w1l2 Concepts Unannotated v9

CTL.
SC1x -Supply Chain & Logistics Fundamentals
Introduction to Logistics & Supply

Chain Management:
Key Concepts
MIT Center for

Transportation & Logistics
Agenda
Push vs. Pull Systems
Segmentation Strategies
n
n
Products
Supply Chains
Handling Uncertainty
CTL.SC1x - Supply Chain and Logistics Fundamentals
Lesson: Key concepts
Push vs. Pull Processes
You can learn almost everything about

logistics from a sandwich shop
How many different
sandwiches can be made?
Sandwich = Bread + Protein + Spread +Topping
18
10
20
21,600 Unique
Sandwiches!
Make to Order
Make to Stock
Engineer to Order
By J immy J ohn's Franchise, LLC http://upload.wikimedia.org/wikipedia/commons/e/e3/Jimmy_John_employees_having_fun_making_sandwiches.jpg
By U.S. Department of Agriculture (20111012-FNCS-LSC-0242) [ CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], v ia Wikimedia Commons
http://upload.wikimedia.org/wikipedia/commons/0/06/20111012-FNCS-LSC-0242_-_Flickr_-_USDAgov.jpg
Pull vs Push Processes

Push
n
n
n
Execution is performed in anticipation of an order

Demand is forecasted
Proactive process based on projected need/demand
Pull
n
n
n
Execution is performed in response to an order

Demand is actual and known with certainty
Reactive process based on actual need/demand
Push / Pull Boundary

n
Point where push processes are separated from pull processes
Story of Three Sandwiches

Buy Raw
Materials
Prepare
Components
Final
Assembly
Sell
Product
PUSH
PUSH
PUSH
PULL
PUSH
PUSH
PULL
PULL
PUSH
PULL
PULL
PULL
Ready Made Turkey Wrap
Signature Ham Sandwich
One-of-a-Kind Dagwood
By U.S. Department of Agriculture (20111012-FNCS-LSC-0195) [ CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], v ia Wikime

http://commons.wikimedia.org/wiki/File%3A20111012-FNCS-LSC-0195_-_Flickr_-_USDAgov.jpg
By pdphoto.org (pdphoto.org) [ Public domain], v ia Wikimedia Commons http://commons.wikimedia.org/wiki/File%3ASandwich.jpg
"Dagwood" by EncycloPetey - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 v ia Wikimedia Commons
6
http://commons.wikimedia.org/wiki/File:Dagwood.JPG#mediaviewer/File:Dagwood.JPG
Push vs Pull Processes

What about pure systems?
n
Pure push leads to higher inventory levels and potential spoilage /

imbalance but faster cycle time
Pure pull very rare
Mixed systems are common Where is the Push-Pull Point?

n
n
Push undifferentiated, raw product or components

Pull finished product
Benefits of mixed systems

n
n
Allows for efficient mass customization (Postponement)

Allows for pooling of products aggregating demand
Key Principles
n
n
Maximize external variety with minimal internal variety

Keep in-process inventory as Raw as Possible (RAP)
Segmentation
Supply Chain Segmentation

In reality . . .
n
n
n
Firms operate multiple supply chains

There is no such thing as a one-size-fits-all supply chain
Firms segment in order to match the right method to the right
product/customer/supplier combination
Firms can segment products, customers, suppliers, etc.
Segmentation only makes sense if you do something

different in how you buy, make, move, store or sell!
Purchasing / Procurement
Forecasting / Demand Planning
Inventory Planning
Inventory Control
Warehousing / Materials Handling

Order Management
Transportation Management
Customer Service
How should I treat these products differently?
c
c
c
Summer
Winter
Fulfillment
Center
Distribution
Center
Fulfillment
Center
c
c
c
By Tage Olsin (Cropped f rom I mage:Baseball.jpg by Tage Olsin) [ CC-BY-SA-2.0

(http://creativecommons.org/licenses/by-sa/2.0)], v ia Wikimedia Commons
Fulfillment
http://commons.wikimedia.org/wiki/File%3ABaseball_(crop).jpg
Center
By Matt Boulton derivative work: MrPanyGoff [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], v ia
Wikimedia Commons http://commons.wikimedia.org/wiki/File%3AIce_hockey_puck_-_2.jpg
Ball, Braden (2012) Simulation as a Method for Determining Inventory Classifications f or Allocation, MIT Masters Thesis
c
c
c
10
Supply Chain Segmentation

How many segments? (Rules of thumb)
n
n
n
n
Homogenous- within the segment should be similar

Heterogeneous- across segments should be very different
Critical Mass - should be big enough to make it worthwhile
Pragmatic - dimensions should be useful and communicable
How can I segment my customers or suppliers?

Lead time
Purchase History
Geography
Sales Trends
Strategic Importance
Service Level
Order Size/Volume
Demographic
Channel Segmentation
How can I segment my products?

n
n
n
Physical characteristics (value, size, density, etc.)

Demand characteristics (sales volume, volatility, sales duration, etc.)
Supply characteristics (availability, location, reliability, etc.)
Adapted f rom Prashant Yadav (2005) Course Notes, Zaragoza Logistics Center.
11
Distribution of SKUs
12
Product Segmentation
Local Grocery Store
~20,000 SKUs
n Categories: Dry, Frozen, & Perishables
Analysis of Dry Goods (~8,000 SKUs)
n 1.156 M SKUs sold in 1 year
n
Number of units sold per SKU

w
w
w
w
Mean 144
Median 72
Mode 0
Std Dev 355
Biggest Sellers?
Biggest Sales Day?
Top Sellers
1.
2.
3.
4.
5.
EVAPORATED MILK 12 OZ
BATHROOM TISSUE
BOTTLED WATER 1 GALLON
MACN CHEESE
CANNED WHITE TUNA
How are products distributed in terms of sales volume?

Uniform? Normal? Other?
Kerslake, Christopher (2005) A Method f or Analyzing t he Delivery Frequency From a Distribution Center t o a Retail Grocery Store, MIT Masters Thesis
"Faced products on a s upermarket shelf" by Amnesiac86 - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 v ia Wikimedia Commons -
http://commons.wikimedia.org/wiki/File:Faced_products_on_a_supermarket_shelf.JPG#mediaviewer/File:Faced_products_on_a_supermarket_shelf.JPG.
13
Potential Product Distributions

100%
90%
Percent of Sales Volume
80%
70%
60%
50%
40%
144
30%
20%
10%
144
144
144
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Percent of SKUs
Uniform
Normal
Power
LogNormal
14
Frequency of SKU Sales

100%
90%
80%
Percent of Items Sold
70%
60%
y = 1.1245x0.3784
50%
R = 0.9717
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of Products
This is an example of the Power Law, y=axk

Why is this important?
Is this distribution unique?
90%
100%
Example: Distribution of Traffic on Lanes

Full Truckload movements between Postal Codes in US
5 million shipments on ~400k lanes
100%#
90%#
3% of volume is handled
by 43% of the lanes!
Percent'of'Total'Volume'(Shipments)'
80%#
70%#
60%#
Very few traffic lanes account

for the vast majority of
truckload movements.
50%#
50% of volume is handled

by 3% of the lanes!
40%#
30%#
20%#
10%#
0%#
0%#
10%#
20%#
30%#
40%#
50%#
60%#
Percent'of'Total'Lanes'(5'digit'postal'code'to'5'digit'postal'code)'
70%#
80%#
90%#
100%#
16
Power Law (y=axk)

Exceptionally common in physical and social systems
n
n
n
n
n
n
n
n
n
n
Severity of hurricanes and earthquakes

Income within a population (Paretos Law)
Visits to websites (Nielsens Law) & blogs
Frequency of words in any language (Zipfs Law)
Frequency of digits within tables (Benfords Law)
Frequency of authors citations in literature (Lotkas Law)
Animals metabolic rates with respect to mass (Kleibers Law)
Profitability of customers & products
Distribution of volume on traffic lanes
Questions from students in a class
The important few versus the trivial many
Fundamental Insight
Distribution of many phenomena across a

population follow a Power Law relationship
17
ABC Analysis
18
Segmentation: ABC Analysis

Class A Items - the important few
Very few high impact items are included
n Require the most managerial attention and review
n Expect many exceptions to be made
Class B Items the middleshare
n Many moderate impact items (sometimes most)
n Automated control w/ management by exception
n Rules can be used for A (but usually too many exceptions)
Class C Items - the trivial many
n Many if not most of the items that make up minor impact
n Control systems should be as simple as possible
n Reduce wasted management time and attention
n Group into common regions, suppliers, end users
n
Remember these are arbitrary classifications

19

ci
Part ID
5497J
3K62
88450
P001
2M993
3HHT8
56M4
89KE
45O3
55K2
978SD3
78HJQ2
23LK
990RT
58JH4
2340P
3784
38JQ2
56TT7
7UJS2
Price
$ 2.25
$ 2.85
$ 1.50
$ 0.77
$ 4.45
$ 6.10
$ 3.10
$ 1.32
$ 12.80
$ 24.99
$ 7.75
$ 0.68
$ 0.25
$ 3.89
$ 7.70
$ 6.22
$ 0.85
$ 0.77
$ 1.23
$ 4.05
Di
Annual
Demand
260
43
21
388
612
220
110
786
14
334
24
77
56
89
675
66
148
690
52
12
4,677
ci D i
Annual $
Value
$ 585.00
$ 122.55
$ 31.50
$ 298.76
$ 2,723.40
$ 1,342.00
$ 341.00
$ 1,037.52
$ 179.20
$ 8,346.66
$ 186.00
$ 52.36
$ 14.00
$ 346.21
$ 5,197.50
$ 410.52
$ 125.80
$ 531.30
$ 63.96
$ 48.60
$ 21,983.84
1.
2.
3.
4.
Identify the SKUs that management

should spend time on
Prioritize SKUs by their value to firm
Create logical groupings
Adjust as needed
Example:
Sample of 20 SKUs
Total of 4,677 units
Total ~$22k
20

ci
Part ID
55K2
58JH4
2M993
3HHT8
89KE
5497J
38JQ2
2340P
990RT
56M4
P001
978SD3
45O3
3784
3K62
56TT7
78HJQ2
7UJS2
88450
23LK
Price
$ 24.99
$ 7.70
$ 4.45
$ 6.10
$ 1.32
$ 2.25
$ 0.77
$ 6.22
$ 3.89
$ 3.10
$ 0.77
$ 7.75
$ 12.80
$ 0.85
$ 2.85
$ 1.23
$ 0.68
$ 4.05
$ 1.50
$ 0.25
Di
Annual
Demand
334
675
612
220
786
260
690
66
89
110
388
24
14
148
43
52
77
12
21
56
4,677
ci D i
Annual $
Value
$ 8,347
$ 5,198
$ 2,723
$ 1,342
$ 1,038
$ 585
$ 531
$ 411
$ 346
$ 341
$ 299
$ 186
$ 179
$ 126
$ 123
$ 64
$ 52
$ 49
$ 32
$ 14
$ 21,984
ciDi
Cum $
Pct Ann
Value
$ Value
$ 8,347
38%
$ 13,544
62%
$ 16,268
74%
$ 17,610
80%
$ 18,647
85%
$ 19,232
87%
$ 19,763
90%
$ 20,174
92%
$ 20,520
93%
$ 20,861
95%
$ 21,160
96%
$ 21,346
97%
$ 21,525
98%
$ 21,651
98%
$ 21,773
99%
$ 21,837
99%
$ 21,890
100%
$ 21,938
100%
$ 21,970
100%
$ 21,984
100%
A Items:
80% of Value
20% of SKUs
B Items:
15% of Value
30% of SKUs
C Items:
5% of Value
50% of SKUs
21
C
Items
B
Items
95
%
85
%
75
%
65
%
55
%
45
%
35
%
25
%
A
Items
15
%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
5%
Percent of Annual Value
Distribution By Value
Percent of SKUs
22
Segmentation: Other Methods
Demand variability
Economic value
Volatile: Sophisticated techniques; frequent reviews
Stable: Less sophisticated techniques; less frequent reviews
Unimportant: Unsophisticated techniques; infrequent reviews
Adapted f rom Prashant Yadav (2005) Course Notes, Zaragoza Logistics Center.
23
Segmenting Supply Chains
24
Segmentation: Innovative vs. Functional
Functional
Innovative
Demand
Predictable
Unpredictable
Life Cycle
Long > 2 yrs
Short <1 yr
Margin
5% to 20%
20% to 60%
Variety
Low (10-20)
High
Error at Production
~10%
~40-100%
Avg Stockout Rates
1% to 2%
10% to 40%
Forced Mark down
0%
10% - 25%
Lead time for MTO
6 mon to 1 yr
1 day to 2 wks
Efficiency
Match Supply & Demand
Supply Chain Objective
Source: F isher, M. (1997) What Is the R ight Supply Chain for Your Product?, Harvard Business R eview. Adapted from Sheffi (2010) ESD.260 Course Notes
By Balougador (Own w ork) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], http://commons.wikimedia.org/wiki/File%3ACampbellsModif.
By (Own w ork) [GPL (http://www.gnu.org/licenses/gpl.html), GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/3.0)],
25
CTL.SC1x -
Supply Chain and Logistics Fundamentals
http://commons.wikimedia.org/wiki/File%3ASmart_phone.jpg
Supply Chain Portfolio

Decision variables for SC Design :
(One option is chosen from each column)
Fast / High
Cost
Intermediate
Design
Slow/Low Cost
On shore
Near shore
Off shore
(e.g., US/Europe)
(e.g., Mexico/ Romania)
(e.g., China, Vietnam)
International
Shipping
Air Freight
Rail/Truck
Ocean
Final Assembly
Location
On Shore
Near Shore
Off Shore
On Shore
Near Shore
Off Shore
(Factory/DC)
(Factory/DC)
(Factory/DC)
Build to Stock
Configure to Order
Build to Order
Manufacturing
Location
Order Fulfillment
Location
Inventory Stocking
Model
Source: Olavsun, Lee, & DeNyse (2010) A Portfolio Approach to Supply Chain Design, Supply Chain Management R eview. Adapted from Sheffi (2010) ESD.260 Course
Notes
26

Original Inkjet SC:
Fast / High
Cost
Manufacturing
Location
Order Fulfillment
Location
Inventory Stocking
Model
Slow/Low Cost
On shore (e.g.,
US/Europe)
International
Shipping
Final Assembly
Location
Intermediate
Design
Rail/Truck
On Shore
On Shore
(Factory/DC)
Build to Stock
Source: Olavsun, Lee, & DeNyse (2010) A Portfolio Approach to Supply Chain Design, Supply Chain Management R eview. Adapted from Sheffi (2010) ESD.260 Course Notes
Hp500-1" by Oguenther - Own w ork. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Hp500-1.png#mediaviewer/File:
27

Postponement Inkjet SC:
Fast / High
Cost
Intermediate
Design
Slow/Low Cost
Manufacturing
Location
Off shore (e.g.,

China, Vietnam)
International
Shipping
Ocean
Final Assembly
Location
Order Fulfillment
Location
On Shore
On Shore
(Factory/DC)
Inventory Stocking
Model
Configure to Order
"Hp-deskjet-895cxi". Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Hp-deskjet-895cxi.jpg#mediaviewer/File:Hp-desk
"MFHP1600" by LupisSM - Own w ork. Licensed under Creative Commons Attribution-Share Alike 3.0-2.5-2.0-1.0 via Wikimedia Commons -
http://commons.wikimedia.org/wiki/File:MFHP1600.JPG#mediaviewer/File:MFHP1600.JPG
28

Cost Competition Inkjet:
Fast / High
Cost
Intermediate
Design
Slow/Low Cost
Manufacturing
Location
Off shore (e.g.,

China, Vietnam)
International
Shipping
Ocean
Final Assembly
Location
Off Shore
Order Fulfillment
Location
Inventory Stocking
Model
On Shore
(Factory/DC)
Build to Stock
"MFHP1600" by LupisSM - Own w ork. Licensed under Creative Commons Attribution-Share Alike 3.0-2.5-2.0-1.0 - http://commons.wikimedia.org/wiki/File:MFHP1600.JPG#mediaviewer/File:MFHP1600.
29
30
Variability & Uncertainty

Occurs in all aspects of supply chains
Managing to the mean or average is rarely sufficient
Handled by assuming a probability distribution
n
Normal Distribution ~N(, )

w Continuous (-<x<+) and Symmetric
w Most commonly used for good or worse
Log-normal Distribution ~(*, *)

w Continuous (0<x<+) and Skewed right
w Less common but good for supply chains
Poisson Distribution ~P()

w Discrete (integers 0)
w Commonly used for low valued distributions
31
Normal Distribution
( x0 )2
( )
f x x0 =
Normal ~N(, )
x 2
fx (x 0 )
Spreadsheets
NORMINV(probability,,) =+kx
NORMDIST(x,,,1) =P[x<+kx]
Area =
P[x<+kx]
Area =
P[x+kx]
=1-P[x<+kx]
Unit Normal ~N(0,1)
Transformation: k = (x-)/x
Spreadsheets
NORMSINV(probability) =k
NORMSDIST(k) =P[u<k]
2 x2
Standard Unit Normal Tables

Look up k or P[u<k]
fu (u 0 )
( )
f u u0 =
Area =
P[u<k]
n
n

2
3
68.3%
95.5%
99.7%
0
x02
2
Area =
P[uk]=
=1-P[u<k]
Confidence Intervals
n
x0
+kx
u0
32
Poisson Distribution
Poisson ~P()
Probability of x events occurring w/in a time period
n Mean = Variance =
x0
e
p[x0 ] = Prob !" x = x0 #$ =

for x0 = 0,1,2,...
In Spreadsheets:
x0 !
n
p(x0) = POISSON(x0,,0)
x0
x
e
n
F(x0) = POISSON(x0,,1)
F[x0 ] = Prob !" x x0 #$ =
x!
x=0
n
30%
2.2
Poisson Tables (partial)

Columns:
Rows: F(x0)
25%
Probability
20%
15%
10%
5%
0%
0
10
11
12
13
14
15
16
17
Random Variable
33
Key Points from Lesson
34
Key Points from Lesson

Push vs. Pull Systems
n
n
Push proactive based on forecast demand

Pull reactive based on actual demand
Benefits of Mixed Systems

n
n
n
Maximize external variety with minimal internal variety

Keep in-process inventory as Raw as Possible (RAP)
Postponement & Aggregated Demand
Segmentation Strategies
n
n
Segment for a purpose (functional vs. innovative)

Product segmentation (ABC) good starting point
n
n
Normal Distribution
Poisson Distribution
35
CTL.SC1x -Supply Chain & Logistics Fundamentals
Questions, Comments, Suggestions?

Use the Discussion!
"Jack Russell tilting h er h ead" b y Writ Keeper - Own work. Licensed u nder Creative Commons Attribution-Share Alike
3.0 http://commons.wikimedia.org/wiki/File:Jack_Russell_tilting_her_head.jpg
MIT Center for

Transportation & Logistics
caplice@mit.edu

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CTL.

SC1x -Supply Chain & Logistics Fundamentals

Introduction to Logistics & Supply

MIT Center for

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Push vs. Pull Processes

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

You can learn almost everything about

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Pull vs Push Processes

Execution is performed in anticipation of an order

Execution is performed in response to an order

Push / Pull Boundary

Point where push processes are separated from pull processes

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Story of Three Sandwiches

Ready Made Turkey Wrap

Signature Ham Sandwich

CTL.SC1x - Supply Chain and Logistics Fundamentals

By U.S. Department of Agriculture (20111012-FNCS-LSC-0195) [ CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], v ia Wikime

Push vs Pull Processes

Pure push leads to higher inventory levels and potential spoilage /

Mixed systems are common Where is the Push-Pull Point?

Push undifferentiated, raw product or components

Benefits of mixed systems

Allows for efficient mass customization (Postponement)

Maximize external variety with minimal internal variety

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Supply Chain Segmentation

Firms operate multiple supply chains

Segmentation only makes sense if you do something

CTL.SC1x - Supply Chain and Logistics Fundamentals

Warehousing / Materials Handling

Lesson: Key concepts

How should I treat these products differently?

By Tage Olsin (Cropped f rom I mage:Baseball.jpg by Tage Olsin) [ CC-BY-SA-2.0

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Supply Chain Segmentation

Homogenous- within the segment should be similar

How can I segment my customers or suppliers?

How can I segment my products?

Physical characteristics (value, size, density, etc.)

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Number of units sold per SKU

How are products distributed in terms of sales volume?

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Potential Product Distributions

Percent of Sales Volume

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Key concepts

Frequency of SKU Sales

Log-normal Distribution ~(, )