Supply Chain Management

Location, production, inventory, transportation.

last updated Wednesday, November 19, 2025
#Supply Chain Management #Supply Chain Structure

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by John Burson

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A supply chain is a network that includes vendors of raw materials, plants that transform those materials into useful products, and distribution centers to get those products to customers.

Without any coordinated effort, each organization in the network pursues its own agenda and operates independently of the others. However, such an unmanaged network results in inefficiencies. For example, a plant may aim to maximize throughput to reduce unit costs. If the end demand seen by the distribution system does not consume this throughput, there will be an inventory accumulation. There is much to be gained by managing the supply chain network to improve its performance and efficiency.

Decision Variables in Supply Chain Management

In managing the supply chain, the following are decision variables:

• Location - of facilities and sourcing points
• Production - what to produce in which facilities
• Inventory - how much to order, when to order, safety stocks
• Transportation - mode of transport, shipment size, routing, and scheduling

The Bullwhip Effect

A problem frequently observed in unmanaged supply chains is the bullwhip effect. This effect is an oscillation in the supply chain caused by demand variability. It must be addressed to avoid poorer service and higher costs.

Inventory Management

Variation in demand increases the challenge of maintaining inventory to avoid stockouts. There exist techniques for inventory management that optimize the performance for a given set of parameters.

Vendor Managed Inventory

An effective way to improve supply chain performance is for the vendor to determine the quantities its downstream customers should order, rather than the other way around. This approach is known as Vendor-Managed Inventory, abbreviated VMI. While its implementation poses practical challenges, it can be an effective way to reduce inventory and stock-outs.

Accurate Response

In the classical news vendor problem, one must decide the optimal order quantity that maximizes profits, given that some money is lost if all units do not sell and that potential profits are lost if the units sell out. Sometimes, a second order can be placed once the sales period begins. Such an opportunity helps one better match supply and demand, since the first order can be a quantity equal to the expected demand minus a selected number of standard deviations (2, for example) below that mean. Of course, any minimum order quantities must be considered.

In many industries, the variance in demand is proportional to the variance in the forecasts for that demand. This relationship even exists in stock price forecasting. When this relationship holds, it can be used to estimate the mean demand and its variance, which can then be used in optimization models.

For seasonal goods such as winter sportswear, which have a short selling season and long lead times, a firm can do several things to match supply and demand better:

• Additional events can be held before large trade fairs to secure orders earlier.

• Supplier capacity can be reserved without specifying the exact product mix. This postponement of the final mix has benefits similar to those of postponing product customization until the distribution center.

• Common parts can be used in designs to pool some of the variations between individual demands.

Supply Chain Structure

A supply chain's performance is measured by profit, average product fill rate, response time, and capacity utilization.

Profit projections may improve if another parameter is relaxed, but one must consider the impact of that relaxation on all aspects of the model. For example, if customers are lost due to slow response times, the profit projections may be artificially high.

Carrying more inventory can improve the average fill rate and reduce stock-outs. The optimal balance must be struck between inventory costs and lost profits from stock-outs.

Response time often can be improved at the expense of higher overall costs. As with the fill rate, the optimal trade-off should be found. If response time is sacrificed to achieve higher profits, sales forecasts may have to be revised if the demand elasticity for the chosen service levels is significant.

Capacity utilization should be high enough to reduce overhead sufficiently, but not so high that there is no room to grow or to handle fluctuations in demand. Problems often occur when capacity utilization exceeds 85%. Lower capacity utilization, in effect, gives an option to increase output in the future. Higher capacity utilization reduces downside risk by reducing costs, but it also limits upside gains if future demand outstrips supply.

Make To Order

Some firms have turned to make-to-order production systems to reduce inventory and increase flexibility. Such a system can reap significant benefits for some companies. Make-to-stock is better for companies whose customers are unwilling to wait for the product.

 
 
 

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