Supply Chain Management

A presentation

by

Satyendra Kumar Bharti

SUPPLY CHAIN MANAGEMENT

• Value Chain

• Supply side- raw materials, inbound logistics and production processes

• Demand side- outbound logistics, marketing and sales.

WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in the acquisition and conversion of materials to finished products delivered to the customer"

SupplierManagement

Schedule /Resources Conversion

Stock Deployment Delivery

CustomerManagement

Leads to Business Process Integration

Material Flow

Information Flow

• Supply chain is the system by which organizations source, make and deliver their products or services according to market demand.

• Supply chain management operations and decisions are ultimately triggered by demand signals at the ultimate consumer level.

• Supply chain as defined by experienced practitioners extends from suppliers to customers.

• SUPPLY CHAIN INCLUDES :

– MATERIAL FLOWS

– INFORMATION FLOWS

– FINANCIAL FLOWS

Purchasing

ProductionOptimization Advanced

Planning

OrderManagement

Export / Import & FreightManagement

Forecastingand DemandPlanning

Warehousing& Distribution

Available toPromise

ERP Engines- Oracle- SAP

Integrating SCM ApplicationsIntegration of Process and Technology

functional areas:

accounts payable

inventory

procurement

Performance indicators for SCM

Optimize

material sources: track/measure supplier performance, scorecard them

spending patterns/supplier

materials handling - available when/where needed

inventory levels - reduce out-of-stock or overstock

• SUPPLY CHAIN MANAGEMENT IS FACILITATED BY :

– PROCESSES

– STRUCTURE

– TECHNOLOGY

• Supply chain objectives may differ from situation to situation.

• For functional products, cost efficiency is the critical factor.

• For innovative products, responsiveness is the important factor.

Supply Chain Structure

Information Flow

Raw Materials

RETAILERFACTORY DC RDC

SUPPLIER

Finished Goods

Supply Chain and Demand Chain

• Demand chain is defined as the system by which organizations manage sales and distribution of products and services to end users.

• Conceptually incorrect to look at demand chain separately

• Look at the pipe as a whole.

• But is there a pipe at all?– More a network– Not necessarily linear

• Value chain orchestration rather than controlling the flow through the pipe

• A network of independent and interdependent organizations mutually and cooperatively working together to control, manage and improve the flow of materials and information from suppliers to end users

SUPPLY CHAIN DRIVERS

• Why sudden interest?– Demanding customers

– Shrinking product life cycles

– Proliferating product offerings– Growing retailer power in some cases– Doctrine of core competency– Emergence of specialized logistics providers

– Globalization

– Information technology

13

Supply Chain Management Drivers

Improve customer service

Improve order management

corporate Growth

Improve asset use

Improve demand planning

Improve warehouse/distribution activities

Accelerate “cash to cash” cycle

Supplier/Supply base management

Strengthen partnerships

Regulatory compliance

SUPPLY CHAIN ELEMENTS

• Supply Chain Design• Resource Acquisition• Long Term Planning (1 Year ++)

Strategic

• Production/ Distribution Planning• Resource Allocation• Medium Term Planning (Qtrly,Monthly)

Tactical

• Shipment Scheduling• Resource Scheduling• Short Term Planning (Weekly,Daily)

Operational

• Supply Chain Goals

Efficient supply chain management must result in tangible business improvements. It is characterized by a sharp focus on – Revenue growth– Better asset utilization – Cost reduction.

– Are not we talking about MUSKAAN & 1P1P here !!!!!

Input Cost Reduction

• Some of the Methods of Input Cost Reductions :

1.Price Negotiation -Negotiating with Vendors for decrease in prices.

2.Alternate Product Development -Replacement of running product with a new cost effective

product.

3.Alternate Vendor Development -Replacement of existing Vendor for a similar product with new

Vendor

4. Product Re engineering-Making changes in product without deterioration in service rendered

.

The key to success

Exploring the

hidden potential

Reduce Overall Cycle Time : Improve Response

Supply Chain Management

Underlying Principles

Compression

Conformance

Co-operation

Communication

(Planning/Manufacturing/Supply)

(Forecasts/Plans/Distribution) (Cross -Functional)

(Real Time Data)

Isolated point of view

Restricted area of Exploration

Solution Lies in Breaking the boundaries and Aim to reach the goal

Voice that helps me to explore my hidden potentials

Critical Success Factors today

• Cross functional management and planning skills

• Ability to define, measure and manage service requirements by market segment

• Information systems

• Relationship management and win win orientation

PUTTING IN PLACE A WELL OILED SUPPLY CHAIN

• Supply chain as an efficient customer satisfying process

• Effectiveness of the whole supply chain is more important than the efficiency of each individual department.

. The steps involved

• Step1- Designing the supply chain– Determine the supply chain network– Identify the levels of service required

Step 2 - Optimizing the supply chain• Determine pathways from suppliers to

the end customer– Customer markets to Distribution centers

– Distribution centers to production plants

– Raw material sources to production plants– Identify constraints at vendors, plants and

distribution centers– Get the big picture

– Plan the procurement, production and distribution of product groups rather than individual products in large time periods- quarters or years

Step 3- Material flow planning

• Determine the exact flow and timing of materials

• Arrive at decisions by working back from the projected demand through the supply chain to the raw material resources

• Techniques• ERP

Step 4 - Transaction processing and

short term scheduling

• Customer orders arrive at random• This is a day to day accounting system which

tracks and schedules every order to meet customer demand

• Order entry, order fulfillment and physical replenishment

Information flows in Supply Chain Management

• Information is overriding element• Need for databases• Master files: Information about customers, products,

materials, suppliers, transportation, production and distribution data- do not require frequent processing

• Status files- heart of transaction processing- track orders and infrastructure status- updated daily.

• Essentially using the same information to make all plans right from structuring the network to processing every day supply chain tasks.

Issues in customer management

• Penetration vs Spread

• Concentration is necessary to commit the necessary resources for true customer integration

• Depth of customer contact– R&D - sharing information vs developing new

products together– Logistics - Pros and cons of methods of

transportation vs reengineering the logistics process

The New Model of Relationships

• Hard bargaining vs shared destiny• Exit vs Voice• Arms length relations vs Involving dealers and

suppliers in product development• Piling up vs Replenishing dealer inventory more

frequently• In short working together as partners to cut

costs, boost efficiencies, innovate and share value

• Adversarial vs partnerships

• Short term vs long term contracts

• Large vs small order quantity

• Full truck load vs small parcels

• Inspection vs no inspection

• Written order vs understanding

• Many vs few suppliers

• Design and then invite quote from vendor vs involving vendor in development

• Bargaining, holding cards close to chest vs Shared destiny, transparency

Summary• Segmentation of customers based on service

needs• Customization of logistics network

• Listen to signals of market demand and plan accordingly.

• Differentiate product close to the customer• Source strategically• Develop a supply chain wide technology

strategy• Accept channel spanning performance

measures

• Assess options such as modularized design or modification of manufacturing processes that can increase flexibility.

• Cultivate warm relationships with suppliers.• Efficient supply chain management has to be

accompanied by a technology strategy.

Dell’s Direct Business Model of Virtual Integration

• Advantages of a tightly coordinated supply chain traditionally facilitated by vertical integration.

• Combined with focus and specialization.

• Leveraging on investments others have made and focusing on delivering solutions and systems to customers

• Fewer things to manage - fewer things go wrong• Suppliers’ engineers part of Dell’s Design team• Have only a few partners

Dell’s Direct Business Model of Virtual Integration

• Share information with partners in Real time fashion.

• Stitch together a business with partners that are treated as if they are inside the company.

• Change focus from how much inventory there is to how fast it is moving

• Assets collect risks around them one way or the other.

• Limited or no testing - Eg. Sony Monitors

Dell’s Direct Business Model of Virtual Integration

• Only three Manufacturing centers - Austin, Ireland and Malaysia.

• Inventory levels and replenishment needs sometimes conveyed to vendors on hourly basis.

• Substitute information for inventory and ship only when we have real demand from real end customers

• Clever segmentation - Focus on institutional markets - 70% to very large customers with annual purchases exceeding $1 million.

Dell’s Direct Business Model of Virtual Integration

• Exit from retail business after wrong entry in 1989.• Segmentation - closeness to customers and

access to valuable information.• Demand forecasting as a critical sales skill• Help global customers, manage their total

purchase of PCs by selling them a standard product

• Dell server loads software on customers’ computers

• Meet customers’ needs faster and more efficiently than any other model.

Li and Fung, Hong Kong

• Founded in 1906

• Today 35 offices in 20 countries

• 1997 revenues of $ 1.7 billion

• Largest export trading company in Hong Kong

• Customers- American and European retailers

• Sources clothing and other consumer goods ranging from toys to fashion accessories to luggage

• Order from Europe• Buy yarn from Korea• Weave and dye in Taiwan• Buy Japanese zippers made in China• Make the garments in Thailand in five different

factories• Pulling apart the value chain and optimizing at

each step

• Victor Fung

“ Today, assembly is the easy part. The hard part is managing your suppliers and the flow of parts.“ Good supply chain management strips away time and cost from product delivery cycles. Our customers have become more fashion driven, working with six or seven seasons a year instead of just two or three. Once you move to shorter life cycles, the problem of obsolete inventory increases dramatically. With customer tastes changing rapidly and markets segmenting into narrow niches, it’s not just fashion products that are becoming increasingly time sensitive.”

• Endorsement by Stan Shih, CEO, Acer• Buying right things• Reaching into suppliers to ensure that certain

things happen on time and at the right quality level.

• Buyer informs five weeks before delivery.• Reserve undyed yarn from yarn supplier.• Lock up capacity in weaving and dyeing mills.• Outsourcing not same as leaving suppliers to do the

worrying.• Single factories are too small to have much buying

power and to demand faster deliveries from suppliers.

• To shorten delivery cycle, need to go upstream to organize production.

• Li & Fung able to delay commitment to a particular fashion trend.

• Integrated logistics management• Elimination of consolidators in container

shipments• Smokeless factory

– Design– Procurement– Inspection of raw materials

– Production planning

– Line balancing– Inspection of finished goods

“ If we don’t own factories, can we say we are in manufacturing? Absolutely, because of the 15 steps in the manufacturing value chain, we probably do 10.”

• “As far as I am concerned, inventory is the root of all evil. At a minimum, it increases the complexity of managing any business. So it’s a word we don’t tolerate around here.”

• Need for sophisticated information systems. Li & Fung working to create a database to systematically track all supplier relationships.

• “ Someone might steal our database but when they call up a supplier, they don’t have the long relationship with the supplier that Li & Fung has. It makes a difference to suppliers when they know that you are dedicated to the business, that you have been honoring your commitments for 90 years.”

• Broadening the middle• Better prices and better margins for customers• Tackling the soft $3 in the cost structure. $3

represents the inefficiency in the supply chain for a consumer product priced at $4. Look at costs throughout distribution channels than just in factory

INVENTORY MANAGEMENT

SupplierRawMaterial

LogisticsProvider

LogisticsProvider

Warehouse

RetailStore

It's easy to turn cash into inventory... the challenge is to turn inventory back into cash!

Content Overview…

•What is inventory management?

•Computation of Various Periods

•Computation of Various level

•Various Organizational Set-up for Materials

•Classification of Inventory

•Setting Various Stock Levels

•Computing Inventory Turnover Ratio

•A brief on stock count

Origins of the word InventoryThe word inventory was first recorded in 1601. The

French term Inventaire, or "detailed list of goods,“

Typology•Buffer/safety stock •Cycle stock (Used in batch processes, it is the available inventory excluding buffer stock)•De-coupling (Buffer stock that is held by both the supplier and the user)•Anticipation stock (building up extra stock for periods of increased demand or decreased supply)•Pipeline stock (goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet)

Inventory Management Means…

Properly maintaining tolerable stocks to ensure uninterrupted service

Explanation:- (a) Stocks to be maintained properly

(b) The quantity should be tolerable

(c) It should be for continuous operation

Computation of Various Periods:-

1.Raw Materials Conversion Period (RMCP) = (Average Inventory of Raw Materials) / (Material Cost Per Day)

Example:- Suppose we have average raw material Inventory of Rs.500 lac and we use on average per day raw material of 50 lac, then the RMCP will be 500 lac / 50 lac =10 days

2. Average Inventory = (Opening Stock +Closing Stock) / (2)

3. Work-in-progress Conversion Period (WIPCP) = (Average inventory of work-in progress) / (Cost of production per

day)Example:- Suppose we have average inventory of work-in-

process of Rs. 300 lac and cost of production per day is Rs.100 lac, then the WIPCP will be 300 lac / 100 lac =3 days

4. Finished Goods Conversion Period (FGCP) = (Average inventory of finished goods) / (Cost of goods sold per day)

Example:- Suppose we have average inventory of finished goods Rs.500 lac and cost of goods sold per day is Rs.125 lac, then the FGCP will be 500 lac / 125 lac =4 days

5. Book Debts Conversion Period (BDCP) = (Average debtors) / (Cost of sale per day)

Example:- Suppose we have average debtors of Rs.1375 lac and cost of sale per day is Rs.125 lac, then the BDCP will be 1375 lac / 125 lac =11 days

6. Payment Deferral Period (PDP) = (Average creditors) / (Cost of purchase per day)

Example:- Suppose we have average creditors of Rs.600 lac and cost of purchase per day is Rs.50 lac, then the PDP will be 600 lac / 50 lac =12 days

Gross Operating Cycle = RMCP+WIPCP+FGCP+BDCP=10 + 3 + 4 + 11 = 28 days

Net Operating Cycle = Gross Operating Cycle-PDP or= 28-12 =16 days

Net Operating Cycle = (RMCP+WIPCP+FGCP+BDCP)-PDP

Classification of Inventory

1] ABC (Always Better Control ) analysis of InventoryClass No. of Item % of Total Value of Items % of Total

A 10 80

B 20 15

C 70 5

2] HML (High Value, Midium Value & Low Value ) analysis

H = High Value may be defined Item Value > Rs. 5000

M = Medium Value may be defined Item Value between Rs. 5000 to Rs.1000

L = Low Value may be defined Item Value < Rs. 1000

3] ABC and VED analysis all together

V E DD

A AV AE .AD

B BV BE BD

C CV CE CD

4] GOLF (Government, Ordinary, Local & Foreign) analysis

G = Buying from Government

O = Buying by ordinary process

L = Available locally

F = Import

5] SOS (Seasonal and Off-seasonal)

S = Seasonal Items

OS = Seasonal Items after Season

2 Reorder Period = The span of time in which EOQ is used. In above case it is (365 days / 3000 no.) x 245 no. =29.81days, say 30 days.

3. Reorder Level = (Maximum daily use x Maximum lead time days) +Safety stock In above case maximum daily use is 12 no., suppose maximum lead time is 14 days and safety stock is defined 94 no. Hence Reorder Point = (12no.x 14 day) + 94 no. = 262 no,

4. Maximum Stock Level = (Reordering level – Expected minimum consumption in units during lead time) + Reorder quantity.In above case RL= 262 no., minimum consumption may be= 50 no., ROQ = 245 no. So the Max. Stock Level = (262-50) +245=457 no.

5. Minimum Stock Level = Reordering level – (Average use per period x Average time to obtain delivery) In above case RL = 262 no, average per day consumption =8.22 no. and LT= 10 days hence Min. Stock Level = 262 – (8.22 x 10) = 179.8 say 180 no.

6.Average Stock Level =(Minimum Stock+ Maximum Stock) / (2)

7. Safety Stock - The size of inventory which covers any type of unforeseen and likely delay in getting the material from vendor (it includes—probable ordering delay, manufacturing/ dispatch delay, transportation delay and likely other delay. Practically it is difficult to calculate however it can be as under:-Safety Stock= Reorder Level – Average demand per day x Lead time. In above case RL= 262 no., Demand per day=8.22 no.,,LT = 10 days, hence Safety Stock = 262 – (8.22 x 10) = 179.8 say 180 no.

Various Levels May be Summarized as:-

MRP = Material Requirement Planning, it covers BOM and many other thing. It includes integrated team work efficiency of all concerns internal and external. It has many limitations in Indian scenario.

Case of Bearing xxxDescription UOM Count Remarks

EOQ No. 245 Size of order should be

Reorder Period Days 30 Ideal interval for order

Reorder Level No. 262 At this level order should be released

Maximum Stock Level No. 457 Ideal max. inventory

Minimum Stock Level No. 180 Ideal min. inventory

Average Sock Level No. 319 Ideal avrg. inventory

Safety Stock Level No. 180 Ideal safety inventory

A brief on “Stock Count”

What is it? Physically counting each item in the inventory

When is it done?

In the beginning of each month recommended

Who does it? A designated person

All stock must be accounted for. Everything that comes in and goes out must be recorded.

Inventory Audit

Raw Materials

Process of Manufacturing

Stores and Spare Part

Auditor’s Observation & Conclusions

Work-in process

By-products and scraps

Finished goods

Loose Tools and Others

Rejected Material to be sold

Inventory Audit

Key Messages•Maintain an adequate inventory at all time to ensure uninterrupted service.

•Don’t allow any item to run to the below of its minimum level.

•Never order more than your storage space can hold. Never order more supplies than you can use before they deteriorate.

•All items in the inventory must be accounted for and recorded.

•Always inspect new shipment before accepting.

•Ensure Proper Storage of Inventory

•Don’t allow to even an small item to be a dead inventory

INVENTORY TURNOVER RATIO1. ITR (Inventory Turnover Ratio) = (Cost of sale during the year) /

(Average stock holding during the year)Note:- for the above calculation profit must be deducted from the sale.

2. Data on Annual Inventory Turnover Ratio:-

Year Japan U.S. India

1950 3 3 1

1960 8 10 2

1975 21 10 4

1985 38 12 5

1990 44 20 7

1995 46 21 8

2005 48 23 9.5

Indian standard meets to approx. 1970’s standard of Japan & US

Ideally in Indian scenario the inventory turn over ratio should be approx. 10%of annual sale. If our sale per month is 20 core then our over all inventory should be 10% of (20 x 12) =24 crore

REMEMBER AT LEAST THRICE EVERY DAY

It's easy to turn cash into inventory... the challenge is to turn inventory back into cash!

Thank You