Welcome to “Modeling and Analytics for Supply Chain Management”! We are in week 12 that is the final week for this course. And as you all know that if you have followed the earlier weeks‟ lectures, we are into „designing the global supply chain‟ and you must have noticed that we have divided this „designing the global supply chain‟ because „designing the global supply chain‟ has to incorporate many-many aspects. So, we decided and we have divided to the global supply chain into the first aspect is to take care of the supply chain risk. Second aspect that you have to take care is, sorry, the first aspect to take care is „supply chain taxation‟ which is again this supply chain type; the second aspect that you have to take care is „transshipment‟. Third aspect that you need to take care is „flexibility‟. So, global supply chain before designing you will have to take care of these aspects to ultimately arrive at a global supply chain design. So, you have finished off with those things. That is the taxation, then your transshipment, and the third one is your flexibility. But all this has to be done keeping in mind the total cost; total cost has to be very-very minimum. (1:48) So, today we will deal with the total cost of the supply chain. Now, you will tell me that, why total cost, what is the relevance of total cost, because supply chain is composed of the supplier who sends it via a transporter to the factory. From the factory, it goes to the warehouse. From the warehouse it goes to the wholesaler. From the wholesaler it ultimately comes to the retailer. So, if you are looking at cost of the supply chain, your cost that is that will be your argument, that your cost is of the supplier cost, transporter cost, factory cost, warehouse cost, wholesaler‟s own cost, retailer cost. So, cost is a summation of all these activities 1, 2, 3, 4, 5, 6, and so on. So, plus, plus, plus, plus, plus so, yeah, anyway you have given a summation. So, so that will be your argument. That your costs, there is no need to compute total supply chain cost, your cost to the summation of all these, agreed, your cost is a summation of all these, agreed, absolutely fine. But you know what will happen if you do not calculate the supply chain cost, if you do not model the supply chain cost you know what will happen? What is the supplier‟s objective? (3:28) The suppliers‟ objective is to supply and make to supply at a price, suppliers‟ objective is to supply at a price and make a maximum profit out of it, agreed? That is the objective of the supplier. Who are you? You are the organization that is the manufacturer. What is the objective of the manufacturer? To get it at the lowest cost; now, you see these two objectives are very-very conflicting, if the supplier wants to maximize his profit, then your cost will not be the minimal. Now, look at the transporter, what is the transporter‟s objective? Again maximize profit, what is your objective? Minimize costs. Look at the wholesaler, maximize profit, minimize cost; retailer, maximize profit, minimize cost; look at the warehouses, what is their objective? Minimize cost. So, you see everywhere there is a conflicting objective, somebody wants to maximize and some other players in the supply chain is wanting to, you are wanting to minimize. Now, sometimes there is another great problem. This transporter wants to minimize cost, this transporter wants to minimize cost and these are I will magnify this then it will be better; the transporter wants to minimize cost and in his truck, what does he do? He puts consignments of different parties. So, per unit transportation cost comes down. So, you minimize cost but your objective is the safety of your products, your objective is the security of your products. So, what you say to the transporter? No, if it is my vehicle, then you cannot put any other companies load in my vehicle. So, what will happen? Your per unit transportation cost will rise because the transporter now will then have a 20 metric ton or a 40 empty truck and then you are carrying only 3 units of a product in that truck. So, your per unit cost is increasing. Plus the transporter he will not listen, in the midway he will put some other products in his truck. So, you see it is always a conflicting objective that we are talking about. So, that is why, that is why your modeling the total cost in supply chain is very-very essential and then if you. (6:23) And then if you are modeling the total cost of supply chain you are basically your objective is to minimize the total cost of the supply chain this is what we are trying to do today. Modeling the total cost of supply chain, objective is to minimize the total cost of supply chain, agreed? So, now let us move, then what is the total cost; let us see. Let us see, what is the total cost? (6:55) This is what we were discussing when supply chain is a composition of the individual players, what is the need to understand the total cost of supply chain. (7:04) So, let us see what is the supply chain cost? These are very simple things, do not worry these are very simple things what is the supply chain cost? Unit cost of raw material plus transportation cost of raw unit, unit transportation cost of raw material. So, unit cost of raw material, unit cost of raw material plus, so raw material cost plus transportation cost, unit transportation cost multiplied by quantity of the raw materials. So, basically raw material plus transportation cost, why? Let us see, let us go a bit slowly and understand this because this is very important, lot of, we have seen that when we try to model this, many people forget many things here. That is why we will go a bit slow. Many people forget many things because this is a very-very big formula that will come up, very big one; very big one. So, see how it works. (8:08) Now, so see what is happening? I am a supplier, we will remove all this, remove all this; yeah, I am a supplier, I am a supplier. So, how many units I am, so I am supplying; this is my, I am a supplier, I am supplying to the factory here. So, how much am I supplying? How much quantity? Let us say 100 units I am supplying. What is the price at which I am supplying? I am supplier, I am writing on top. What is the price at which I am supplying? I am supplying at 50 rupees, 50 rupees I am supplying, per unit, per piece. What is the transportation cost from supplier to factory? What is the transportation cost? Let us say transportation cost is 400 rupees for one truck, 400 rupees for one truck. How many units am I sending? How many units am I sending? I am sending 100 units. So, what is the transportation cost per unit? 400 rupees for one truck, how many units am I sending 100 units. So, what is the transportation cost per unit? So, transportation cost per unit is how much 4 rupees. So, what is my total cost for moving the product from supplier to the factory? What is the total cost of moving the product? The raw material cost 50 rupees, the transportation cost 4 rupees; the raw material cost 50 rupees, the transportation cost 4 rupees; so, total 54 rupees into how many units, into how many units? 100 units or 100 pieces; so, 54 into 100 is rupees; 5400. So, rupees 5400 is the total cost of movement from the supplier to the factory. (10:28) That is what we have mentioned here, unit cost of raw material from supply plus unit transportation cost this we took as 50; remember just to explain, just to make things simple. Unit cost of raw material we took 50 rupees. Unit transportation cost was 4 rupees because 400 rupees truck fare, truck charges, vehicle charges and 100 units was going so 4 rupees per piece. So, unit raw materials, unit transportation cost, 4 rupees, so 54 rupees. So, 50 plus 4, 54 multiplied by quantity of raw materials. So, we, how many units did we take? We took 100 so 100, so 5400, 5400. So, this is fine, this is the first one. (11:35) Let us go to the next one fixed cost and variable cost of plant operation plus transportation cost from plan to distribution center. So, we have finished up with the first phase from the supplier it has gone to factory, so this part is done, this, this part is done. What is the next part? From factory to distribution center or the DC; from factory to distribution center (DC); so, what are the costs? Fixed cost of operating the plant if the plant is open so factory cost we had done this in warehouse location models similar plus the production cost, unit production cost. So, plant cost that is the fixed cost, salary, rent, rates, taxes, etc unit production cost, variable cost multiplied by the quantity of products produced that gives me the total production costs. Per unit production cost multiplied by quantity of products produced; so, per unit multiplied by quantity that gives me the total production cost; plus the transportation cost from factory to the distributor. Plus the transportation cost from the factory to the distributor; so, what is happening in the factory? (13:12) So, let us clear it, what is happening in the factory, inside the factory? Inside the factory 3 things are happening. One is my fixed cost for factory location, salary, machines, etc, etc. Second is my production, production cost and the third is from factory to the distribution centers the transportation cost, this is what we have mentioned, unit transportation cost. So, in factory these three things are happening. This is the second part of the story; so, fixed cost and variable of plant operation. (13:59) What is the third cost at the distribution center? So, from the factory, now it has come to distribution center, from the factory it has come to a distribution center. So from, so, we had the supplier, from the supplier it came to factory. So, supplier to factory was A, from factory, from factory to the distribution center this was B part of my formula. Now, we are saying from the distribution center to the cross dock. This is the C part of the. Now, I think this is clear from this supplier to the factory was A, from the supplier to the factory was A. From factory to distributor fixed cost plus transportation cost, fixed cost plus transportation cost B. At the distribution center what will it again be? The fixed cost of the distribution center plus the transportation cost. Let us see what we have done here. Let us see, fixed cost at the distribution center, unit transportation cost to cross dock J, if cross dock J is assigned to distribution center K. So, basically the same warehouse location problems. So, fixed cost plus variable cost, variable cost here means transportation cost. Fixed cost of the distribution center that is your rent, trade taxes, electricity bill, salary, etc and your unit transportation cost multiplied by the number of units that has been transported. So, that is your cost at distribution center. Now, in the same slide, even before going to the next slide, you can easily tell me now, what is the cost at the cross dock center. The cost at the cross dock center will be what? The fixed cost at the cross dock center, from the cross dock where is it going? It is going to the, assume it is going to the retailer. So, what is the cross dock cost here? So, from cross dock, so from the cross dock; so, fixed cost here, this was my C and this was my D. So, cross dock; what is happening? The fixed cost at the cross dock plus the unit transportation cost multiplied by the cost of the, multiply the transportation cost to the product, total number of products produced, sorry, let me rephrase it. The cost here from cross dock to the retailer is the fixed cost at the cross dock, fixed cost at the cross dock plus the unit transportation cost multiplied by the total number of products that has been transported, so unit transportation cost multiplied by the total number of products that has been transported. So, fixed cost plus the transport cost, fixed cost plus transport costs; so, what is my, so with these blue compartments, you very clearly know which cost is up to which place? So if we go to the formula, PPT slide; A, you see A starts from supplier and ends with transportation up to factory. B, factory starts from fixed cost of the factory to transportation up to distribution center. C, stars from fixed cost at distribution center to reaching the cross dock. D, cross dock starts from fixed cost of the cross dock up to reaching it to the retailer or customer, whatever you want to say. (18:15) So, your transportation cost is basically. So, your transportation cost is basically A plus B plus C plus D. Transportation cost is A plus B plus C plus D and what is your objective? Your objective is to minimize this. Now, we have mentioned in the previous class that in this entire process, modeling this, we had already done, you have to keep in mind the flexibility. What will happen if the flexibility increases? What will happen to your total cost? Your total cost will also increase, if flexibility increases, total cost also increases, flexibility less, because you have to build your systems to incorporate certain changes, flexibility less my total cost also less. So, you have to keep in mind the flexibility aspect. Another thing that we mentioned, you have to keep in mind the risk aspect. Now, risk you have already learned in a previous week. You will not take your supply chain through a place where it is very, very risky and for that you have done risk analysis, country risk analysis, region risk analysis can be done even product risk analysis can be done. Sometimes certain products vary like perishable. So, if you are going by a route and there is a chance that this route might be clogged, then you do not want to send your products with that route. So, this is again, so you have to be very careful. So, risk analysis, and this entire system. You see, total cost, other than mathematical modeling, mathematical modeling will end here, minimize this total cost, fine, done. Run a linear programming, run a linear programming and then you do linear programming, run an LP, run a linear programming and then you know that I have got least cost model, that is fine. But you know what affects this least, this least cost, what, the question is, what affects this least cost? (20:38) So this, what affects the least cost of A? What affects the least cost of B? What affects the least cost of C? And what affects the least cost of D? If I know that, what affects the least cost of these things? Then I also know what affects the least cost of supply chain. What is happening; the least cost of the supply chain that we will understand. Now, you see, so, remember in the previous class, we have mentioned that we will bring in some of the risk and the performance, risk we have just not told that we will be very careful with supply chain design with the risk part of it. We have not brought in the risk part in supply chain design in this week, this module because risk as a separate module we have discussed, you just need to incorporate it, nothing else. So, if you see, how will it, how will my total cost be minimal? If the performance of this one is the performance of this, performances of these individual units are up to the mark. And what did we do for performance measurement for each of these individual units? We studied data envelopment analysis. So, this is so, somewhere, so, what have we learned? Somewhere down the line for supply chain designing, somewhere down the line for supply chain designing, you will have to be very careful with minimizing cost, risk etc, etc. (22:20) Now, we are fully ready with designing the entire supply chain that is just a matter of one session, because we have done all these things before. We know how to get the total cost, etc, etc. So, in the, this total, so in the up to now, up to now what have we done for designing the supply chain? We have learned, we have to be very careful with the tax, risk, yes, we have done it in a previous module so we did not discuss it here. We have to be very careful with transshipment options. We have to be very careful with flexibility and we have to be very careful with your total cost of supply chain. So, you will have to very careful if we know these five things. If you know these five things, designing supply chain is not a problem; designing supply chain is not a problem. So in the next lecture, we will pick up one situation, one mathematical problem and we will design the supply chain. Thank you!
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