supply chain management - sachin
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Supply Chain Management:
An Overview
Dr. Ranjan Ghosh
Indian Institute of Management
Calcutta
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Some Definitions
Supply Chain Management encompasses everyeffort involved in producing and delivering a
final product or service, from the supplierssupplier to the customers customer. SupplyChain Management includes managing supplyand demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing andinventory tracking, order entry and ordermanagement, distribution across all channels,and delivery to the customer.
The Supply Chain Council, U.S.A.
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Supply
Sources:plants
vendors
ports
RegionalWarehouses:stocking
points
FieldWarehouses:stockingpoints
Customers,demandcenterssinks
Production/purchasecosts
Inventory &warehousingcosts
Transportationcosts
Inventory &warehousingcosts
Transportationcosts
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Flows in a supply chain
Customer
Information
Product
Funds
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Some More Definitions
Supply Chain Management deals with the management of
materials, information, and financial flows in a network
consisting of suppliers, manufacturers, distributors andcustomers.
Stanford Supply Chain Forum
Logistics involves managing the flow of items,
information, cash and ideas through the coordination ofsupply chain processes and through the strategic
addition of place, period and pattern values.
MIT Center for Transportation and Logistics
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Some More Definitions
Supply Chain Management is primarily concerned with the efficient
integration of suppliers, factories, warehouses and stores so that
merchandise is produced and distributed in the right quantities, to
the right locations and at the right time, and so as to minimize totalsystem cost subject to satisfying service requirements.
Simchi-Levi
Call it distribution or logistics or supply chain management. By
whatever name, it is the sinuous, gritty, and cumbersome process by
which companies move, materials, parts, and products to customers.
Fortune (1994)
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Key Observations
Integrated activity:
*Among functions such as logistics, manufacturing, distribution,design/engineering, marketing, finance,etc.
* Multiple organizations,i.e., suppliers, customers& 3 PL providers
* Coordination of conflicting goals, metrics, etc.
Responsible for multiple flows:
* Information (orders, status, contracts)
* Physical (finished goods, raw material, w.i.p.)
* Financial (payment, credits, etc.)
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Key Observations (continued)
Most analysis involves trade-offs* Across different entities
* Across metrics: Cost, Service, Time, Risk, etc. Each interface in the supply chain represents
* Movement of goods
* Information flows
* Transfer of title
* Purchase and sale
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Notable Quotes
In the end, all business comes down to
Supply Chain vs. Supply Chain
Robert Rodin, CEO, Marshall Industries
Japanese Manufacturing Industry owes its Competitive Advantage
and Strength to itsSub-Contracting Structure.Ministry of International Trade and Industry, Japan (1992)
Manufacturing now competes less on product and qualitywhichare often comparableand more on inventory turns and speed to
market.
John Kasarda, Forbes, 1999
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Philosophy of SCM
The entire supply chain is a single, integratedentity.
The cost, quality and delivery requirements ofthe customer are objectives shared by everycompany in the chain.
Inventory is the last resort for resolving supplyand demand imbalances.
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Efficiency: Basis of
Production Management Efficiency leads to lower costs
Lower cost implies
Lower Price => Greater demand => Bettermarket growth => Higher profits => Product/Process development => Better market share
1980s and 1990s: Era of achieving excellence atthe firm level (JIT, TQM, TPM, BPR, ERP, etc)
2000s: Era of achieving excellence at the valuechain level (SCM, CRM, E-Commerce, etc.)
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Evolution of SCM
Stage 1: Vendor Purchase Production - Distribution Retailer
Stage 2: Materials Management -
Logistics Management
Stage 3: Supply Chain Management
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Why is SCM Important?
Strategic AdvantageIt Can Drive Strategy
* Manufacturing is becoming more efficient
* SCM offers opportunity for differentiation (Dell) or
cost reduction (Wal-Mart or Big Bazaar)
GlobalizationIt Covers The World
* Requires greater coordination of production anddistribution
* Increased risk of supply chain interruption
* Increases need for robust and flexible supply chains
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Why is SCM Important?
(continued)
At the company level, supply chain management
impacts
* COSTFor many products, 20% to 40% oftotal product costs are controllable
logistics costs.
* SERVICEFor many products, performance
factors such as inventory availabilityand speed of delivery are critical to
customer satisfaction.
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Conflicting Objectives in the
Supply Chain
1. Purchasing
Stable volume requirements
Flexible delivery time Little variation in mix
Large quantities
2. Manufacturing Long run production
High quality
High productivity
Low production cost
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Conflicting Objectives in the
Supply Chain3. Warehousing
Low inventory
Reduced transportation costs Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices
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Decision Phases in
a Supply Chain
Supply chain strategy or
design Supply chain planning
Supply chain operation
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Process view of a supply chain
Cycle view
Push/pullview
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Cycle View of Supply Chains
Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
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Customer order cycle
Customer arrival
Customer order entry Customer order
fulfillment
Customer orderreceiving
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Replenishment cycle
Retail order trigger
Retail order entry Retail order fulfillment
Retail order receiving
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Manufacturing cycle
Order arrival from the
distributor, retailer, orcustomer
Production scheduling
Manufacturing and shipping
Receiving at the distributor,retailer, or customer
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Push/Pull View of
Supply Chains
Pull processes: execution is
initiated inresponse to acustomer order
Push processes: executionis initiated inanticipation
ofcustomer orders
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Push/Pull View of Supply
ChainsProcurement,Manufacturing andReplenishment cycles
Customer Order
Cycle
Customer
Order Arrives
PUSH PROCESSES PULL PROCESSES
SUPPLY CHAIN DESIGN
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SUPPLY CHAIN DESIGN:
Three Components
1. Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)
2. Partner Selection
(Choice of suppliers and partners for the chain)
3. The Contractual Relationship(Arm's length, joint venture, long-term contract,
strategic alliance, equity participation, etc.)
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LESSONS IN
SUPPLY CHAIN DESIGN1. KNOW YOUR LOCATION IN THE
VALUE CHAIN.
2. UNDERSTAND THE DYNAMICS OF
VALUE CHAIN FLUCTUATIONS.
3. THINK CAREFULLY ABOUT THE
ROLE OF VERTICAL COLLABORA--TIVE RELATIONSHIPS.
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Dell Computers supply chain
Customer
Web page
Assembly plant
All of Dells suppliers and theirsuppliers
Dell builds to order: customer orderinitiates manufacturing at Dell
Dell does not have a retailer, wholesaler,or distributor in its supply chain
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Dell Computers supply chain
Dell carries only about 10 days of inventory(vs. 80 to 100 days of inventory for the
competition) Less inventory to become obsolete, e.g.,
computer chips
Less inventory to be defective (implicationsof small inventory and product quality)
No finished product inventory; some partsno inventory, e.g., Sony monitors
Dell outsources service and support to 3rd
party providers
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Supply chain objective
Maximize overall value generated
Value strongly correlated to supply
chain profitabilitythe differencebetween the revenue generated from thecustomer and the overall cost across thesupply chain
Example: A customer purchasing acomputer from Dell pays $ 700 (therevenue)
Dell and other stages of the supply chainincur cost to convey information,
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Examples of Supply Chains
Dell / Compaq
Toyota / GM / Ford
Milk Distribution System of NDDB
Merry-Go-Round System of NTPC
Dabbawalas of Mumbai
Amazon / Borders / Barnes and Noble
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The Dynamics of the Supply
Chain
OrderSi
ze
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
Retailer OrdersDistributor Orders
Production Plan
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The Dynamics of the Supply
Chain
OrderSize
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
Production Plan
Three Types of Integration
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Three Types of Integration
of the Supply Chain
Geographical Integration
*From local to world-wide logistics
Functional Integration
* From Function-dominated logistics to
Flow-dominated logistics
Inter-Firm Integration
* From a Sector-based Logistics to Inter-sector Logistics
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Supply Chain Integration is Difficult
for two main reasons Different facilities in the supply chain may
have different, conflicting objectives
* For instance, the suppliers are in direct conflict withthe manufacturers desire for flexibility.
The supply chain is a dynamic systemthat evolves over time
* Not only do demand and supplier capabilities changeover time, but supply chain relationships also evolveover time.
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Supply Chain: The
Magnitude In 1998, American companies spent $898
billion in supply-related activities (or 10.6% of
Gross Domestic Product).
Transportation 58%
Inventory 38%
Management 4%
Third party logistics services grew in 1998 by
15% to nearly $40 billion
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Supply Chain: The Magnitude
(continued)
SOME ESTIMATES FOR INDIA
* Logistics Spend IN Rs. 2,40,000 crores
(approx. US $ 50 Billion)* Share of GDP . 12-13 %
* Major Elements are ( Percentage of Total)
* Transportation 35
* Inventories 25* Packaging 11
* Handling & Warehousing .. 9
* Others & Losses 14
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Supply Chain:The Magnitude(continued)
It is estimated that the grocery industry in USA
could save $30 billion (10% of operating cost)
by using effective logistics strategies.
A typical box of cereal spends 104 days getting from
factory to supermarket.
A typical new car spends 15 days traveling from thefactory to the dealership.
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Supply Chain: The
Magnitude (continued) Compaq computer estimates it lost $500 million to $1
billion in sales in 1995 because its laptops and desktops
were not available when and where customers were readyto buy them.
Boeing Aircraft, one of Americas leading capital goodsproducers, was forced to announce write-downs of $2.6
billion in October 1997.The reason? Raw material shortages, internal and supplierparts shortages. (Wall Street Journal, Oct. 23, 1997)
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Supply Chain: The Potential
In 25 years, NDDB has enabled India to become thelargest producer of milk by implementing a logistics andsupply chain system that has eliminated several
intermediaries, thereby leading to a much higherremunerative price (yield) for producers and lower pricefor consumers.
As described in the FORBES magazine, the Dabbawalasof Mumbai has achieved an extremely high level ofreliability and precision (SIX SIGMA level in QAparlance) in delivering to their customers the productsearmarked for them.
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Supply Chain: The
Potential
Procter & Gamble estimates that it saved retail customers
$65 million through logistics gains over the past 18months.
According to P&G, the essence of its approach lies inmanufacturers and suppliers working closely together .
jointly creating business plans to eliminate the source ofwasteful practices across the entire supply chain.(Journal of Business Strategy, Oct./Nov. 1997)
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Supply Chain: The Potential
Dell Computer has outperformed the competition in
terms of shareholder value growth over the eight
years period, 1988-1996, by over 3,000% (see
Anderson and Lee, 1999) using
- Direct business model
- Build-to-order strategy.
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Supply Chain: The Potential
In 10 years, Wal-Mart transformed itself
by changing its logistics system. It has the
highest sales per square foot, inventoryturnover and operating profit of any
discount retailer.
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Complexities Involved in
Supply Chain Management The supply chain is a complex network of
facilities and organizations with different,conflicting objectives
Matching supply and demand is a majorchallenge
System variations over time are also an
important consideration Many supply chain problems are new and there
is no clear understanding of all the issuesinvolved
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Supply Chain:
The ComplexityNational Semiconductors:
Production:
Produces chips in six different locations: four in the US,
one in Britain and one in Israel Chips are shipped to seven assembly locations in
Southeast Asia.
Distribution
The final product is shipped to hundreds of facilities all
over the world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within 45 days
5% are delivered within 90 days.
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Supply Chain Challenges
Achieving Global Optimization
Conflicting Objectives
Complex network of facilities
System Variations over time
S ti l O ti i ti
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ProcurementPlanning
ManufacturingPlanning
DistributionPlanning
Demand
Planning
Sequential Optimization
Supply Contracts/Collaboration/Information Systems and DSS
ProcurementPlanning
ManufacturingPlanning
DistributionPlanning
DemandPlanning
Global Optimization
Sequential Optimization vs.
Global Optimization
Source: Duncan McFarlane
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Supply Chain Challenges
Achieving Global Optimization
Conflicting Objectives
Complex network of facilities
System Variations over time
Managing Uncertainty
Matching Supply and Demand
Demand is not the only source of uncertainty
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Managing Uncertainty
1. Point forecasts are invariably wrong
Plan for forecast rangeuse flexiblecontracts to go up/down.
2. Aggregate forecasts are more accurate
Aggregate the forecastpostponement/risk pooling
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Managing Uncertainty (contd)
3. Longer term forecasts are less accurate
Shorten forecasting horizonsmultipleorders; early detection
4. In many cases, somebody else knows
what is going to happen
Collaborate
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Whats New in SCM?
Global competition
Shorter product life cycle
New, low-cost distribution channels
More powerful well-informed customers
Internet and E-Business strategies
Levels of implied demand
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Levels of implied demand
uncertainty
Low High
Price ResponsivenessCustomer Need
Implied Demand Uncertainty
Detergent
Long lead time steel
High Fashion
Emergency steel
Understanding the Supply Chain: Cost-
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Understanding the Supply Chain: Cost
Responsiveness Efficient Frontier
High Low
Low
High
Responsiveness
Cost
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Achieving Strategic Fit
Implied
uncertaintyspectrum
Responsive
supply chain
Efficient
supply chain
Certain
demand
Uncertain
demand
Responsiveness spectrum
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Key Concepts
Design, operate, and control the physical andinformation flows as though the channel wereone seamless corporate entity.
Let the activities (and costs) migrate acrosscorporate boundaries to where they make themost sense.
Rely on the benefits of channel integration toreplace the benefits of open market forces.
Share the risks and the rewards between players.
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New Concepts
Push-Pull strategies
Direct-to-Consumer
Strategic alliances
Manufacturing postponement
Dynamic Pricing
E-Procurement
Dealing with Product Variety:
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Dealing with Product Variety:
Mass Customization
Mass
Customization
High
HighLow
Low
Long
ShortLeadTime
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Tailored Logistics
Each Logistically Distinct Business
(LDB) will have distinct requirements
in terms of
Inventory
Transportation
Facility
Information
Key: How to gain efficiencies while
Applying the Framework
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to e-commerce:
What is e-commerce? Commerce transacted over the Internet
Is product information displayed on the
Internet?Is negotiation over the Internet?
Is the order placed over the Internet?
Is the order tracked over the Internet?Is the order fulfilled over the Internet?
Is payment transacted over the Internet?
Existing Channels
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Existing Channels
for Commerce Product informationPhysical stores, EDI, catalogs, face to face,
Negotiation
Face to face, phone, fax, sealed bids,
Order placement
Physical store, EDI, phone, fax, face to face,
Order tracking
EDI, phone, fax,
Revenue Impact of
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Revenue Impact of
E-Commerce Length of supply chain
Product information
Time to market
Negotiating prices and contract terms
Order placement and tracking
Order fulfillment
Payment
C t I t f E C
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Cost Impact of E-Commerce
Facility costs
Site and processing cost
Inventory costsCycle, Safety, Seasonal inventory
Transportation costs
Inbound and outbound costs
Information sharing
Coordination
A Pl th f A h
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A Plethora of Approaches
Just in Time Inventory
Vendor Managed Inventory
Quick Response
Collaborative Planning, Forecasting and Replenishment
Cross-docking / Flow through Centres
Outsourcing / 3 PLs
Activity Based Costing
Internet / EDI
Bar-Coding / RFID
Build to Order
A Plethora of Approaches
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A Plethora of Approaches(continued)
Partnerships / Alliances
Auctions / Exchanges
Postponement Strategies
SC Software
SC Event Management
Merge-In-Transit
Collaborative Transportation Management CashtoCash Metrics
F k f l i
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Framework for analysis
Model Based Approach* Use fundamental models to gain insights
* Analytical, though not necessarily Operations
Research, approach
* Extensive use of case studies and real-life examples
Total System Cost
* Avoid the silo effect of traditional logistics
* Capture and integrate across different players in SC
* Service can be included
Framework for Analysis
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Framework for Analysis(continued)
Portfolio of Solutions
* Rarely is a single solution sufficient or practical
* A set of solutions is usually more applicable
* The context matters
Management of Uncertainty
* Risk can be measured, monitored, and managed
* Impacts sourcing, contracting, pricing, incentives, etc.
Modeling for SCM
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Modeling for SCM
Forecasting Models
- These models allow prediction of demand based on past data orother parameters that are independently available. They enable
better planning, given the lead-time necessary for response.
Location Models- These models identify the optimal location of facilities such as
plants and warehouses, considering the inbound and outboundtransportation costs as well as the fixed and variable costs ofoperation at the locations under consideration. These are
usually formulated as Mixed IntegerProgramming Models.
Modeling for SCM (contd)
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Modeling for SCM (contd)
Distribution Network Design Models- These models are usually comprehensive in nature, deciding
between two, three and even four stages of distributionnetwork, location of warehouses and break-bulk points,and sometimes even the transportation.
Allocation Models- These models help in optimally allocating commodities from
sources to destinations in a multi-source, multi-destination
environment. The costs considered for optimisation areproduction costs and warehousing costs. The constraintsconsidered can be due to demand, capacity, routerestrictions, etc.
Modeling for SCM (contd)
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Modeling for SCM (contd)
Inventory Models
- Inventory plays a major role in SCM.
- Inventory can be of various types such as:- Batching and shipment inventories
- Buffer stocks to take care of uncertainties
- Pipeline inventory ( primary and secondary
transportation )
These models minimize the total relevant cost, based on trade-
offs among, inter alia, inventory carrying cost, ordering cost,
stock-out cost, transportation cost, taxes & duties, etc.
Modeling for SCM (contd)
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Modeling for SCM (contd)
Routing Models
- These models allow optimal routing on atransportation network from a given source to a
destination. The models used are the ShortestPath Problem, the Traveling Salesman Problemand the Vehicle Routing Problem. DecisionSupport Systems that interactively use theexpertise of the decision maker by providinggraphical support through a map (i.e., using aGeographical Information System ) are also veryuseful in such decisions.
Modeling for SCM (contd)
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Modeling for SCM (cont d)
Scheduling Models
- These models enable allocation of resources toparticular activities. Depending on the criteria of
interest and the number of resources, the modelsare of aid in evaluating appropriate rules for allocation.
Alternative Analysis- This model simply proposes the identification of alternatives,
criteria for decision making and analysis of the alternativesacross the criteria to arrive at the best choice. Formal
approaches such as simulation and analytic hierarchy process
could be used in assessing the implications of the criteria.