Supply Chain Management Guide © Imants the. The Supply Chain Management Guide 1. Introduction.

Supply ChainManagement Guide

© Imants

the

The Supply Chain Management Guide

1. Introduction

1. Introduction 1.1. Key Concepts1.1.1. Supply Chain

The Supply Chain is:• the sequence of suppliers that contribute to the

creation and delivery of a good or service to end customers.

1. Introduction 1.1. Key Concepts1.1.2. Logistics

Logistics is:• the management of the storage and flow of

goods, services and information throughout your organisation.

1. Introduction 1.1. Key Concepts1.1.3. Supply Chain Management

Supply Chain Management is:• organizing the cost effective flow and storage of

materials, in-process inventory, finished goods and related information from point of origin to point of consumption to satisfy customer requirements.

A Business Philosophy

A way of doing business with your customers and suppliers.

1. Introduction 1.1. Key Concepts1.1.4. A Philosophy

1.2 Principal Issues1.2.1. Supply Chain (1)

Supply Chain

The supply chain of a company consists of different departments, ranging from procurement of materials to customer service.

The supply chain includes activities associated with inventory (materials) acquisition, storing, use in production, transit, and delivery to customers.

1. Introduction

1.2 Principal Issues1.2.1. Supply Chain (2)

The activities are planned, executed, and monitored under the guidelines set by the company’s chosen customer service levels and in line with the company’s other operating goals.

1. Introduction

1. Introduction 1.2. Principal Issues1.2.2. Elements of Logistics

Elements of Logistics:• materials management:

• sourcing and receiving of raw materials or unfinished products for subsequent use

• material flow system: • the ability to locate and schedule material through to

end production and disposition

• physical distribution: • the delivery of finished goods to customers

1.2. Principal Issues1.2.3. Logistic Goal

1. Introduction

Logistic goal and objectives

The right products

The right quantity

The right moment

At minimalcost

FlexibilityDeliveryreliability

Delivery time/lead time

Inventorylevel

1.2. Principal Issues1.2.4. Logistic Steps

Logistic steps:• accepting a customer order

• receive and enter• credit clearance / authorize• delivery commitment

• supplier ordering• forecasting demand• scheduling manufacturing• inventory management• delivery to customer.

1. Introduction

1.2. Principal Issues1.2.5. Evolution

1. Introduction

Quality productsLowest possible cost

Order fulfillment

Integration of supply chainsCustomer service

Preferred partnersCommunication

Supply chain communitiesCommon goals, objectives

Supply

Chain

Evolution

1. Introduction 1.2. Principal Issues1.2.6. The Goal

Supply Chain Management Goal

To evolve a company’s supply chain into an optimally efficient, customer-satisfying process, where the effectiveness of the whole supply chain is more important than the effectiveness of each individual department.

1. Introduction 1.2. Principal Issues1.2.7. Focus

Supply Chain Management focuses on business processes:

• product change• planning• order management• stock management

instead of functions:• sales• purchasing• production

1. Introduction 1.2. Principal Issues1.2.8. Drivers of Change (1)

Drivers of change:• outsourcing trend• actual customer demand: speed, flexibility and

cheap products• new software: ERP, sophisticated application

software

1. Introduction 1.2. Principal Issues1.2.8. Drivers of Change (2)

• new technologies• Electronic Data Interchange (EDI)• internet, intranet, extranet• wireless communications• teleconferencing and telecommuting• bar coding.

1.2. Principal Issues1.2.9. Activities

Supply chain management activities:• Forecasting demand• Selecting suppliers• Ordering material• Managing inventory• Scheduling production• Shipping and delivery• Organizing information exchange

1. Introduction

1.3. Analysis1.3.1. Diagram

1. Introduction

Understand thecustomer

Understand theproduct

Understand theprocess

Understand the information flow

1. Introduction 1.3. Analysis1.3.2. Understand the Customer (1)

Know and understand the customers:• Your existing customers, i.e.,

• demographics• existing and potential number• income levels?

• Who are your potential customers?• How might these customers be grouped?• For which percentage of sales is each group

responsible?

1. Introduction 1.3. Analysis1.3.2. Understand the Customer (2)

• What is the effect of various methods of communications (i.e., telephone, fax, e-mail, internet telephoney systems) in your relation with your customers?

• What do your customers want from you?• How well do your competitors meet customers

needs?

1. Introduction 1.3. Analysis1.3.3. Understand the Products

Understand the products:• How many?• Where are they?• Which percentage of sales?• What is the product life cycle?• What is the product mix?

1. Introduction 1.3. Analysis1.3.4. Understand the Process

Understand the production process:• process flow

• linear flow• job shop - batch flow• assembly line• continuous flow• project flow

• order fulfillment strategy• make-to-order• make-to-stock.

1. Introduction 1.3. Analysis1.3.5. Understand the Information Flow

Understand the information flow:• What information is required for effective

decision-making at each stage in the supply chain?

• What data has to flow between each part of the supply chain?

1. Introduction 1.4. Performance Indicators (1)

A total view must be taken in assessing performance.

Performance measures need to be focused on what factors add to total performance, total value or total cost.

The principle measure of performance is customer service. Optimum service levels are necessary from each supplier to each customer throughout the supply chain.

1.4. Performance Indicators (2)1. Introduction

Suppliers InputsAddingvalue

Outputs Customers Results

EffectivenessEfficiency

Productivity

Profitability

Customer Service + Quality

CustomerService


Effectiveness: • accomplishment of the right things, on time,

within the requirements specified.

Efficiency:• resources expected to be consumed divided by

resources actually consumed.


Productivity:• measures of output divided by measures of input

for a given period of time.

Profitability:• relationship between revenues and costs.


2. Purchasing and Procurement

2. Procurement 2.1. Key Concepts

Purchasing: implies the monetary transaction.

Procurement: the responsibility for acquiring the goods and services the organization needs:

• goods:• raw materials• production parts• maintenance, repair and operating supplies (MRO)

• services:• consulting services• utilities• workers health care benefits.

2. Procurement 2.2. Principal Issues2.2.1. Evolution in Purchasing

Evolution in Strategies for Purchasing

Focus on price

Focus on quality,reliability,

responsiveness,and total cost

Strategic focus- supplier relationships

- forecasting- cycle time

2. Procurement 2.2. Principal Issues2.2.2. The Procurement Process (1)

The Procurement Process:• preparation:

• identify needs, such as dependability, long term availability

• evaluate user requirements to ensure suitability of purchase

• forecast when and how purchase will be needed• identify and select suppliers• develop an efficient ordering system for control

• negotiation:• bidding processes• contracts

2. Procurement 2.2. Principal Issues2.2.2. The Procurement Process (2)

• order placing via appropriate channels (i.e. authorized purchase order)

• receiving including adjustments for damages, short or over-shipping and incorrect costs

• monitoring supplier performance.

2.2. Principal Issues2.2.3. Supply Uncertainty

Elements of supply uncertainty:• lead time to supply• quantity supplied• quality of supply• data accuracy on products supplied and prices.

2. Procurement

2. Procurement 2.2. Principal Issues2.2.4. Selecting a Supplier

In selecting a supplier, a number of factors must be analyzed:

• price• quality• reliability• credit terms• shipping costs.

Look at the whole transaction cost of dealing with a supplier (not just the cheapest price).

2.1. Principal Issues2.2.5. Positive Trends (1)

Positive trends in purchasing and procurement include:

• reduced number of suppliers• long-term relationships with suppliers• suppliers located close to customers for

improved access• integrated information infrastructure: EDI,

electronic catalogs

2. Procurement

2.1. Principal Issues2.2.5. Positive Trends (2)

• suppliers considered to be an essential part of the business

• suppliers involved in future product development programs.

2. Procurement

2. Procurement 2.3. Analysis

Key considerations in analyzing the purchasing process:

• annual sales• annual purchases• number of suppliers• number of supplier alliances• total number of purchased products or parts• short and long-term cost effective purchasing• efficient business management of the purchasing

process.

2. Procurement 2.4. Suggestions

Analyze what the suppliers requirements are for:• goods and services: lot sizes, packaging, delivery

frequency, and responsiveness• information: how much and when• financing arrangements and costs.

Compare your needs and abilities against these requirements.

D%=100-(L*100)/S

2. Procurement 2.5. Performance Indicators2.5.1. Delivery to Schedule

The following formula is used to assess suppliers delivery to schedule performance.

D = monthly delivery performance (%)L = number of line items delivered later than

scheduledS = number of line items scheduled for delivery

during month

Different tolerances for A, B, C-articles (seechapter 6)

Q%=100-(R*100)/N

2. Procurement 2.4. Performance Indicators2.5.2. Quality to Specification

The following formula is used to assess quality performance.

• Q = monthly quality performance (%)• R = number of units rejected during month• N = number of units delivered during month


3. Sales Forecasting

3.1. Key Concepts

Sales forecasting is

the process of organizing and analyzing information in a way that makes it possible

to estimate future sales.


3.2. Principal Issues3.2.1. Demand Uncertainty

Elements of demand uncertainty:• timing of order• size and composition of order• data accuracy on:

• products required• delivery points• timing.



3.2. Principal Issues3.2.2. Components of Demand

Components of demand:• Trend:

• growth or decline over an extended period of time

• Cyclical:• wavelike fluctuation around the trend

• Seasonal:• pattern of change that repeats itself year after year

• Random:• not accounted for by the other components (trend,

cyclical, or seasonal).

3.2. Principal Issues3.2.3. Sales Forecasting Methods (1)

Qualitative sales forecasting methods rely more on judgment and intuition than on historical data:

• surveys of buyer intentions, such as questionnaires, telephone polls, and consumer interviews

• Delphi technique:• a body of experts, consulted separately, is asked to

arrive at a consensus opinion

• sales force composite:• based on the combined estimates of experienced sales

personnel.




Quantitative sales forecasting methods make use of past data to predict future sales:

• market tests to gauge consumer response (usually to a new or modified product) under actual conditions

• trend projections/analysis (also called Time Series) involves forecasting sales based on the historical relationship between sales and time, which is expressed as a growth rate (percentage) and each measure is plotted on a growth curve:



• moving average: all observations are given equal weight and only a few of the previous observations are considered

• exponential smoothing: gives greater weight to more recent observations and considers all past observations

• regression analysis can be used to forecast a dependent variable (i.e., sales) as a result of changes in one or more independent variables (i.e., advertising)



• input-output models forecast the impact of the change in the outputs (sales) of one industry on the out-outs of the purchasing industry (i.e., a reduction in the supply of tin cans produced by the metal industry would effect the supply of canned tuna that would be produced by the fish canneries).



Computerized forecasting models include:• spreadsheets, such as Microsoft Excel (with the

Data Analysis Toolpack) and Lotus 123, that can perform calculations automatically with changes in entered data

• forecasting application software:• statistical packages, such as SAS, MYSTAT, and Minitab• forecasting packages specifically designed for

forecasting applications, such as Forecast X, SAS, Forecast Pro.


3.2. Principal Issues3.2.4. Major Uses of Sales Forecasts (1)

Sales forecasts are used for:• production:

• production scheduling• inventory control

• purchasing:• determination of procurement requirements• scheduling of purchases to get favorable prices



• marketing:• formulation of marketing strategies for products• setting of sales quotas• scheduling of advertising expenditures and sales

promotions

• personnel:• planning of manpower requirements

• finance:• establishing of operating budgets• cash flow planning• capital budget / expenditure decisions



• top management:• overall planning and control of operations of the

company.

3.2. Principal Issues3.2.5. Advantages Forecasting (1)

Accurate sales forecasting offers several advantages:

• reduced excess inventory• fewer stock shortages which result when demand

exceeds supply• fewer unnecessary production line changes to

fulfill unanticipated demand• less overtime hours through improved

predictions in personnel requirements


3.2. Principal Issues3.2.5. Advantages Forecasting (2)

• improved customer service levels as supply and demand balance

• more economic purchasing power.



3.2. Principal Issues3.2.6. Forecast Accuracy

Factors that influence forecast accuracy:• availability of product demand history• capability of computer system• other available history (i.e., new products, design

changes, changes in customer base, promotional actions, economic indicators)

• responsibility for forecasting: a team effort is required (Sales, Distribution and Manufacturing).


3.3. Checklist

Sales forecasting considerations:• What are the items to be forecast?• How far into the future should the forecast

extend?• What is the length of the time period for stating

the forecast quantity?• How frequently should the forecast be made,

reviewed and revised?• What would constitute an acceptable tolerance of

forecast error?

3.4. Suggestions (1)

Prior to forecasting sales, scrub the data by removing the effects of unusual events that are not likely to happen again. Otherwise, the forecasting model will show a distorted view of the past.



Examples of problems that may require data adjustments:

• unusual weather• addition or loss of major customers• special promotions• changes in price or package size.




Determine the most accurate forecasting method:• regularly use a number of different methods to

generate forecasts• maintain historical accuracy information on each

method• use the most accurate method to generate

“official” forecasts.



Make an ABC-analysis of the items to forecast:• A-items are reviewed each month by management• only those B- and C-items with a significant

deviation between forecast and actual demand need to be reviewed by management.


4. Production planning and control

4. Production Control

4.1. Key Concepts 4.1.1. Production Planning and Control

The responsibility for:• number of units of a specific product to be

produced• time intervals over which production will occur• availability of equipment, materials and work

force• cost effective inventory and resource

management.


4.2. Principal Issues4.2.1. Production as a Goal or Means (1)

Production as a goal:• resources are planned and used in the production

process regardless of actual demand• often based on economies of scale, where lower

cost per item is presumed to generate end product demand.


4.2. Principal Issues4.2.1. Production as a Goal or Means (2)

Production as a means:• resources are planned and used in the production

process only as a result of product demand• often based on economies of scope, where end

product demand has greater influence over production units and costs.


4.2. Principal Issues4.2.2. Economies of Scope vs Scale (2)

Economies of scale production assumptions:• responsive to profit margin gains• fixed production plans• lower cost per item• larger production runs• less production set up and change over cost• greater risk of product/inventory obsolescence• higher inventory carrying costs• material is pushed through the production

process.


4.2. Principal Issues4.2.2. Economies of Scope vs Scale (1)

Economies of scope production assumptions:• responsive to demand• flexible production plans• variable cost per item• smaller production runs• increased total set up and change over costs• lower product/inventory obsolescence• minimized inventory carrying costs• material is pulled through the production process

as needed.


4.2. Principal Issues4.2.3. Order Decoupling Point

How far does a customer order penetrate in the production process?

Purchasing Production Warehouse Distribution

Manufacture tostock

Manufacture toorder

Position of the order decoupling point

4.2. Principal Issues4.2.4. Planning Hierarchy

Aggregate plan: works with aggregate (grouped) units

Master Production Schedule: indicates the quantity and timingof the production of specific end items.

(actual orders are incorporated)

Materials planning: what material is needed when?

Capacity requirements planning: which equipment, work forceand facilities are required?

Loading: which job on which work center?

Sequencing: in which order have the jobs to be processed?



4.2. Principal Issues4.2.5. Production Control Systems

Formal production control systems for inventory include:

• Economic Order Quantity (EOQ)• Materials Requirements Planning (MRP)• Just-in-Time concept(See Chapter 6, Inventory Management)


4.3. Suggestions

Suggestions:• pull rather than push material through the

production process• produce nothing until it is needed• reduce set up times• reduce lot sizes• try to move the order decoupling point to an early

stage in the supply chain• try to remove transaction (steps which ad no

value) from the process.


5. Material Handling

5.1. Key Concepts5.1.1. Material Handling (1)

Material Handling:• moving of goods between incoming transport,

storage, processes and outgoing transport• the set of activities that move production inputs

and other goods within plants, warehouses and transportation terminals.


5.1. Key Concepts5.1.1. Material Handling (2)

Providing the right amount of material:• in the right condition• at the right place• at the right time• in the right position• in the right sequence• for the right cost• by using the right methods.



5.2. Principal Issues5.2.1. Materials Handling Manager (1)

The task for the materials handling manager is to find the methods, the routes, the layouts and the right components to minimize handling.


5.2. Principal Issues5.2.1. Materials Handling Manager (2)

Six main responsibilities of the materials handling manager:

• packaging - unitizing• internal transport• storage• retrieval• identification• communication.


5.2. Principal Issues5.2.2. Material Handling System Design

The design of a material handling system depends upon the the type and the characteristics of the materials to be handled.


5.2. Principal Issues5.2.3. Material Handling System

Components (1)

Material handling equipment:• unitizing equipment• material transport equipment• storage and retrieval equipment• automatic identification and communication

equipment.



Components (2)

Unitizing equipment:• containers, such as cartons, boxes, and bags • carriers or support, such as pallets, skids, and

plywood• stretch wrap• shrink wrap.



Components (3)

Material transport equipment:• conveyors (belts and rollers)• industrial vehicles, such as pallet trucks, lift

trucks, and automated guided vehicles (AGV)• monorails• hoists• cranes.



Components (4)

Storage and retrieval equipment:• unit load storage equipment• unit load retrieval equipment• small load storage and retrieval equipment.



Components (5)

Automatic identification and communication equipment:

• bar coding• radio frequency tag• magnetic stripe• smart cards• voice headsets• machine vision.


5.2. Principal Issues5.2.4. Cost-effective Means of Transport (1)

Key factors to consider in selecting means of transport:

• physical characteristics of loads• the number of loads to be moved• the distance to be moved• the required speed of movement.



Movement distance (m)

Unitsmoved/ hour Conveyors Motorized trolleys

Forklift trucks

Manual trolley

Manual



Other factors which influence the means of transport:

• cost of building/dismantling loads• packaging costs• space requirements• interface with other storage, transport and

handling systems• housekeeping issues.


5.2. Principal Issues5.2.5. Warehousing (1)

The warehouse must be:• located in the right place• the right size• organized

to allow:• efficient delivery and placing• cost-effective use of its space• adequate access to stored materials• security from theft and weather• flexibility to deal with the various items.



The mission (or goal) of a warehouse is set by demand. The warehouse location is a means to achieving the mission.

Mission Location Demand

Balance and buffer Near the manufacturer Monthly/quarterly replenishments

of stocks

Accumulate and consolidate Central to production locations Weekly/monthly orders

Rapid response Close to customer Daily



Within the warehouse, stock must be:• put into known places and• in known order

so that it can be:• retrieved quickly and in the right quantity• rotated properly (ex. first-in, first-out).



Warehousing activities:• receiving goods• identifying goods• sorting goods• dispatching goods to storage• holding goods• picking goods• preparing shipments• dispatching shipments.


5.3. Suggestions

Suggestions for materials handling:• use identification systems, such as bar coding to

handle the right material:• give a part identification number• give a location identification number

• handle similar materials, packaging and size of loads at the same time

• implement improvements in material handling systems which will increase the efficiency of the overall system.


6. Inventory Management


6.1. Key Concepts

Inventory:• those stocks or items used to support production

and customer service.

Service level:• probability (%) that stock will be available to meet

demand.


6.2. Principal Issues6.2.1. Types of Inventory (1)

Types of Inventory:• raw materials:

• purchased parts used in manufacturing other items

• work-in-process: • parts that are in the manufacturing process

• sub-assemblies: • manufactured parts that are partially completed and

stocked in inventory


6.2. Principal Issues6.2.1. Types of Inventory (2)

• finished goods: • Items ready for sale to a customer

• MRO:• maintenance, repair and operation supplies.


6.2. Principal Issues6.2.2. Functions of Inventory (1)

Functions of inventory:• safety stocks:

• protect against uncertainties of materials supply and consumer demand

• cycle stocks: • result from ordering or producing in lots

• transit stocks: • materials must be moved from one location to another


6.2. Principal Issues6.2.2. Functions of Inventory (2)

• speculative stocks: • expected price increase

• promotional stocks:• additional inventory accumulated for a promotional

event.

6.2. Principal Issues6.2.3. Elements of Inventory (1)


Safety stock

Excess stock

Replenishments

InventoryLevel

Time

Elements of inventory


6.2. Principal Issues6.2.3. Elements of Inventory (2)

Elements of inventoryOver time, demand and the ability to service demand (replenish inventory) can vary. Forecasts may not be precise due to uncertainties, so, a reserve of stock (safety stock) may be necessary to reduce inventory shortages (stock-outs). Inventory levels above the safety stock and normal demand are considered excess inventory.


6.2. Principal Issues6.2.4. Inventory Holding

Reasons for holding inventory:• purchased parts:

• variations in supplier lead time• quantity discounts• price changes• scarcities of materials

• manufactured parts:• cover period between production runs• allow flexibility in production scheduling• variations in product demand (safety stock)• economies of scale.


6.2. Principal Issues6.2.5. Inventory Costs (1)

Cost of inventory production and holding:• order/set-up costs:

• cost of replenishing inventory through changes in the production run for a different item

• includes labour and other associated costs

• carrying costs:• cost of capital• insurance costs• costs of space, staff• inventory handling, deterioration, damage,

obsolescence, insurance


6.2. Principal Issues6.2.5. Inventory Costs (2)

• opportunity costs:• restriction of other investments that could have been

made with the same money

• stock-out costs:• lost sale• halted production.


6.2. Principal Issues6.2.6. Inventory Management (1)

Objectives of inventory management:• minimize costs:

• working capital• carrying costs• scrap and rework

• highest level of customer service.



Inventory management tasks:• make decisions about:

• safety stock• replenishment production runs• excess stock.



Inventory must be managed differently for:• independent demand: influenced by market

conditions• dependent demand: derived from the production

of parent items.(see following slide)



A

B C

D E

Independent demand

Dependentdemand

6.2. Principal Issues6.2.7. ABC-Analysis (1)

ABC analysis of inventory:• select a criterion (sales / usage) based on

importance• rank the inventory items on criterion• calculate the cumulative sales and/or usage for all

items• assign items into A, B, C groups• assign inventory levels and warehouse locations

for each item.




ABC classification, where items are not of equal importance:

• A-items• few items (ex. 15 %) which have a high rate of usage

and/or high unit cost and account for 80 % of the total value of usage in the inventory

• B-items• number of items (ex. 25 %) which in total account for 15

% of the total value of usage



• C-items• great many items (ex. 60 %) with low individual usage

and/or low unit value which in total account for only 5 % of the total value of usage



ABC analysis chart demonstrates relative importance of inventory items.

Class of Item % of Items % of Value

Class A 15% 80%

Class B 25% 15%

Class C 60% 5%


ABC - Analysis Chart

0

100

200

300

400

500

600

Product 1 Product 2 Product 3 Product 4

Nu

mb

er o

f it

ems

C

B

A



6.2. Principal Issues6.2.7. ABC Analysis (6)

ABC and inventory control efforts:• A-items

• very careful management• careful estimates of future usage.

• B-items• routine management• routine effort in forecasting demand.

• C-items• little effort in forecasting demand • however be careful for strategic items (safety stock).


6.2. Principal Issues6.2.8. Inventory Management Systems (1)

Inventory management systems include:• two-bin replenishment system:

• used for low value , non-critical items (i.e.. class C items)• relies on visual inspection of declining inventory• one bin contains enough material to meet needs

between the time one order is received and another is placed

• second bin (also called the “reserve bin”) contains enough material to meet needs between placing an order and receiving the materials

• if production taps into the reserve bin, additional materials must be ordered immediately



• reorder point system:• amount ordered when inventory declines to a

predetermined level• considers:

• when to order (re-order point)• how much to order (order quantity)

• periodic review systems:• after predetermined fixed passages of time, orders are

placed for variable amounts• consider:

• how much to order (order quantity)• how long between orders (reorder time interval)

• Materials Requirements Planning (MRP):• assumes variable demand throughout production• calculates component requirements based on the Master

Production Schedule (MPS), Bill of Material and inventory data

• materials are purchased only when the MPS has them scheduled for use

• materials are pushed through a plant



• MRP II systems share information with other functional departments, outside the operations area (i.e., purchasing, sales, cost accounting). These systems plan the use of company resources, including scheduling raw materials, vendors, production, equipment and processes

• JIT: different approach to reordering:• activities that add no value are waste• material only is supplied when it is requested from the

next step in the production process (pull system)• these requests are called kanbans.




6.2. Principal Issues6.2.9. How Much to Order: EOQ (1)

Economic Order Quantity (EOQ):• the lot size that minimizes total annual inventory

holding and ordering costs• assumptions:

• annual demand is constant. • forecast is perfect (no random error)• all costs are constant and linear• lead time is known and constant.


Q - Lot size of the orderH - Average annual holding cost per unitD - Annual demandS - Cost per order

Q - Lot size of the orderH - Average annual holding cost per unitD - Annual demandS - Cost per order

Annualcarryingcost

Annualorderingcost

Total cost = +

Q2

H DQ

STC = + --


Q/2 = Average inventory on handD/Q = Number of orders per year

Q/2 = Average inventory on handD/Q = Number of orders per year


The Total-CostCurve

Ordering Costs

QO Order Quantity(Q)(optimal order quantity)

Holding costs

Q = 2DS

H =

2(Annual Demand)(Order or Setup Cost)

Annual Holding CostOPT

Cost



Economic Order Quantity (EOQ): variations• quantity discounts: product cost is function of the

order quantity• variations in demand: safety stock• variations in lead time: safety stock.


6.2. Principal Issues6.2.10. When to Order: ROP (1)

Reorder point (R.O.P.)R.O.P. = (D/W) * L

D: annual demand W: working days L: lead time


ROP

time

Q

L

6.2. Principal Issues6.2.10. When to Order: ROP (2)

R.O.P. with uncertainties in demand, lead time and supply: safety stock

R.O.P. = (D/W) * L + SS

ROP

time

Q

L

Safety Stock


6.2. Principal Issues6.2.11. Safety Stock

Level of safety stock with a set service level:• track historical sales to find:

• average• standard deviation

• establish % service level• find Z-score from distribution table• SS = (Z-score) * Standard Deviation


6.2. Principal Issues6.2.12. Excess Inventory

Reasons for excess inventory include:• engineering changes• spoilage• defects• technical obsolescence• lack of market demand.



6.2. Principal Issues6.2.13. Inventory Counting Methods (1)

Inventory Counting Methods:• Cycle counting:

• a few experienced people count continuously throughout the year

• timely detection of errors• fewer mistakes in item identification• minimal loss of production time• systematic improvement of record accuracy.

6.2. Principal Issues6.2.13. Inventory Counting Methods (2)

• End of year:• many inexperienced people count inventory in a short

hectic period once per year

• no correction or cause of errors

• many mistakes in item identification

• plant and warehouse shutdown for inventory

• no improvement of inventory accuracy.



6.3. Suggestions6.3.1. 6 Step Action Plan

• Find out why you have inventories• Analyze the present situation:

• inventory matrix (slide 6.3.2)• ABC-analysis

• Define the inventory levels• Define the inventory system• Define performance indicators• Performance follow-up

Fill in the different amounts of inventory

Raw material WIP Sub-assemblies MRO Finished Goods

Safety

Cycle

Transit

Speculative

Promotional

-------

-------


6.3. Suggestions6.3.2. Inventory Matrix

6.3. Suggestions6.3.3. Rationalize Products

• Print and analyze lists of slow-moving and Class C items

• Monthly evaluation• Action plans• Follow-up


6.3. Suggestions6.3.4. Reduce Excess

Reduce excess:• try to move the order decoupling point to an early

stage in the supply chain to reduce inventory holding (carrying) cost:

• ABC - item management• shorten replenishment cycles.

Sourcing Production Warehouse Distribution


6.4. Performance indicators (1)

Inventory turnover:

Stock coverage:• stockholding x 52 weeks / annual usage

Customer satisfaction:• comparison of % of demand actually satisfied

with the defined service level• number of backorders

Annual cost of salesInventory value at cost


6.4. Performance indicators (2)

Excess inventory reduction:

R=inventory reduction during month (%)

PE=prior month excess inventory (value)

CE=current month excess inventory (value)

R%=((PE - CE)/PE)*100



7. Distribution

7. Distribution 7.1. Key Concepts (1)

Physical distribution:• the activity that is concerned with:

• receiving parts or finished goods• storing them until they are required• and then delivering them to the customer.


Transport operator:• who does the moving.

Intermodal:• interchange point from one transportation mode

provider to another.


Consolidation:• the process of receiving multiple lots in small

quantities, which are accumulated and then repackaged into one larger lot.

Cross docking:• unloading the cargo from several trucks and then

immediately reload it into one container for delivery to a final destination.


Distribution warehouse: • a facility designed to assemble and then

redistribute goods in a way that facilitates rapid movement to customers.

Unitization: • a technique for grouping boxes on a pallet or skid

for later movement by pallet jack, forklift, conveyor and/or truck.


Containerization: • the process of combining several unitized loads

into a single well-protected load.

7. Distribution 7.2. Principal Issues7.2.1. Functions of Physical Distribution

Functions of physical distribution:• inventory management• order processing• warehousing:

• the set of activities involved in receiving and storing goods and preparing them for reshipment

• materials handling• transportation.

7. Distribution 7.2. Principal Issues7.2.2. Distribution Decisions

Important distribution decisions:• Which transport mode?• Number and location of distribution warehouses?• Own or contract-out warehousing and transport?

7.2. Principal Issues7.2.3. Transport Modes (1)

Basis of transport mode selection:• nature, volume, value and criticality of goods• flexibility of transport mode: coping with demand

change.

7. Distribution


Methods of transport:• trucks• railroads• water• airways• pipelines

7. Distribution

Rail

Truck

PipelineWater

Air

Piggyback Birdyback

Fishyback

7. Distribution 7.2. Principal Issues7.2.3. Transport Modes (3)

Trucks:• flexible, on-time, low loss and damage, tracing,

accuracy and wide geographical coverage• weather and traffic conditions can delay

shipments• still heavy price competition.


Railroads:• inexpensive for carload lots• requires more packing material or must allow for

rough handling• somewhat slow• freightforwarders, piggyback truck, and

doublestack containers offer cost savings for users.

7. Distribution


Water transportation:• ideal for heavy, low-value non-perishables, but

has high fixed costs• weather can be a problem• containerization and improved ports allow for

expansion in new products and markets.

7. Distribution


Airways:• high costs, so only suitable for high value or

urgent or perishable items• weight and locations limited• saves inventory holding costs• important in international trade.

7. Distribution


Pipelines:• slow but dependable, continuous flow of liquids

or slurries• harder to establish today due to government

regulations.

7. Distribution

7. Distribution 7.2. Principal Issues7.2.4. Outsourcing

Decisions for owning or contracting-out transport consider:

• total cost• control• customer service• flexibility• management skills• operators• return on investment.

7. Distribution 7.2. Principal Issues7.2.5. Distribution Warehouses

Number and location of distribution warehouses are based on:

• customer service needs• available transportation services• cost trade-off.

7. Distribution 7.3. Performance indicators

Performance can be assessed on the basis of:• distribution system flexibility:

• response time to special requests

• distribution system information:• speed, accuracy and message detail of response

• distribution system malfunction recovery:• efficiency to recover from malfunction (errors in billing,

damage, claims).


8. Customer Service

8.1. Key Concepts

A statement of goals and acceptable performance for the quality of service

that a company expects to deliverto its customers.

Customer Service Standard

8. Customer Service

8. Customer Service

8.2. Principal Issues8.2.1. What Customers Look for (1)

What customers look for:• Pre-transaction:

• accessibility of data (catalogue, price lists, literature)• completeness of data (products, prices, instructions)• availability of samples

8. Customer Service


• accessibility of the organization:• experts• assurance of product suitability, quality, reliability

(employees should be knowledgeable about products)• customers want to be noticed, appreciated and

recognized as important individuals• efficiency of the information flow

8. Customer Service


• Transaction:• reliability: delivery on time, in the right quantities, and

error-free• quality of products, packaging, palletisation• information about order processing, dispatch, transport• flexibility: time, product variants, volumes• assurance of satisfaction after purchase.

8. Customer Service


• Post-transaction:• technical support, training, helpdesk• availability of spare parts and repair instructions• product traceability• handling of complaints: speed, monitoring, evaluation• administration: invoices, accounts receivable, and

payments• performance measurements and evaluation.

8. Customer Service

8.2. Principal Issues8.2.2. What Customers Experience (1)

The customer experience is:• any episode in which the customer comes in

contact with the organization:• personal contact• telephone• mail• advertising• internet (i.e., e-mail, forms)

• any event that forms a perception of the organization in the mind of the customer.

8. Customer Service

8.2. Principal Issues8.2.2. What Customers Experience (2)

The customer experience is a chain of contacts the customer undergoes in obtaining a product. Each link represents a contact. The total experience depends on the weakest link.

Customer(start)

ShippingSalesService

Customer(end)

8.2. Principal Issues8.2.3. What Customers Want

Fill in this table for all of your products

Customer

wants

Product

offered

Product

characteristic

Performance

measure

Performance

target

Fast car Sports car Speed mph

8. Customer Service

8. Customer Service

8.2. Principal Issues8.2.4. Customer Service Issues

Customer service issues include:• accurate understanding of customer’s needs and

wants• the ability to deliver necessary customer service

levels• variations between plans and their actual

implementation• effective communications with the customer’s• difference between supplier’s and customer’s

perception of service level.

8. Customer Service

8.2. Principal Issues8.2.5. Service Levels

Which service level approach to you use:• cut costs and reduce or eliminate service• maximum service at any cost• the cost of stock-out is no greater than the cost of

carrying additional inventory (break-even point)• competitive advantage, where service is

sufficiently higher than competitors’ service.

8. Customer Service

Sales (value) % Total Sales % Cumul Products What the customer wantsCustomer 1 92000 18,4 18,4 A 3 days ex stock

Customer 2 83500 16,7 35,1 A (75%), B(25%) 2 weeks

Customer 3 73200 14,6 49,7 B 5 days ex stock

Customer 4 31500 6,3 56,0 C 6 weeks order to delivery

-------

-------

-------

-------

Total Sales 500000

8.3. Analysis8.3.1. Customer Analysis (1)

Customer Analysis: example table:The following table helps to identify the customer groups, their primary expectations, and their contribution to total sales.

8. Customer Service


Pareto Analysis:• in many cases, approximately 80% of the turnover

(i.e., stock) can be ascribed to approximately 20 % of the customers, articles or orders

• Rank the customers, products, etc. in order of magnitude

• Calculate % that each item contributes to total value

• derive a cumulative % list• evaluate the cumulative list and identify

appropriate breakpoints (A, B and C).

8. Customer Service


8. Customer Service

8.3. Analysis8.3.2. Know the Customer

Know the customer:• Who is our customer?• What are the important things we know about our

customers?• What do our customers expect?• What do our customers want?

8. Customer Service

8.3. Analysis8.3.3. Customer Service Levels

Customer service levels:• Do we consistently meet and exceed

expectations?• How well do we solve the problems that our

customers experience?• What service levels will give us a relative edge

over our competitors?• How, and how quickly, are we using customer

information?

8. Customer Service

8.3. Analysis8.3.4. Customer Response

Customer response• What did you like most/least about doing

business with us?• What will you tell others about us?• How can we serve you better?

8. Customer Service

8.4. Suggestions

Group (segment ) customers based on service needs:

• Companies traditionally group customers by industry or product, and then provide the same level of service to everyone within the group.

• To improve customer satisfaction, customers should be grouped by distinct service needs and services should be tailored to each group.

8. Customer Service

8.5. Performance Indicators 8.5.1. Customer Service Level

Customer service level• The desired probability versus the actual

percentage that product demand can be met from stock

• expressed in a number of ways:• % of orders completely satisfied from stock• % of units demanded which are met from stock• % of units demanded which are delivered on time• % of time there is stock available

8. Customer Service

8.5. Performance Indicators 8.5.2. Availability

Performance indicators of availability:• stock-out frequency:

• how many times does demand for a specific product exceed its availability

• fill rate:• how much of a specific product is available to satisfy

customer demand

• orders shipped complete:• how often is customer demand fully met.

8. Customer Service

8.5. Performance Indicators 8.5.3. Operational Performance

Operational performance indicators:• speed:

• order cycle time

• flexibility:• ability to handle extraordinary customer requests

• malfunction recovery:• contingency plans for recovering from service failures.

8. Customer Service

8.5. Performance Indicators 8.5.4. Reliability

Reliability performance indicators:• ability to comply to:

• planned inventory availability• operational performance

• capability and willingness to:• provide accurate and timely customer logistical

information

• commitment to:• continuous service quality improvement.

8. Customer Service

8.5. Performance Indicators 8.5.5. Quality

Quality performance indicators:• Ability to deliver:

• items without errors• shipped goods without damage.

The EndSupply Chain Management Guide

Please forward any comments to: [email protected]

Internet: http://www.managementsupport.com

Main trucking image © 1999 www.arttoday.com

All intellectual contents Copyright © Imants

http://www.managementsupport.com/







Supply Chain Management Guide © Imants the. The Supply Chain Management Guide 1. Introduction.

Documents

Transcript of Supply Chain Management Guide © Imants the. The Supply Chain Management Guide 1. Introduction.