Exam 2 - ism-india.orgAdvantages and Disadvantages Some advantages of standardization and...

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Supply Management Integration Exam

Exam 2

Exam 2: Categories and Tasks

Supply Chain Strategy

– Task 2-A-1

– Task 2-A-2

– Task 2-A-3

– Task 2-A-4

Sales and Operations Planning —Demand Planning

– Task 2-B-1

– Task 2-B-2

Sales and Operations Planning —Forecasting

– Task 2-C-1

– Task 2-C-2

– Task 2-C-3

– Task 2-C-4

– Task 2-C-5

Sales and Operations Planning —Product and

Service Development – Task 2-D-1 – Task 2-D-2 – Task 2-D-3

Quality Management

– Task 2-E-1 – Task 2-E-2 – Task 2-E-3

Logistics and Materials Management

– Task 2-F-1 – Task 2-F-2 – Task 2-F-3 – Task 2-F-4 – Task 2-F-5 – Task 2-F-6 – Task 2-F-7 – Task 2-F-8 – Task 2-F-9 – Task 2-F-10 – Task 2-F-11 – Task 2-F-12 – Task 2-F-13

Project Management – Task 2-G-1

Exam 2

TASK 2-A-1

Exam 2

Task 2-A-1 Task Outline

1) General issues in standardization and simplification

2) Sources of standards

Develop and/ or implement a material or service standardization program.

This task contains bridge and non-bridge exam material.

Full 6Q; Bridge 1Q

Exam 2

General Issues in Standardization and

Simplification

Standardization: the process of agreeing on a

common specification. This process can take place

at different levels: (1) across an organization; (2)

throughout an industry; (3) across a nation; and (4)

around the world

Simplification: a reduction in the number of sizes

and designs of an item that an organization uses

Exam 2

General Issues in Standardization and Simplification

Advantages and Disadvantages

Some advantages of standardization and simplification are – Reduction of non-value-added activities

– Decreased total cost of ownership

– Increased profitability

– Decreased cycle time

– Improved quality

– Lower maintenance costs

– More consistency

– Fewer suppliers

– Leverage buying

– Lower inventory costs

– Reduced training costs

Exam 2

Advantages and Disadvantages – Cont.

Some disadvantages of standardization and

simplification are

– Limited competition, customer choices and opportunities

for new products and services

– Requirements for new contracts and new relationships

with supplier

– Costs of introduction, training, installation, and

development of instructions, procedures and processes

– Increased time and development costs

Exam 2

Procedures/Steps in Applying Standardization and Simplification

Standardization committees – Typically, a cross-functional team appointed when

organization embarks on standardization program

– Objective: simplification of design and reduction of total cost of ownership

– Duties include • Administer the program

• Develop the standards

• Evaluate requests for standardization (and for exceptions to standardization)

• Set policy

• Participate with suppliers

Exam 2

Procedures/Steps in Applying Standardization and Simplification – Cont.

Involvement of other departments – In manufacturing environment

• Engineering and supply management likely drive the process

• Others will be primary stakeholders

– In service environment • Program may be driven by supply management, a specific line of

business or business unit, or staff support function such as human resources or marketing

– Finance makes key contributions related to costs, inventory, asset management

– End users often offer best ideas

– All stakeholders should have opportunity to contribute

Exam 2

Effects on production methods/operations

– In manufacturing environments

• Reduced set up time

• Longer production runs

• Improved efficiency

• Lower operating costs

• Fewer component parts

– In nonmanufacturing or service environments

• Productivity gains

• Reduction in non-value-added activities

Exam 2

Effects of global operations

– In manufacturing, consider

• Can parts be shipped to all global locations?

• Are there local content laws or buying requirements that

negatively impact program?

– In nonmanufacturing, consider

• Minor variations to a product/service in differing countries may

serve cultural purposes

• Is there a specific local reason for variation to exist?

Exam 2

Applications

High-use or high-volume items are

– High-volume items good candidates for standardization

– Also consider parts and components that have great

commonality

– Factor in the impact of current contractual obligations

when making plans to standardize high-use or high-

volume items

Exam 2

Applications – Cont.

Procurement of facilities

– Standardization of facilities can reduce overall costs of

design, construction and training

Procurement of maintenance, repair and operating

(MRO) items

– Good starting point for any standardization program

Procurement of services

– Combine contracts for same/similar services across

organization for better rates and performance

– Standardize the process of outsourcing

Exam 2

Applications – Cont.

Brand names versus generic names – Interchangeable parts is a higher-level objective for

standardization and simplification

– Specifications should not limit to one brand name when equivalents are available

Cost-benefit analysis pertaining to standardization – Should be one of first steps before pursuing any

standardization project

– Use return on investment (ROI) model to review costs associated with expected cost avoidance and cost savings

– Use total cost of ownership analysis to determine whether benefits outweigh costs

Exam 2

Sources of Standards

Source Internal

Organization

Government

International

Industry/

Associations

Examples -Internal work

instructions

-Policies and

procedures

-Quality

manuals

-Standards for

behavior,

communication,

dress, etc.

In U.S.

In Europe

-CENELEC

-United

Nations

(standards

transporting

dangerous

goods,

coding

products,

trade, etc.)

-ISO (12

standards)

-UNESCO

Here are a few examples of the many sources of standards

Exam 2

Task 2-A-1 Recall Question #1

Standardization is BEST described as an agreement upon

specific:

(A) Key business performance indicators.

(B) Quality, designs, sizes, types, materials or services.

(C) Forms and methods of manufacture.

(D) Brands and equivalent generic products.

Exam 2

All of the following are advantages of implementing a

standardization and simplification program EXCEPT:

(A) Decreased total cost of ownership.

(B) Decreased cycle time.

(C) Lower maintenance costs.

(D) Reliance on fewer suppliers.

Exam 2

Task 2-A-1 Case Study #1

Discussion Questions:

1. What are the first steps that Cross might take in order to lay the

foundation for his standardization initiative?

2. What might Cross do in order to improve acceptance of the program

by the stakeholder community?

3. How can Cross decide which areas to attack first for his

standardization efforts?

Exam 2

Task 2-A-1 Summary and Review

Define standardization and simplification

Describe advantages and disadvantages of

Discuss procedures/steps in applying

Identify some applications for standardization and

simplification

What are some sources of standards?

Exam 2

TASK 2-A-2

Exam 2

1) Key principles of xRP

2) System development life cycle (SDLC)

Implement requirements planning to align supply management activities with

organizational strategy

All of the content in this task is bridge exam material.

Full 8Q; Bridge 5Q

Exam 2

Key Principles of xRP

xRP: an acronym for “________ requirements

planning” systems where “x” may be

– Materials

– Enterprise

– Distribution

Exam 2

Enterprise Integration

Dependent demand planning systems

– Are based on fundamental hierarchal linkages of

materials requirements planning (MRP)

– Use power of computers and communications systems

– Provide highly integrated software that gives high

visibility across supply chains

– Typically integrate systems; e.g., MRP II

• More recent systems include enterprise resource planning (ERP)

• Expand ability to plan areas of supply chain well beyond MRP II

Exam 2

Enterprise Integration – Cont.

ERP II

MRP II

DRP II

Exam 2

Hypothetical MRP System

Demand forecast

Bill of

materials

Order releases Order schedules

Changes

Purchase orders

Inventory transactions

Contract orders

Master schedule

MRP software program

Inventory

records

Exam 2

MRP II (Manufacturing Resource Planning)

– Links MRP to organization’s financial system and other processes

• Addresses financial planning in dollars

• Addresses operational planning in units

• Has simulation capability to answer “what if”

– Comprised of variety of functions, each linked together

• Business planning

• Sales and operations planning

• Production planning

• Master production planning

• Materials requirements planning

• Capacity requirements planning

• Execution of support systems for capacity and materials

Exam 2

ERP (Enterprise Resource Planning)

– Integrates all data and processes of various functions

within an organization into single system

– Typically, includes broad-based applications that

eliminate need for external interfaces between multiple

systems

– Focuses on integrating internal functions within one

organization

Exam 2

Manufacturing

Engineering, Bills

of Material,

Scheduling,

Capacity, Workflow

Management,

Manufacturing Flow

Supply Management Inventory, Procurement, Supplier Scheduling, Goods Inspection, Supply Chain Planning

Human Resources HR Management, Payroll, Training, Time and Attendance, Benefits Management

Financials General Ledger, Cash Management, Fixed Assets, Accounts Payable, Receivables

Data Warehouse Self-Service Interfaces, Customers, Suppliers, Employees

Project Management Costing, Billing, Activity Management, Time and Expense, Scheduling

Customer Mgmt. Sales and Marketing, Commissions, Service, Customer Contact, Call Center Support

ERP System Applications

Exam 2

Add-on modules are multiple add-on applications to ERP systems and include – Continuous replenishment program (CRP): an inventory management

program where information is submitted electronically from customer to supplier

– Warehouse management system (WMS): designed for managing movement and storage of materials throughout the warehouse (see Task 2-C-2)

– Customer relationship management (CRM): systems that manage and deal with customer needs via Web access

– Supplier relationship management (SRM): offers ability to source and select materials quickly and monitor quality

– Distribution requirements planning (DRP): time-based demand from distribution center to balance customer fill rate against inventory investment (see Task 2-C-2)

– Distribution resource planning (DRP II): a computerized inventory system for replenishment at multiple warehouse sites (see Task 2-C-2)

Exam 2

ERP II

– Expands beyond ERP to include

• Customers

• Suppliers

– A source of competitive advantage

– ERP II is a demonstration of knowledge management

and integration

• Traditional ERP business areas are still maintained within the

organization’s enterprise

• Many areas extended to supplier and customer bases

Exam 2

Order Management

Supply Chain Management

Procurement

Electronic Customers

Customer Service

Interactive Marketing

Demand Forecasting

Inventory

Integrated Forecasting

Quality Systems

Suppliers Customers

Financials

Distribution

Manufacturing

ERP II – Extension of Traditional ERP Systems

Exam 2

Data Source Consolidation

ERP systems often designed to accommodate

– Different languages

– Exchange rates for different currencies

Requires many more data sources

Increases complexity of implementation

When implemented, it is a powerful tool to plan,

schedule and control virtually all aspects of

– Production

– Supply chain

Exam 2

Information Sharing

Enterprise-wide systems allow for sharing and use of data

by all business units

In determining what information should be shared, consider

– What information is available?

– How is the information accessed?

– Who should have access to what information?

Sharing information with key suppliers often improves

performance, but requires determining

– What information suppliers need

– What information can be shared

– Under what conditions

Exam 2

System Development Life Cycle (SDLC)

System development life cycle (SDLC): a

methodology used to develop, maintain and

replace information systems. Typical phases in the

SDLC are

– Analysis

– Design

– Development

– Integration and testing

– Implementation and maintenance

Exam 2

Analysis

Conduct analysis to determine system(s) that will

provide optimal level of support at minimal cost

including

– Information output requirements including

• Level of detail

• Frequency of need

• Timing

– Existing data and information support systems

– Extent of integration required

– Capacity available, both labor and hardware

Exam 2

Design

Analysis should define what final design should include

Design parameters include – Data requirements including

• Level of detail

• Timing

• Accuracy

– Integration plan based on extent and types of integration required

– Cost

– Implementation plan including responsibilities and timing

– Capacity requirements including labor and hardware

– Training plans

Once a design is developed, evaluate commercial software packages

Exam 2

Development

Involves buying/writing code for any software designed

uniquely for the organization

Customization may

– Increase cost of software

– Require retrofitting anytime there is an update

Organizational changes to support new system include

– Any new hardware or communications systems

– Updating policies, procedures, work instructions

– Training programs

– Hiring any new employees needed to support system

– Changing functional relationships as needed

– Implementing any new measurement/evaluation programs needed

to support new system

Exam 2

Testing

Properly performed, analysis and design phases of

system development result in explicit measurement

criteria to determine if implemented system is

operating according to design

Testing phase should operate system under all

expected operating conditions

Results should be evaluated against criteria

Exam 2

The computer-based system that utilizes a master

production schedule, bill of materials and current

inventory data to determine current new requirements

and timing is called:

(A) Enterprise resource planning (ERP).

(B) Materials requirements planning (MRP).

(C) Distribution requirements planning (DRP).

(D) Distribution resource planning (DRP II).

Exam 2

When determining an order needs to be released,

materials requirements planning (MRP) considers:

(A) Lot size.

(B) Capacity.

(C) Due date.

(D) Safety stock.

Exam 2

Task 2-A-2 Case Study

1. What should Jones do now to avoid a shortage in weeks 4 and 5?

2. What options does Jones have to prevent a recurrence of this problem

in the future?

Exam 2

Describe and distinguish among MRP, MRP II,

ERP and ERP II

Identify 3-6 add-on modules for ERP

List 3 considerations in sharing information

Explain the 4 phases of a system development life

cycle (SDLC)

Exam 2

TASK 2-A-3

Exam 2

1) Forecasting models/methodologies

2) Measures of forecast accuracy

3) Replenishment/priority tools

4) Scheduling processes

5) Capacity utilization techniques

Implement operations planning, scheduling and inventory control processes to ensure

optimum use of Resources.

Full 7Q; Bridge 4Q

Exam 2

Forecasting Models/Methodologies

Supply managers use forecasts to

– Improve sourcing methods

– Better identify key suppliers for strategic materials and

supplies

– Improve quality and increase supplier performance levels

– Estimate demand

– Determine if supply can meet demand

– Predict technology trends

– Predict prices

– Predict dependent demand

– Estimate the supply management budget

Exam 2

Forecasting Models/Methodologies – Cont.

Forecasts provide a snapshot of expected future conditions

Conditions can and will change

Conditions that affect forecasts include

– Lead times

– Labor markets

– Global trade

– Money markets

– Technology shifts

– Weather conditions

– Material shortages

Forecasts must be adjusted as conditions change

Exam 2

Forecasting Models/Methodologies – Cont. Forecasting Process

In general, organizations

go through a five-step

process to create a forecast

Step 1 Select what to forecast Choose time horizon Select forecast model(s)

Step 2 Collect relevant data: (time series, sales projections, executive opinion, market research, other

Step 4 Validate forecast(s)

Step 3 Prepare forecast(s): qualitative/quantitative

Step 5 Implement results

Exam 2

Term Length Use

Long-term Usually developed for

more than one year

Used as a basis for capacity

planning, making location

decisions, process changes

Medium-term Varies from three

months to one year

Used as a basis for making

decisions about staffing, production

or service delivery, purchasing,

distribution

Short-term Less than three

months

Used as the basis to schedule

workforce, manage inventory, plan

production, develop schedules for

final product assembly

Length of forecast

– Forecasts can typically be broken down into

Exam 2

Quantitative forecasts

– More sophisticated than judgmental

– Based on real data, not opinions

– Frequently involves large amounts of data

– Requires use of statistics and computer programs

– Examples

• Least squares/regression model

• Box-Jenkins

• Winter’s model

Exam 2

Forecasting Models/Methodologies – Cont. QUANTITATIVE FORECAST METHODS TIME-FRAME

Method Description

Medium

squares/

regression

A straight line is fitted to past

data using a fitting technique

know as the least squares

method

Jenkins

Complicated yet accurate

method estimates a

mathematical formula that will

approximately generate the

historical demand patterns in

a time series

Winter’s

Simultaneously considers the

effects of trend and seasonal

factors using the exponential

smoothing technique

Exam 2

Judgment Sampling

Judgmental, or qualitative, forecasts are based on

– Opinions of others

– Estimates from sales staff

– Results of market research

Used most often when organization has no

– Background in quantitative forecasting

– Quantitative data available for analysis

Useful in adjusting for specific future events and

incorporating decision-maker’s (CEO or other senior) high

level of experiential knowledge

Exam 2

Judgment Sampling – Cont. QUALITATIVE FORECAST METHODS TIME-FRAME

Method Description

Medium

Sales force

composite

A manager reviews sales best estimate of

expected level of customer demand for region,

then forecasts at district and national levels

Market

research

Surveys collected from consumers to estimate

interest in product or service

Jury of

executive

opinion

Executive opinion based on experience,

knowledge, opinions of employees from key

areas and external parties such as customers

and suppliers

Delphi

method

Moderator collects results from survey sent to

panel of experts, then creates new survey and

sends to panel. Process continues until

consensus is reached

Exam 2

Future Sales Based on Past Sales

Future sales based on past sales

– Relatively unsophisticated approach often used when

little other data is available

– Often includes life-cycle analogy, where life-cycle

pattern/demand for one product is thought to translate to

another

– Life-cycle analogy is most appropriate when one product

is replacing another

• For similar use

• By same basic population

Exam 2

Measures of Forecast Accuracy

Standard error rates: essentially the standard

deviation of the distribution

– Standard deviation: a measure of dispersion of data.

Standard deviation is calculated by finding the difference

between the average and each actual observation,

squaring each difference, summing all squared

differences, dividing that total by n – 1 (where n is the

number of observations) and taking the square root of

the result

Exam 2

Measures of Forecast Accuracy – Cont.

Mean squared error: the average of the square of

the error, where the error term is the forecasted

value subtracted from the actual value for a given

time period

Mean percentage error: the forecast error divided

by the actual value for a given time period and

expressed as a percentage

Exam 2

Replenishment/Priority Tool

Supplier-Managed Inventory (SMI)

Supplier-managed inventory (SMI): inventory

management system that holds a supplier

responsible for ensuring that stock is maintained at

appropriate levels in the purchaser’s facility and for

replenishing items when these levels drop.

Sometimes referred to as vendor-managed

inventory (VMI)

Exam 2

ABC Analysis/Classification

ABC analysis: application of Pareto’s Law or the 80/20 rule to define three categories: A, B and C. ABC analysis is used to determine the relative ratios between the number of items and the dollar value. For example, the items purchased repetitively for stock; the number of purchase orders and the dollar value; and the number of suppliers and percent of spend – “A” items are of highest importance and are typically those in the top 10-

20% of the total dollars of inventory or spend and account for 70-80% of the investment

– “B” items are of moderate importance and are typically the next 15-25% of the items and account for 10-20% of the investment

– “C” items are of low importance and are the remaining 65-75% of the items and typically account for 5-10% of the investment

ABC classification: a system of categorizing items in decreasing order based primarily on their total annual dollar value

Exam 2

Reorder Point Systems

Reorder point: a predetermined inventory level that

triggers an order. This level provides adequate

inventory to meet anticipated demand during the

time it takes to receive the order

Reorder point system: a continuous-review

inventory control system in which an order is

placed whenever a withdrawal brings the inventory

position to a predetermined reorder point level

Exam 2

Fixed Order Period

Fixed order period: a fixed order interval inventory

control system in which an item’s inventory position

is reviewed on a scheduled periodic basis, rather

than continuously. An order is placed at the end of

each review, if appropriate, and the order quantity

usually varies. Also called periodic inventory review

system

Exam 2

Fixed Order Quantity

Fixed order quantity (FOQ): a material

replenishment system in which the size of the

orders remain fixed, while the time interval

between them changes, depending on how quickly

the items are consumed

Exam 2

Kanban

Kanban: a Japanese term meaning “signal.” It is

usually a printed card that contains specific

information such as part name, description,

quantity and so on that signals a cycle of

replenishment for production and materials. It is an

order release mechanism and one of the primary

tools of a just-in-time (JIT) manufacturing system

Exam 2

Buffer/Safety Stock

Buffer/safety stock: additional inventory held as a

buffer against uncertainties in demand or in the

supply system

Exam 2

Obsolete/Damaged/Slow Moving

Obsolete inventory: not usable to the organization

because the intended use no longer exists

Surplus or slow moving inventory: wastes

organization assets due to lost opportunity costs as

well as incurred carrying costs

Damaged inventory: no longer fit for its intended

purpose

Obsolete and slow moving inventory may be

usable, but damaged inventory is not

Exam 2

Scheduling Processes

Flow Manufacturing

Term used to describe a “one-piece flow” business strategy

that allows an organization to establish continuous

sequencing of product, within a flow process, that is

replenished either from external suppliers or other internal

processes based on actual customer demand and works

hand-in-hand with just-in-time (JIT)

Individual units of production “flow” directly through

manufacturing process without time delays associated with

batching in traditional manufacturing processes

Lead times and costs are reduced by decreasing or

eliminating batching and unnecessary routing

Exam 2

Level Scheduling

Part of flow manufacturing

Level scheduling: a technique to balance

production throughput at each workstation to meet

expected cycle time; i.e., level use of capacity

Cycle time: a measure of how frequently each unit

will be produced

To succeed, must convert suppliers to same

business strategy

Exam 2

Level Scheduling – Cont.

Two approaches to level scheduling

– The use of inventory to absorb demand when it exceeds

production allocated to a given product over a set period

of time

– Produce small lots of product using flexible capacity that

can accommodate the production of a wide range of

product

• Uses lean production methods that enable organization to

economically produce small lots

Exam 2

Package Optimization

Goal: use the least amount of packaging that

provides an adequate level of protection within the

shipping environment

Benefits

– Waste reduction

– Cost savings in materials

– Savings in shipping costs

Exam 2

Package Optimization – Cont.

Package optimization process – Begins by understanding product, such as its

• Value

• Physical characteristics (length, height, width, weight)

• Fragility

– Have information on available packaging materials and properties of each along with recommended application

– Be familiar with • Acceptable level of damage to the package

• Modes of transportation that will be used

• Whether packaging will be reused

• Packaging budget

Exam 2

Package Optimization – Cont.

Important questions to consider – Does the existing/proposed packaging material just meet

or exceed requirements?

– Will less protection still adequately protect product?

– Is any cushioning material required? • If so, will less cushioning still protect product from damage

during shipment?

Testing standards to assess various transport packaging materials developed by – American Society for Testing and Materials (ASTM)

– International Safe Transit Association (ISTA)

Exam 2

Shared Visibility into Inventory (Your Organization, Customer and Supplier)

Modern supply chain techniques require synchronization of

material production and flow throughout supply chain

Must maximize visibility of

– Customer demand

– Inventory in

– Own organization

– Supplier organizations

– Customer organizations

Enables all in supply chain to

– More effectively plan production and distribution

– Maximize customer service with least inventory, transportation or

other costs

Exam 2

Bull-Whip Effect

Term refers to fact that small changes in customer demand will increasingly become exaggerated as demand is communicated upstream in supply chain

These exaggerations along with tendency to accumulate safety stock at each point in supply chain amplify/intensify for 3 reasons – Bullwhip effect is exaggerated when organization places

responsibility for meeting demand on supplier, regardless of actual demand fluctuations

– Carrying too much inventory results when organizations continue with functional silo mentality focusing on individual needs rather than on those of supply chain

– When supply managers take advantage of pricing discounts, bullwhip effect is worse because organizations are carrying excess inventory and increasing need for warehouse space

Exam 2

Bull-Whip Effect – Cont.

Bull-whip effect worsens due to data transfer methods where data is communicated but not necessarily accurately or with regularity

Bullwhip effect – Is wasteful

– Occurs because of a lack of information across the supply chain

– Results in unnecessarily high inventory levels

To minimize, organizations need – More effective inventory management practices

– More collaboration with suppliers

Exam 2

Capacity Utilization Techniques

Sales Forecasts

Sales forecasts can help organizations plan use of

capacity so that

– Total costs are minimized

– Customer service is maximized

Often done by inputting forecasts into a sales and

operations plan

Exam 2

Capacity Utilization Techniques

Implementation Schedule

When executing a capacity utilization plan, the

organization must “fine tune” utilization capacity to

determine whether production

– Is ahead of schedule

– Behind schedule

An organization can adjust capacity for short time

periods by

– Tracking order load on capacity

– Projected available capacity

– An example of adjusting capacity is overtime

Exam 2

Which of the following measures of forecast accuracy is

the one that gives a better idea of the true magnitude of

the forecast error?

(A) Mean absolute deviation

(B) Mean absolute percentage error

(C) Mean squared error

(D) Absolute value error

Exam 2

In the ABC analysis/classification method of inventory

replenishment:

(A) The supplier manages the inventory, ensuring that stock levels are

always appropriate.

(B) There is a fixed order period for certain products, but not for others.

(C) Specific information signals the need for replenishment for each type

of material.

(D) Pareto’s Law is used to define three categories of materials, with

varying levels of controls based on the categories.

Exam 2

Task 2-A-3 Case Study #1

Discussion Question:

1. What steps should the supply manager consider in making his

decision to improve the company’s forecasting system?

Exam 2

Distinguish between quantitative and qualitative forecasting

models and briefly describe least squares/ regression, Box-

Jenkins and Winter’s model

Identify measures of forecast accuracy

Discuss various methods for replenishing inventory

Define flow manufacturing and level scheduling

Identify the goal, process for and benefits of package

optimization

Describe the bull-whip effect and explain how to minimize it

How are sales forecasts and implementation schedule

techniques used for capacity utilization?

Exam 2

TASK 2-A-4

Exam 2

TASK 2-B-1

Exam 2

TASK 2-B-2

Exam 2

TASK 2-C-1

Exam 2

TASK 2-C-2

Exam 2

Task 2-C-2 Task Outline

1) Purpose of forecasting: quantity, industry capacity and availability, cost

or price, technology, planning and assuring supply

2) Economic concepts and terms used in forecasting

3) Sources of data used in forecasting

4) Forecasting methodologies/techniques

5) Factors that can affect forecasts

Develop supply forecasts in light of economic and technological trends

Full 7Q; Bridge 2Q

Exam 2

Purpose of Forecasting

Quantity – Organizations predict sales quantities when developing demand forecasts

Industry capacity and availability – An organization determines whether its demand forecast is realistic –

whether there will be enough, too much or not enough industry capacity to

meet overall customer demand and whether it will have the capacity to meet

its share of the market

– To create a capacity forecast, an organization evaluates the competition in

terms of overlapping product lines and market coverage, and the expected

effect on the marketplace

– It then estimates capacity for its own organization and uses the demand

forecast and capacity forecast for its own capacity planning

Cost or price – Organizations forecast prices/costs to identify future costs and their effect

on sales price

Exam 2

Purpose of Forecasting – Cont.

Technology

– Organizations forecast technology trends to determine

impact on demand and threats to revenue or market

Planning

– Historical and economic reviews of key spending

categories provide the cornerstone of planning activities

Assuring supply

– Forecasting supply conditions in critical markets is a key

element for meeting demand

Exam 2

Economic Concepts and Terms Used in

Forecasting

Price index: a ratio expressing the relationship

between the price of a commodity at a given point

in time to its price during a specified base period.

This information can be used to chart price level

changes

Exam 2

Forecasting – Cont. Examples of price indices include

– Producer Price Index (PPI): a measurement tool compiled by the U.S. Bureau of Labor Statistics (BLS) reflecting the average change in prices charged by producers during a given time period, compared to those charged in a base year. The PPI measures inflation at earlier stages of the production and marketing process than does the consumer price index (CPI)

– Consumer Price Index (CPI): compiled by the U.S. BLS, the CPI is a monthly measure of changes in the prices of goods and services consumed by urban families and individuals. The relative importance given to individual items in the index’s basket is based on periodic surveys of consumer expenditures. The CPI is computed for the nation as a whole, for each of 17 large metropolitan areas, for individual items, and for commodity and service groupings. It is commonly used to measure inflation

– Implicit price deflator: a factor used to eliminate inflation-related price changes in computing a nation’s real changes in output. Also known as GDP deflator

Exam 2

Forecasting – Cont.

Interest rate: the price paid for borrowing money,

expressed as a percentage. Interest rates fluctuate

according to a number of factors, including

– Lender’s willingness to postpone use of the money

– Lender’s willingness to assume risk

– The possibility that inflation will reduce the purchasing

power of the funds by the time they are repaid

– The administrative costs of processing a loan

Exam 2

Economic indicators: activities that change relative to the economy. Categories include – Leading: a measure of economic activity that changes before

the business cycle does and thus indicates its future direction; for example, bond yields often indicate the direction of the stock market

– Lagging: a measure of economic activity that tends to change after the state of the general economy has changed; for example, the unemployment rate

– Coincident: a measure of economic activity based on a combination of coincident indicators (the Industrial Product Index, manufacturing and trade sales, non-agricultural employment, and personal income net of transfer payments)

Exam 2

Inflation/deflation

– Inflation: a loss of purchasing power, caused by

increasing prices

– Deflation: an increase in purchasing power, due to a

decrease in prices

Capacity utilization: the extent to which an

organization, industry or nation uses its installed

facilities. It compares actual output to potential

output using the available installed capacity

Exam 2

Economic indexing: comparing economic factors to

other measures, such as

– Variable interest rates on mortgages

– Social Security payments indexed to the cost of living

– Union wage contracts indexed on a monthly basis

– Certificates of deposit indexed to Treasury bill rates

– Variable interest bonds tied to the return on T-bills

– Etc.

Exam 2

Gross Domestic Product (GDP): a measure of a nation’s domestic

output, which is the total value of all finished goods and services

produced within a country within a given time period (usually one

calendar year)

Balance of merchandise trade: a measure of “visible” (e.g., cars and

electronics) trade; positive value indicates trade surplus (exports

exceed imports) and negative value indicates trade deficit

Balance of payments: measure for the difference in the flows of funds in

and out of a nation’s boundaries; a summary statement of a country’s

transactions with the rest of the world during a year

Exchange rates: the price of a currency as it is being exchanged for

another

Exam 2

Sources of Data Used in Forecasting

ISM Report on Business® - Manufacturing and Nonmanufacturing

Government publications (international and U.S. domestic) including – Survey of Current Business

– Federal Reserve Bulletin

Private publications such as – The Wall Street Journal

– Business Week

– Financial Times

Exam 2

Sources of Data Used in Forecasting –

Commercial forecasts

Regional surveys

Internal historical data

Industry sources such as – Chemical Week

– American Metal Market

Online indices and search engines/Internet. For example, the following provide extensive statistical data – United Nations (www.un.org)

– Organization for Economic Co-Operation and Development (www.oecd.org/home/)

– International Monetary Fund (www.imf.org)

Exam 2

Forecasting Methodologies/Techniques

Short-term vs long-term forecasting

– Short-term

• Usually up to one year

• Used as aid in development and execution of short-term

purchase plans and operational or tactical activity

– Long-term

• Longer than one year

• Facilitates the evolution and development of strategic plans

• Typically include in-depth commodity and industry studies

Exam 2

Forecasting Methodologies/Techniques –

Macro vs micro forecasting

– Macro

• Project broad scale activities; e.g.,

– A nation’s gross national product

– An industrial sector such as services or farm sector

– Micro

• Organization-specific or limited to small segments of larger

issues

– Macro and micro forecasts usually are linked; e.g.,

• Organization’s projection for next year’s inventory investment

based on sales estimates (micro)

• Sales estimates based on general economic conditions (macro)

Exam 2

Delphi method: a method of forecasting where a

panel of experts is polled repetitively in writing to

develop a consensus prediction of future

environmental conditions

Correlation/regression analysis: method for

measuring the statistical relationship between two

data series. Measures of correlation are used to

describe the degree of relationship between two

variables (or data series)

Exam 2

Time-series analysis: method for examining the factors that influence changes in data series over time. These factors include trends, cyclical variances, seasonal fluctuations and random influences

Central tendency: the clustering of data around the central value of a data set

Variability: the degree to which individual data values differ from each other. The smaller the variability, the more tightly the numbers cluster around a central value

Exam 2

Analysis of cyclical data: data indicating a cycle, or the residual variation of fluctuation around a long-term trend; i.e., changes in economic or business systems

Trend analysis: a trend is general movement upward or downward. Studying data to reveal such movement may lead to better decision-making. Factors that can create trends include changes in population, productivity, technology, supply/demand, and price or costs

Decision tree analysis: a decision-making tool that maps alternative courses of action and their consequences

Exam 2

Factors That Can Affect Forecasts

Forecasts are accurate only as long as all conditions remain unchanged

Factors that can affect forecasts include – War and threats of war

– Strikes and threats of strikes

– Natural factors; e.g., disasters, discoveries, depletions

– Changes in • Technology

• Government

• Law

• Population

• Consumer tastes

Exam 2

Factors That Can Affect Forecasts – Cont.

For critical items, consider and track factors such

– Fluctuating lead times

– Changing labor conditions

– Changes in money markets

– Political factors

– Technological shifts

– Climatic conditions

– Changes in global trade

Exam 2

Task 2-C-2 Recall Question #1

Which of the following is the LEAST important reason

supply managers need to forecast? To:

(A) Determine the quantity required.

(B) Determine the availability of the product or service.

(C) Determine the supplier’s delivery time.

(D) Determine the price of the product or service.

Exam 2

Gross Domestic Product is the:

(A) Total value of all finished goods and services produced within a

country within a given time frame.

(B) Difference between the value of a country’s exports and the value of

its imports.

(C) Difference between the flows of funds into and out of a country’s

boundaries.

(D) Amount of funds owed by a domestic organization to another

organization in a foreign country.

Exam 2

Task 2-C-2 Case Study #1

1. What components of a time series can be seen in these data?

2. What type(s) of time series forecasting model(s) would be appropriate

to use?

3. What error criterion should the supply manager use to evaluate the

various models?

Exam 2

Task 2-C-2 Summary and Review

Describe the purpose of forecasting

Define the following terms – Price index

– PPI

– CPI

– Implicit price deflator

– Interest rate

– Capacity utilization

– Economic indexing

– GDP

– Balance of merchandise trade

– Balance of payments

– Exchange rates Cont.

Exam 2

Task 2-C-2 Summary and Review – Cont.

Contrast the following: inflation/deflation

Identify some of the sources of data and some of

the methodologies or techniques used in

forecasting

What are some of the factors that can affect

forecasts?

Exam 2

TASK 2-C-3

Exam 2

1) Buying strategies

2) Financial tools

3) Forecasts of volume

4) Factors in the selection of the method of procurement

Plan and communicate sourcing and supply strategies based on forecasted data.

This task contains no bridge exam material.

Full 7Q; Bridge No Q

Exam 2

Buying Strategies

Spot buying – Buying on the open market for immediate delivery

Buying to requirements – Usually 3 weeks to 3 months supply

– Ensures supply without building costly inventory

Forward buying – More than current requirements, but not more than foreseeable

– “Drivers” include potential shortage, strikes, price increase, etc.

Speculative buying – More than current and known future requirements

– Usually to take advantage of favorable pricing and profitable future resale

Exam 2

Buying Strategies – Cont.

Volume purchase agreements – May be based on total order quantity or dollar value

– A time frame is typically specified

– Primary objectives include • To ensure supply

• To consolidate volume and maximize purchasing leverage while eliminating some inventory cost

Life of product supply – Refers to award of a materials or components contract for life of the

finished product

– Typical reasons for a life-of-product contract include • To eliminate repetitive re-bidding

• Supplier familiarity of buyer needs

• Special supplier capabilities

• Best pricing for small quantities

Exam 2

Just-In-Time – Focuses on identification and elimination of waste in a process

– Objectives include

• Facilitation of a “pull” manufacturing system

• Reduction in raw material, in-process and finished goods inventory

• Decreased inventory shrinkage

• Increased inventory turnover

• Lower risk of component obsolescence

• Reduced requirement for storage space

– Requires close collaboration and planning with supplier

Consignment – Refers to inventorying supplier owned material on the buyer’s site

– Payment is made as inventory is used and replenished

Exam 2

Commodities

– Currently defined two ways • Any tangible good that can be bought, sold or bartered

– Gold, silver, oil, bulk food products (corn, coffee), etc.

• Goods that are sold on a commodities market

– Market dynamics • Price movement may result from speculation, not real

demand

• Many purchases are investments, not for use by the buyer

Exam 2

Commodities – Cont.

– Exchanges • An established market where supply and demand may

operate freely while buyers and sellers conduct trading of

various commodities

– Terminology • Cash commodity – an actual commodity under a contract for

the purchase or sale and delivery at some future date

• Spot price – the price paid for a commodity when purchased

for cash on an exchange for immediate delivery

Exam 2

Supplier replenishment systems

– Refers to supplier managed inventory on the buyer’s site

– Ownership of the materials depends on the negotiated

agreement

Outsourcing

– Essentially, a make-or-buy decision

– Outsourcing may be

• Nearshore – when business is relocated to a geographically

nearby location

• Farshore – when business is outsourced to a more distant

supplier

Exam 2

Financial Tools

Hedging – An organization enters into a futures contract to offset or reduce

its price exposure in the cash market

– Long hedge – buying a futures contract to safeguard profits related to an extended delivery, fixed price sales contract when purchase of materials is postponed

• Protect material prices by buying futures contract based on current pricing. Ensures material availability at current futures contract price, should market price of materials rise

– Short hedge – selling a futures contract based on current pricing to protect inventory values in a declining market.

• If declining prices cause finished product prices to fall, the loss should be offset by the difference between the futures contract and the current pricing

Exam 2

Financial Tools – Cont.

Dollar averaging

– First, the price cycle is estimated and divided into

equal time periods. Then dollar averaging can take

place in two scenarios

• Buying the same quantity in equal time periods over a price

• Spending the same $ in equal time periods over a price cycle

Exam 2

Contracting – Long term contracts – typically formed when there is value in

a long term supplier relationship

– Price change clauses – (escalation or de-escalation clauses) • Useful in an agreement where future price of materials and/or labor

is unknown

• Typically in long-term contracts

• Protects buyer and supplier from unpredictable price changes

– Multi-year contracting • Strategic supplier relationships are typically multi-year in scope

• A multi-year agreement demonstrates buyer/supplier commitment

• Performance expectations should be carefully defined

• Problems should be quickly addressed

– Future delivery contracting – typically used to ensure future availability of required goods/services

Exam 2

Contracting – Cont.

– Buying capacity reserves

• When volume of material requirements can be estimated, but the

exact mix is unknown, a portion of supplier manufacturing

capacity may be reserved

• Reduces the uncertainty and risk associated with insufficient

capacity

• Downside: if reserved capacity is not used, buyer must pay

anyway

Exam 2

Forecasts of Volume

Determining annual requirements – Derived from sales/marketing forecasts and historical usage

Part (or product) life cycle – Forecasts over entire product life, rather than monthly or annually

– May form the basis for life-of-product supply contracts

Supply markets relative to short/long term buying needs – Short term need may require no more than a quick scan of the

market

– Long term, more critical needs dictate extensive studies, including • Current/future technological impact assessments

• Possibility and availability of material substitutes

• Worldwide demand and supply

• Price analysis

• Development and use of tracking mechanisms and info systems

Exam 2

Factors in Selection of the Method of

Procurement

First, a question: Competitively bid or negotiate? The “drivers” may include – Degree of competition and the market situation

• Many suppliers: competitive bidding

• Few suppliers: negotiation may be favored

– Industry norms and standards • Standard products are competitive. Bidding may be favored

• Negotiation is favored for custom-made items, specialized need, or poorly defined specs

– Urgency • Competitive bidding is typically more time consuming

• If need is urgent, negotiation may be best

– Dollar value • Low dollar value may not be worth the bid process

Exam 2

Procurement – Cont.

– Nature of the product or service specifications • When specs are clearly defined, bidding is usually favored

• Where specs are unclear, or may be changed later, negotiation is best

– Type of contract desired • Fixed price contracts favor bidding

• Cost reimbursable and uncertain delivery contracts favor negotiation

• As uncertainty rises, so does the likelihood of negotiation

– Frequency of purchase • Repetitive purchases often call for blanket order, systems

contracts or use of a charge card

• Competitive bidding is likely not worth the effort

Exam 2

– Risk • Low volume/low risk – non-critical, bid process impractical

• Low volume/high risk – increase volume and bid, or simplify and mitigate risk and negotiate

• High volume/low risk – bidding is generally favored

• High volume/high risk – negotiation is generally favored

– Customer requirements • When final customer dictates the supplier, negotiation is favored

• Short lead times may reduce available suppliers….negotiation

• When there are sufficient competitive sources, bidding is favored

– Lead time • Given sufficient time for the process, bidding may be favored

• If goods are required quickly, negotiation is usually favored

Exam 2

– Level of flexibility

• When supply manager has high level of flexibility, bidding is

favored

• If the buyer needs a high level of supplier flexibility, negotiation is

– Buyer/seller uncertainty

• Generally, as level of uncertainty rises, so does the need to

negotiate

Exam 2

Which of the following is a PRIMARY objective of a

volume purchasing agreement?

(A) To take advantage of volume pricing while maintaining low inventory

(B) To reduce the cost per unit of holding inventory

(C) To fix the delivery schedule of the contract over a defined time frame

(D) To reduce pricing volatility over the contract term

Exam 2

Which of the following is the MOST critical issue when

selecting a supplier for a Just-In-Time (JIT) delivery

agreement?

(A) Availability of transportation resources is the most key supplier

selection criterion when implementing a JIT delivery agreement.

(B) A JIT delivery agreement will change a supply management

department from a transactional orientation to a focus on supplier

understanding of JIT.

(C) JIT II operates the same as JIT, but on a larger scale.

(D) The supplier’s quality process is of prime concern when developing a

JIT delivery agreement.

Exam 2

Task 2-C-3 Case Study #1

1. What are the key considerations in design of a JIT system for delivery

of M-1 to Moss, Inc.?

2. How much inventory should be on hand at Moss, Inc.?

3. How would you structure the JIT delivery arrangement?

4. Are there any other issues that warrant consideration?

Exam 2

Define

– Spot buying

– Buying to requirements

– Forward buying

– Speculative buying

– Life of product supply

– Dollar averaging

What is “hedging,” what is its intent and how is it used?

Identify 10 key influences on selection of a method of

procurement

Exam 2

TASK 2-C-4

Exam 2

1) Elements of early supplier involvement (ESI)

2) Business forecasting models

3) Confidentiality issues

4) Parameters for disclosure

5) Legal implications

6) Supplier managed inventory (SMI)

7) Collaborative Planning Forecasting and Replenishment (CPFR)

8) Product life cycle

9) Information exchange options

Manage forecasted data with suppliers.

Exam 2

Elements of Early Supplier Involvement

Early supplier involvement (ESI)

– A practice that brings together one or more selected

suppliers with a buyer’s product or service design team

early in the product development process

– Objective: utilize the supplier’s expertise and experience

in developing a product specification that is designed for

effective and efficient product roll-out

Exam 2

Elements of Early Supplier Involvement

(ESI) – Cont.

ESI can be particularly beneficial in the following areas

– Manufacturing process

– Capital acquisitions budget

– Product or service development/implementation

– Cost

– Quality

– Availability

– Technology

– Design

– Product co-development

– Cycle time

Exam 2

Business Forecasting Models

Rely on leading indicators

– Indicators of economic activity that change in advance of

business cycle changes, thus indicating its future direction

Examples of indicators include

– Change in number of building permits

– Money supply

– Inventory level changes

– Changes in stock prices

– Number of unemployment insurance claims

– Average hours worked per week

– New orders

Exam 2

Confidentiality Issues

ESI requires trust between the parties

Confidentiality plays a big role

Information shared may take a variety of forms

Supply management professionals must ensure information about one supplier is NOT shared with another (unless legally required) – Must make sure everyone in organization understands

need for confidentiality

– Must establish controls to protect information

– May use non-disclosure agreements (NDA)

Exam 2

Parameters for Disclosure

When using ESI, agree in advance on parameters for disclosure

Organizations often are concerned with protecting intellectual property – Safest: no access

– An alternative: intellectual property agreement

Organizations often share production plans with suppliers – Supplier should regard as confidential

– Use confidentiality or non-disclosure agreement

Exam 2

Legal Implications

NDAs must clearly define “proprietary information”

and how it may be used

May include a dispute resolution clause

Effective NDAs

– Prevent each party from disclosing other party’s

confidential information to third parties

– Limit use of other party’s confidential information to

authorized purposes set forth in NDA

Exam 2

Supplier Managed Inventory (SMI)

An inventory management system that holds a

supplier responsible for

– Ensuring that stock is maintained at appropriate levels in

the supply management professional’s facility and

– Replenishing items when these levels drop

Exam 2

Collaborative Planning Forecasting and

Replenishment (CPFR)

An initiative developed by the Voluntary Industry

Commerce Standards (VICS) Association that

allows collaborative processes across the supply

Some of the first applications involved a final

retailer sharing its consumer demand forecasts

upstream in the supply chain to enable

manufacturers of branded goods to produce and

distribute their products to the retailer at lower

Exam 2

Product Life Cycle

Product life cycle: the stages a product goes

through from beginning to end. Five distinct stages

– Design

– Introduction

– Growth

– Maturity

– Decline

Suppliers can be actively involved during each

Exam 2

Information Exchange Options

There are many options for sharing information

between supplier, buying organization and other

involved parties

Formats for sharing include

– Face-to-face meetings

– Virtual meetings

– Conference calls

– E-mail

– Web portals

– Other systems integrations using various technologies

Exam 2

In the early stages of engagement with suppliers,

which factors are the BEST considerations when

managing early supplier involvement (ESI)?

(A) Technology, design, cost, co-development, quality, intellectual

property and risk management

(B) Delivery, cost and quality

(C) Supplier contract and relationship

(D) The supplier’s history with the buying company

Exam 2

Which of the following BEST describes Supplier Managed

Inventory (SMI)?

(A) Inventory management system related to forecasting and MRP

(B) Inventory management system related to maintaining stock at

appropriate levels

(C) Inventory management system relating to capacity planning models

(D) Inventory management system relating to legal contracting

Exam 2

Task 2-C-4 Comprehension Question #1

John Davis is a sourcing manager for a consumer electronics manufacturing company. His company is developing a new product that they expect will change the industry, and Davis wants to engage suppliers in the product development cycle. Which of the following includes the items MOST important when involving suppliers in the development cycle?

(A) Confidentiality agreements are essential.

(B) Confidentiality agreements, production plans and pricing are important.

(C) Confidentiality agreements, ownership of intellectual property (IP), risk, production capacity and cycle time are important.

(D) Price, quality and delivery are important.

Exam 2

Task 2-C-4 Comprehension Question #2

Julio Suarez is the Director of Supply Management for an arts and crafts company that sells to retail stores and television home shopping networks. The products are seasonal items and his company’s customers are very demanding about on-time delivery, often charging his company for lost profit if delivery schedules are not met with 99% on-time delivery. Suarez is responsible for managing forecasted data with suppliers. The two key success factors for Suarez’s management of forecasted data are:

(A) The supplier’s contract and price.

(B) The company’s material requirements planning (MRP) and the strength of the supplier relationship.

(C) Early supplier involvement and detailed knowledge of the company’s and supplier’s manufacturing processes.

(D) The supplier’s delivery schedule and a company’s receiving schedule.

Exam 2

What is ESI and what is its objective?

Give examples of leading indicators

Describe the impact of the need for confidentiality

on ESI and ways to manage this need

Define the following and describe the role of ESI in

– Supplier managed inventory

– CPFR

– Product life cycle

Exam 2

TASK 2-C-5

Exam 2

TASK 2-D-1

Exam 2

TASK 2-D-2

Exam 2

Task 2-D-2 Task Outline

1) Sales projections

2) Staffing requirements

3) Operations capacity and capabilities

4) Logistics/distribution capabilities

5) Supplier capability/capacity analysis

6) Lead time and inventory planning

Participate in product-service ramp-up and/or ramp-down strategies and

implementation

Full 6Q; Bridge 3Q

Exam 2

Introduction

Supply management must be able to manage a ramp-up

strategy (including various logistics and distribution

decisions) to

– Meet challenges of

• Time-to-market

• Volume growth

– Help the organization

• Achieve fast payback on new product development

• Gain leading market position from early entry

Ramp-up: the period during which the manufacturing

process makes the transition from zero to full-scale

production at target levels of cost and quality

Exam 2

Sales Projections

Sales projections

– Critical to achieve effective ramp-up

– Poor forecasting

• May lead to involuntary downtime as suppliers cannot supply

enough critical components

• Other times, supply management may rely on a supplier to

handle problems caused by poor sales forecasts

Exam 2

Staffing Requirements

Ramp-up projects

– Operate most effectively within a cross-functional and

cross location team structure

– As production moves from pilot to volume, cooperation

among people and departments is critical

Exam 2

Operations Capacity and Capabilities

Operations flexibility and response time

– Ramp-up is characterized by

• High variability and uncertainty

• Conflicts in managing short cycle times and fast throughput

increases

– Fast entry strategy may be achieved through

• Computer-aided-design/computer-aided manufacturing

(CAD/CAM)

• Design for manufacturing

• Aggregate project planning

Exam 2

Operations Capacity and Capabilities –

Equipment and labor capabilities

– During ramp-up, new equipment needs to be

• Delivered

• Hooked-up

• Installed

• Aligned with the right process

– May require detailed experiments and analyses to prove

process capability prior to release of product

– Skilled labor is required to undertake rapid problem

solving to build knowledge of the process and improve

yield rates

Exam 2

Logistics/Distribution Capabilities

Efficient logistics networks

– Key to ramp-up

– Ensure materials arrive on desired schedule

Rapid logistics may help keep schedule when

supplier shortages occur

Exam 2

Supplier Capability/Capacity Analysis

Supply management professionals must be mindful of

– Technological aspects of product design

– Commercial issues of capacity and ramp-up

Tooling

– Long lead times

– Lasting impact

– “Right” amount of tooling and capacity are critical to meet expected

demand without incurring significant costs

Prototype qualification

– Testing and evaluation of prototypes for minimal technical

requirements is critical for meeting long term cost and performance

targets

Exam 2

Lead Time and Inventory Planning

Key challenge of ramp-up: ensure supply chain

maintains pace with volume growth

This challenge is exacerbated in a global

production network

Exam 2

Task 2-D-2 Recall Question #1

What is the BEST definition of a ramp-up period when

introducing a new product and/or service?

(A) The planning leader invites the cross-functional, cross-location team

members to begin working.

(B) The manufacturing or production process makes the transition from

zero to full-scale production.

(C) The project planning process is initiated with key milestones and

deliverables noted.

(D) Suppliers are notified of the planned introduction of a new product

and given detailed specifications.

Exam 2

Which of the following is NOT a consideration in

developing a ramp-up strategy for new product

introduction?

(A) Sales projections

(B) Capacity requirements

(C) Early supplier involvement (ESI)

(D) Staffing requirements

Exam 2

Task 2-D-2 Case Study #1

Discussion Question:

1. What should New Age’s supply management professionals consider

as they seek to establish both the inbound logistics requirements and

assist in selecting the outbound distribution suppliers?

Exam 2

Task 2-D-2 Summary and Review

Define ramp-up

Discuss some of the key areas of concern during

ramp-up and the contributions made by supply

management in each

Exam 2

TASK 2-D-3

Exam 2

Task 2-D-3 Task Outline

1) Product and technology roadmaps of supplier and customer

2) Data on sales performance to plan

3) Integration requirements between supplier and customer systems

4) Product pricing strategy

5) Financial and information flows

6) Critical service factors

7) Customer segmentation (derived demand and market segmentation)

8) Supplier collaboration processes

Create systems and process improvements to help the organization meet sales goals.

Full 5Q; Bridge 4Q

Exam 2

Product and Technology Roadmaps

To identify opportunities, one must first understand the organization’s supply chain strategy and

economics. This is typically based on:

Target market Mass market or niche market?

High price/high service market vs low price discount market?

Decisions: make-or-buy, leverage supplier value, joint venture

Product features and

technology

What is needed to support the target market and

product/service?

Choice of technology level depends on joint R&D capabilities

Customer features and

operational scale

One large customer or lots of small customers?

Collaborate with suppliers to ensure balanced supply chain

capacity and low cost

Customer service and

inventory/staffing alignment

Usually, higher service requires higher inventory and staffing

Should share planning information with suppliers

Doing so tends to improve the quality of decisions

Exam 2

The Roadmap

A roadmap is a plan that identifies the route to achieving a desired end result – A technology or product roadmap

• Focuses on a single technology or product

• Describes the way it is expected to develop

• May include project plans to support development

– The roadmap focuses on • Forecasting development/commercialization of new technology

• The organizations’ competitive position relative to the technology

• How the technology and the competitive position will develop

– The roadmap may be used to • Influence resource allocation

• Form subsections of complex product maps

• Form development time frames and milestones

• Leverage R&D investment by coordinating research activities

Exam 2

Supply management’s role – Influencing which technology will be used

– Assessing the risk of switching to new technologies

– Determining resulting impact on the supply chain

– Working with engineers to evaluate/select suppliers

– Monitoring supplier investment in future technology

Sales goals – Sales and revenue objectives are good guidelines for

• Planning supply chain activities

• How to best engage suppliers

• Ensuring alignment between supply and sales strategies

Exam 2

Data on Sales Performance to Plan

Sales continually change in response to micro and macro economic conditions

Supply must monitor the planned to actual sales gap in order to appropriately adjust supply chain capacity and capability

Point-of-sale information – This refers to computation of sales data and inventory

adjustments at the time and place of sale

– It uses magnetic or electronic media

– Point-of-sale data is a good source of actual to planned sales data

Exam 2

Integration of Supplier and Customer

Systems

Multiple cross-business communication standards

increase difficulty and cost of buyer/supplier

system integration

Before proposing joint improvement opportunities

to suppliers, supply management must

– Understand where integration is desirable

– Identify the issues with establishing the linkages

Exam 2

Product Pricing Strategy

Supply management can help meet target sales price and margin goals by working with suppliers to optimize the cost vs product/service features trade-off

Margins – “Margin” is defined as

• As a business metric, the ratio of operating profit to revenue

• For individual products, the difference between cost and selling price

• The minimum return below which products are not profitable

– Supply management’s role • Reduce cost of good to improve margin to target levels

• If reducing price in order to gain additional sales and revenue, supply management can provide options on which to base that decision

Exam 2

Financial and Information Flows

Supply management

– Is concerned with the extended supply chain. Financial and

information flows up and down the chain facilitate better

supply chain management

– Must partner with Finance and IT to facilitate better decisions

Inability to share and synchronize key data hinders

seamless information flow between supply chain

partners

Best-in-class organizations seek to integrate and align

their entire inter-corporate procurement-to-pay cycle

Exam 2

Critical Service Factors

Supply management must stay current on critical

customer service factors

Organizational ability to meet customer service

requirements depends in part on supply

management performance

Strong links with Sales and Marketing facilitate

better supply management performance

Exam 2

Customer Segmentation

Understanding segmentation of an organization’s customers facilitates better understanding of the demand for final products

This requires segmentation of current and, sometimes, potential customer base

Customer segmentation is the process of grouping customers with similar characteristics, such as demographics or attributes, in order to – Better manage customer relationships

– Meet existing customer needs

– Identify needs that are not being met

Exam 2

Customer Segmentation – Cont.

The goal of segmentation is to quantify each customer segment’s net contribution to profitability

Segmentation may be used as the principle basis for allocation of resources to

– Product development

– Marketing strategy

– Pricing

– Service

– Sourcing strategies

– Product distribution

– Differentiated delivery programs

Supply management’s understanding of customer segmentation and strategic suppliers facilitates contribution to customer satisfaction and, ultimately, to profitability

Exam 2

Supplier Collaboration Processes

Supplier collaboration refers to practices aimed at driving continuous improvement and lowering total cost to the mutual benefit of all stakeholders

Exam 2

Supplier Collaboration Processes – Cont.

Demand management – A compilation of demand data/supply management capability

– The objective is to closely match supply with demand, within the constraints imposed by supply management

Specification rationalization – Defined as

• Improving value through continued cost analysis

• Simplifying non-critical product attributes

• Use of lower cost substitutes

– Techniques include

• Standardizing parts

• Substituting lower cost parts or materials

• Product value analysis

• Examination of product life-cycle costs

Exam 2

Make vs buy analysis – Defined as

• Determining what products/services should be provided in-house

• Determining what products/services should be sourced outside

– A make-or-buy analysis evaluates options based on

• Whether or not the process is a core competency

• Relative “fit” of the decision

• Relative cost

Inventory or asset management – Consider “Vendor Managed Inventory” (VMI)

• Integrates the supply chain

• Empowers suppliers to manage replenishment

– VMI may also involve suppliers in production planning

Exam 2

Joint Process Improvement – Defined as

• A joint effort by supply managers and suppliers to analyze current and potential future aspects of their relationship

• Analysis should extend over the entire value chain

– Goal: identify mutually beneficial opportunities

Value chain may include

Customer Service

Manufacturing Processes

Procure-to-Pay Cycles

Product Development

Research and Development

Planning

Exam 2

All of the following are primary choices that organizations

are faced with in determining their supply chain strategy

and economics EXCEPT:

(A) Target market.

(B) Customer selection and operational scale.

(C) Product features and technology.

(D) Sales goals.

Exam 2

Demand management is included in the supplier

collaboration process, and allows an organization to

reduce costs by managing the factors that drive

consumption. Which of the following is NOT one of the

typical levers used in demand management?

(A) Reducing frequency

(B) Encouraging substitution

(C) Imposing tighter process/tracking

(D) Applying product value engineering

Exam 2

Task 2-D-3 Comprehension Question #1

Organizations that collaborate with their suppliers receive many benefits, including increased mutual visibility into inventories and other information that improves efficiency in the physical supply chain.

However, many parts of the total business-to-business information flow have not kept pace with the information flows about products and materials in the physical supply chain. Which of the following initiatives could a supply organization implement to more fully integrate financial and information flows?

(A) Inventory and logistics information systems

(B) Accounts payable and accounts receivable systems

(C) Procurement-to-pay cycles

(D) Respective warehousing systems

Exam 2

Task 2-D-3 Summary and Review

Describe the typical basis of an organization’s supply chain

strategy and economics

Discuss supply management’s role in

– Product and technology roadmaps

– Product pricing strategy

– Customer service

Explain point-of-sale information and why it is useful to

supply management

Identify the reasons for customer segmentation

Define supplier collaboration and describe several supplier

collaboration processes

Exam 2

TASK 2-E-1

Exam 2

Task 2-E-1 Task Outline

1) Supplier quality practices

2) Supplier certifications/registrations (e.g., International Organization for

Standardization [ISO], good manufacturing practices [GMP])

3) Congruence of test methodologies and results between buying and

selling organizations

4) Organizational requirements for supplier certification (e.g., evidence of

statistical process control [SPC])

Develop and/or administer a supplier quality certification program

Exam 2

Introduction

Supplier certification: an organization’s process for

evaluating the quality systems of key suppliers in

an effort to eliminate incoming inspections

Exam 2

Supplier Quality Practices

Supply management organizations may categorize

suppliers as follows

– Approved suppliers: suppliers that meet an organization’s selection

criteria and have been added to the approved list

• Approval process may include

– Submission of samples for testing

– Inspection of the supplier’s quality systems

– Preferred suppliers: a group of suppliers that an organization has

determined meet its expectations for quality, delivery and/or price

and that are able to respond to unexpected changes

• Often master price agreements are established

• Entire organization must buy from these suppliers

Exam 2

Supplier Quality Practices – Cont.

Partnered suppliers: close relationship with supplier usually

built around long term arrangements, large volume

commitments, and joint product/service process

development

– Often called strategic alliance

– A collaborative relationship

Certified suppliers: suppliers whose enterprise-wide quality

control systems are integrated with the supply management

organization’s enterprise-wide quality control system

– Reduces total costs associated with quality

• Eliminates duplication of effort

• SPC an other quality control processes are used

Exam 2

Prequalified suppliers: suppliers added to an organization’s “approved supplier” list when they have passed preliminary screening including examination of – Financial strength

– Facilities

– Location

– Size

– Technology

– Labor status

– Management

– Costs

– Terms

– References

Exam 2

Certifiable suppliers: suppliers that are not currently

certified but in the process of becoming certified by the

supply management organization

Disqualified suppliers: individuals, companies or other

organizations that fail to meet the standards established by

a supply management organization and are barred from

competing for that organization’s business

Acceptance testing: test procedures that lead to formal

acceptance of a new/changed product, process or system

Exam 2

Certification requirements

– Created by the supply management organization

– Basis for supplier to be certified

• Qualifies supplier for reduction/elimination of incoming inspections

– Certification standards include definitions of

• How measurements are made

• Minimum level of quality no longer requiring inspection

– Supplier reviews its measurement system with supply

management to

• Ensure measurements are correlated

• Provide documentation that minimum certifiable quality levels have

been achieved

Exam 2

Locations of inspections may include

– Supplier’s plant

– In process

• At inspection stations

• At final inspection before shipment

– Supply management organization

• Incoming inspection

• In process (as supplier’s materials are used)

• At final inspection before shipment

Exam 2

Levels of thoroughness of inspections include

– No inspections at all

– Occasional audits or random inspections

– Routine sample inspections

– One hundred percent inspections

Results of inspections should be documented

– Regardless of their location

– Regardless of their level of thoroughness

Exam 2

Supplier Certifications/Registrations (e.g., ISO [International Organization for Standardization], GmP [Good Manufacturing Practices])

International Organization for Standardization

– A worldwide federation established in 1947

– Promotes the development of global standards to

enhance international business interactions

– The ISO is comprised of standards organizations from

more than 140 countries

Exam 2

Supplier Certifications/Registrations – Cont.

ISO 9000: family of standards and guidelines primarily

concerned with

– Quality management or what the organization does to fulfill the

customer’s quality requirements and

– Applicable regulatory requirements

The intent of the standards is to provide an organization

with a methodology for enhancing customer satisfaction

and achieving continual improvement of its performance in

pursuit of these objectives

Exam 2

Supplier Certifications/Registrations – Cont.

Good manufacturing practices (GmP)

– First prepared by the World Health Organization (WHO) in 1967

– Currently extended through international organizations and country-

specific regulations

– GmP ensures

• Quality assurance

• Compliance

• Good product development

– GmP regulations require a quality approach to manufacturing,

enabling companies to minimize or eliminate instances of

• Contamination

• Mix-ups

• Errors

Exam 2

Congruence of Test Methodologies and Results

between Buying and Selling Organizations

To achieve consistent quality, organizations and suppliers collaborate in such areas as – Acceptance/rejection

– Testing capability • Workers

• Machines

– Process control • Statistical process control (SPC)/statistical quality control (SQC)

• Six sigma/Cpk

– Quality systems • Organization and management

• Documentation

• Certification/validation

Exam 2

Organizational Requirements for Supplier

Certification (e.g., Evidence of SPC)

Management responsibility

Quality system

Contract review

Design control

Document and data control

Procurement

Control of customer-supplied

product

Product identification and

traceability

Process control

Inspection and testing

Control of inspection, measuring and test equipment

Inspection and test status

Control of nonconforming product

Corrective and preventive action

Handling, storage, packaging, preservation and delivery

Control of quality records

Internal quality audits

Training

Servicing

Statistical techniques

Areas examined before certifying suppliers may include

Exam 2

Task 2-E-1 Recall Question #1

Which of the following worker capability indicators is of

LEAST value to a supply manager when determining the

supplier’s ability to detect and report on individual

workers’ correct and incorrect work?

(A) Hours of SQC (statistical quality control) or TQM (total quality

management) training

(B) Number of certifications held

(C) Use of process control charts by equipment operators

(D) Reviewing acceptance/rejection history

Exam 2

Which of the following would be LEAST useful in

evaluating a supplier quality system?

(A) Process control

(B) Acceptance sampling criteria

(C) Employee quality training programs

(D) Product traceability

Exam 2

Task 2-E-1 Comprehension Question #1

The following list contains the steps in obtaining an ISO 9000 certification.

I. Process audits

II. Inquiry into registration process

III. Contract with registrar

IV. Rolling certification audits

V. Final certification audit

VI. Certification audit

Which of the following is the correct sequence from first to last of these steps?

(A) I, II, III, VI, IV, V

(B) II, III, VI, I, V, IV

(C) III, IV, VI, V, I, II

(D) VI, II, I, III, V, IV

Exam 2

Task 2-E-1 Comprehension Question #2

Rank the type of supplier classification given below from least stringent to most stringent from a supplier’s perspective.

I. Approved

II. Certified

III. Partnered

IV. Preferred

(A) I, II, III, IV

(B) I, IV, III, II

(C) II, III, I, IV

(D) IV, III, II, I

Exam 2

Task 2-E-1 Summary and Review

Define the following

– Supplier certification

– Approved suppliers

– Preferred suppliers

– Partnered suppliers

– GmP

Identify the focus of ISO 9000

Discuss methodologies and requirements that

organizations use to certify their suppliers

Exam 2

TASK 2-E-2

Exam 2

TASK 2-E-3

Exam 2

Task 2-E-3 Task Outline

1) Benchmarking systems

2) Process mapping

3) Process costing

4) Maturity models

5) Capability maturity model-integration (CMMI)

6) Contract management maturity model (CMMM)

7) Process improvement metrics

8) Process improvement methods (e.g., lean methods, JIT [Just-In-Time], Six Sigma, value stream mapping)

9) Supplier workshops

Implement Continuous improvement processes within the supply chain

Full 10Q; Bridge 3Q

Exam 2

Benchmarking Systems

Benchmarking: a process by which selected

practices and results of one organization are

compared to those of one or more other

organizations to establish targets for improvement

Benchmarking can be performed either by

– Identifying world class organizations and visiting them

for information gathering and comparison

– Responding to surveys from third-party independent

research organizations that collect, aggregate and

disseminate benchmark data

Exam 2

Benchmarking Systems – Cont.

Benchmarking

– A search for industry best practices that lead to superior

performance

– A method for continuous improvement

• Focuses on continuous process of measuring against the “best”

– Results allow organization to

• Establish goals

• Periodically measure progress

Exam 2

Steps in benchmarking include

– Identify what is to be benchmarked

– Identify comparative organizations

– Determine data collection methods and collect data

– Determine current performance gap

– Project future performance levels

– Communicate benchmark findings and gain acceptance

– Establish functional goals

– Develop action plan

– Implement specific actions and monitor progress

– Recalibrate benchmarks

Exam 2

Maturity in benchmarking is achieved when

– Organization achieves leadership and superiority as a

result of incorporating best industry practices in all

business processes

– Benchmarking program is institutionalized throughout

entire organization

Exam 2

Process Mapping

Process mapping: a method of drawing a pictorial

representation of a process (e.g., manufacturing a

component or ordering a part) that breaks the process

into key activities, transfers, decisions and approvals

Process maps enable analysis of the inputs, outputs

and interrelationships of each process to

– Understand how processes interact in a system

– Locate process flaws that are creating systemic problems

– Evaluate which activities add value for the customer

– Mobilize teams to streamline and improve processes

– Identify processes that need to be reengineered

Exam 2

Process Mapping – Cont.

Process mapping

– Ensures common understanding of activities, results and

users involved in a specific business process

– May help define boundaries of a business process

– Provides a baseline against which to measure

improvements

– Also known as

• Flow charts/diagrams

• Process diagrams

• Workflow diagrams

Exam 2

Process Costing

Process costing: determining the cost to perform a specific process. Process costs include both – Direct expenses

• Direct labor

• Direct materials

– Indirect costs; e.g., • Overhead

• Profit

Used with process mapping to – Reduce costs of a process

– Distinguish between high value add and low value add activities in a process

Exam 2

Maturity Models

Maturity: a measure of effectiveness in any specific process

Maturity model: an evolutionary roadmap

Originated from quality initiatives such as – The Deming Prize

– ISO Standards

– Malcolm Baldrige National Quality Award

Examples – Capability Maturity Model-Integration (CMMI)

– Contract Management Maturity Model (CMMM)

Exam 2

Capability Maturity Model-Integration

(CMMI)

Developed by the Software Engineering Institute (SEI) at Carnegie Melon University in Pittsburgh

Collection of best practices that guide process improvement

Five maturity levels – Initial

– Managed

– Defined

– Quantitatively managed

– Optimizing

Exam 2

Contract Management Maturity Model

(CMMM)

Developed by Acquisition Research Program, Naval Postgraduate School

Assess level of capability for each of six major steps in the contract

management process

– Procurement planning

– Solicitation planning

– Solicitation

– Contract administration

– Contract closeout

Identify level of maturity

– Ad hoc

– Basic

– Structured

– Integrated

– Optimized

Exam 2

CMMM – Cont.

CMMM helps you

– Develop a roadmap to assess, measure and improve

contract management processes and relationships

including

• Roles and responsibilities

• Timelines

• Performance management

• Costs

– Create a vision of excellence

– Produce a framework or guide for improvement

Exam 2

Process Improvement Metrics

Process management: the function of planning,

organizing, controlling and improving a process and

measuring its utility in providing the desired end result

Common process improvement metrics

– Productivity: a measure of the ratio of outputs to inputs

– Efficiency: a measure of actual outputs compared to a

standard output measure where the standard output measure

is an estimate of what should be produced, given a certain

level of resources

– Cycle time: a measure of total elapsed time needed to

complete the process

Exam 2

Process Improvement Methods (e.g., Lean Methods, JIT

[Just-In-Time], Six Sigma, Value Stream Mapping)

Tools and techniques used to improve various business

processes

Common methods include

– Lean production

– Just-in time (JIT)

– Six sigma

– Value stream mapping (VSM)

Exam 2

Process Improvement Methods – Cont.

Lean production

– A philosophy of operations that focuses on minimization

of all resources (including time) used in the organization

– It employs a set of principles and practices to reduce

cost through the

• Relentless removal of waste

• Simplification of all processes

Exam 2

Just-in time (JIT)

– An operations management philosophy, the objectives of

which are to reduce waste and cycle time

– Operationally, JIT minimizes inventory at all levels. It requires

• Consistent quality at the appropriate level

• Frequent on-time delivery of small lot sizes

– The objectives are to

• Have only the required inventory, as needed

• Have zero defects

• Reduce lead times through reductions in setup times, queue

lengths and lot sizes

• Accomplish all of this at minimum cost

Exam 2

Six sigma: a quality management program with a goal of no

more than 3.4 defects per million parts and an outstanding

commitment to quality

Value stream mapping (VSM): a lean manufacturing

technique in which the transformation of materials is traced

from beginning to end to determine if there is waste in the

process in the form of a

– Step where no value is added or

– Point of “wait time” when material is being stored to await further

value adding transformation

– This concept may also be applied to services

Exam 2

Supplier Workshops

Another source of process improvement

– Specific to buying organization’s supply chain

– Allows for exchange of information and ideas

In supplier workshops

– Buying organization and its critical suppliers

• Collaborate on process improvement opportunities

• Seek results of

– A more streamlined supply chain

– Benefits for all supply chain partners

Exam 2

Which continuous improvement process measures the

effectiveness of an organization’s contract maturity

processes?

(A) Capability maturity model-integration (CMMI)

(B) Capability management maturity model (CMMM)

(C) Process mapping

(D) Value stream mapping

Exam 2

What definition BEST fits a description of a six sigma

continuous improvement process?

(A) A reduction of variability of a process resulting in about 3.4 defects

per million quality levels

(B) A means of understanding inter-organizational process relationships

(C) A measure of the ratio of outputs to inputs

(D) Total elapsed time needed to complete a process

Exam 2

Task 2-E-3 Case Study #1

1. What steps would you undertake to plan and execute the

benchmarking study?

2. What recommendations would you make to improve efficiency of the

supply organization?

Exam 2

Task 2-E-3 Summary and Review

Discuss the steps involved in benchmarking

Describe how each of the following contributes to process

improvement

– Benchmarking

– Process mapping

– Process costing

– Maturity models

– Supplier workshops

Explain the differences between CMMI and CMMM

Name 3 common process improvement metrics

Exam 2

TASK 2-F-1

Exam 2

Task 2-F-1 Task Outline

1) Policies and procedures

Design transportation and distribution policies and procedures to ensure optimum

flow of materials

Full 5Q; Bridge 2Q

Exam 2

Policies and Procedures

Transportation Modalities

Ability to execute transportation and logistics

strategies better than competitors will lead to

improved performance

Transportation market drivers include

– Globalization

– Intense competition

– Short product life cycles

– Deregulation

– Environmental issues

Exam 2

Transportation Modalities – Cont.

Five modes of transportation

– Water

– Motor carrier

– Rail

– Air

– Pipeline

See Task 2-B-3

Exam 2

Transportation Modalities – Cont.

Considerations for selecting a transportation mode include – Types of goods to be transported including

• Size

• Weight

• Density

• Packaging

• Specific physical characteristics

– Which mode (or combination of modes) best suits organization’s needs

– Delivery requirements, including time needed

– Organizational requirements

Exam 2

Transportation Restrictions

There are many transportation rules and

restrictions

Examples include

– All carriers have weight and volume restrictions

– Laws restrict the transportation and handling of

hazardous materials

– Policies govern border-crossing inspections and security

measures

Exam 2

Carrier Cost Auditing

Organizations implement audit procedures to – Review freight bills

– Objective is to control transportation costs

Overcharges typically result from human error – Rate variances

– Descriptions

– Weights

– Routing

Auditing activity is often outsourced to a third party, called a freight bureau

Exam 2

Carrier Performance Auditing

Carrier performance

– Must be optimal

– To ensure customer value

Areas monitored for performance include:

– Willingness to work as a partner

– Commitment to continuous improvement

– Acceptance of innovation

– Focus on time reduction

– Flexibility in logistics systems design

– Commonality of core values

Exam 2

Freight Classifications/Rates

Line-haul: transport between major cities or nodes

as differentiated from local service. The term

applies to all modes of transportation: air, truck, rail

Line-haul rate: freight rate that is charged for the

line haul of the cargo. Usually the rate does not

include any related cargo handling such as lifting

containers on and off rail cars

Exam 2

Freight Classifications/Rates – Cont.

Most rates are negotiated

– Due to deregulation

– Set forth in contract

Basis for negotiated rates stem from former

regulatory standards; e.g.,

– Class

• Goods categorized according to value, density, susceptibility to

damage and theft

– Distance

Exam 2

Available Technology

Use of technology is widespread in logistics

Four groups of computerized transportation activities

– Transportation analysis: software that facilitates monitoring costs

and service by providing historical reporting of key performance

indicators

– Traffic routing and scheduling: software providing features such as

sequencing and timing of vehicle stops, route determinations,

shipping paperwork preparation, vehicle availability

– Freight-rate maintenance and auditing: software that maintains

databases of freight rates that are used to rate shipments or to

perform freight bill auditing

– Vehicle maintenance: common features of this software include

vehicle-maintenance tracking, scheduling, reporting

Exam 2

Relocation or Movement Processes

Considerations when relocating or moving

products include

– Physical restrictions such as warehousing

– Methods of transportation

– Amount of material to be relocated or moved

Exam 2

Task 2-F-1 Recall Question #1

Freight classifications/rates are generally based on which

of the following?

(A) A national freight classification system

(B) One set of rates for inter-state transportation and another set for intra-

state transport

(C) The former standards based on classes and distances but negotiated

between each shipper and carrier

(D) A carrier’s published rates which are applied to every shipper

Exam 2

When a shipper checks performance of a carrier based on

such items as the carrier’s willingness to commit to

continuous improvement and acceptance of innovations,

the shipper is performing a/an:

(A) Carrier performance audit.

(B) Carrier cost audit.

(C) Shipment process audit.

(D) Early supplier involvement (ESI) program.

Exam 2

Task 2-F-1 Comprehension Question #1

Your organization has been experiencing high fleet

operating costs, slow response times to customers, many

overtime charges and trouble managing the drivers’

schedules. For these reasons you are considering

implementing a:

(A) Process audit to see exactly where things are falling apart.

(B) Plan to change transportation modes.

(C) Freight rate maintenance and auditing software package.

(D) Traffic routing and scheduling software package.

Exam 2

Task 2-F-1 Application Question #1

A supply manager for a U.S. auto parts manufacturer has

begun buying some raw materials and components from

China and other locations overseas. In the process of

auditing the entire logistics function the supply manager

has determined that shipping rates have gotten out of

hand. With his location in the Midwest, the company has

utilized air transport in the past as the primary method of

shipment since the goods can then essentially go door-

to-door with little delay.

Exam 2

Task 2-F-1 Application Question #1 – Cont.

Which of the following changes would BEST control costs while minimizing delays in receipt of the materials? (A) Multimodal shipping, with water transport to the United States port of

entry and trucking to the warehouse.

(B) Multimodal shipping, with air transport to the United States port of entry and trucking to the warehouse in order to keep shipping times as short as possible.

(C) Multimodal shipping, with water transport to the United States port of entry, rail to the closest point to the warehouse and trucking from there to the warehouse.

(D) Multimodal shipping, with water transport to the United States port of entry, air shipment to the closest airport and trucking to the warehouse.

Exam 2

Task 2-F-1 Summary and Review

Discuss considerations when selecting a

transportation modality

Define freight bureau

Describe how freight rates are determined and the

basis for the rates

Identify four groups of computerized transportation

activities

List key considerations when relocating or moving

products

Exam 2

TASK 2-F-2

Exam 2

TASK 2-F-3

Exam 2

1) Freight terms (domestic and international)

2) Delivery tracking systems

3) Delivery performance measurements

4) Visible versus latent damage

5) Rules for freight claims

6) Resolution processes

7) Freight audit procedures

Manage the resolution of delivery/ receiving problems

Full 5Q; Bridge 2Q

Exam 2

Freight Terms (Domestic and International)

Incoterms are the standard for specifying

international freight terms

Incoterms are increasingly being applied to

domestic shipments, although some organizations

in the U.S. still use FOB terms

See Task 2-B-3

Refer to Incoterm in contract to resolve

delivery/receiving problems

Exam 2

Delivery Tracking Systems

Large organizations use real-time tracking systems to

determine

– Shipment dates

– Where a shipment is at any point in time

– When delivery has taken place

These systems allow

– Remedial action when necessary

– Redirecting cargo to respond to sudden need elsewhere

RFID (radio frequency identification device) support

systems by providing real-time communication

Exam 2

Delivery Performance Measurements

Delivery performance = important determinant of customer satisfaction

Primary objective: supplier to deliver required materials/services on time

Frequently used delivery performance measures – Damages

• ($) amount/vehicle

• ($) amount to goods while in transit

• ($) amount to goods during loading

• ($) amount to goods while unloading

– Late deliveries as a percent of all deliveries

– Percent of orders delivered on time

– Percent of deliveries outside preset delivery windows

– Cost of damage claims

Exam 2

Visible versus Latent Damage

Visible damage – Unconcealed loss or damage

– Easy to detect during routine inspection

– Goods can be refused for delivery or replaced at no additional cost to buying organization

– Damage should be noted on carrier’s delivery receipt

Latent damage – Concealed loss or damage

– Not easy to detect

– Hidden and unnoticeable during inspection

– Often discovered after time has passed

– Latent damage may be difficult to identify before using the goods, but a buying organization may invoke

• Warranty rights to replace/repair item

• Or, in the U.S., rejection rights under the Uniform Commercial Code (UCC)

Exam 2

Rules for Freight Claims

Freight claims: claims against a carrier due to loss of, or damage to, goods transported by that carrier; also for erroneous rates and weights in assessment of freight charges

Freight claims are important when loss/damage occurs in a transport move

Procedures and forms used are generally standardized across all modes

Claims handling involves actual recording, handling and monitoring of product claims

Requires accurate, real-time data and historical records

Exam 2

Resolution Processes

Two components to a claims resolution process

– Escalation of conflict: if parties cannot settle claim

amicably (through negotiation), litigation may be

necessary

– Corrective action: action taken to bring a process that

has veered off the planned course back on track

• To avoid escalation of claims and satisfy the customer, the

carrier or shipper has the option of taking corrective action

before claim is filed

Exam 2

Freight Audit Procedures

To control costs, organizations need procedures for

auditing freight bills

Common for freight bills to include mistakes

Auditing can be performed internally or externally

Many organizations outsource freight auditing to

freight bureaus

– Freight bureaus provide auditing service on percentage

or commission basis

Exam 2

In addition to simply tracking the location of a shipment,

sophisticated, advanced delivery tracking systems

provide which of the following?

(A) Routing, scheduling and dispatching

(B) Shipment delivery date, scheduling and routing

(C) Scheduling, driver assignments and driver performance ratings

(D) Routing, dispatching and driver performance ratings

Exam 2

“Rate basis” for freight classification rates can BEST be

defined as:

(A) Rates established for direct routes from one point to another.

(B) Rates established based on agreements regarding quantity of freight

to be shipped.

(C) Rate formula including the specific factors or elements that control the

making of a rate.

(D) Rates from point of origin to point of destination.

Exam 2

A supply manager is tasked with developing an in-house freight

auditing process. In developing the process and testing it, there

appears to be a significant problem with matching descriptions of

items ordered with descriptions of items received. This could

potentially cause problems in determining if the freight bills are

correct. To combat this, the supply manager institutes a new policy to

(A) Supplier purchase orders forwarded to the responsible carrier.

(B) All order, receipt and invoice documentation matched before shipping.

(C) Restrictions on the choice of carriers to those who provide the best

information.

(D) Shipments with incomplete bills of lading refused.

Exam 2

Your lamp manufacturing firm has been facing increased damages to the components it receives from a specific domestic supplier. While you have been in frequent contact with the component supplier, you have not been satisfied with the response as the supplier is adamantly maintaining that the carrier is to blame. You are not certain the carrier is causing the damage, but you are also not certain that the carrier isn’t at fault. At this point you realize that if you don’t do something soon, you will not be able to collect on any damages from anyone, as:

(A) You are closing in on nine months since the date of first delivery, at which time you will not be able to file a claim with the carrier.

(B) You have been negotiating for so long with the supplier that you will be accused of having accepted the situation.

(C) Your company does not intend to use litigation to resolve its claim.

(D) The visible damage to the shipment was not noted at the time of delivery.

Exam 2

Name the common standard for specifying freight

What are delivery tracking systems?

List commonly used delivery performance

measurements

Contrast visible versus latent damage

Define freight claims and describe how they are

resolved

Exam 2

TASK 2-F-4

Exam 2

TASK 2-F-5

Exam 2

1) Considerations for geographical location

2) Order picking versus stock replenishing functions

3) Labor intensive versus mechanized

4) Virtual warehouse versus real warehouse

5) Logistics-performance measures, strategies and cost savings

initiatives

6) Third-party logistics considerations

7) Scorecards

8) Process improvement action plans

Develop and/or implement a warehouse management system

Full 4Q; Bridge 4Q

Exam 2

Introduction

Organizations use inventory to

– Improve ability to coordinate supply with demand

– Keep transportation and supply costs reasonable

Warehouses and materials handling systems are

needed to support production and service delivery

and the strategic supply management process

Warehouse: a facility used for receiving, storing

and distributing materials in support of

organizational strategies

Exam 2

Considerations for Geographical Location

Labor Considerations

Labor costs are ongoing costs in warehousing

Workers ultimately determine an organization’s

success

In locating the logistics organization, consider

– Employees’ skills and abilities

– Pay scales

– Training programs

– Selection and retention procedures

– Other employee-related issues

Exam 2

Transportation Availability Considerations

Transportation is probably the largest variable cost

component in the location decision

Selection of transportation carriers is important

Availability, adequacy and cost of transportation

carriers affect proximity of

– Plants

– Warehouses

– Retail locations to final consumers

Exam 2

Governmental Issues

Federal, state, local laws influence location of

– Plants

– Warehouses

– Offices

– Retail locations

Every country, state and local government has

different zoning ordinances that govern location

Organizations must ensure that their buildings

meet requirements

Exam 2

Governmental Issues – Cont.

Political – Some countries, state and local governments offer tax

breaks and other concessions in order to bring new jobs into an area

– Others do not, as they do not wish to see changes in their communities

Tax considerations – In most U.S. states, there could be a disadvantage to

owning property – various taxes apply

– In other countries, e.g., India, tax incentives are offered to encourage building in their country

Exam 2

Environmental Considerations

An important supply management responsibility is

keeping the environment clean and healthy for the

future, regardless of where doing business

Supply managers should be proactive in

environmental areas of logistics including

– Packaging

– Remanufacturing

– Disposal

– Reuse

Exam 2

Environmental Considerations – Cont.

When deciding on location, consider

– Availability of local recycling programs

– Cleanup and disposal requirements for hazardous

materials and obsolete or out-of-date inventory

Oversight

– In U.S., state and federal agencies such as Department

of Transportation, Environmental Protection Agency,

Occupational Safety and Health Administration

– A source for international environmental information is

the Center for International Environment Law (CIEL)

Exam 2

Channel Proximity/Modality Considerations

Channel provides consumers with goods they desire in right combinations at minimum cost – Location and structure determined by consumer buying

patterns that drive logistical service output requirements

– The best channel is formed when no other competing organization generates higher profits and consumer satisfaction per dollar of cost

– Supply chain intermediaries arrange processes and functions in ways to minimize cost if given desired level of output by consumer and competitive conditions

– Shifting of specific processes leads to entry and exit of service providers in channel

Exam 2

Average Delivery Time

Average lead time is an indicator of logistics

performance

Yet, variances occur

Remote or global logistics facilities tend to increase

– Average delivery time

– Variability in delivery time

Exam 2

Build Out versus Build Up

Build out: to expand a facility horizontally

Build up: to expand a facility vertically

Building height dictates how high shelving can be

assembled

The higher the shelving, the better the space

utilization

– Important to consider cubic footage (CF) as well as

square footage (SF)

– Equipment needed is directly related to vertical capacity

Exam 2

Two-Dock versus Single-Dock Layout

Loading docks must be

– Flexible

– Efficient

Single-dock may be appropriate

– For a smaller facility

– Low to moderate shipping activity

Two-dock system can handle

– Higher-use operation

– Simultaneous shipping and receiving

Exam 2

Two-Dock versus Single-Dock Layout – Cont.

Good dock design contributes to

– Sound logistics

– Safety

– Efficiency

– Profitability

Exam 2

Guidelines for dock design

Position building on site and doors on building to

allow safe access to roads and dock area

Arrange loading dock to accommodate trucks of all

sizes. Factors include

– Dimensions of dock door

– Dock height

– Location of landing strip

Exam 2

Assist those responsible for material flow to get

through the docks. Judge dock equipment based

– Safety

– Productivity

– Reliability

– Capacity

– Flexibility

Plan a staging area inside loading dock for efficient

material flow to and from internal destination

Exam 2

Safety Considerations

No compromise on safety for carriers and their

customers

Due to demand, carriers often allow longer times

between repair and replacement of equipment

Supply managers – be aware if carrier develops

reputation for unsafe operations

– Having too many accidents

– Loss of customers

Exam 2

Security

Key issue: required level of security

Goal: adequately protect organization’s fiscal, physical and human resources from theft/harm

If entire facility is secure, the need for guards and gates will be lower

Can limit cost of securing facility by – Controlling ingress and egress

– Keeping parking areas away from immediate vicinity

– Designing building to be difficult to penetrate

Alarm systems are deterrents, but are not impenetrable

Exam 2

Security – Cont.

Local fire codes dictate alarm and extinguishing

equipment

Ensuring warehouse security is a good investment

– Security systems with television monitors

– Badge entry

Most losses are from internal theft – to limit risk

– Control ingress and egress

– Have verifiable document system

Exam 2

Sanitation

Another consideration in locating a facility

Distance to local landfill affects

– Transportation costs

– Labor costs

Consider local and government regulations

regarding

– Substances that may be banned from dumping

– Recycling requirements

Sewage systems also may be a factor

Exam 2

Warehouse Material Handling Systems (e.g., Facility

Consideration Regarding Forklifts, Pickers, etc.)

Forklifts

– Have enabled productivity growth for

• Receiving

• Storing

• Picking

• Staging

• Loading

– Must integrate into product flow within facility

Exam 2

Warehouse Material Handling Systems – Cont.

Pallets – Most common method of supporting a unit load

– Allow for effective movement of unit loads by forklift

– Produced in various materials, sizes, designs

– Most common materials • Wooden: available in most geographical locations and can be repaired

easily

• Plastic: use increasing because can be reused almost indefinitely

• Corrugated paper: can be erected as needed, thus reducing space requirements

• Steel and aluminum also used

– Useful, but a cost consideration in material handling systems

– Return process • Supply managers design the process

• Adds complexity to operating processes

• A consideration in locating a facility

Exam 2

Warehouse Material Handling Systems – Cont.

Warehouse receiving – Entails scheduling appointments with carriers for specific

unloading times

– Requires ability to measure and predict work flows

– Advance shipping notices (ASNs) facilitate receiving • Notification in electronic data interchange (EDI) or extensible

markup language (XML) format (may also be paper based)

• Sent ahead of a shipment listing its contents and shipping information

– Often includes purchase order numbers, lot numbers, quantity, pallet or container number and carton number

– Usually combined with bar-coded compliance labeling for scanning, receipt into inventory, automated data collection

Exam 2

Order Picking versus Stock Replenishing

Functions

Order picking: outbound flow of materials from an organization’s warehouse to its customers

Orders must be – Prepared

– Picked

– Packed

– Delivered to staging area

Consider how to reduce order-picking time when designing materials handling system

Sequence orders into efficient pick lists

Exam 2

Functions – Cont.

Stock replenishing: inbound flow of materials

from suppliers to an organization’s

warehouse

Key to ensuring optimal level of stock that is

– Cost effective

– Minimizes on-hand inventory

Exam 2

Functions – Cont.

Replenishment methods

– Independent or random demand • Usually end-customer driven

• Uses a reorder point/level system for inventory management

– System sets a predetermined inventory level that triggers order

– Level provides adequate inventory to meet anticipated demand

– Dependent or predictive demand • Derived from demand for another component/finished product

• Driven by customer demand

• Uses systems such as MRP or MRPII

Exam 2

Labor Intensive versus Mechanized

Materials handling is typically a labor-intensive process when performed – Manually

– Semi-manually

Goal is to – Optimize materials handling

– Minimize costs

Achieve goal through – Layout

– Equipment

– Automation

Exam 2

Automation

Automated warehouse: a storage facility that uses

one or more automated technologies such as

– Automated storage/retrieval systems (AR/RS)

– Automated-guided vehicle systems (AGVS)

– Radio-frequency identification systems (RFID)

– Automation includes automated palletizers and handheld

bar-code readers

Exam 2

Automated Warehouse Technologies

SYSTEM CHARACTERISTICS

Automated storage/retrieval

systems (AS/RS)

•Enables highly accurate, real-time inventory

management

•Keeps precise records of all item counts by location in

storage while ensuring security of materials

•Frees up large amounts of floor space due to ability to

densely pack inventories in overhead space

•Permits major expansions in production volume

without need for additional new space

Automated-guided vehicle

systems (AGVS)

•Computer controlled materials handling system

•Consists of small vehicles (carts) that move along a

guided pathway

Radio-frequency identification

systems (RFID)

•A passive or active radio-data chip that is attached to

products to allow warehouse to track, access and

compile data

•Part of the supply chain flow process

Exam 2

Picker-to-Part versus Part-to-Picker

Picker-to-part methods

include

– Pick-to-pallet

– Pick-to-cart

– Pick-to-roller

– Man-aboard

storage/retrieval

Part-to-picker systems

include

– Carousels

– Storage conveyers

– Automated storage/retrieval

systems (AS/RS)

Traditional material-handling approaches require picker to travel to storage location

Goal: minimize travel – a non-value-added activity

Exam 2

Virtual Warehouse versus Real Warehouse

Real warehouse – Organizations operate bricks-and-mortar warehouse

– Inventory travels through warehouse before being shipped to customer

Virtual warehouse – Building and inventory still exist

– Inventory for sale may not be in organization’s warehouse but shipped directly from supplier

– Made possible by real-time information sharing through systems integration

– Advantages • Organizations can offer wider variety of products to customers without

stocking them

• May generate more revenue

• Reduces cost of warehousing

Exam 2

Logistics-Performance Measures, Strategies and Cost Savings Initiatives

Cost-to-Sales Ratios

Used to evaluate organizational effectiveness

Must determine which costs to include in metrics,

– Logistical functions

– Overhead

– Net or gross sales

Exam 2

Logistics Cost Per Unit versus Budget

Most comprehensive way to control costs is through predetermined standards and flexible budgets

Standard costs (a benchmark): what costs should be if operations are efficient; a direct approach to determining and assigning logistics costs but may not be appropriate for non-repetitive tasks

Four basic types of budgets to control logistics costs – Fixed-dollar (static): estimate of functional expenses

– Flexible: accounts for seasonal and internal factors that drive activity costs beyond budgeted levels

– Zero-level: assigns all costs necessary to perform range of support services for functional units and develops funding in zero-up manner – funds justified on basis of planned activity

– Capital: specifies amount and timing of significant financial investments for logistics resources

Exam 2

Cost of Functions as a Percent of Sales

A productivity ratio; the cost of a function; e.g.,

– Logistics

• Compare annual amount spent on logistics resources (labor,

operations, overhead) to sales revenue

• Although sales vary annually, ratio should remain same or

change in an expected way

Exam 2

Inventory Turns (e.g., Sales/Inventory, Cost of

Goods Sold [COGS]/Inventory)

Measure of the velocity of total inventory movement through

the organization

Found by dividing annual sales (at cost) by average

aggregate inventory value maintained during the year

Generally, the higher the turnover, the more favorable the

measure

Calculating inventory turns is a key method for determining

world-class performance in logistics and supply

management

Exam 2

Third-Party Logistics Considerations

Third-party logistics (3PL) services are provided by a party other than the manufacturer or seller or the party buying or receiving

Third party – Not directly involved in buy/sell transaction

– Provides one or multiple services, e.g., warehousing, transportation, crossdocking, inventory management, packaging, freight forwarding

Trend in warehousing: increased use of 3PLs

Service provided by 3PL is their core activity

Use of 3PL enables client to release many fixed costs and decrease headcount

Exam 2

Scorecards

A performance measurement and management

document

Records ratings from a performance evaluation

process

Improve logistical performance using scorecards

Vision and Goals

Activities Strategies Performance

Measures

Exam 2

Process Improvement Action Plans

Applied when an area of performance is

unsatisfactory

Ways to improve/change must be identified

Corrective action requires

– Reviewing the underperforming process

– Determining the underlying factors

– Developing an action plan to make improvements

Exam 2

Process Improvement Action Plans – Cont.

Continuous process improvements – Not just when there are issues

– Should be addressed throughout the life of a partnership • Joint interaction

• Involvement among all parties

5S discipline – Originated with Japanese

– Practical improvement method for • Office

• Logistics functions

• Warehouse

– Based on premise that by assigning everything a location, time is not wasted looking for items

Exam 2

Process Improvement Action Plans – Cont.

Benefits of 5S come from deciding

– What should be kept

– Where it should be kept

– How it should be stored

Five levels of 5S

Sort Seiri Keep only essential items that can be stored

efficiently to keep workplace free of clutter

Set in order

or arrange

Seiton Focus on orderly workplace and keep items where

they will be used

Shine Seiso Keep workplace clean and neat

Standardize Seiketsu Standardize work practices so individuals

understand responsibilities

Sustain Shitsuke Continuously improve and train

Exam 2

Which of the following should a supply manager take into

consideration when designing and laying out a

warehouse?

(A) Union labor is efficiently utilized, state and local taxes are minimized

and entry and exit points are on opposite sides.

(B) Materials flow efficiently, locations are clearly identified and space

utilization is optimal.

(C) Build ups and build outs remain possible, space utilization is optimal

and labor costs are minimized.

(D) Equipment options remain flexible, state and local taxes are

minimized and labor costs are minimized.

Exam 2

In a process improvement project, what is the FIRST step

that should be taken?

(A) The process owner should be identified and consulted.

(B) All those involved in working through the process should be notified.

(C) The underperforming process should be reviewed.

(D) The underlying factors of the underperforming process should be

determined.

Exam 2

Your organization has one warehouse which is currently

running out of space. While there is some money in the

budget for improvements, there is not enough financing

for either an expansion of the current warehouse or the

construction of a new warehouse. The current warehouse

is a largely manual, labor-intensive operation. While it

utilizes forklifts and hand carts, most material handling is

done by personnel.

There has also been a large drop in accuracy of the

inventory, causing some production delays because raw

materials that were supposed to be in stock were, in fact,

out of stock. Cont.

Exam 2

Task 2-F-5 Application Question #1 – Cont.

As a way to expand the capacity of the warehouse without incurring huge construction costs, as well as increasing the accuracy of the inventory, you recommend:

(A) An automated storage and automated retrieval (AS/AR) system as it provides for a significant increase in inventory accuracy and the ability to densely pack inventories in overhead spaces.

(B) A radio frequency identification (RFID) system because it will increase the accuracy of the inventory and allow pickers to find material more quickly.

(C) Guided vehicles because they will decrease the need for personnel, which should help move material more quickly and accurately.

(D) Reformulating the layout of the warehouse which should help alleviate the space congestion.

Exam 2

There are 12 considerations for geographical location – name and describe at least 6 of these

Define and describe order picking and stock replenishing

Name 3 components of optimizing materials handling and minimizing cost

Describe the differences between virtual and real warehouses

What are the 4 types of budgets used to control logistics costs?

What is a 3PL and what does it do?

List the steps involved in improving logistical performance using a scorecard Cont.

Exam 2

Task 2-F-5 Summary and Review – Cont.

When and how is process improvement used?

Define – Inventory turns

– Build out

– Build up

– Order picking

– Stock replenishing

– 5S discipline

Exam 2

TASK 2-F-6

Exam 2

TASK 2-F-7

Exam 2

TASK 2-F-8

Exam 2

1) Physical tracking systems

2) Overall project plan

3) Customer requirements

4) Cost considerations

5) Available technology for warehouse management system (WMS)

6) Warehouse management

7) Inventory accuracy and inventory integrity

Develop and/or implement an inventory management system

Full 4Q; Bridge 4Q

Exam 2

Physical Tracking Systems

There is necessity for locating inventory items and linking those items to inventory or warehouse management system (WMS)

Inventory or warehouse management system (WMS) – Provides accurate and timely information

– Basis for supply management and other decisions

U.S. government and many large retailers place stringent requirements on suppliers to provide products that can be easily – Identified

– Tracked

Exam 2

RFID (Radio Frequency Identification Devices)

Primary components of RFID devices/systems

– Host computer

– Reader

– Interface transmitter

– Tag device

A data chip attached to a product to allow tracking,

access to and compilation of data as part of supply

chain flow process

– Passive data chip: read only

– Active data chip: may be read and updated

– Tagless systems: tag printed directly on item; lowers costs

Exam 2

RFID – Cont.

RFID may be used

– For individual items, entire cartons and containers (as large

as those used in ocean shipping)

– As a tool for use with security information systems

– To provide manifest for shipping containers sealed at factory

whose contents have been verified (may facilitate customs

security inspections at ports)

– For animal identification, media centers and libraries,

hospitals, prepaid toll passes, etc.

Initial cost: high, but dropping

Areas of concern: data security and invasion of privacy

Exam 2

RFID – Cont.

Key benefit to RFID: maintains real-time communications on all inventory encompassed in system within range of RFID readers

RFID reader’s function: capture information remotely and transmit it to WMS where it is used for – Order and production planning

– Customer order fulfillment

– Replenishment decisions

– Order tracking

– Other purposes

Exam 2

Bar Code

Bar code: machine-readable code; a pattern of

alternating parallel bars and spaces, representing

numbers and other characters

Scanning a bar code facilitates

– Interface with computerized records

– Automatic updating of inventory records

– Reduced data-entry errors

– Improved processing speed and inventory accuracy

Exam 2

Bar Code – Cont.

Universal Product Code (UPC)

– A popular form of bar coding

– Used by retailers and food and grocery industries

Many industries have different standards

Common application: intelligent shipping label

– Information stored and accessed within small space

– Information includes

• Purchase information

• Carrier code

• Freight sort code

Exam 2

Bar Code – Cont.

Bar coding increases efficiencies in

– Receiving

– Inventory

– Warehouse management

– Reordering for replenishment

– Sales management

Exam 2

Unique Identification Device (UID) and Item Unique Identification Device

(IUID) [Department of Defense (DoD) Initiative]

Used by – U.S. Department of Defense (DoD)

• Best known application: DoD suppliers must affix UID labels on

– Items with acquisition cost of at least $5,000

– Classified or sensitive items

– Items that are serially managed

– Property furnished to third parties such as contractors

– U.S. Food and Drug Administration (FDA) • Interested in applying UID system to drugs, medical devices

– U.S. Patent Agency • Interested in applying UID system to patented items

– Other U.S. governments (state and local)

– Several industries

Exam 2

UID and IUID – Cont.

Consists of

– Reader device (UID/IUID): retrieves data encoded on

machine-readable media

– Item unique identification devices (IUID)

• Subset of UID

• Mark tangible items with unique item identifier (UII)

– A character string, number or sequence of bits assigned to a

discrete entity or its associated attribute

– Uniquely distinguishes asset from other like and unlike entities

– Each UII has only one occurrence making it useful to track items

during their life cycle

Exam 2

Overall Project Plan

Increasingly important to manage inventories and

warehouses well in order to

– Remain competitive

– Be a good customer

– Deal with security issues

Technology helps add value for

– Internal customers

– External customers

Exam 2

Plan for Business Continuity

Business continuity and disaster recovery plans are strategic guiding principles of – How to ensure an organization can maintain and continue

operations if a crisis, disaster or other disruption occurs

Business continuity: an action plan for sustaining business operations in support of customer needs. Capabilities, communications and data must be maintained

Disaster recovery plan: an action plan for being properly prepared for when a crisis seriously affects an organization

Supply continuity plan: an action plan for continued receipt of supplies in the event of a disruption of normal supply chain channels, or a plan to prevent such disruption from occurring

Exam 2

Plan for Business Continuity – Cont.

Internal and external supply chain business continuity and

recovery plans for warehouse and inventory management

supply interruptions typically include

– Plans for employees’ safety and escape from dangerous situations

– Method of communicating with and locating employees during and

after the disaster

– Communications plans for all stakeholders, including employees,

suppliers, shareholders

– Plans for communicating with the press

– Regularly backing up data so that databases can be restored to a

point just before crisis, disaster or disruption, if necessary

Exam 2

Plan for Business Continuity – Cont.

Business continuity and recovery plans – Cont.

– Contingent shipping methods

– Contingency plan for labor interruption

– Plans for safeguarding equipment, computer systems, other assets

– Action plans for escape paths

– Having well-developed supplier relationships

– Training for disasters that are likely to occur in given area

– Generic disaster drills

– Maintaining safety stock level

Exam 2

Implementation Plan

Objectives for inventory-management system

– Minimize inventory-related risks

– Ensure smooth operations as costs of ordering and carrying

inventory are balanced against costs of stock outs

Key considerations for WMS plan

– Meet customer requirements

– Cost considerations

– Available technologies

Inventory and warehouse management are not identical but

overlapping; e.g., could have an inventory but no physical

warehouse

Exam 2

Implementation Plan – Cont.

Planning change to inventory/warehouse management

begins with describing current state

– Develop set of detailed process flow diagrams describing current

flows of materials and services into, through and out of system

– Include quantities and timing of flows when possible

– Consult users of current system

– Compile data/records to support process flow diagrams

– Verify that diagrams accurately represent the process

Once the current state is understood

– Prioritize objectives

– Identify where changes should be made

– Design new system

Exam 2

Develop transition plan – Determine budget and available funding

– Assemble team to lead transition

– Determine transition milestones

– Set performance objectives such as • Product availability

• Inventory turnover

• Throughput

• Order fill rate

• Stock outs

• Mishandled items

• Number of items received in given time period

• Inventory accuracy

• Order fill accuracy

• Length of time to fill orders

– Determine training needs

Exam 2

Transition plan – Cont.

– Develop plan for continuity of business during the

switchover

– Set overall measures at a strategic level

– Keep goals in mind

• Adding value for the customers

• Eliminating non-value-added steps from processes

Exam 2

Manpower and Equipment Requirements

Largest operating costs in warehouse budget

– Labor

– Equipment

Largest capital costs

– Floor space

– Cubic warehouse space

Other large investments

– Electronic and computer systems

– Material handling systems

Exam 2

Facility Design

Objectives of facility design – Ensure warehouse activities add value for the customer

– Minimize non-value-added activities

Design must facilitate how goods are received, stored and issued

Key factors in design – Materials handling equipment

– Personnel needed

– How movement of materials is performed including patterns needed for

• Group picking

• Zone picking

• Commodity picking

Exam 2

Facility Design – Cont.

The dock area

May be a receiving area during one part of day and a shipping area during another part of day

There may be areas for – Cross-docking

– Inspection of goods

– Breaking bulk

– Special-order pallet assembly

– Problem resolution

– Other assembly processes

Exam 2

Warehouse size depends on

– Location relative to other warehouses

– Whether it is general purpose warehouse or has special

requirements such as

• Refrigeration or temperature control

• High level of security for items of high value or a sensitive nature

• Storage of highly flammable items

• Storage of hazardous or corrosive materials

Exam 2

Warehouses must store fast moving goods in

convenient locations

Warehouse expansion

– Build up or build out

– Consider cubic footage (CF) as well as square footage

– See Task 2-B-1(1)(G)

Exam 2

Physical Constraints

Characteristics of goods stored create the physical

constraints

Consider

– Type of goods

– Size and weight of product stored

– Special equipment requirements

– Danger level of an accident

– Value of goods stored

– Security requirements

Exam 2

Fixed or Random Storage Locations

Typically, two types of storage systems – Fixed-location system

• One that stores inventory item in a set physical location

• Usually has lower space utilization and higher accuracy

• Simplifies storing and record keeping

– Random-location system • One that stores the inventory in any available space

• Facilitates higher utilization of storage space

• A computer is typically required for item location

• More real-time analysis required to know if spaces

– Are empty

– Can be consolidated

With both systems, warehouse location of item is identified in perpetual inventory record

Exam 2

Customer Requirements

Driving force in development and implementation of inventory and WMS – Adding value for internal and external customers

Customer requirements vary due to – Frequency of order placement

– Size of orders due to quantity or money

– Variety of items in an order

– Shipping or delivery methods

– Amount of order preparation processing

– Need for special handling

– Packaging requirements

– Security requirements

Exam 2

Cost Considerations

To better manage costs and implement process

changes and improvements, consider the

numerous costs involved in warehouse

management. These relate to

– Customer requirements

– Nature of the customers

– Products stored

– Warehouse design, layout and structure

– Equipment used

– Personnel required

Exam 2

Cost Considerations – Cont.

Products stored

– Types

– Variety

– Size and weight

– Value

Specific requirements

– Customer expectations

– Quality standards

enforced or required

– Safety, security,

temperature, shelf life

– Equipment

Warehouse personnel

– Safety, security and

training requirements

– Flexibility, availability, skill

set, location of labor pool

Warehouse

– Size, location, physical

structure

– Ownership; e.g., leased

or owned

– State of automation

Examples of Cost Characteristics

Exam 2

Available Technology for Warehouse

Management System (WMS)

WMS’s continues to evolve. Look for these features and functionality – Flexible location assignment system

– Ability for user-defined task parameters; e.g., FIFO/LIFO for picking

– Easy-to-use integration with data collection devices including bar code scanners and RFID technology

– Reasonable logic in determining locations and put-away/pick sequences

– Various order-picking choices; e.g., wave, batch or zone picking

– Ability to interleave tasks; put-away and pick

– Automated data collection

– Cycle counting

– Labor tracking and capacity planning

– Integration with accounting and ERP systems

– Ability to communicate with WMS at other locations – organization’s, its customers or suppliers

Exam 2

Available Technology for Warehouse Management System (WMS)

SWOT Analysis

SWOT analysis can help define most important features for a WMS – consider such things as – Whether to lease or own

– How many warehouses are needed

– Where to locate the warehouses

– What product variety to manage in each

– What value-added services to offer

May be performed – Manually by brainstorming

– With commercially available software tools; e.g., some WMS software solutions have a SWOT analysis module

Exam 2

Available Technology for Warehouse Management System (WMS)

SWOT Analysis – Cont.

Reach consensus on – Strengths

– Weaknesses

– Opportunities

– Threats

Examine results

List alternative courses of action

Develop set of recommendations to bring about desired changes

Strengths

Capitalize on

strengths

Weaknesses

Shore up

weaknesses

Opportunities

Take advantage

of opportunities

Threats

Thwart threats

Exam 2

Warehouse Management

Important goal: minimize cost of storing, moving

and transporting goods into and out of warehouse

stores location

Must be achieved while

– Providing best possible customer service

– Making best use of

• Space

• Labor

• Equipment

Exam 2

Structures

Private ownership

– An organization chooses to

own its own warehouses

– Creates a fixed cost on

income statement

(depreciation expense)

– Creates a fixed asset on

balance sheet

Public warehousing

– Short- or long-term leases of

warehouses and related

services that are owned and

operated by other

organizations

– Common for organizations to

hire third-party logistics (3PL)

providers (see Task 2-B-1) if

warehousing is not a core

competency

Two primary types of warehouse structures

Exam 2

Structures – Cont.

Centralized warehouse system Order replenishment decisions

made in one location

Requirements of entire distribution and warehouse network are combined

Total customer service and demand needs are balanced throughout the system

Volume purchasing can be used to create larger costs savings

Sometimes decisions delayed and do not always consider individual needs of separate locations

If inventory must be transshipped, transportation costs may be higher than in decentralized system

Decentralized warehouse system Each location functions

independently from all others in the system

Decisions from a given site

– Can be made faster

– More closely matched to customer’s demand

Smaller orders and more overall inventory in the system create higher costs

Centralized and decentralized structures may be used in both private and public warehousing environments

Exam 2

Storage Location

WMS frequently have computer programs to optimize stocking locations for incoming goods. This facilitates achieving goals to – Minimize stocking costs

– Minimize picking costs

– Maximize space

– Group similar items as closely together as possible

– Ensure that all constraints with respect to safety, temperature, security are met

– Put-away and pick on a timely basis

– Provide good customer service

Exam 2

Storage Location – Cont.

Examples of location systems include – Fixed location: see Task 2-C-2(2)(F)

– Random/floating location: see Task 2-C-2(2)(F)

– Overflow location • Used when more inventories come into warehouse than expected

• Always considered temporary

• Goods pulled on LIFO basis to free up space for other goods and move to fixed/random location when overflow need has subsided

– Point-of-use location • Usually managed by Kanban

• Used to store goods close to consumption area

• Replaced on a pull signal only when demand is required

• Likely to be used when warehouse provides assembly services

Exam 2

Replenishment Systems

Distribution Requirements Planning (DRP)

– Supply management term for the time-based demand from the

distribution center to balance the customer fill rate against inventory

investment

– Primary method of planning goods in a WMS

– An information system that takes individual customer demands upon

a set of warehouses projected over next several periods of time and

uses that information to predict demand across warehouses

– Demand information and current inventory are matched against the

master production schedule to determine which items must be

replenished

– Links customers, distribution centers, warehouses and

manufacturing plans to help plan flow of materials

Exam 2

Replenishment Systems – Cont.

Distribution Resource Planning (DRP II) – More sophisticated than DRP

– Uses computerized inventory system for replenishment at multiple warehouse sites

– Includes functions for planning for warehouse space, personnel requirements, transportation alternatives and financial flows

Kanban – “Lean” concept approach to warehouse management (minimize

inventory while maximizing product flows)

– Concept: replace inventory or materials only when there is demand for those goods

– Japanese term meaning “signal.” Signal is printed card that contains specific information (part name, description, quantity). Card used to signal replenishment needs. It is an order-release mechanism and a primary tool of just-in-time

Exam 2

Inventory Classification Systems

Since some inventory items warrant closer attention and

control than others, a variety of techniques are used

including

– Classification as indirect and direct purchases

– Classification by physical characteristics (then category specialists

oversee purchase and management of their group)

– Inventory type/classification for SKU

– ABC classification

Note: Classification in each technique by individual stock keeping unit (SKU)

Exam 2

Inventory Classification Systems – Cont.

Classification as indirect and direct purchases

– Individual SKUs classified

– Indirect purchases: those items that will be used

internally by some process or management system

– Direct purchases: those items that will be used in

production or service delivery and sold to an external

customer

Exam 2

Inventory type/classification for SKU – Cost and demand are primary considerations for every SKU.

Then, SKU’s break down into nine types of inventory

– Each SKU assigned classification and monitored accordingly; e.g., low cost, low demand (1) items may require less attention than medium cost, high demand (8) items

– Method set forth in book, Inventory Classification Innovation

Low Cost Medium Cost High Cost

High Demand 7 8 9

Medium Demand 4 5 6

Low Demand 1 2 3

Exam 2

ABC Classification – A commonly used classification system

– In use for many years

– Based on Pareto analysis or 80/20 rule • 20 percent of items account for 80 percent of value

– Total value calculated for each SKU is based on • Annual usage

• Total purchase dollars spent

– SKUs are ranked high to low

– Listing enables supply manager to see where bulk of dollars reside in inventory

– SKUs classified as A, B, C

Exam 2

A Classification: higher value items. Top 20% of total items purchased comprise 80% of value of total purchases. Items receive close oversight to maintain scheduled deliveries and minimal inventory

B Classification: medium value items. Next 30% of items purchased comprise 10-15% of value of total purchases. Items are reviewed periodically with normal amount of oversight and only given high priority when need is critical

C Classification: last 50% of items purchased comprise 5-10% of value of total purchases. Items receive minimal attention and may be ordered in bulk or purchased with procurement cards since they represent only a small percentage of dollars spent

* Percentages will vary by product, industry, etc.

Percentage of Total

Items Purchased*

Percentage of Value of

Total Purchases*

A 20 Up to 80

B 30 10-15

C 50 5-10

Exam 2

Inventory is also classified for valuation purposes. Three basic methods are – LIFO

• Stands for last in, first out

• Assumes items purchased last are used or sold first

• Last purchased items likely higher in value – remaining inventory valued at older price. Results in lower value for remaining inventory on organization’s balance sheet

– FIFO • Stands for first in, first out

• Assumes items purchased first are also used or sold first

– Average costing • Assigns an inventory value for an item at the average cost paid

Exam 2

Cycle Counting

A physical stock-checking system in which inventory divided into groups – Physically counted at predetermined intervals depending on their

ABC classification

– Counting goes on continuously without interrupting operations or storeroom activities

Proactive approach to inventory management and a best practice: makes inventory accuracy a priority

Preferred method for ensuring accuracy

Corrections are achieved through cycle counting but this is not the primary objective

Objective: identify reasons, find cause of any inaccuracies and correct cause

Exam 2

Cycle Counting – Cont.

Here’s an example of predetermined intervals for physically counting inventory groups depending on their ABC classification – A Items

• 20% of items account for 80% of dollars spent

• Count once a month

– B Items • 30% of items account for 10-15% of dollars spent

• Count four times per year

– C Items • 50% of items account for 5-10% of dollars spent

• Count once annually

Exam 2

Perpetual

An inventory control record system that requires immediate recording of transactions (receipts and withdrawals) for each item in inventory

Does not negate need for physical inventory counts

Checks inventory after each transaction to see if level is below reorder point – If so, places order of pre-determined size

Periodic inventory system is an alternative system – Records completed transactions in batches

– Fixed order-interval inventory control system – item’s inventory position reviewed on scheduled, not continuous, basis

– If appropriate, order placed after review – quantity usually varies

Exam 2

Inventory Accuracy and Inventory Integrity

Stock Keeping Units (SKU) Establishment

Items are kept in inventory at a specific location

Each has a unique number or bar code

Creating SKUs for individual items

– Is an initial step in identifying and controlling inventory

– Can be meaningful/non-meaningful

Meaningful Non-meaningful

PHW-125-2303

PHW – Purchased Commodity – Hardware

125 – Supplier identification

2303 – Supplier part number

S1274043725

Exam 2

Physical Inventory

In a manufacturing organization, physical inventory is classified as

– Raw material

– Work in process

– Finished goods

– Maintenance, repair and operations (MRO) items

– Sub-classifications such as repair parts or spares, excessive items,

obsolete items

– Possible non-manufacturing items such as office or building supplies

In a retail distribution center, most inventory is held as finished goods

RFID technology

– Facilitates tracking of physical inventory

– Improves inventory accuracy

Exam 2

Reconciliation

There may be discrepancy between physical

inventory count and perpetual record

If so, variances are noted on discrepancy report

Reconciliation

– Settling or resolving these variances

– Requires an adjustment

Discrepancy report serves as audit trail

Exam 2

Shrinkage

Less inventory on hand than expected; a reduction in the amount of inventory on hand for reasons other than issuance or a sale

Result of materials being – Lost

– Stolen

– Misplaced

– Evaporating

– Deteriorating

Policy changes may be warranted if specific items repeatedly experience shrinkage; e.g., – Additional security measures

– Relocation of items

Exam 2

Issue/Return

A common term used in conjunction with “issue

and return” is “store”

– Store: keeping the item in a given location until there is a

request for its use

– Issue: goods going out of the warehouse

– Return: goods coming back into the warehouse

Exam 2

Issue/Return – Cont.

Steps involved with storing inventory – Receiving

– Issuing paper/electronic record

– Determining storage location

– Putting item away in designated location

Steps involved with issuing inventory – Upon request for inventory item, generating pick ticket

identifying materials needed

– Picking: retrieving item from wherever it resides in warehouse

– Staging: can be separate area where materials are housed until delivered or picked up

– Delivery or pick up

Exam 2

Issue/Return – Cont.

Steps involved with returns – Occur for variety of reasons including

• More material was received than was needed

• Incorrect item was received

– Customer returns material to warehouse

– Warehouse must have procedures to • Inspect item to ensure its condition

• Adjust inventory count

– May be a restocking fee – returns generate additional costs in labor time and handling

– Customers may return damaged/unusable stock and expect credit • Such items not returned to stock but properly disposed of and removed

from accounting and inventory records (not always easy to determine when/where damage occurred)

• To accept return and issue credit often requires a returning materials authorization (RMA)

Exam 2

Recoup

A strategy supply managers should have in place

to recover losses in inventory and other assets

when disposal is necessary due to obsolescence

or damage

Objective: elimination of items in ways that

maximize value to the organization. Recoup

methods remove items from the financial assets on

the balance sheet and avoid the carrying cost

associated with holding the inventory

Exam 2

Recoup – Cont.

Methods for recouping inventory losses

– Sell excessive inventory back to supplier

– Re-engineer component for use elsewhere in a product’s bill

of material (BOM)

– Rework item as an alternative part that is useable

– Send item to a spare parts distribution center or another

division if it is useful as a spare part or still needed elsewhere

– Donate item to a non-profit organization that can use it –

obtain a possible tax deduction

– Sell item at scrap value

– Scrap at no value

Exam 2

Inventory Consolidation

Trend is toward leaner inventory

– Reducing amount and types of inventory on hand

– Consolidating inventory at multiple locations

Reducing number of locations also reduces

– Operational costs

– Inventory levels

– Safety stock levels

With multiple locations, lead times may vary. Key considerations

when consolidating inventory include identifying which sites have

– Lowest lead time

– Best operational efficiency

Exam 2

Security

Internal – Limit access to

• Inventory to ensure inventory items are not lost, stolen, misplaced, damaged

• Warehouse and storage locations to personnel who work there

– Establish procedures for • Placing new items in inventory

• Receiving goods

• Requesting materials

• Picking and releasing materials

• Returning materials

– Require documentation at each step of process

– Update records – bar coding and RFID tags help

Exam 2

Security – Cont.

External

– Under C-TPAT, organizations are asked to

• Ensure integrity of their security practices

• Communicate their security guidelines to their business partners

• See Task 2-B-3

– Many other countries impose similar requirements

– ISO 28000

• Issued by International Organization for Standardization (ISO)

• Series of standards on supply chain security management

systems

Exam 2

Inventory Policies/Procedures

Effective inventory management requires sound

policies and procedures

– Supply management plays key role in development

– Must have support and buy-in of senior management

Policy manual

– Provides blueprint for entire organization on its supply

management practices

– Reflects value of warehouse operation

– Must be easily understood by customers and staff

– Should be reviewed and updated periodically

Exam 2

Inventory Policies/Procedures – Cont.

Policies and procedures must address – Safety

– Recycling

– Standardization

– Security

– Access to inventory

– Inventory issuance

– Product returns

– Surplus property

– Inventory counting

– Requests for new inventory items

– Distribution

– Deliveries

Exam 2

Inventory accuracy and integrity are best controlled by

– Establishing strict policies

– Performing regular and routine training for all involved with

handling the inventory

– Holding people accountable for errors

– Taking disciplinary action

Policies and procedures should be evaluated for

effectiveness and cost

Is the effectiveness of the policy worth the return on investment of

implementation and ongoing costs?

Exam 2

Examples of evaluating for effectiveness and cost include – Safety and security

• Has become a top concern

• To maintain good safety and security records, check effectiveness of

– Training

– Drills

– Reviews of concepts and procedures

• Reward employees with longstanding safety and security records

• Breaches of safety or security result from no or ineffective training, drills, reviews, recognition

Exam 2

Examples – Cont.

– Inventory accuracy in cycle counting procedures policies

on inventory accuracy should clarify monetary value

above which supervisory approval is required in order to

make corrections

– Allowable tolerance for adjusting low-level C items

during cycle counting

• If items within 1-2%, system may be set to not record adjustment

• May be cost prohibitive to count exact amounts of some very

inexpensive C items if large quantities stored – weighing is an

alternative

Exam 2

Examples – Cont.

– Procurement policies: Economic Order Quantity (EOQ),

lot size multiplier, minimum buys, level of spend are

procurement policies to assure inventory items are

purchased at the best possible cost/benefit ratio

• Price is just one factor – may not be overriding issue

• Policies today are as likely to exist for quality and timeliness as

for price

Exam 2

Location of Materials (e.g., Secure Storeroom, Outside

Yard Storage, etc.)

How and where items are stored depends on

– Method of movement needed

– Items’ characteristics

Availability and location of international facilities vary by

country

– Long-term investments may be required to establish storage

facilities

– If existing facility used, must be analyzed to ensure products and

storage containers will fit the facility

Exam 2

Yard Storage, etc.) – Cont.

Special storage considerations

– Any items at high risk for pilferage must be kept in secure location

– If certain items are for a specific department, they may require

special security arrangements

– Hazardous goods should be stored in area with special structures –

some cannot be stored together and must be separated by

containment walls and ceilings

If moveable trailers/containers are used for storage,

inventory system should include location codes for trailer

numbers, yard locations, etc.

Exam 2

Yard Storage, etc.) – Cont.

Tracking inventory items

– Satellite systems, coupled with RFID systems make global tracking

of inventory items possible

– Items can be tracked by the minute and scheduled receipts may be

based on known location of goods

– At any time during shipment, goods can be tracked to a location,

vessel, port, rail car, highway trailer, third-party warehouse, etc. with

scanning and recording equipment

– Sophisticated systems can record all movements and material can

be tracked to its exact location at any time

Exam 2

Jeff Jones, of AllBright Solar Power, Inc., thought that to

help choose the optimum features of the warehouse

management system (WMS) capabilities that best fit the

needs of AllBright he should first consider performing a

SWOT analysis. Jones analysis would examine all of the

following decision elements EXCEPT:

(A) Warehouse location.

(B) Required configuration of docking platforms.

(C) A lease or buy option.

(D) A finished goods product mix.

Exam 2

All of the following are important features of a warehouse

management system (WMS) EXCEPT:

(A) A flexible location assignment system.

(B) Automated storage and retrieval integration.

(C) A cycle counting training program.

(D) Multiple picking options.

Exam 2

In performing a SWOT analysis for AllBright Solar

Power’s warehouse expansion strategy, Jeff Jones

examined the boundaries of business continuity and

disaster recovery planning. All of the following are

considered strategic elements of business continuity and

disaster recovery planning EXCEPT:

(A) Regular data backup and alternate site storage

(B) Action plans for escalation

(C) Selection of an asset security organization

(D) A communications plan with the press

Exam 2

Describe the components and uses of RFID, bar coding, UID and IUID

What is business continuity planning?

Identify the objectives and key considerations when planning a warehouse management system

Name the objectives of warehouse facility design

Describe 4 types of storage location systems

Name 5 reasons customer requirements vary

In addition to customer requirements, identify 4 areas of costs involved in warehouse management

What features and functionality should a WMS include?

What are the key steps in a SWOT analysis?

Describe the differences between private and public warehouses and centralized and decentralized structures

Exam 2

Task 2-F-8 Summary and Review – Cont.

Define 3 replenishment systems used in WMS

Describe 3 inventory classification systems

What is the purpose of cycle counting?

What is a perpetual record system?

How are stock keeping units (SKU) established?

Define store, issue and return, and describe steps involved in each

Identify the objective and various methods of recoup

What are benefits of inventory consolidation?

List key elements of internal and external security

Why have inventory policies/procedures and what are some of the areas they must address?

Name 2 determinants of location of materials

Exam 2

TASK 2-F-9

Exam 2

1) Organizational policy for asset classification

2) Physical tracking systems (e.g., bar coding, asset tags, serial

numbers, RFID)

3) Financial tracking systems

4) Internal distribution (e.g., distribution channels)

5) Types of equipment and assets. (e.g., cars, airlines, railroads, copiers)

6) Asset management

Coordinate and/or monitor the movement of equipment and assets within the

organization

Full 4Q; Bridge 4Q

Exam 2

Organizational Policy for Asset Classification

Asset classification: the process of grouping economic resources into appropriate categories. Assets are classified to facilitate an efficient overview of the organization’s financial health. These assets are defined as – Current assets: short-term resources owned by an organization including

cash, inventory and accounts receivable. Have a life of one year or less or the normal operating cycle of the organization

– Fixed assets: assets that last more than a year, with an impact on shareholder value and considered by management to be worth controlling. Usually referred to as property, plant and equipment and depreciated over a certain monetary amount

– Intangible assets: assets such as brand name, goodwill, reputation, patents or trademarks that have a value but cannot be physically seen or touched. Usually have a life in excess of one year. Amortization is used for use, costing and control

– Investment assets: use of capital to create more money, either through income-producing vehicles or through risk-oriented ventures designed to result in capital gains

– Deferred cost: incurring of an expenditure that has a future benefit in excess of one year and is capitalized to an asset account

Exam 2

Organizational Policy for Asset

Classification – Cont.

Assets are usually classified by specific accounting

– In U.S.

• Established by the American Institute of Certified Public

Accountants (AICPA) or the Securities and Exchange

Commission (SEC)

• Sarbanes-Oxley (SOX) reporting requirements also apply

– Other countries

• Other organizations specify the country’s accounting rules

– Internationally

• No one global accounting system

Exam 2

Organizational Policy for Asset

Classification – Cont.

Inventory policies aligned with term “current assets” – Inventory is a current asset

– Organizations typically use inventory classification systems

– See Task 2-C-2(6)(D)

Capital expenditures aligned with term “fixed assets” – Are typically for depreciable fixed assets

– Have impact on shareholder value

– Considered by management to be worth controlling

Exam 2

Physical Tracking Systems (e.g., Bar Coding, Asset Tags,

Serial Numbers, Radio Frequency Identification [RFID])

Any asset considered of value must be monitored

and tracked – can move throughout organization

and between organizations

Asset tags are a popular way to track

– Bar codes: see Task 2-C-2(1)(B)

– Serial numbers: adding serial numbers to an asset tag

improves tracking integrity and adds value to reliability of

security

– RFID: see Task 2-C-2(1)(A)

Exam 2

Physical Tracking Systems – Cont.

Asset tracking software allows an organization to

– Assets it owns

– Where each is located

– Who has it

– When it was checked out

– When it is due for return

– When it is scheduled for maintenance

– Cost and depreciation

Exam 2

Physical Tracking Systems – Cont.

Other automated methods for tracking – Optical character reading (OCR)

– Machine vision

– Magnetic strip and surface acoustic wave (SAW)

SOX mandates methods for managing and tracking fixed assets for publicly owned corporations – Records and controls must be documented

– Policies are imposed and need to be adhered to

– Physical asset inventories must be performed

– Audit trails must be sustained

Exam 2

Financial Tracking Systems

Tracking value of assets is required by all organizations

These are key indicators of organizational performance. They assist in

– Measuring net value

– Reporting the value

Capital equipment

– Equipment used by an organization for its production potential that costs

more than predetermined threshold value and whose cost is depreciated

over time

• Basic equipment and asset tracking systems include spreadsheets like Excel

that can be charted for analytical use and graphed for presentation

• Most fixed asset tracking software includes RFID/bar coding

• ERP modules can be programmed/customized to manage tracking on capital

assets

Software programs available to track inventory and assets: from

complex (integrated tracking system) to simple (spreadsheet)

Exam 2

Internal Distribution (e.g., Distribution

Channels)

The moving of materials such as raw materials, parts and sub assemblies within the organization to – An internal customer

– The next stage of the manufacturing process

Internal transportation – The infrastructure that allows materials to be moved

including internal transportation equipment such as • Pallet jacks

• Fork lifts

• Conveyor belts

• Storage-and-retrieval machines

Exam 2

Types of Equipment and Assets (e.g., Cars,

Airlines, Railroads, Copiers)

Equipment and assets – Vary from organization to organization

– Typically items used in • Production

• Delivery of goods/services to internal and external customers

– Examples • Cars

• Airlines

• Railroads

• Copiers

• Computers

• Machinery

• Finished goods

Exam 2

Asset Management

Asset management: process of tracking fixed assets that an organization owns and lists on its balance sheet

Most organizations use inventory management software, bar coding and/or RFID tools

Purpose of asset management – Maintain accurate financial accounts

– Prevent theft

– Manage movement of assets

Process aspires to maximize return on investment for each asset and includes – Purchase of asset

– Use of asset

– Disposal of asset

Exam 2

Asset Management

Inventory Management

Inventory management: the business function concerned with planning and controlling inventory. An inventory of fixed assets differs from an inventory of expendable goods – Inventory of expendable goods

• See Task 2-C-2

– Inventory of fixed assets • Information Technology (IT) and finance are primary stakeholders.

Usually accountable for collecting, reporting and performing physical inventories of assets

• Software programs available which include bar coding

• Human Resources (HR) plays key role if someone is hired or leaves the organization

• Usually, IT, finance and HR work together and are accountable for acquisition, collecting data on location, performing physical inventories and reporting financial obligations of asset value for government reporting purposes

Exam 2

Asset Management

Asset Recovery

The re-employment, reuse, recycling or

regeneration of something of value (property,

equipment or goods) that is no longer needed for

its original intent. After an asset has exceeded its

usefulness, the practice of asset recovery begins

Finding new use for existing asset

– Good business practice

– Can minimize environmental impacts

– Reduces an organization’s disposal costs

Exam 2

Asset Management

Asset Recovery – Cont.

When disposing of assets, the objective is to increase the cash position

of the organization by optimizing the return on the assets

Action items for asset recovery

– Identifying assets for removal from the organization’s asset inventory

– Consideration for asset tracking, inventory accuracy

– Data security, removal of organization information

– Environmental compliance, current and cradle-to-grave or cradle-to-cradle

responsibilities

– Logistics, storage and handling

– Life-cycle completions

– Value analysis, optimal return from asset

All issues must be addressed and resolved before removing an asset

from organization’s balance sheet

Exam 2

Which of the following asset tracking methods would be

LEAST effective in tracking warehouse capital assets?

(A) An Excel spreadsheet.

(B) Bar codes.

(C) Radio Frequency Identification Devices (RFID).

(D) A card index system.

Exam 2

The PRIMARY objective of asset recovery is to:

(A) Minimize the environmental impact of the asset’s disposal.

(B) Classify and monitor an asset throughout its life cycle.

(C) Re-employ or reuse a surplus asset of value.

(D) Optimize return on the asset.

Exam 2

AllBright’s two new warehouses were built to house finished goods to improve overall customer service. AllBright Solar Power’s Marketing and Sales Vice President, Mike Moore, wanted the highest customer service levels possible. Moore had a discussion with Mike Jones, Manager for Inventory Control and Warehousing, and Moore suggested that the best way to achieve desired high customer service levels was to carry 100% of all finished goods inventory. Jones responded that AllBright could not afford that level of customer support, as the necessary finished goods inventory would cost too much. Aside from the cost of the finished goods themselves, which of the following cost elements would MOST likely be the greatest driver of finished goods inventory costs? (A) Inventory holding costs. (B) Cost of invested funds. (C) Shrinkage of goods. (D) Material handling costs.

Exam 2

Define asset classification, current assets, fixed assets, intangible assets, investment assets

List SOX mandates for tracking fixed assets

Identify the key performance indicators on how well an organization is performing financially

What are internal distribution and transportation?

Define asset management and compare inventory of expendable goods versus inventory of fixed assets

Define asset recovery and state its objective

Exam 2

TASK 2-F-10

Exam 2

TASK 2-F-11

Exam 2

TASK 2-F-12

Exam 2

TASK 2-F-13

Exam 2

TASK 2-G-1

Exam 2

Task 2-G-1 Task Outline

1) Project initiation

2) Project planning

3) Project execution

4) Project monitoring and control

5) Project closure

Perform project management activities

Full 9Q; Bridge 5Q

Exam 2

Introduction

Project management: the process of coordinating

the organization, planning, scheduling, controlling,

monitoring and evaluating of activities so that the

objectives of a project are met

Relationship to supply management involves

– Method/approach for conducting many supply

management activities

• Many of which are executed as projects

– Supply management activities; e.g., sourcing, support

many projects

Exam 2

Introduction – Cont.

Projects are created to meet at least one of five

objectives

– Create a change in organization

– Exploit new opportunities

– Implement the strategic plan

– Fulfill a contractual agreement

– Solve some problem

Exam 2

Introduction – Cont. Project Life Cycle – New Product Development

(sequence of activities to accomplish

specific goals and objectives)

Feasibility

Deploy

Prototype

Design

Concept

Development

Exam 2

Process

Group Description Activities

Initiating Processes for formalizing

authorization to begin new

project or project phase

Evaluate alternatives

Clarify objectives

Develop project scope

Develop project charter

Identify available resources

Planning Planning and managing a

successful project

Gather information

Finalize scope

Develop cost budget

Develop schedule

Identify risks

Establish quality requirements

Plan purchases

PROJECT PROCESS GROUPS

Introduction – Cont.

Exam 2

Process

Group Description Activities

Executing Processes to complete the

work and meet project

requirements

Coordinate people and resources

Perform project activities

Obtain information, bids, quotes, proposals

from suppliers

Select suppliers

Implement any approved changes

Monitoring

& Control

Processes to examine project

execution, identify problems,

take corrective action

Observe/monitor

Review supplier performance

Measure against project plans & performance

baselines

Implement corrective actions

Establish preventive measures

Closing Formal termination of a project

or project phase; handing off a

project; canceling a project

Finalize all process group activities

Close out contracts

Resolve contract issues

Exam 2

Project Initiation

Initiation: necessary activities to gain approval for

project

Projects are initiated to

– Solve problems

– Develop new processes/procedures

Project-related supply management activities include

– Needs identification or problem definition

– Determining project feasibility

– Proposing a project solution

– Obtaining project approval and authorization

Exam 2

Project Initiation

Root Cause Analysis

Initiation includes conducting root cause analyses to – Define the problem that the project will solve

– Identify needs for which the project will provide solution

Analyses include – SWOT analysis

– Kepner-Trego rational process analysis

– Six sigma process analysis

– Business case analysis

– Alternative analysis

– Project feasibility analysis

– Stakeholder analysis

Exam 2

Project Initiation

Strengths, Weaknesses, Opportunity, Threats (SWOT) Analysis

SWOT Analysis (see Task 2-C-2)

– Define problem/identify need

– Create understanding of the environment that created the

problem(s)

– Help identify projects that will minimize/eliminate these problems

– Include stakeholders

– Address three important issues

• Frequency

• Importance

• Likelihood of resolution

– You can rank order results using a prioritization matrix

Exam 2

Problem

Description

Frequency

Occurrence

Importance

Feasibility of

Resolution

SWOT analysis: Prioritization Matrix 1. How frequently does the problem/issue occur? 2. How important is the problem/issue? 3. How likely is it that we can resolve problem/issue? 4. To obtain score

– Assign rankings (1=low, 2=medium, 3=high) for questions 1, 2 and 3 for each problem

– Calculate product of columns 1, 2 and 3 for each problem to obtain Total Score

Project Initiation

Exam 2

Problem

Description

Frequency

Occurrence

Importance

Feasibility of

Resolution

Late deliveries 1 2 2 4

# of rejections 2 3 3 18

High prices 3 3 1 9

Project Initiation

SWOT analysis: Prioritization Matrix 1. How frequently does the problem/issue occur? 2. How important is the problem/issue? 3. How likely is it that we can resolve problem/issue? 4. To obtain score

– Assign rankings (1=low, 2=medium, 3=high) for questions 1, 2 and 3 for each problem

– Calculate product of columns 1, 2 and 3 for each problem to obtain Total Score

Exam 2

Project Initiation

Kepner-Trego Rational Process Analysis

Kepner-Trego rational process analysis

– Systematic procedures developed to apply critical thinking to

information, data and experience for the purpose of

• Solving problems

• Making decisions

• Anticipating future problems

• Appraising situations

– Four phases

• Situation appraisal

• Problem analysis

• Decision analysis

• Opportunity (or potential problem) analysis

Exam 2

Project Initiation

Kepner-Trego Analysis – Cont.

Phase 1 of Kepner-Trego

– Situation appraisal

• What is the environment?

• Look at the actual situation and identify problems to solve

• Helps regain order where there has been uncertainty, establish

priorities, determine project parameters

Exam 2

Project Initiation

Phase 2 of Kepner-Trego – Problem analysis

• Why did this happen?

• Develop a deviation statement

– Identify the problem

– Describe it

– Important step: problem description is the basis for scope of project

• Based on deviation statement, describe identity, location, timing, magnitude – ask

– How often is this happening?

– Where is the problem occurring?

– When is it happening?

– What is the extent/degree of the problem and its occurrence?

– Who is involved in the situation/problem?

Exam 2

Project Initiation

Phases 3 and 4 of Kepner-Trego

– Decision analysis

• Determine course of action to meet project goals

– Opportunity (or potential problem) analysis

• What lies ahead?

• What kinds of decisions will have to be made in the future?

Exam 2

Project Initiation

Six Sigma Process Analysis

Six sigma process analysis

– A quality improvement initiative originally developed by

Motorola

– A data-driven framework to make quality improvements

in an organization’s value-adding processes while

simultaneously

• Saving money

• Increasing revenues

– Objective: implementation of a measurement-based

strategy aimed at reducing variances and improving

processes

Exam 2

Project Initiation

Six Sigma Process Analysis – Cont.

Six sigma

– Everyone (CEO to frontline employee) involved in improving

quality

– Uses project management approach

– Six sigma equation: Y = ƒ(X)

where: Y = output (key business objectives and measures)

ƒ = function (interrelationships to be controlled and

managed)

X = controllable and noncontrollable variables that affect Y

– Strives for perfection

• No more than 3.4 (0.00034%) defects per million measurement

opportunities

Exam 2

Project Initiation

Six Sigma Process Analysis – Cont.

DMAIC Improve existing processes

incrementally

– D – Define project deliverables and customer goals

– M – Measure the process to determine current performance

– A – Analyze and determine the root causes of any defects

– I – Improve the process by eliminating defects

– C – Control future process performance

DMADV New processes or improve

existing processes more than incrementally

– D – Define project deliverables and customer goals

– M – Measure and determine customer’s needs and specifications

– A – Analyze process options that will meet customer’s needs

– D – Define the process in detail to meet customer’s needs

– V – Verify design performance and ability to meet customer’s needs

Two Common Six Sigma Processes

Exam 2

Project Initiation

Business Case Analysis

Business case analysis

– An approach to analyzing a business case for a

proposed project

– Structured proposal for business improvement

• Functions as decision package for organizational decision-

makers

• Should include

– Reasons for proposed project

– Estimated costs

– Expected benefits

– Analysis of alternatives to the project

– Expected risks

Exam 2

Project Initiation

Alternative Analysis

Alternative analysis

– Part of the business case

– Analyzes various alternatives to proposed project

– For each alternative, examines

• Benefits

• Costs

• Risks

• Feasibility

Exam 2

Project Initiation

Alternative Analysis – Cont.

Examples of Project Benefits

BENEFIT DESCRIPTION

Financial $ of new revenue generated

$ cost savings

% increase in profit margin

Market % gain in market share

Estimated increase in competitiveness

% increase in customer awareness

Customer % increase in customer satisfaction

% increase in customer retention

Increase in customer loyalty

Supply Management % increase in efficiency

% improvement in supplier quality

% improvement in supplier delivery

Exam 2

Project Initiation

Alternative Analysis – Cont. Examples of Project Costs

COST DESCRIPTION

Project Participants Project staff salaries

Training costs for employees

Purchasing costs of contractors/consultants

Internal Organization Downtime during testing

Losses in productivity during transition

Resistance to change

New manuals

Physical Assets Equipment and materials

Computers, phones, printers

Office space dedicated to project

External Suppliers Training costs

Temporary losses in productivity/service delivery

Resistance to change

Search costs for new supplier(s)

Exam 2

Project Initiation

Alternative Analysis – Cont.

– Generally associated with the project itself; e.g.,

• Project will not be completed on time

• Funding needed to complete project not available

– In analyzing risk, assess

• Probability risk will occur

• Difficulty in avoiding risk

• Difficulty in mitigating risk

• Potential effect of risk (including costs)

• Countermeasures to take if risk occurs

Exam 2

Project Initiation

Project Feasibility Analysis

Project feasibility analysis

– Feasibility study helps limit the number of solutions to

consider by determining the chance that each will

• Solve the problems

• Take advantage of an opportunity

Exam 2

Project Initiation

Project Feasibility Analysis – Cont.

Example of Feasibility Study

CATEGORY RATING METHODOLOGY USED

Additional people needed to

complete project

7 Survey of available

employees taken to identify

skill sets

New processes will have to

be adopted

4 Benchmarked processes at

other organizations

New capital equipment will

have to be purchased

8 Inspected current capital

equipment

New technology needed to

complete project

8 A team created technology

prototype

Feasibility Rating: 1 = extremely low feasibility 10 = extremely high feasibility

Exam 2

Project Initiation

Project Feasibility Analysis – Cont.

Feasibility study may include analyses of

– Net present value (NPV): difference between present

value of all cash inflows and present value of all cash

outflows during life cycle of improvement

– Internal rate of return (IRR): rate of return that would

make present value of future cash flows plus final market

value of an investment/business opportunity equal the

current market price of investment/opportunity; i.e., what

is break even rate of return?

– Payback period: period of time needed for project to

recover its initial investment, based on cash inflows

Exam 2

Project Initiation

Stakeholder Analysis

Stakeholder analysis – Assists in

• Assessing project environment

• Determining level of risk and variability

• Identifying relationships, both positive and those with conflicts

– Helps identify each stakeholder and • His/her role

• Level of interest

• Influence in project

• Primary stakeholder: those ultimately affected by project’s deliverables

• Secondary stakeholder: intermediaries that aid in project delivery process

Exam 2

Project Initiation

Stakeholder Analysis – Cont.

Stakeholder analysis questions to consider – What are each stakeholder’s expectations with regard to

project?

– What are likely benefits each stakeholder will accrue from project?

– What resources will each stakeholder want to commit (or avoid committing) to project?

– What other interests does each stakeholder have that could conflict with project?

– How does each stakeholder feel about other stakeholders involved in project?

See Task 3-C-4

Exam 2

Project Initiation

Project Charter

Project charter – Developed by project manager and project sponsor once project

approved

– May be in form of memo, email, formal document and addresses

• Project scope and any constraints

• Project’s important milestones

• Assigned project manager

• Project team members

• Risk analysis

• Dated signature of project sponsor

– Defines project

– Used to announce project to stakeholders

– Begins paper trail

– Used as guide by team members

Exam 2

Project Planning

Planning: provides roadmap for project. Formal project plan provides each team member with details

Planning begins with

– Writing description of project

– Writing clear statement of project objectives

– Creating work breakdown structure (WBS) with corresponding project organization and functional responsibility chart

• WBS: provides illustration of project scope and tasks, and becomes a basis for monitoring project progress

• Organization and functional responsibility chart: identifies project team and shows responsibilities assigned to team members for various tasks

– Preparing project schedule

– Planning resource requirements

• Known as resource loading

• Involves scheduling necessary resources including people, equipment, for given project activities at given times

Exam 2

Project Planning – Cont. Project Name:

Supplier Development

Process Performance Analysis

Data Analysis Supplier

Opportunities Improvement

Strategies

Task 1

Task 2

Task 3

Task 1

Task 2

Task 3

Subtask 1

Subtask 2

Example Work Breakdown Structure (WBS)

Exam 2

Project Planning

Organizational Structures

Project organizational structures can include

– Functional: project tasks performed by department

responsible for the function; e.g., accounting,

engineering, finance, supply management, marketing

– Matrix: project roles, responsibilities and authority

shared by functional department members and project

managers

– Projectized: greater degrees of independence and

authority, with project manager having full authority over

project team members

Exam 2

Project Organizational Structures

TRAITS FUNCTIONAL MATRIX PROJECTIZED

PM’s Authority Little or none Limited to high High to almost total

% Personnel

Assigned FT

Virtually none 0-95% 85-100%

PM’s Role Part-time Part- to full-time Full-time

Titles for PM’s role Project Coordinator

Project Leader

Project Coordinator

Project Manager

Project Officer

Program Manager

Project Manager

Program Manager

Project Adm. Staff Part-time Part- to full-time Full-time

Level of Commitment Inside group: high

Outside group: low

Varies Highest

Communication More difficult More difficult Least difficult

More structured

Priority Inside group: high

Outside group: low

Varies Highest

Potential Conflicts Low High Low

Exam 2

Project Planning

Project Team Roles and Responsibilities

Example Responsibility Assignment Matrix (RAM)

Project Phase Task

Project

Oper. Imp.

Analyze Need A1 ○ ● ● ●

A2 ● ○ ○

A3 ● ● ■

Solicit Quotes B1 ○ ●

B2 ■ ○ ●

Write RFP C1 ■ ○

C2 ○

Coding: ○ Approval ● Responsible Notification ■ Support

Exam 2

Project Planning

Schedule Development

Project schedule

– A time-phased plan for performing activities of project

– Based on WBS

– Critical path

• Consecutive sequence of activities in project whose cumulative

time requirements determine minimum total project time

• Delay in critical path activities delays entire project if other steps

are not compressed

Exam 2

Project Planning

Schedule Development – Cont.

Many organizations use one or more of the following to

graphically portray project schedule

– Gantt chart: horizontal bar chart commonly used to plot planned and

actual progress of project activities

– Critical Path Method (CPM): involves analyzing all steps in project to

identify shortest path

– Program Evaluation and Review Technique (PERT): network

planning technique used for controlling activities in project

• Each activity assigned pessimistic, probable and optimistic estimate of

duration

• Critical path and project duration are determined

• Project progress monitored using this data

Exam 2

Project Planning

Budget Development

Budget

– A plan to allocate resources to a project

– Must be developed to gain approval for plan

– Usually organized by

• Project task

• Expected timing of expense associated with task

– Used by senior management to monitor and control

project

• Data must be collected and reported in timely manner

Exam 2

Project Planning

Risk Management

Risk management – Identification, analysis and planned response to potential project

– Identified by

• Brainstorming with stakeholders

• Analyzing schedule

• Reviewing past similar projects

– After risks are identified, they are assessed for

• Probability of occurrence

• Possible magnitude

• Risk matrix: risk analysis tool for assessing a risk based on an event’s probability of occurrence and impact of that risk event

– Assign responsibility to someone on the project team for monitoring and managing highest risks

Exam 2

Project Planning

Risk Matrix

Example Risk Matrix

Probability

Low Consequence High

Mitigating this risk reduces the consequences, moving it to the upper left quadrant

Exam 2

Project Planning

Procurement Planning Process

During planning, the project manager involves

– Stakeholders

• Including supply management

– Decides what should be outsourced

Supply management activities during planning

– Procurement planning

– Solicitation planning

Exam 2

Project Planning

Procurement Planning Process – Cont.

Procurement planning process

– Identifying which business needs can best be met

through outsourcing

– Determining

• Sourcing method

• Specifications or descriptions

• Quantities

• Timing

Exam 2

Project Planning

Solicitation Planning and Process

Solicitation planning process

– Determine contract type

– Develop solicitation document

– Determine

• Proposal evaluation criteria

• Contract award strategy

– Structure contract terms and conditions

– Finalize solicitation

Exam 2

Project Planning

Project Plan Approval Process

Planning culminates in a project plan that covers – Overview: short project description, deliverables, major milestones

– Objectives: details of project deliverables

– Technical and managerial approaches: special practices beyond normal procedures

– Contractual agreements: detailed description of agreements with clients and suppliers

– Project schedule: timeline of all project-related activities and major deliverables, milestones

– Project budget: capital and operating expenses

– Risk management: solutions to eliminate/mitigate potential problems

– Resource requirements: project team and skill requirements

– Evaluation methods: evaluation standards and procedures, monitoring requirements

Exam 2

Project Planning

Project Plan Approval Process – Cont.

Project plan approval process

– Plan must be written so progress can be tracked

– Plan goes through a review and approval process

• Small functional projects may need only functional manager

approval

• Large projects may require sponsor approval

• Individual organizations develop their own review and approval

processes

– Once a plan is approved, the project is ready for

execution

Exam 2

Project Execution

Once project plan approved, team moves to next

phase, the actual deployment of the project

Project execution for supply management activities

involves implementing supply management plans

developed during project planning

Exam 2

Project Execution

Selection Process

Solicitation process involves obtaining bids and

proposals from prospective suppliers on how

project needs can be met

It includes

– Conduct pre-proposal conference

– Conduct advertising

– Develop and maintain qualified bidders list

Exam 2

Project Execution

Source Selection Process

Source selection process involves

– Receive bids/proposals

– Evaluate bids/proposals based on evaluation criteria

stated in solicitation

– Negotiate with suppliers

– Execute contract award strategy (select supplier)

Exam 2

Project Monitoring and Control

Project monitoring and control

– Once tasks have started and contract work has begun,

the project must be administered

– Includes monitoring the project by collecting, reporting,

documenting any project information important to

• Project manager

• Other stakeholders

– Part of administration and control process is

• Overseeing contracts

Exam 2

Contract Administration Process

Contract administration process – Ensures that both party’s performance meets contractual

requirements

– Project manager and supply manager should create and follow a set of control procedures to assure compliance

– All work must be properly authorized

– Periodic inspections are necessary

– A system to deal with change orders should be established

– Report performance to project manager and other stakeholders

Exam 2

Contract Administration Process – Cont.

Performance measurement tools include

– Earned value management (EVM): see Task 2-D-1

– Schedule analysis

• Compares planned schedule with actual schedule

• Schedule variance is computed by comparing difference between

– Budgeted cost of work scheduled (BCWS)

– Budgeted cost of work performed (BCWP)

– Budget analysis compares budgeted cost of work scheduled

(BCWS) against actual cost of work performed (ACWP)

– Can calculate efficiency indicators

• Cost performance index (CPI) = BCWP/ACWP

• Schedule performance index (SPI) = BCWP/BCWS

Exam 2

Contract Administration Process – Cont.

Additional areas involved in project monitoring and

control include

– Consideration and processing of all change requests

– Monitoring and controlling risk

– Managing and reporting cost, schedule and performance

results

• Called triple constraints (cost, schedule, performance)

• The parameters of the project objectives

– Conducting milestone reviews

Exam 2

Project Closure

The last step in the project life cycle

Formalizes acceptance of project and brings it to an end

All personnel involved in project are – Transferred back to their function

– Reassigned to a new project

Completed project is transferred to – Client

– User department

Important step at this stage: closing out contracts

Exam 2

Project Closure – Cont.

Contract closeout: the process of verifying that all

administrative matters are concluded on a contract

that is otherwise physically complete

It includes

– Property disposition

– Final receipt and acceptance

– Final payment

– Best practice and lessons learned identification

Exam 2

Project Closure – Cont.

Post project audit

– Conducted to assess completed project in terms of

• Project methods

• Procedures

• Records

• Properties

• Budgets

• Actual costs

• Contractor performance

Exam 2

Task 2-G-1 Recall Question #1

Consider the following steps in the project management process.

I. Closing

II. Execution

III. Initiation

IV. Planning

V. Monitoring and controlling

Which of the following options describes the appropriate sequence (from first to last) of these steps?

(A) IV, II, III, V and I

(B) IV, V, III, II and I

(C) III, IV, II, V and I

(D) III, IV, V, II and I

Exam 2

Task 2-G-1 Recall Question #2

You have been asked by the head of Supply Management to develop a

training program for a class for the newly hired group of supply management

analysts. As a supply management professional, you decide to create case

studies covering each of the project procurement management areas for use

in the class. Which of the following represents the six (6) procurement

project management areas identified by the Project Management Institute?

(A) Plan purchase and acquisitions, negotiate contracting, request suppliers’

responses, select suppliers, contract administration and contract closure.

(B) Plan purchase and acquisitions, plan contracting, request suppliers’

responses, select suppliers, contract termination and contract closure.

(C) Plan acquisitions, negotiate contracting, request suppliers’ responses, select

suppliers, contract administration and contract closure.

(D) Plan purchase and acquisitions, plan contracting, request supplier’s

responses, select suppliers, contract administration and contract closure.

Exam 2

Task 2-G-1 Case Study #1

1. What are some analysis tools Rodriguez should incorporate when

analyzing capital equipment acquisitions during the project initiation

phase?

2. List four or five processes or tools Rodriguez can use in the project

monitoring and control phase to manage the contract.

Exam 2

Task 2-G-1 Summary and Review

Describe the relationship between project management and supply management

Projects are typically created to meet at least one of five objectives – name them

Define project life cycle

Describe the following project process groups and identify key activities and deliverables/outputs of each – Initiating

– Planning

– Executing

– Monitoring and control

– Closing

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