amount but increases the total cost across all motorists by a larger amount This is represented in fig. by the marginal cost curve, which measures the marginal increase in total cost as a result of additional traffic flow Observe marginal cost curve is higher than the average cost curve In other words, the marginal impact of a motorist on the total cost is much higher than his share of impact From marginal cost perspective, motorists should be charged a toll P1-P0 so that the cost they bear is the true cost they are imposing on the highway system This toll lowers the vehicle flow rate to Q1. In other words, the absence of a congestion toll results in an overuse of the transportation infrastructure and a resulting congestion cost on all users The problem illustrated is given by Vickrey Each member of a group going out to dinner is likely to order expensive item if the plan is to share the bill equally at the end instead of having each person pay his true charge Thus it is fair to say that the overall bill is higher if it is shared equally compared to each person paying based on consumption This is true with transportation infrastructure if pricing is not linked to congestion Quasi market prices for transportation infrastructure thus result in higher prices in peak locations and time, and lower prices other wise

Such pricing is not commonly observed for transportation infrastructure except for roads in Singapore and city centers in few European countries Overall it is important to keep in mind that transportation infrastructure faces congestionrelated problems It may be most effective to charge a congestion toll and use the money generated to improve the effectiveness of transportation infrastructure