Stochastic Modeling of Supply Chain Management Systems

Stochastic Modeling of Supply Chain Management Systems

C. Elango (Cardomam Planters’ Association college, India)
DOI: 10.4018/978-1-61520-625-4.ch023
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Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-of-origin to the point-of-consumption in order to meet customers’ requirements. Supply Chain Management (SCM) is the practice of coordinating the flow of goods, services, information and finances as they move from raw materials to parts supplier to manufacturer to wholesaler to retailer to consumer. This chapter introduces the concept of Supply Chain Management System (SCMS). Two stochastic modeling problems are discussed in this chapter. Poisson demand process with (s,S) installation policy at retailer nodes are assumed to simplify the study . The system performance measures are computed with reference to specific cost structure. The total average annual variable cost is taken as optimization criterion. Numerical examples are provided to illustrate the problem.
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Supply Chain

A supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and finally deliver the products to customers through a distribution system that includes as (probably multi-echelon) inventory system. Thus, a supply chain spans procurement, manufacturing, and distribution. Since inventories are needed at all these stages, effective inventory management is one key element in managing supply chain. To fill orders efficiently, it is necessary to understand the linkages and inter-relationship of all the key elements of supply chain. Therefore, integrated management of the supply chain has become a key success factor for some of today's leading companies. The Hewlett-Packard was one of the early pioneers in using operation research to help implement effective supply chain management throughout the corporation.

To aid in supply chain management, multi-echelon inventory, models now are likely to include echelons that incorporate the early part of the supply chain as well as the echelons for the distribution of the finished product. Thus the first echelon might be the inventory of raw materials or components that eventually will be used to produce the product. A second echelon could be the inventory of sub assemblies into the final product. This might then lead into the echelons for the distribution of the finished product, starting with storage at the point or points of manufacture, then at national or regional warehouses, then at field distribution centers, and so on.

The usual objective for a multi-echelon inventory model is to coordinate the inventories at the various echelons so as to minimize the total cost associated with the entire multi-echelon inventory system. This is a natural objective for a fully integrated corporation that operates this entire system. It might also be a suitable objective when certain echelons are managed by either the suppliers or the customers of the company. The reason is that a key concept of supply chain management is that a company should strive to develop an informal partnership relation with its suppliers and customers that enables them jointly to maximize their total profit. This often leads to developing mutually beneficial supply chain contracts that enable reducing the total cost of operating a jointly managed multi-echelon inventory system.

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