C S C 2 Fundamentals of Supply Chain Management Module 1 - Book 1 of 2 ) ) 2012 APICS CSCP Exam Content Manual (ECM) ; Course Overview } ~Section.A: Supply Chain Management Concepts >” “Section B: Supply Chain Alignment with Business Strategy 2 Section C: Supply Chain Design and Improvement Considerations > Section D: Inventory Management > :Preparing for the Certification Exam ‘Studying the APICS CSCP Learning System combined with on-the-job knowledge, professional experience, and other APICS learning tools, such as the APICS Dictionary, is the most effective way to prepare for the APICS CSCP certification examination. The APICS CSCP Learning System is intended to cover the body of knowledge tested by the APICS CSCP certification examination; however, the APICS CSCP Learning System does not “teach the test.” The Leaming System focuses on acquiring knowledge, whereas the exam. tests the candidate's ability to apply that knowledge in accordance with accepted industry standards, Content on the exam is based on real-world scenarios and requires candidates to apply the concepts in the APICS CSCP Leaming System. While both the APICS CSCP Learning System and the APICS CSCP certification examination are based on the APICS CSCP Exam Content Manual (which is available for ree download at www LearnCSCP.com > Resource Center > Certification Exam Resources), they are developed independently of one another. To preserve exam integrity, specific exam questions and their breadth are not shared with the APICS CSCP Leeming System developers. Intellectual Property and Copyright Notice All printed materials in the APICS CSCP Learning System and all material and information in the companion online component are owned by APICS and protected by United States copyright law as well as international treaties and protocols, including the Berne Convention. The APICS CSCP Learning System and the companion Access Code for the CSCP online component are for your personal educational use only -and may not be copied, reproduced, reprinted, modified, displayed, published, transmitted (electronically or otherwise), transferred, sold, distributed, leased, licensed, adapted, uploaded, downloaded, ot reformatted. In addition to being illegal, distributing CSCP materials in violation of copyright laws will limit the program's usefulness. APICS invests significant resources to create quality professional development. ‘opportunities for its membership. Please do not violate APICS” intellectual property rights or copyright laws : APICS Dictionary, 13° Edition Reference ‘Definitions contained within the APICS CSCP. Learning System are consistent with the APICS Dictionary, ‘13th edition. You may purchase the complete dictionary from the APICS bookstore. Section StartDate Completion Date Section Quiz Score* 1-A: Supply chain management concepts | 1-B: Supply chain alignment with business strategy 1-C: Supply chain design and improvement considerations 1-D: Inventory management ' *Look for this test on the Web at www.LeamCSCP.com.Course Overview and Module 1: Fundamentals of Supply Chain Management Book 1 Module 1, Book 1 Contents 2012 APICS CSCP EXAM CONTENT MANUAL (ECM)... ECM-1 COURSE OVERVIEW. MODULE 1: FUNDAMENTALS OF SUPPLY CHAIN MANAGEMENT Introduction... Section A: Supply Chain Management Concepts... It's a World of Global, Complex, Interdependent Supply Chains. Basic Supply Chain . The SCOR® Model: Linking Processes, Metrics, Best Practices, and Technologies... Vertical versus Horizontal Integration . Supply Chain Management Objectives... Supply Chain Management Benefits. Accounting and Financial Statement Basics ‘Section B: Supply Chain Alignment with Business. Strategy. .o0cnmenam ‘Business Strategy and Competitive Advantages : Organizational and Supply Chain Strategy, Prioritization, Capabilities, and Alignment. Resolving Misalignment or Gaps. ri ~ Section C: Supply Chain Design and Improvement Considerations ............1-115 Understanding the Marketplace. bus Supply Chain Design Considerations. Continuous Improvement... Section D: Inventory Management The Need for Inventory Aggregate and Item Inventory Management Flow of Material... se Functions of Inventory Inventory-Related Cost Categories. Effects of Inventory on the Financial Statements. © anzanies Version 3.0, 2012 Baiion ‘ligase LrModule 1, Book 2 Contents . Lit Rule of Logistics in Supply Chain Management, . sn Hr Logistics Service Providers—3PLs and 4PLs... Last Reverse Logisties bass Section F: Market Segmentation 197 Reasons to fdentify’ and Understand Market Seements hey Ways to Sezment Markets 1-200 Understanding the Wants ane Needs of Latch L203 Section G: Demand Planning Forecast Demand Demand Management, Links Demand Management Functional Responsibilities and Interfaces, Among the Elements. Section H: Customer Relationship Management (CRM) Concepts 378 Neel for CRM.. 1 ‘ope of CRM Le3te Elements of CRM Benefits of CRM Implementing CRM. Need for and Uses of Customer Information in CRM. Section I: Supply Management Concepts..... Total Cost of Ownership . ‘Outsourcing and Offshoring Make-versus-Buy Analysis, Range of Buyer-Supptier Relationships... Developing Supply Plans Supplier Relationship Management (SRM) Interrelationship between CRM and SRM Bibliography..... Cumulative Course Index © zonancs Version 30,2012 Bition ‘igh reeved @_rwinsen pra nnyatoneAPICS Certified Supply Chain Professional™ (CSCP) Learning System This product is based on the APICS CSCP Exam Content Manual (ECM) developed by APICS. Although the text is based on the body of knowledge tested by the APICS CSCP exam, program developers do not have access to the exam questions. Therefore, reading the text does not guarantee a passing score. The references in this manual have been selected solely on the basis of their educational value to the APICS CSCP certification program and on the content of the material. APICS does not endorse any services or other materials that may be offered or recommended by the authors or publishers of books and publications listed in this module. Every effort has been made to ensure that all information is current and correct. However, laws and regulations are constantly changing. Therefore, this product is distributed with the understanding that the publisher and authors are not offering legal or professional services. ‘Acknowledgments ‘We would like to thank the following dedicated subject matter experts who shared their time, experience, and insights during the initial development and subsequent updates of the CSCP Learning System: Greg. Allgar Julie Jenson, CPIM, CSCP Maryanne Ross, CFPIM, CIRM, Curtis Brewer, CFPIM, CIRM, CSCP —_ Honey Johnson, CFPIM, CIRM, cSscP Jashobrata Bose, CSCP CPM, CSCP Kimber Rueff, CPIM, CIRM, ‘Al Bukey, CFPIM, CIRM, CSCP Rajesh Kamat, CSCP SCP, CPM. Luc Chalmet, Ph.D, CFPIM,CSCP Prakash Kanagalekar, CPIM, CSCP__‘Jgnacio Sénchez-Chiappe ‘Teck Kerr, CPIM, CSCP, CPM. Carolyn Sly, CPIM, CSCP, C.P-M. Prashant Choudhary, CSCP Pam Somers, CPIM, CIRM, CSCP N. Dadich, CSCP, LSS Jose Lara Bleekbelt Mike Loughtiaas CSGP=——= == Chad Stisklin Prasania K. Dash, CSCP, PMP Giuseppe Lovecchio, CFPIM, CSCP Shashank Tsk, CPIM, CSCP Sudripio De, CSCP Richard Merit, CFPIM, CSCP, Huan-Jau (Arthur) Tseng, CFPIM, Amaud Deshais, CPIM, CIRM, CPM. 2 —"CSCP; CPM, CPSiI——————T aguas cS Cp———————Bave Furbide: CFPIM: GERM. ‘Alan Downs, CPIM, CSCP Steven J. Miller, CSCP Sudeep Valmiki, CSCP Ralph G. Faielo, CFPIM,CIRM, Alan L, Milliken, CFPIM, CIRM, ‘Rosemary Van Treeck, CPIM, csce cscP CIRM, CSCP Laura E. Gram, CSCP Peter W. Murray, CIRM Wow Verwoerd CFPIM, CIRM, Janice M. Gullo, CFPIM, CSCP Mike Oizeat, PBD., CIRM, CSCP Robert Vokuck, PhD. CFPIM, Aiton Gin BE,CSCP Kast Regn Focal eumescrce i joni Holeman, CFPIM, CIRM, Eddie J. Whitfield, CPIM, CIRM, Etc F Jas PhD. CFPIM, SCP aia Chan ran, CPIM, esee Rajesh Kumar Jagadeeswaran, CPIM, Vivek Wikhe, CS "CSCP David Rivers, CFPIM, CIRM, CSCP- MA ee? Blair Williams, Yona, CFPIM, Dave Jankowski, CFPIM, CSCP eae © 2012 aPICs Version 3.0, 2012 Ealtion iis ened @ reninPICS The Association for Operations Management® APICS CSCP Exam Content Manual This manual is in effect from January 1, 2012, through December 2012. Visit apics.org/CSCP for APICS CSCP Exam Content Manual Errata. lected solely on the basis of their educational value to the APICS_ materials that may be offered or recommended by the authors or publishers of books and publications listed in this manual © 2012 APICS The Association for Oy 8430 West Bryn Mawr Avenue Suite 1000 Chicago, IL 60631-3439 USA (773) 867-177 (800) 444.2742 Fax: (773) 639-3001 rations Management No portion of this document may be reproduced under any circumstances. CSCP is a registered trademark of APICS. : ‘Stock #09031-2012Table of Contents Letter to Candidates. Seen . Introduction... About the APICS CSCP Examination... EOM-2 Question Format . . EOM2 Taking the Test 0 : ECM.3 Interpreting Test Scores... z seven ECM3 Suggested Study Materials sn ECM3 Additional Resources for APICS CSCP Candidates. ECM4 APICS CSCP Leaming System EoM-4 1 EOMS APICS CSCP Instructor-Led Review Courses. APICS Educational Programs. EOMS PICS Cert in Production and inventory Management (opimy ‘Basics of supply Chain Management (8SCM) Review Course and Examination. nn OMS APICS CSOP Certification Maintenance Continuing Professional Development EOMS EOM5 se EOM6 The Importance of Certification Maintenance APICS Code of Ethics. EOM7 APICS Certified Supply Chain Professional (CSCP) Scope of the Subject Matter soos OMT APICS CSCP Content. ECM-T Content Outline. ECB. Key Terminology. ECM-14 “Supplemental-Glossary. SECMAT: Bibliography ECM-18 Sample Questions... ECM-18 ECM-20 Answers to Sample Questions..Letter to Candidates Dear Candidate: On behalf ofall the members of APICS The ‘Association for Operations Management and the Corified Supply Chain Professional (CSCP) Examination Committee, | want to congratulate you for your interest in the APICS CSCP certification program. APICS is the global leader and premier source of the body of knowledge in operations management, including production, inventory, supply chain, purchasing, and logistics. Since 1957, individuals and companies have relied on APICS for its superior training, internationally recognized certifications, comprehensive resources, and worldwide network ‘of accomplished industry professionals. ‘The APICS CSCP program is primarily intended {or professionals in supply chain management and operations management and is designed to test the candidate's knowledge and application of the supply chain management body of knowledge. The successful candidate will be able to recognize and analyze specific supply chain situations and opportunities and select the appropriate approaches, tools, techniques, and technologies. ‘The candidate will be able to define the actions. necessary to implement selected solutions. This includes an understanding of, and the ability to, manage the ‘+ alignment of supply chain processes and capabilities with strategic business goals ‘© organizational roles and infrastructures in the _——-supply.chain. —_ ‘© material, information, and financial flows ‘+ intra- and interorganizational relationships ‘+. selection and use of technologies to enable effective process management. The APICS CSCP program will help you advance your career while giving you validated foundational knowiedge to assist in improving your company's competitive position and profitability. The program takes a broad view of the field, extending beyond internal operations to ‘encompass all the steps throughout the supply chain—from the supplier, through the company, to the end consumer and the reverse flow of products and materials forthe purpose of managing retums, refurbishing, or recycling. The program provides you with the knowledge to effectively manage the integration of these activities fo maximize a company’s value chain. ‘The subject matter is organized into three content areas. Fundamentals of Supply Chain Management (scm) This section provides the foundation for the exam by addressing the concepts and strategies used for effective supply chain management. It includes an overview of supply chain management, ‘managing the supply chain, and improving the supply chain Strategy, Design, and Compliance This section addresses considerations in the design of a supply chain, the processes that support the organization's strategy, improvement of the sustainability of the organization and its trading partners, and compliance with applicable regulations and voluntary standards Implementation and Operations This section covers managing and balancing supply and deman¢ through measuring, analyzing, and improving supply chain processes. This APICS CSGP Exam Content Manual is intended to provide you with an overview of the program, an outline of its body of knowledge, key terminology, and references. The outline is divided into three diagnostic areas, and the relative emphasis of each of the areas is indicated by a percentage figure. A sample of 10 illustrative ‘questions is aiso provided. The APICS CSCP Exam Content Manual should not be the only reference you use to prepare for the CSCP exam; however, it should be the first. We wish you sucoess in your pursuit of the CSCP designation. Roly White, CFPIN, CIRM, CSOP CSCP Examination Committee Chair CSCP Exam Content Manual ECM-1Introduction ‘This exam content manual provides guidance for individuals preparing for the certification ‘examination. The objective of this manual is to outline the APICS CSCP tested body of knowledge, ‘The main section of this manual begins with a statement of the scope of the subject matter, followed by a descriptive outline of the content. Key terminology and a bibliography of references are provided. The section concludes with sample questions similar to those that appear on the examination and the correct answers for the sample questions, with brief explanations of why they are correct. ‘The recommended procedure for mastering the subject matter is to ‘+ review the content outline, which defines the scope of the material + study each topic, using the suggested references. At the end of each major section isa list of the references that apply to the topios in that section. ‘The first number indicates the sequence number ‘or the reference in the Bibliography section, and the numbers in parentheses Indicate the chapter(s) within that reference, Candidates should understand the definitions of the key terms and the application of the outlined fools and techniques. Sufficient references are given that provide different approaches to the material covered in each diagnostic area and different styies of presenting the information. Reading available periodical material, such as APICS magazine, will help you maintain an awareness of changes in the state of the art About the APICS CSCP Examination ‘The APICS CSCP exam consists of 175 multiple- choice questions. There is a four-hour time limit for the exam, For more information about testing and registration policies and procedures, call APICS Customer Service at 1-800-444-2742 (United States and Canada), or +1-773-867-1777 and order a current APICS CSOP Certification Bulletin or vist the APICS website at apics.org/certification/CSCP/CSCPexam.htm. Candidates who plan to test in North America should order stock #09056, and candidates testing outside North America should order stock #09057. Candidates may also order the bulletins at apies.orglescp or via the APICS Bookstore at apics.org/bookstore. Question Format Several question formats are used in the APICS. CSCP examination although not all are included in this manual's sample questions (pages 18-19). A review of ail the formats is recommended to ensure maximum preparedness. For each question, only one of the four choices represents the correct answer. Examples 1 and 2 are samples of an incomplete statement or a question, followed by four suggested completions or answers. In Example 1, you are to choose the one option—A, B, C, or D— that completes the statement correctly. in Example 2, you are to choose the option that best answers the question, Example 4: The 80-20 rule is an application of: (A) Statistical process contro! (B) Defect measurement {C) Root cause analysis (D) Pareto analysis (The correct answer is D.) Example 2: Which of the following is used as a key performance indicator (KPI) to measure variability of demand through the supply chain? (A) Bullwhip effect (8) Fil rate (C) Inventory tus (0) Internal failure (The correct answer is A.) ECM-2 © 2012 APICS The Association for Operations ManagementExample 3 Is different, All te choices given are correct EXCEPT one. You are to choose the option that does not correctly complete the statement, Example 3: All ofthe following are examples of voice of the customer EXCEPT: (A) collecting point-of-sale (POS) data (B) customer panel groups (©) recording customers’ problems with recent purchases (0) surveying customers online (The correct answer is A.) Examples 4 and 5 ask for a judgment or evaluation of the MOST or LEAST appropriate choice. The judgment is not one person's opinion; itis the accepted choice according to the APICS body of knowledge. Example 4 asks for the MOST ‘appropriate choice. Example § calls for the LEAST appropriate choice. Example 4: The MOST significant advantage of, strategic sourcing is: (A) finding suppliers who can provide materials at lowest cost, (8) using technology to select low-cost, high- quality sources of materials (C) developing long-term supplier relationships (2) having a process for recurring transactions with single suppliers (The correct answer is C.) Example 5: Which of the folowing factors has had the LEAST impact on the growth of = =castomrer relationship mranagemant2=—— (A) increased customer expectations (8) reduced commodity prices (C) increased ease in comparison shopping —{D) reduced cost of gaining new customers (The correct ariswer is C.) Taking the Test Before starting your exam, read all the directions carefully. Be sure you understand them before ‘you begin to read and answer any questions. Read each question carefully and thoroughly. ‘Take care to avoid assuming information not iven or “second guessing” the question, Do not Took for hidden tricks or exceptional circumstances. Every effort has been made to avoid misleading wording and to provide sufficient information for each question. Choose the best ‘answer from the choices given. Ifa question includes stimulus material, such as @ table, graph, or situation, be sure to study it before you answer the question, Interpreting Test Scores Scoring is based on your correct responses. ‘There is no penalty for incorrect answers. Itis to your benefit to make a choice, even if you are not Certain of the correct answer. A blank answer will have the same result as an incorrect answer. ‘The APICS CSCP scaled score range is 200-350. ‘The minimum passing score is 300. You will eceive your final exam score along with diagnostic information on your performance. Suggested Study Materials This manual contains a Bibliography section that lists references. A candidate may discover that the material covered in the chapters of one reference duplicates material covered in another reference, Both sources are included as references to allow candidates some discretion in selecting test preparation materials that they find accessible and understandable. In deciding if 2 single reference is sufficient, candidates should assess their own level of knowledge against both the descriptive examination specifications and the detailed topic list contained in the content outline. If there are any areas of weakness, the candidate should consult another reference as part of the ‘est preparation process. It's Hot practical to ist ail texts that contain excellent material. The serious student of supply chain management who wishes to stay current with the state of the art will take advantage of publications such as those listed in the ‘comprehensive APIOS Educational Resourees Brochure (stock #01041), featuring APICS reference materials. To receive the brochure, call APICS Customer Service at 1-800-444-2742 (United States and Canada) or +1-773-867-1777, ‘or via the APICS Bookstore at apics.org/bookstore. ‘The content outline provided in this document should be considered a primary resource for exam, preparation. It provides an overview of the major {opics included in the exam, as well as a lst of the concepts that are relevant to that topic. SCP Exam Content Manual ECM-3.The APICS Dictionary, 13th edition, is an essential publication that applies to the exam content manual and exams. Within the profession, terminology varies among industries, companies, ‘and the academic community. The examination ses standard terminology as defined in the APICS Dictionary and the Supplemental Glossary section in this manual. Recognizing the terms and understanding their definitions are essential. In studying for the APICS CSCP certification exam, candidates may discover multiple terms used fo denote the same technique, An example of this is lateral integration versus horizontal integration. APICS has attempted to provide consistency with preferred terminology. However, synonyms are ofien used by authors in the various references used to compile the body of knowledge. Candidates are encouraged to be familiar with all terms and concepts listed within each outline and key terminology section, using the APICS Dictionary as the primary guide for definitions. The Supplemental Glossary, included in this manual, provides needed additional information identified by the exam committee. Additional Resources for APICS CSCP Candidates APICS offers a number of resources to help individuals prepare for the APICS CSCP examination. In addition to the cited references, it may be helpful for you to pursue chapter-sponsored courses, college courses, APICS workshops, salt study courses, or courses offered by APICS" network of Authorized Education Providers (AEPs) as a means of learning the body of knowledge that is tested in the certification program. A wide variely of courses and materials is available, As with any other investment of tine ‘and money, you should research various courses before investing in one. For courses in North ‘America, visit the Chapter Locator on the APICS website at apics.org or call APICS Customer Service at 1-800-444-2742 (United States and Canada) or +1-773-867-1777 to obtain contact information for your local chapter. For courses outside North America, visit apics.org/international to locate the nearest, ABP, APICS CSCP Learning System ‘The APICS CSCP Learning System is a comprehensive professional development and certification preparation program. This self- directed program combines print material and online interactive tools. This system is also offered in instructor-led formats. ‘The APICS CSCP Learning System does not “teach the test’ and in many areas reviews: concepts but does not teach concepts, The APICS CSCP Learning System provides a thorough review of the subject matter, but It should not be used without the most current APICS CSCP Exam Content Manual as a means to direct the candidate's study. There will kely be ‘some content in the APICS CSGP Learning ‘System not covered by the exam; conversely, there wil ikely be some content in the exam not covered by the learning system. Thus, the use of the current exam content manual to assist candidates with their studies is essential, For more information, visit the APICS website at apies.org or call APICS Customer Service at 1- 800-444-2742 (United States and Canada) or +1- 773-867-1777 and request a complimentary ECM-4 © 2012 APICS The Association for Operations ManagementAPICS Educational Resources Brochure (stock #01041). APICS CSCP Instructor-Led Review Courses The instructor-led format combines the APICS CSCP Leaming System print and online ‘components with the leadership of a qualified instructor; peer collaboration; company networking; and a structured, set schedule to keep participants on track. APICS provides an on- line list of APICS Qualified Instructors for your review at apics.orgicscpprepare. APICS Educational Programs APICS offers a varioty of educational programs and the APICS International Conference & Expo. For a list of APICS learning opportunities and Information on course availabilty, call APICS Customer Service at 1-800-444-2742 (United States and Canada) or +1-773-867-1777. APICS Certified in Production and Inventory Management (CPIM) Basics of Supply Chain Management (BSCM) Review Course.and Examination ‘The APICS CPIM Basics of Supply Chain Management module introduces terminology, approaches, and techniques for managing the internal supply chain in a manufacturing organization. For that reason, the references and the review course may be valuable resources for —-APICS.CSCP-candidates who are.not familiar with —— the production and inventory management environment. Additionally, individuals inexperienced in taking certification examinations using the multiple-choice format of items typically 1e BSOM examination, APICS CSCP Certification Maintenance Continuing Professional Development The Importance of Certification Maintenance ‘The growing number of individuals choosing to pursue professional development through APICS' Certified Supply Chain Professional (CSCP) program indicates a strong awareness that continuing education and skils development are essential to meeting the information and technological challenges in today’s rapidly evolving workplace and global marketplace. Professional development opens doors to individual career opportunities and organizational success. Although APICS CSCF certification and APICS CSCP certification maintenance are voluntary programs, they equally demonstrate one's commitment to achieving the highest level of professional development and standards of excellence, ‘The APICS CSCP Certification Maintenance program upholds both the objectives of the APICS ‘CSEP program and APICS" visiorr to promote === lifelong learning. This flexible program recognizes that individuals are at various levels in their careers, come from many industries, have _ different educational needs and career goal have varying degrees of access torcontinuing education. Thus, requirements for maintaining certification can be met through multiple sources and a variety of professional development activities intended to help prepare for the challenges ahead and maintain a professional edge by + preserving the currency of hard-earned certification credentials expanding your knowledge of the latest industry practices expanding your knowledge of the latest industry practices reinforcing skills ‘= exploring new technology solutions © reinforcing skills nd CSCP Exam Content Manual = ECM-5+ improving job performance + demonstrating commitment to excellence + increasing competitive advantage. To promote professional growth and lifelong learning, APICS CSCP designees must complete the APICS Certification Maintenance program every five years, Complete details on how to maintain your APICS CSCP designation will be mailed to candidates upon successful completion Of the certification requirements. Visit the APICS. website at apics.org or call APICS Customer Service al 1-800-444-2742 (Uniled States and Canada) or +1-773-867-1777. APICS Code of Ethics When you start an examination, you wil be asked to pledge to abide by the APICS Code of Ethics Once certified, you pledge to continue your education to increase your contribution to the supply chain profession. After achieving the APICS CSCP certification, you pledge also to share your knowledge with others by participating in APICS research and educational activities at local, district, national, and international levels. APICS Code of Ethics: + To maintain and improve sound business practices and foster high standards of professional conduct, + To hold in professional confidence any information gained of the business of a fellow member's company and to refrain from using such information in an unethical manner. + To seek success without taking unfair advantage or using questionable acts that would compromise one’s self-respect, + Toneither engage in nor sanction any exploitation of one’s membership, company, or profession, + To encourage, and cooperate in, the interchange of knowledge and techniques for the mutual benef of the profession, + Tobe careful with one’s criticisms and liberal with one's praise; to build and not to destroy. + Whenever @ doubt arises as fo the right or ethics of one’s position or action, to resolve such doubt according to generally accepted standards of truth, fair dealing, and good taste. ‘+ To maintain high personal standards of moral responsibilty, character, and business integrity + To uphold the high ideals of the association as outlined in the bylaws. Failure to abide by APICS Code of Ethios policy may result in sanctions up to and including decertification, ECM-6 ©2012 APICS The Association for Operations ManagementAPICS Certified Supply Chain Professional (CSCP) Exfective for January 1, 2012-December 31, 2012, ‘exams. CSCP EXAMINATION COMMITTEE Roly White, CFPIM, CIRM, CSCP (Chair) Nishat Ahmed, CPIM, CIRM, CSCP, C.P.M. MC. Dean, Inc. Joanne Gorski, CFPIM, CSCP Fox Valley Technical College Robert Pinchot, CPIM, CSCP DuPont Andrea M. Prud'homme, Ph.D., CPIM, CIRM, CSCP, The Ohio State University Eduardo A. Shelley, CFPIM, CIRM, CSCP Solmex. Scope of the Subject Matter Please read the introductory material in this manual for essential information about the examination. ‘The APICS CSCP certification covers concepts, strategies, processes, tools, and technologies. applied to managing the end-to-end forward and backward flow of materials, information, and value ina supply chain. ‘The subject matter is organized into three content a= — Fundamentals of Supply Chain Management (scm) ‘This section provides the foundation for the exam by addressing the concepts and strategies Used ‘or effective supply chain management. It includes an overview of supply chain management, managing the supply chain, and improving the supply chain. Strategy, Design, and Compliance This section addresses considerations in the design of a supply chain, the processes that support the organization's strategy, improvement of the sustainability of the organization and its trading partners, and compliance with applicable regulations and voluntary standards. Implementation and Operations This section covers managing and balancing supply and demand through measuring, analyzing, ‘and improving supply chain processes. ‘The successful candidate will be able to recognize and analyze specific supply chain situations and opportunities and select the appropriate approaches, tools, techniques, and technologies. The candidate will be able to define the actions necessary to implement selected solutions. This Includes an understanding of, and abilty to, manage ‘+ alignment of supply chain processes and capabilities with strategic business goals ‘organizational roles and infrastructures in the supply chain ‘material, information, and financial flows * intra- and interorganizational relationships + selection and use of technologies to enable effective process management. Many of the Items on this exam require the candidate to apply one or more of the items identified in the outing and key terminology. APICS CSCP Content ‘Three content areas have been designed to organize the APICS CSCP domain. The relative importance of a topic is not necessarily reflected by its appearance in the outline. The relative importance of these topics will vary among industries. The percentage figures given below can be used as a guideline for the APICS CSCP exam content Fier an rorc | Fundamentals or Surly Crain 4 | Management aan (sou ‘Supply Chain | Strategy, i "| Design ana || 5888% Compiance | implementation , and Operations | _9°23% CSCP Exam Content Manual = ECNL-7Content Outline |. Fundamentals of Supply Chain Management (scm) This section addresses the fundamental concepts Used for effective SCM and will provide the foundation for the APICS CSCP exam. It includes ‘an overview of SCM concepts and the need to align resources with the strategy of the organization. Management and improvement of the supply chain are then addressed. Exam questions covering this area will include elements related to the foliowing: ‘A. Supply Chain Management Concepts: A thorough understanding of the roles in a supply chain network and the flow of value through itis required. A broad understanding of the supply chain management processes, objectives, integration, and benefits is also required. Knowiedge in this area encompasses: 1. Basic supply chain a. Entities b. Structures ©. Flows 2. Supply chain management processes — SCOR® model a. Plenning demand and supply Sourcing goods and services Producing goods and services Delivering goods and services Planning for and processing returns 3. Vertical and horizontal integration 4. Supply chain management objectives a. Improved customer service b. Efficient use of systemwide resources ©. Effective use of systemwide resources d. Leverage of partner strengths 5. Supply chain management benefits a, Improved market knowledge b. Increased velocity in the flows of goods and services, funds, and information. Increased visibility of flows Reduced variability of flows Integrated operations Improved management of risk Increased sustainebility ‘Supply Chain Alignment with Business Strategy. The supply chain strategy should align with and enable the business strategy. Achieving appropriate alignment requires an Understanding of the forms of competitive advantage being pursued. It also requires an Understanding of the organizational strategy, priorities, capabiities, and the resolution of misalignments or gaps. Knowledge in this area encompasses: 1. Competitive advantages 2. Business capabilities and strategy a. Organizational strategy b. Prioritization options ¢. Organizational capabilities d. Alignment of capabilities and strategy 3. Resolving misalignment or gaps 4. Collaboration among trading partners a. Benefits of collaboration b. Requirements for success ‘Supply Chain Design and improvement Considerations: The supply chain strategy should be designed with an understanding of the marketplace. It also requires an Understanding of supply chain management design and continuous improvement considerations. Knowledge in this area encompasses: 1. Understanding the marketplace 2. Supply chain design considerations ‘a. Network configuration Inventory location and levels Product design Information technology ‘Support systems 3. Continuous improvement a. Product considerations b. Process improvement initiatives . Managing change b. ©. 4. 8. Inventory Management: Inventories throughout the supply chain must be planned and controlled for effective supply chal ‘management, Managing inventories, in turn, requires an understanding of the costs of 8 ©2012 APICS The Association for Operations Managementmaintaining and not maintaining inventory. Knowledge in this area encompasses: 1. Need for inventory Aggregate and item inventory management Flow of material Functions of inventory Inventory-related cost categories Effects of inventory on the financial statements E. Logistics Fundamentals: An understanding of the logistics function is required. Understanding the role of logistics, types of logistics service providers, and reverse logistios is required. Knowledge in this area encompasses: 4. Role of logistics in supply chain management ‘a. Logistics functions b. Logistics value proposition . Flow of goods and information d. Push, pull, and push-pull systems 2, Logistic service providers a, Types of logistics services b. Advantages of using logistics service providers cc. Disadvantages of using logistics service providers 3. Reverse logistics a. Activities supported === po Design tor reverse ogists = ©. Benefits F. Market Segmentation: An understanding of market segmentation is required. Understanding the reasons for identifying market segmer ways to segment markets, and understanding the wants and needs of each segment is important. Knowledge in this area encompasses: 4, Reasons to identify and understand market segments 2. Ways to segment markets 3. Understanding the wants and needs of each segment Demand Planning: An understanding of demand forecasting, the components of demand management, associated linkages, and demand management functional responsibiities and Interfaces is required. Knowledge in this area ‘encompasses: 1. Forecasting demand ‘2. Demand forecasting concepts Qualitative methods Quantitative methods Combination methods Measures of forecast error 2. Components of demand management a. Planning demand b. Communicating demand c. Influencing demand 4. Prioritizing demand 3, Linkages among the components 4, Demand management functional responsibilities and interfaces a. Product development b. Marketing ©. Sales d. Operations Customer Relationship Management (CRM) Concepts: Effective customer relationship management includes an understanding of the CRM philosophy. It also requires the understanding of the need, scope, elements, and benefits of CRM. Knowledge in this area Need for CRM ‘Scope of CRM Elements of CRM —______ 2. 3. 4, Benefits of CRM 5. Implementing CRM 6 Need for, and uses of, customer information in CRM Supply Management Concepts: Effective management of all sources of supply requires an understanding of the components of the total cost of ownership and the considerations in deciding whether to source an item internally or externally. It also requires an understanding of. CSCP Exam Content Manual ECM-9the types of relationships that can exist between a firm and its suppliers, the development of supply plans, and supplier refationship ‘management. Knowledge in this area encompasses: Total cost of ownership Make versus buy analysis Range of buyer-supplier relationships Developing supply plans 5. Supplier relationship management (SRM) References: 1; 2 (1-6); 3 (1-2, 6-7, 9); 4(1, 5-8): 5(1,3,5, 8-9, 12) I, Supply Chain Strategy, Design, and Compliance ‘This section addresses considerations in the design of a competitive supply chain, the processes that support the organization's strategy, improvement of the sustainability of the organization and Its trading partners, and compliance with applicable regulations. Exam questions covering this area will include elements related to the following: A. Sustainabilty: Designing and operating a supply chain requires an understanding of the concepts of sustainable business practices and how to adapt and apply them to a specific supply chain, Knowledge in this area encompasses: 1. Economic ‘a. Micro and macro considerations b. Leading and lagging economic Indicators . Balancing short-term and long-term Performance 2. Environmental a. 180 14000 Series of Environmental ‘Management Systems Standard b. Governmental regulatory compliance ©. Industry-specific guidelines and standards 4. Impact of supply chain decisions 3. Social ‘a. ISO 26000 Guidance on Social Responsibility b. Corporate social responsibility considerations 4. United Nations “The Global Compact" 5. Triple bottom line (TBL) 10 ©2012 APICS The Assoc! B. Risk Management: Designing robust supply cchain requires recognizing the sources and forms of risks, the magnitude and potential impact of each, and methods of mitigating each form of risk. Knowledge in this area encompasses: 41. Identification, mitigation, and response to risk a. Forms of risk b. Assessing the risk in a supply chain ©. Mitigating significant risks d. Responses to risk 2. Security and regulatory concerns 8. Risk of loss, such as intellectual property or goods b. Complying with import and export requirements, such as prohibited goods, labeling, and documentation ©. Costs and benefits of participating in security partnerships 4. Costs and benefits of meeting sustainability regulations fe. Product traceability 3, 180 31000 Risk Management Principles and Guidelines Globalization: Managing globally dispersed sources of supply and demand requires an understanding of the requirements for operating in multiple countries and for moving goods and funds among countries. Knowledge in this area encompasses: 1. Effects of globally dispersed supply and demand 8. Export and import participants b. Currency considerations ©. Harmonized Tariff Schedule (HTS) 4. Total, or landed, cost of acquisition 2, Free trade zones a. Definition b. Benefits ©. Requirements 3, Trading blocs a. Definition . Effects on supply chains within the bloc . Effects on supply chains that extend outside the bloc ion for Operations Management4. Operational considerations. a. Exporting issues b. Importing issues Incoterms 5. Implications of globalization a. Legal and regulatory considerations. b. Acceptable standards of conduct ©. *Glocalization” D. Logistics: An understanding of the total effect thal globalization and supply chain management has on inbound and outbound logistics is important. An understanding of trade-offs among warehousing, transportation, and logistics services’ decision making is also required. Knowiedge in this area encompasses: 1, Transportation ‘a. Transportation objectives and considerations b. Stakeholders in transportation decisions ©. Modes of transportation d. Considerations in mode selection 2. Warehousing a. Warehousing objectives and considerations b. Warehouse capabilities , Automated material handling 3, Transportation and warehousing trade-offs a. Publiciprivate b. Owningileasing assets Gapaciy coastaints E. Managing the Supply Chain: Managing the supply chain requires an understanding of the ‘dynamics of supply and demand and the need {0 balance efficiency and responsiveness in the. supply chain, It also requires a set of comprehensive measures that are agreed upon and used by the organizations in the supply chain. Knowledge in this area encompasses: 4. Indicators of supply chain performance ‘a, Customer-focused metrics b. Financial metrics c. Operational metrics d. Other key performance indicators (KPIs) 2. Responsive versus efficient supply chains a. Attributes of an efficient supply chain b. Attributes of a responsive supply chain ©. Supply chain fit with the organizations’ markets requirements F. Technology: An understanding of technologies that enable designing, tracking, operating, and communicating among trading partners within a supply chain is necessary. The correct ‘application of appropriate technology is needed for efficient and effective supply chain management. Knowledge in this area ‘encompasses: 1. Role of technology in supply chain management ‘a, Information system architecture b. Use of information technology in the supply chain c. Comprehensive supply chain management system 4. Need for timely and accurate data 2, Key application tools 2. Enterprise resources planning (ERP) systems b. Advanced planning and scheduling (APS) systems ©. Supply chain event management (scem) 4. Warehouse management systems (ws) fe. Transportation management systems ciws) 3. Data acquisition and communications tools Interface devices a ‘Data communtcations methods —— cc. Databases—hierarchical/relationall network d. Acquisition and use of data ©. -Automatic identification technologies 4, Supply chain design and optimization tools a. Supply network design b. Supply network optimization 5. Interorganization integration tools ‘a. Information technology in collaborations and joint processes b. Standardization c. Challenges 6. Electronic business. ‘a. Enabling virtual organizations CSCP Exam Content Manual ECM-t4GS b. Internet-enabled supply chains E-business considerations d. Business-to-business commerce (828) and business-to-consumer sales (B2C) Influencing and Prioritizing Demand: A thorough understanding of how the members of a supply chain can influence demand and how they may need to prioritize demand when necessary is required. Knowledge in this area encompasses: 1 Designing products and services a. Standardization 3. Measuring customer service Response to inquiries (Order processing Level of service Product or service quality Customer satisfaction Qenoce 4, Challenges in implementing CRM Supplier Relationship Management (SRM): ‘Successful implementation of supplier relationship management requires an Understanding of the underlying concepts, the b. Simplification enabling technologies, and the requirements for ¢. Customization improved management of sources of supply. 4. Sustainabiity considerations Knowledge in this area encompasses: @. Design and development calaboration 4. Supplier selection 2. Marketing a. Corporate social responsibilty (CSR) 2. Market research b. Negotiations b. Demand generation c. Internet-enabled sourcing c. Influencing demand 4. Contract performance @. Alignment with supply chain needs 3. Selling io ply chal 2. Developing and implementing SRM 4. Matching customer orders to supply Developing and implementing a. Need for matching b. Approaches to matching Customer Relationship Management (CRM): Effective customer relationship management includes understanding the underlying 2, Steps in implementing SRM b. Managing risk 3. Creating alliances with suppliers a. Characteristics of a successful relationship concepts; enabling technologies; and requirements for improved demand b. Commitment required for a successful management, customer service, and alignment alliance of customer-facing processes and resources. ©. Steps in creating and maintaining an Knowledge in this area encompasses: alliance 1. Developing and implementing CRM as a 4. Using technology to implement SRM strategy a. Components of a SRM system a. Components of CRM strategy b. Portals and trading exchanges b. Aligning CRM strategy and product or c. Processes enabled by SRM service Ife cycle d. Effects of SRM on the firm and its ©. Crealing @ customer relationship suppliers strategy 4. Developing CRM strategy for various 5. Measuring SRM types and segments of customers 6. Challenges in implementing SRM 2. Using technology to implement CRM J. Inventory Planning and Control: Inventories a. Benefits of using @ customer data throughout the supply chain must be planned, warehouse located, and controlled for effective supply chain b. Sales force automation ©. Keys to successful CRM Implementation management. Managing inventories in turn requires an understanding of the total costs of ‘maintaining and not maintaining Inventory and the techniques for planning and controlling 12 ©2012 APICS The Association for Operations Managementinventory. Knowledge in this area encompasses: 41. Inventory planning a. Locations of inventory b. Levels of inventory 2. Inventory control 2. Determining order quantities Ordering systems Safety stock and safety lead time Organization of storage locations Methods of tracking inventory Methods for assessing inventory accuracy References: 1; 2 (5-10, 13-18, 17); 3 (1, 3-5, 8-11, 12-13, 17); 4 (1-9); 5 (2-12, 14-18) Ill Implementation and Operations. This section addresses managing and balancing supply and demand by measuring, analyzing, and improving supply chain processes. Exam ‘questions will nclude elements related to the following: ‘A. Supply Chain Dynamics: Managing supply chains requires an understanding of the dynamics of supply and demand and the need to balance efficiency and responsiveness in the supply chain. It also requires a set of measures that are agreed upon and used by the ‘organizations in the supply chain. Knowledge in this area encompasses: 1. Sources of variability in demand 2 Sources of variability ir supply ——— 3, Synchronizing supply and demand 4, Metrics ‘Managing Supply rom Internal Sources: Managing supply from internal sources requires an understanding of the operations planning and control processes. Knowledge in this area encompasses: 4, Operations planning and control a. Implementation of the sales and operations plan (S&OP) b. Controling priorities, c. Materials and inventory Capacity management 2. Communicating requirements and priorities 3. Measuring performance a. Operational measures b. Financial measures C. Managing Supply from External Sources: Managing supply from external sources requires an understanding of the basic purchasing processes, selecting suppliers, and evaluating suppliers. Knowledge in this area encompasses: 1. Communicating requirements and priorities 2. Supplier performance management a. Ethical and legal considerations b. Negotiations c. Contract issues d._ Internet-enabled sourcing fe. Scorecards and performance metrics 3. Supplier certication a. Customer and supplier benefits ©. Third-party certification c. Supplier certification process D. Implementation of Demand Plans: Requires an understanding of the methods for prioritizing ‘and fuliling demand. Knowledge in this area encompasses: 4. Demand prioritization a. Time fences b. Allocation of supply c. Measures of customer service levels Ti. Lead-ime monitoring fi, Order status reporting 2. Capturing and communicating point-of-sale ~~ data a a. Capturing data at point-of-sale b. Sharing demand data among trading pariners E. Continuous Improvement: Enhancing the competitiveness of a supply chain requires an understanding of the techniques and tools of continuous improvement and the appropriate application of each. Knowledge in this area encompasses: 1. Continuous improvement philosophies a. Lean b. Six sigma CSCP Exam Content Manual ECM-13,. Theory of constraints (TOC) 4. Total quality management (TOM) 2. Continuous improvement tools a, Basic seven tools of quality (87) b. Seven new tools (N7) References: 1; 2 (5-8, 15-16); 3(9-11, 14-15), 5 (2,4, 7, 12) Key Terminology An understanding ofthe following ist of terms is recommended. The lists intended to be thorough but not exhaustive. The candidate is elso axpocted to be familar wth the defntions of terms idenied inthe content outline. A review of te list ane ‘study ofthe topies inthe outine may veal other important terms. Denitions ofthese terms can be found in the APICS Dictonary, 13h edition. orn the Supplemental Glossary, A ABC analysis, active tag ‘advanced planning and scheduling (APS) agent alliance development anticipation inventories assemble-to-order ‘automatic identification and data capture (AIDC) available inventory available-to-promise (ATP) backlog backorder balanced scorecard balance sheet bar coding benchmarking bill of material (BOM) blanket purchase order bottleneck buffer business intelligence business plan business process management business-to-business commerce (828) business-to-consumer sales (B2C) capable-to-promise (CTP) carrying cost cash flow cash-to-cash cycle time changeover chase strategy collaborative planning, forecasting, and replenishment (CPFR) competitive analysis consignment consortia trade exchanges (CTX) constraint content management applications continuous replenishment cost of goods sold cost of quality ccross-docking cross-selling cumulative lead time customer relationship management (CRM) customer service customer service ratio cycle cycle counting cycle stock cycle time database management sytem (DBMS) data cleansing data dictionary data normalization data warehouse decoupling define, measure, analyze, improve, control (OMAIC) process demand demand forecasting demand management demand planning demand pull demand shaping dependent demand design for the supply chain distribution inventory distribution requirements planning (DRP) distributor 14 ©2012 APICS The Association for Operations ManagementE Inventory visibility electronic commerce (e-commerce) ISO 26000 Guidance on Social Responsibility electronic data interchange (ED!) 180 31000 Risk Management-Principles and electronic document Guidelines. electronic product codes (EPCs) J end-oflife management joint replenishment system engineer-to-order joint venture enterprise resources planning (ERP) dustin-Time (JIT) ‘extensible markup language (XML) extranet us extrinsic forecasting method kaizen kalzen event F kanban feedback kelretsu file transfer protocol (FTP) key performance indicator (KPI) fil rate fluctuation inventory ‘ forecast error landed cost forecasting ee lean s legacy systems general and administrative expenses (G&A) leva cheers global strategy level strategy glocalization linear programming graphical user interface (GUI) line haul costs gross margin toad leveling H local area network (LAN) harmonized system classification codes logistics horizontal marketplace ™ hypertext markup language (HTML) make-to-order hypertext transfer protocol (HTTP) make-to-stock 1 ‘manufacturing resource planning (MRP Il) ‘icone atari Incoterms independent demand information system architecture Information technology——~—- —~ ‘market driven market research market share master planning — ‘aster production schedule (MPS) Intemet interpiant demand ‘material requirements planning (MRP) intranet materials management in-transit inventory mathematical programming Intrinsic forecast method metrics middleware inventory management inventory optimization software mix forecast inventory turnover modular design strategy inventory turns modular system inventory valuation mutticountry strategy Inventory velocity ‘muitisourcing CSCP Exam Content Manual ECM-15N network ° obsolescence optimization ordering cost order losers order qualifiers order winners outsourcing package to order Pareto analysis Pareto’s law Partnership passive tag pipeline inventory planning horizon portal private trading exchange (PTX) process chart process map procurement product differentiation product family product life cycle profit profit margin pull system purchasing push system a {quality function deployment (QFD) quick response program (QRP) R radio frequency identification (RFID) tag rapid replenishment relational database resource management return on assets (ROA) return on investment (RO!) reverse auction reverse logistics reverse supply chain tisk pooling salety stock sales and operations planning (S&OP) seasonality semipassive tag service industry service-oriented architecture (SOA) simulation single-source supplier six sigma software-as-a-service (SaaS) sole-source supplier sourcing spend management standard costs stockkeeping unit (SKU) stockout costs strategic alliance strategic planning strategic sourcing subcontracting supplier supplier certification ‘supplier-input-process-output-customer (SIPOC) diagram supplier relationship management (SRM) supply chain supply chain event management (SCEM) supply chain management (SCM) ‘Supply-Chain Operations Reference-model (SCOR®) supply chain risk supply chain visibility sustainability synchronized production T tactical buying tactical planning target costing tariff third-party logistics (3PL) total cost of ownership (TCO) trade bloc trading bloc transportation management system (TMS) trond triple bottom line (TL) 46 ©2012 APICS The Association for Operations Managementu United Nations Global Compact (UNGC) universality v value-added value-added network (VAN) value chain value stream value stream mapping variance vendor vendor-managed inventory (VMI) virtual trading exchange w warehouse management system (WMS) waste web services x XML (extensible markup language) Supplemental Glossary “The following concepts, not found in the APICS Dictionary, 13th edition, will be helpful in preparing for the CSCP examination. Business process management (BPM): A business discipline or function that uses business Practices, techniques, and methods to create and Improve business processes. BPM is a holistic ‘approach to the use of appropriate process-related business disciplines to gain business performance improvements across the enterprise or supply 180 26000 Guidance on Social Responsil ISO 26000 or ISO SR is an international standard adopted by the Intemational Standards Organization to assist organizations in contributing to sustainable development beyond legal compliance through a common understanding of social responsibility. ISO 26000 Is not a management system standard and it's not intended or appropriate for certification purposes or regulatory or contractual use. 1SO 31000 Risk Management: Principles and Guidelines: A standard adopted by the International Standards Organization that outlines principles and a set of guidelines to manage risk in any endeavor. The standard outlines guidelines for understanding risk, for developing a risk ‘management policy, for integrating risk management into organizational processes (including accountability and responsibilty), and for establishing internal and external risk ‘communication processes. ISO 31000 is not a management system standard and i's not Intended or appropriate for certification purposes or regulatory or contractual use. Trade bloc or trading bloc: A trade bioc is an agreement between countries intended to reduce of remove barriers to trade within member countries. Frequently, but not always, those countries are geographically close. Examples of trade blocs are the European Economic Community and the North American Free Trade ‘Agreement (NAFTA), United Nations Global Compact: A voluntary initiative whereby companies embrace, support, and enact, within their sphere of influence, a set of -chainttpromtes:tusiness:effectivensss-ant==—=—————=* efficiency while striving for innovation, flexibility, and integration with technology. Most process improvement disciplines or activities can be considered as BPM, Demand shaping: The practice of using the 4 Ps (product, pricing, placement, promotion) and other market variables to influence the demand of a product or service so that the demand better matches the available supply. Glocalization: A combination of “globalization” ‘and “localization.” When used in a supply chain context, glocalization is a form of posiponement where a product or service is developed for distribution globally but is modified to meet the needs of a local market. The modifications are made to conform with local laws, customs, culture, or preferences. CSCP Exam Content Manual ECM-17Bibliography All test candetes should familiarize themselves with the flowing references fortis examination A ‘The recommended references pertaining to the diagnostic area are listed atthe end of each section ofthe content outline. All ofthese references are avalable ftom the APICS Bookstore, 1. APICS Dictionary, 13th ed., 2014 2. Bowersox, Donald, David Closs, and M. Bixby Cooper. Supply Chain Logistics Management, 4 3rd ed., McGraw-Hill, 2010. 3. Crandall, Richard, Wiliam Crandall, and Charlo Chen, Principles of Supply Chain Management, CRC Press, 2010 4, Ross, David F. Introduction fo Supply Chain Management Technologies, 2nd ed., CRC Press, 2010, 5. Simehi-Levi, David, Philip Kaminsky, and Edith Simohi-Levi, Designing & Managing the Supply Chain, Srd ed., McGraw-Hill vin, 2008. 5. Sample Questions ‘The following 10 questions are similar in format and content to the questions on the CSCP exam. ‘These questions are intended for practice—that Is, to enable you to become familiar with the way the questions are asked, The degree of success that you have in answering these questions is not related to your potential for success on the actual 6 exam and should not be interpreted as such. Read each question, select an answer, and check your responses with the explanations on pages 20-21 1. Which of the following is the primary advantage of using web-based electronic data interchange (EDI) for communication of transactions? (A) There is more flexibility in transaction formats, (8) It lowers the cost per transaction. (C) Iteliminates translation of transactions (0) A larger number of transactions are supported, 2. Quality remains an elusive concept in most organizations because: 8 (A) it depends on customer perception, (8) there are many quailty philosophies. (C) itis everyone's responsibilty. (0) quality targets change frequently ‘An example of the use of a third-party logistics (3PL) company would be when a company Contracts with another company to (A) perform its shipping and receiving functions, (@) produce and deliver a major subassembly (C) provide payrol services. (D) act as a sales agent in another country Which ofthe folowing is an expected benetit of implementing supply chain event management? (A) It will reduce the need for supply chain performance reporting. (8) It wil improve forecasting accuracy. (C) It notifies partners when a deviation from plans occurs. (D) It reduces the cost of communications between partners. Which of the following applications would enable a company to detect patterns in the preferences of a customer segment? (A) Business inteligence (B) Advanced planning system {C) Seles force automation (0) Artificial inteligence Cash-to-cash oyole time is a measure of how efficiently @ company: (A) recovers its investment in plant and equipment (B) manages assets to generate cash flow (C) converts inventory into sales (0) collects on sales to customers Which of the following types of inventory is used to protect against variations in supply and/or demand? (A) Cycle stock (8) Transportation inventory (©) Safety stock (©) Anticipation inventory Which of the following is typically a characteristic of strategie sourcing? (A) Itincludes automation of contract management processes. (8) It reduces the price of goods and services, 18 ©2012 APICS The Association for Operations Management(C) A supplier receives all of the company’s orders for a product or product family (D) The focus of the relationship is on large transactions. 9, Which of the following measures would be most ‘appropriate for trading partners to use to assess the delivery performance of the manufacturer of items built to forecast? (A) Percentage of items shipped within the final assembly lead time. (8) Percentage of orders shipped complete within 24 hours of their receipt (C) Number of items shipped within 24 hours of their receiot. (0) Revenue from orders shipped in a week. 10. Which of the following is an expected benefit of collaborative supply chain management? (A) Maximizing the performance of the firm (8) Reducing the number of competitors (C) Increasing scope of operations {D) Synchronizing supply and demand (Answers listed on pages 20-21.) CSCP Exam Content Manual ECM-19Answers to Sampie Questions Note: References ta the content outline appear in parentheses, 1 20 8B ((IF1) B is the best choice because a web: based EDI system would eliminate the cost of a private or value-added network. Ais not the best choice because the EDI transaction formats are independent of the network used for transmission, C is not the best choice because the transactions still must be translated to and from the standardized formal, Dis not the best choice because the standards are independent of the transmission method used, A(IIIE) A is the best choice because the customers are the ultimate judges of quality and they may have differing requirements and priorities. B is not the best answer because the Philosophies have similar definitions of quality and address how to improve it. C is not the best choice because the fact that itis everyone's responsibility has nothing to do with the concept of what is quality. D is not the best choice because targets should change once they have been achieved ‘A(IE2) A is the best choice because a 3PL company is a company that manages part or all of a company's product delivery operations and shipping is part of the product delivery operations. B is not the best choice because neither producing the subassembly nor delivering it Is part of the company's product delivery operations. C is not the best choice because payroll services are not a part of the company’s product delivery operations. D is rot the best choice because selling does not necessarily include any delivery operations. C (\lF2) Cis the best choice because supply chain event management monitors the supply chain and notifies designated individuals when specified events or exceptions acour or when trends are recognized. A is not the best choice because it enables performance reporting but does not reduce the need for it. Bis not the best choice because supply chain event management itself does not affect any specttic application. D is not the best choice because supply chain event management does not directly affect the amount or cost of ‘communications among partners, A (\IH2) A is the best choice because business inteligence appiications collect, organize, and analyze information. Use of these applications on customer data would allow the company to detect patterns in the data. B is not the best choice because advanced planning systems ‘address operations rather than customers. C is rot the best choice because sales force ‘automation does not capture or organize the data required to detect pattems in customer preferences. D is not the best choice because artificial inteligence applications are intended to leam and reason like humans to address specific problems. B (IAS) B is the best choice because the definition of cash-to-cash cycle time is that tis an Indicator of how efficiently a company manages assets to improve cash flow. Itis the inventory days + accounts receivable days ~ accounts payable days. A isnot the best choice because cash-to-cash cycle time does not consider the investment in plant and equipment. C isnot the best choice because it is limited to the inventory days component of cash-to-cash oyole time. D Is not the best choice because its limited to the accounts receivable component of cash-io-cash cycle time C(ID) Cis the best choice because safely slock is maintained to protect against variability in either supply or demand. A is not the best choice because cycle stock is related to lot sizing. B is not the best choice because transportation inventory is inventory that is in transit between locations. D is not the best choice because anticipation inventory is, inventory held to cover trends or planned events, such as promotions o plant shutdown. A (ll) Ais the best choice because strategic sourcing focuses on the long-term relationship and, from an information technology Perspective, typically includes automation of Contract management. B is not the best choice because the focus is on the fotal cost of ‘ownership rather than on the quoted price. C is, Not the best choice because strategic sourcing can include contracting with more than one partner for a part or famnlly of parts to reduce the risk of disruptions. D is not the best choice because the focus of the relationship is on a long-term relationship between the pariners rather than on individual transactions. © 2012 APICS The Association for Operations Management8 (1B3) B isthe best choice because the items 10. are being produced to forecast and should be shipped from stock shorly after receipt of the order. Ais not the best choice because the final assembly lead time should not be needed before shipment because the items are produced fo forecast. Cis not the best choice Decause itis a measure of the number of items shipped and there Is no indication of the actual number of items that were ordered. D is not the best choice because revenue is a financial measure, but does not indicate delivery performance. D (IIIA) D is the best choice according to the APICS Dictionary definition of supply chain ‘management. A is not the best choice because ‘SCM should improve the performance of the entire chain, not @ single member of the chain. Bis not the best choice even though it may be ‘an outcome of collaborative supply chain management. C is not the best choice because there is no direct relationship between collaborative supply chain management and the scope of operations for one of the partners. EOM.21 CSCP Exam Content Manual22 ©2012 APICS The Association for Operations ManagementCourse O' verview Welcome to the APICS Certified Supply Chain Professional™ (CSCP) Learning System. Whether you are interested in professional development or are pursuing the APICS CSCP credential, you will find the program to be a complete, easy-to-use learning and reference tool. + Getting Started Course materials Accessing the online course This course allows you to work at your own pace to increase your understanding of supply chain and operations management and the APICS CSCP body of knowledge. It includes three printed textbooks (called modules), which correspond to the knowledge domains tested on the APICS CSCP exam. The course also includes online practice tests and leaming reinforcement activities. Please check that you have received the three modules (five textbooks total) and ‘your online system invitation (provided to you via e-mail) for access to the online course components. If anything is missing or if you have not received your invitation e-mail, please contact APICS CSCP Leaming System Customer Support at 1-888-266-9079 (USA/Canada) or +1-651-905-2664 (worldwide). Before you use the online components of the course, you must create an the system: components Click on tie ink in jour invitation Sinai Ths Wil ake you oe We _ 3. Create a login name and password. Both must be at least eight characters, site to create your account to access the online components of the course. 2. Read and accept the terms-of-use agreement. Log in using your newly created login name and password. 5. Complete the short survey. ‘You will use your login name and password to access the Web site in the future, so write this information in the space below. APICS Certified Supply Chain Professional Learning System Login name: Password: © 2012.APICS Allsights reserved i ‘Version 3.0, 2012 Edition eaeCourse Overview Accessing the program Exiting the program Online help Learn more Note that access to the online components in the CSCP Learning System Web site is valid for one year after activation of your account, Once you are enrolled, you can access and leave the program as often as you wish, To access the program: Go to http:/iwww.LearnCSCP.com, Click Log In to go to the APICS CSCP Learning System login page 3. Enter your fogin name and password. 4, Click Log tn to enter the course. Read the online overview, and then go to the course menu, from which you select course components. You may exit the program from most screens by clicking Log Out. This option allows you to leave the program and return at a later time to where you left off. All current scores and your current place in the tests are saved, You may start any activity over at any time. Ifyou start over in a test, your current score is erased! Upon completion of that test, your new score is saved and displayed on your reports, ‘The Frequently Asked Questions option on the Login screen is available to answer common questions related to enrollment and login, Ifyou require additional assistance, please contact APICS CSCP Learning System Customer Support at 1-888-266-9079 (USA/Canada) or +1-651-905-2664 (worldwide), Monday through Friday, 8 a.m. to 5 pam. central time. For specific details regarding the certification exam, please visit www.APICS.org/esep. The APICS CSCP Learning System combines printed material and online software plus an instructor-led option to enhance your learning effectiveness. Go to www. APICS.org/esep to leam more about the advantages of APICS membership, the power of certification, and the various learning options. + Completing the Course Increase your knowledge base with this enjoyable and complete program as ‘you prepare for the ‘PICS CSCP examination and develop your professional expertise. © 2012 aPICS All rights reserved ‘The APICS CSCP Learning System is based on the APICS CSCP Exam Content Manual (ECM). Using a blend of printed text and online practice testing and learning reinforcement activities, the course provides an enjoyable and complete preparation method for the APICS CSCP certification exam. ‘You may complete the course in any order, The following describes the recommended, step-by-step method. ii @ Version 3.0, 2012 Edition= Step 1: Review the “Introduction to CSCP" tutorial. Once you have read the description of the course on the Overview screen and ey become familiar with the online components, review the first item on the ment, tutorial provides an “Introduction to CSCP,”" which isa tutorial on the Certified Supply Chain overviow of the Professional program. This short presentation introduces the certification SCP program. : ‘program and includes a link to access the CSCP Exam Content Manual, The CSCP exam and leaming system were designed to follow the ECM outline. ‘ame Step 2: Complete the pre-test. ‘You begin to plan your own course of study by completing the online pre-test. ‘This 50-question test checks your basic understanding of supply chain concepts As you answer each pre-test question, you will know immediately if your answer is correct or incorrect and you are given @ reference to the module from The pre-test allows which the question was drawn. If you leave the test, you can reenter it and will you fo evaluate your have the option to either continue or restart the test. You may also print any Soars? page by using your browser's print function. concepts and focus your study. ‘When you have completed the pre-test, you see a report that shows your module-by-module score. You may use this report to develop a study plan to help focus your efforts on the modules you need to examine most thoroughly. Use the print function on your browser if you want to print a copy of your pre- SE = = = = Theentre progam EY Step 3: Study the print modules. Jncludes more than. —_ 7,000 pages OF text reinforced by online Based upon your individual study profile, study each of the three modules at practice testing ard you ox pace. The modules include he following topics, which cmespond to inert cuties, those that constitute the APICS CSCP Exam Content Manual. The APICS CSCP certification exam questions are distributed equally among the three modules, T's important to understand how these three modules are interdependent and illustrate a natural progression of critical decisions regarding the strategies, design, compliance, implementation, and operation of every supply chain. The exhibit below underscores this relationship and previews key topics that are pertinent to each module, Each module is linked to the next, reflecting the need © anzanics ii Version 3.0, 2012 Editon Allg resent Q reteset ereCourse Overview for a solid understanding of concepts, terms, and processes before moving onto the next module, Exhibit 1-1: CSCP Learning System Overview Fundamentals of Module 2: Implementation and ‘Supply Chain Management Supply Chain Strategy, Operations Design and Compliance ‘+ Supply chain management + Network roles + Processes, objectives, benefis + Financial impact At the end of each module section is a progress check. Progress check questions provide an pportunity for you to stop and think about what you have just studied. They include a page reference with the correct answer to guide further review. © 2012 APICS All rights reserved + Sustainability + Managing and balancing + Design considerations ‘supply and demang + Risk management + Eflceney ve 1+ Processes supporting strategy Fesponsiveness + Technology + Continuous improvement 2 CRM and SRM 2 Inventory Module 1; Fundamentals of Supply Chain Management (33. * Supply Chain Management Concepts * Supply Chain Alignment with Business Strategy * Supply Chain Design and Improvement Considerations * Inventory Management + Logistics Fundamentals 3%) ‘+ Market Segmentation + Demand Planning * Customer Relationship Management (CRM) Concepts * Supply Management Concepts Module 2: Supply Chain Strategy, Design, and Compliance (33.3%) + Sustainability + Risk Management © Globalization © Logistics ‘© Managing the Supply Chain © Technology ‘Influencing and Prioritizing Demand * Customer Relationship Management (CRM) * Supplier Relationship Management (SRM) + Inventory Planning and Control v @ Version 3.0, 2012 EditionModule 3: Implementation and Operations (33.3%) + Supply Chain Dynamics Each module ineedes 8 + Managing Supply from Internal Sources bibliography : referencing the ‘Managing Supply from External Sources books used in tho ¢ ‘Implementation of Demand Plans development ofthat» Continuous Improvement module, eS ‘Step 4: Complete the section-specific quizzes. Section-specific tests Each module includes section-specific quizzes. You may take as many cee conding of quizzes. as youlike, as often as you like, After you answer each each module. question, you will know immediately if your answer is correct or incorrect along with the reasoning for the correct answer. If you leave a quiz, you can reenter it and will have the option to either continue or restart the quiz. You may also print any screen by using your browser's print function, ‘sm Step 5: Complete the module-specific eFlashcards. The eFlashcards After you have studied each module and taken the section-specific quizzes, oe ry toreview complete the eFlashcards for that module, The eFlasheards are drawn from the terms and definitions glossary and represent the terms identified as key or supplemental by the by module. APICS Exam Content Manual. The eFlashcards present a definition of a term, and you supply the term, Click to “flip” the card to check your answer. You = ay STROKES oa a PRADESH OS TIONT specific eFlasheards. ae ‘Step 6 Complete the module-specific learning activities. The fearning After you have studied the print module, taken the section-specific peiuiie Se) quizzes, and reviewed the module-specific eFlashcards, complete the exercises designed to reinforce the main online learning activities. These exercises reinforce the concepts concepts presented presented in the text and allow you to apply that knowledge in a real- in the modules. world application © 2012 aPics ¥ Version 3.0, 2012 Edition All rights reserved QB ress eripor coin vace meneCourse Overview Post-test questions will be new. If you don't pass the post- fest, the program helps redirect your study efforts, and then you can fake the test again. Or use the post-test as a refresher f0 help you stay current. The practice exam allows you to get a feel for the actual CSCP exam, © 2012 APIS All ight reserved Step Complete the post-test. ‘When you reach this point, you've studied all the components of the program and are ready to measure your learning gain. The 50-question post-test draws from a different bank than you saw in the pre-test, so all the questions are new. After you answer each question, you wi know immediately whether your answer is correct or incorrect and will see the reasoning for the corr help clarify your understanding, If you feave the test, you can ri have the option to either continue or restart the test. ater it and will Afier you finish the post-test, you may view a report that compares your pre-test and post-test scores and your scores on questions related to each of the three modules, ‘You may take the post-test as many times as you wish until you are satislied with your results. Each time you retake the post-test, your new score is saved. All attempts are recorded in the system and available to you on the reports, | Step 8: Complete the practice exam. Prior to sitting for the CSCP exam or to just review whal you have leamed, you will want to select the CSCP Practice Exam option. This exam includes 50 ‘questions written by the ECM committee—the same group that writes the actual CSCP exam, ‘The practice exam is a useful tool to help you prepare for the CSCP exam. Its format and functionality emulate that of the software used at the Pearson Vue testing center. As such, the practice exam has the same marking and review features as offered by the software atthe testing center. The testis timed to enable you to determine whether you are answering questions at the pace needed to complete the APICS CSCP certification examination within the time allotted, If you are interested in timing your test, allow yourself an uninterrupted block of time. As with the CSCP exam, you do not receive instructive feedback after each question. However, the online reports allow you to see which questions you answered incorrectly and provide source bibliography references for additional information, vi ® Version 3.0, 2012 EditionReview your reports to measure your progress through the course at any time. Help us improve our product offerings and request your Letter of Recognition. © 2012 aPIcs All rights reserved Step At any time, you may view online reports of your progress by clicking the ‘Reports link. The reports show the dates you have completed tests as well as your scores for each attempt of the pre-test, section-specitfic quizzes, post-test, ‘and practice exam, You can use the reports to determine where you may have areas of strength or weakness to direct further studying of the course, ; Review your reports. ‘See! Step 10: Complete the Program Evaluation. ‘Upon completion of the course, we would appreciate your feedback. Select Certificate of Achievement from the menu and complete the online form, Upon successful completion of the course (a post-test score of atleast 80 percent), you can print a Certificate of Achievement (recognizing completion of the learning system) from the Program Evaluation form. vii ‘Version 3.0, 2012 Edition Q rot ipr me sreeCourse Overviens ‘The following is a graphic represen tion of the APICS CSCP Learning System, APICS CSCP Learning System Mole 3 as Section = Speaie Quizaes Module = Mode Module Speate Sposifie Specie Fianheros Fase Fusbeats asa, Program Evaluation and Cmtients of Achievement © 2012 aPics. vil Version 3.0, 2012 Baition Ath evel Q) mente pre nrttneModule 1: Fundamentals of Supply Chain ManagementIntroduction © 2012 aPIcs Allrights reserved ‘There have been supply chains as long as there have been suppliers and customers, but the evolving discipline of managing those chains for competitive advantage belongs to recent decades. Even the term “supply chain” came into common usage only toward the end of the 20th century. As with many other phenomena occurring in that period of time, supply chains and their management reflect the revolution in electronic communication and the shrinking of the world into one global community—what author Thomas Friedman, in his book The World Is Flat, calls the “flattening of the globe.” ‘There were supply chains when primitive hunters brought back skins for transformation into garments for use or trade, Marco Polo went east in search of trade routes to bring rew materials from “the Orient” to Europe. But the scope, scale, and speed of supply chain processes have all gathered revolutionary ‘momentum—and businesses around the world hasten to catch up or, in the case of leaders like Toyota, Walmart, and Zara, to stay ahead. Their opportunities result from the flattening of the global playing field and advances in technolo; their discoveries contribute to globalization and revolutionary technology. Supply chain management (SCM) may be a young discipline, but like those other young disciplines, rocket science and brain surgery, it isn’t a simple one. It also resembles other youngsters in its rapid rate of development. Staying abreast of the theoretical and practical aspects of supply chain management— even keeping up with the vocabulary—requires constant attention. This first module in the APICS CSCP Learning System, Fundamentals of ‘Supply Chain Management, provides basic information that forms a foundation both for the following modules in the course and for the continuous Jeaming ‘you will do later to stay current with new developments ‘+ Section A introduces essential concepts and vocabulary, including definitions and illustrations of the terms “supply chain” and “supply chain management.” It also presents the supply chain processes and the SCOR® model, compares vertical and horizontal integration, and describes supply chain management objectives and benefits. The section concludes with a discussion of the basic financial terms and financial statements that are important in managing the supply chain. roy Version 3.0, 2012 Baton Qo pnonnr me mitrenModule I: Funddeamenals of Supply Chain Management © 2012 aPics All rights reserved S. strategies, including their alignment with organizational capabilities and ion B explores the competitive advantage of various supply chain strategy and how (o resolve misalignment or gaps. Section C explains the need to understand the marketplace before designi a supply chain as well as the key considerations in its design. The section describes how continuous improvement opportunities can be built inte supply chain design in order to reap the benefits of ongoing, ineremental process improvements. It also discusses the importance of managing change successfully throughout the supply chain, Section D explores inventory management from a wide variety of perspectives—the need for inventory, different types of inventory management, the flow of inventory, and its functions in the supply chain. ‘The categories of inventory-related costs and inventory’s effects on an organization's financial statements will round out the discussion. Section E looks at the fundamentals of logistics, its related functions, the custom-tailored value proposition, and the types of logistics service providers and their inherent advantages and disadvantages. The activities involved in reverse logistics are explained, along with how a supply chain can be designed to facilitate this reverse flow of products from the end users in a manner that benefits the manufacturer and society. Section F examines the reasons for identifying market segments, how it is done, and how to leverage the knowledge of the wants and needs of each segment. Section G explores demand planning, including methods for forecasting demand, demand management components and their linkages, and the functional responsibilities and how those areas interface. Section H looks at the basic concepts of customer relationship management (CRM), including the need for CRM and its scope, elements, and benefits. ‘The section concludes with tips on implementing CRM and how customer information can be leveraged in the supply chain. Section I describes supply management concepts such as total cost of ownership, outsourcing and offshoring, factors to consider in a make- -versus-buy decision, and types of buyer-supplier relationships. It also explains how to develop supply plans and foundational concepts of supplier relationship management (SRM). 12 ® Version 3.0, 2012 EditionSection A: Supply Chain Management Concepts ‘This section is designed to ‘+ Define and illustiate the supply chain in terms of entities, structures, and flows Identify and describe key supply chain processes * Describe the SCOR® model and its use for improving supply chains * Differentiate between vertical and horizontal integration ‘+ Define supply chain management and its objectives and benefits| ‘© Describe the stages of supply chain evolution globally and within companies ‘+ Identify specific ways in which supply chain management creates value for all stakeholders # Define key financial terms + Explain key financial statements that are commonly used in supply chain management. It's a World of Global, Complex, Interdependent Supply Chains! When the 8.9 magnitude earthquake and resulting tsunami hit Japan in March 2011, initial concerns and the world’s focus were on the people of Japan. As the weeks progressed, it started to become clear in just how many ways we onnected and that the entire world was affected by this event. These are sampling of the headlines and paraphrased news stories in the weeks that followed: ‘= Wall Street Journal, "Quake Disrupts Key Supply Chains.” Dozens of semiconductor factories had their operations affected by the earthquake, raising fears of shortages or price increases for a number of widely used components. .other manufacturers are likely to be affected by disruptions of transportation of finished goods to airports or ports as well as the movement of employees and supplies to production plants. * Financial Times, “Multinationals Wam over Japanese Supplies.” Multinational companies in several sectors are waming of supply chain disruptions after the earthquake, tsunami, and nuclear crisis in Japan....General Motors became the first intemational group to announce a © 201zanics 1B Version 3.0, 2012 aiion Alig reseed @ revsnior nem ve eneModule 1: Fundameusals of Supply Chain Management © 2012 APICS All rights reserved direct impact on production after the disasters....Sony Ericsson, a ‘smartphone joint venture between the two companies, said its supply chain would be affected, and German carmaker Volkswagen warned of a possible medium-term components shortage. ‘+ JP Morgan /nsights newsletter, “Asia: The impact from the Earthquake in Japan.” It is believed that the adverse impact of the Japanese earthquake on Asia is primarily via a supply chain disruption due to reduced exports from Japan given the interruption in power supply, factory closures, and logistical challenges. + Los Angeles Times, “Disaster Puts Kink in World Supply Chain.” Concerns are growing that the earthquake and tsunami could lead to a long-term disruption in the world’s supply of automobiles, consumer electronics, and machine tools. As millions of people around the globe extended their condolences to the people uf Japan for the lives lost and suffering, companies around the globe had to quickly assess whether their business would be impacted by this tragedy thousands of miles away. In many instances, those firms were not happy to learn how their supply chains would indeed be affected by such an unpredictable natural catastrophe. Even after major disasters like Japan’s recent earthquake, the World Trade Center attacks of September 11, 2001, in New York, the U.S. recession that was felt worldwide in 2009 to 2010, and the volcanic eruption in Iceland in April 2010, ‘when aviation authorities closed the country’s airspace due to a cloud of drifting ash, some companies are hesitant to realize that with the global economy, actions in one part of the world, whether planned, unplanned, human-induced, or naturally occurring, seem to affect us. We are all connected. ‘That level of connectedness is impacting supply chain management and causi to evolve into @ more strategic role. Managers now recognize that the actions taken by one organization in the supply chain can influence the success of the rest of the network. While in the past the strategic focus for many organizations was on it improving their internal quality and reducing costs, the new focus is on implementing total supply chain solutions that require collaboration from partner organizations both upstream and downstream. ‘These new global forces are being met by corresponding technological solutions in supply chains in most nations. Collectively they are revolutionizing supply chain ‘management. 14 ‘Version 3.0, 2012 EditionSection A: Supply Chain Management Concepts ‘We want you to be prepared and ready to handle the new powerful forces that will impact virtually every supply chain: © Global expansion. The globalization of sourcing and manufacturing is making supply chains longer and more complex then ever before, thereby requiring ‘more formal coordination and collaboration. Also, many manufacturers and retail chains have expanded both nationally and globally, creating the need for ‘more formal mechanisms to coordinate supply chain activities. In addition, the firms that have created their own e-commerce sites can now have, or atleast claim to have, global exposure. # Increased project complexity and seope. Project size and complexity are increasing. Projects involve, in some cases, large teams operating at different remote sites. Moreover, the information involved is more important than ever, in larger amounts than ever, and more difficult than ever to manage manually with the required speed and accuracy. » Greater market volatility. Demand is becoming more volatile and harder to predict due to the increasing power and speed of information available to both consumers and competitors. ‘Our goal is to prepare you to grasp these concepts, be confident in your actions, ‘and eventually thrive in the world of supply chain management. Remember that “the beginning of knowledge is the discovery of something we do not understand” (Frank Herbert, science fiction author and writer, 1920-1986). "Topic 1: Basic Supply Chai Basic supply According to the APICS Dictionary, 13th edition, a supply chain is a “global chain. _____- network used to deliver products and services from raw materials toend customers through an engineered flow of information, physical distribution, and cash.” A supply chain, in this view, comprises a network of both entities and ‘processes (the engineered flow). A supply chain doesn’t have to be global, but ‘the massive chains that interest us in this course—the ones that run through corporations such as Walmart, Mitsubishi, Dell, and the clothing chain Zara— are decidedly global in scope. Exhibit 1-2 illustrates a very basic supply chain (one that isn’t necessarily global) with three entities—a producer with one supplier and one customer. © anizanics Ms Veson 0, 2012 Eon feed Q reicitimnn nseModule I: Fundamentals of Supply Chain Management sumer | prmducer | | cmoner Three entities © 2012 aPIcs All rights reserved Exhibit 1-2: The Basic Supply Chain for a Product SS Reverse product flow Primary SS mrinay product product flow flow M@ Poyments prodiucts/services In the dysfunctional organization, this ig what tends to happen: © Internal activities tend to be undertaken impulsively rather than according to plan. * Management provides only the most general sense of mission, communicated perhaps by pep talks at best or threats at worst © Forecasting tends to be mostly guesswork, often inflated by unwarranted ‘marketing optimism, ‘+ Products are designed without advice from other areas that could provide guidance, such as manufacturing or marketing. © 2012 aPics 119 ‘Version 3.0, 2012 Baition Anahi revved @ rent pomee nmrModule I: Fundamentals af Supply Chain Management + Warehouses are sited near each market, stocked with an overabundance uf inventory in anticipation of a big sale, and staffed with manual laborers who have little training, + Thicks or trains are unloaded when they arrive and loaded when an order comes in, without much advance warning in either case ‘There may be flows of payments (but collection may be poorly executed i well as materials, but the exchange of information tends to be tied mostly to asiving orders internally, accepting bids, and sending invoices. © Material requirements planning (MRP) takes place involving a bill of material (BOM), a master schedule, and current on- hand/on-order data, abasic level, Stage 2: Exhibit 1-9 provides an illustration of the semifumctional enterprise. Information ‘semifunctional flow has been improved and functional areas have been defined—but they tend enterprise to perform their functions one after the other without collaborating on the most effective ways of creating value. At this stage, there are no partnerships with customers and suppliers. Exhibit 1-9: Semifunctional Enterprise << information —— > | as | es <— mes —— $$ Revere prose 0” << In the second stage of supply chain evolution, an individual firm undertakes initiatives to improve specific functional areas, Here are some examples: . * The largely manual operations in warehouses may be augmented by the addition of basic materials-handling equipment. ‘+ Inventory management may find ways to reduce levels of inventory within the firm's own facilities. ‘+ Procurement might take advantage of new purchasing strategies to obtain supplies and services at the lowest possible prices. ‘© The traffic department may reduce transportation costs by strategic selection of carriers and routes. + Sortie departments may institute more effective hard skills training and adopt strategies for making jobs more challenging, © 2012 anes 120 Version 30,2012 Bon ‘Alii veved @ resto en peStage 3: integrated enterprise Gani) es Gai) © 2012 aPIcs Allrights reserved Section A: Supply Chain Management Concepts + Marketing may develop more reliable research and forecasting techniques. + Manufacturing resource planning (MRP I) software may be in place, and the company may have cross-functional integration of planning processes. ‘When the nucleus firm concentrates only on improvements within its separate departments, it may find its efforts wasted through lack of communication. For example, market researchers and well-trained sales representatives may uncover ‘market opportunities among current and potential customers without being provided an opportunity to share this information in a structured collaboration with product designers. And this lack of collaboration may play out repeatedly among the departments. In this stage some finctions may be automate¢—MRP software, for instance, may put the bill of material in the computer to streamline ‘workflow. But new software in one department may be incompatible with current software in other areas. In the third stage of supply chain evolution, the individual firm begins to focus on business processes rather than compartmentalized functions, Historically, this shift in supply chain strategy is associated with the late 1980s and early 1990s—the same time that personal computers were becoming more powerful, reliable, and affordable. There are a few key milestones that mark this phase: introduction of ‘manufacturing and enterprise-wide software, increased cross-functional communication and training, centrally located and easily accessible databases and files, and periodic sales and operations planning meetings attended by representatives for all departments involved. Exhibit 1-10 provides a visual representation of a linked internal supply chain with collaboration between functions and sharing of information ‘through companywide enterprise resources planning (ERP) software. _ Exhibit 1-10: Integrated Enterprise >) Purchasing Logistics YPOMCHE YS” Ran Y Macketne Yi sbuton = idalatces —> a en roduststenes < $$ Revere pre ow rea Version 30,2012 Eéition @ reson vereModule 1: Fundamentals of Supply Chain Aan © 2012 aPics All rights reserved ‘This stage is markedly different from the previous one because of the followi * The focus on business processes is facilitated with the increased availability of e-mail, file transfers, powerful databases, and enterprisewide sof applications. Cross-functional cooperation becomes much faster and easier and takes place almost instantaneously across functions. time zones, and international boundaries. +A variety of initiatives reduce the time it takes to get an order from a supplic’ create the product, and deliver it to the customer, including MRP It and ERI! ‘+ MRP has been upgraded to MRP 11, a breakthrough development that allows cross-functional communication between manufacturing and finance. © Enterprise resource planning (ERP) extends that process by adding modules for each functional area until the most advanced versions tie together entire companies, Further advances have reached through the corporate wall to tie supply chain partners together. * Product design in some firms is now a team effort in which production engineers and other stakeholders, such as marketing and purchasing, collaborate with design engineers to “design for marketing,” “design for logistics,” “or design for the environment.” This approach results in products that are on target for customer desires and are ready to be manufactured ‘without making costly modifications in processes, equipment, or staffing, + There are improvements in customer service due to astute segmentation of markets and more efficient replenishment policies suited to each segment. + Inventory is treated more strategically as Just-in-Time procedures, more accurate demand planning, and improved logistics work together to make fulfillment more efficient and reliable. + Warehousing and transportation decisions are carried out in tandem to achieve the optimal balance of cost-effectiveness and customer service. + Warehouse management benefits from more advanced equipment and automation. At this point, the nucleus firm may begin to take a step toward integration with the external members ofthe chain by contracting with a logistics supplier, such as UPS, to “insource” by using its expertise to help optimize logistics decisions. 1-22 ® Version 3.0, 2012 BaitionSeotion A: Supply Chain Management Concepis Stage 4: extended The hallmark of this stage is the decision to extend at least one business process enterprise beyond the boundary of the individual corporation. When the nucleus firm decides to collaborate on planning, design, replenishment, logistics, or another business process with one of its suppliers or customers, the barrier to developing the extended enterprise from end to end of the supply chain integration has been overcome, Exhibit 1-11 shows how the supply chain has changed. Exhibit 1-11: Extended Enterprise [Poem | supa 4 SPIES Seta _-4 COS A tomers) ee << Prvnets — ‘productslservies Samos Sem) 1 proltetseries —> oe et << Revere rote tar 9. Which of the following is an objective of supply chain management? ( ) a. Add value for customers and stakeholders. () b. Improve management of risk. () @ Increase velocity in flows of goods, services, funds, and information. () d_Increase sustainability 10, True or false? The three Vs are velocity, visibility, and volume. () Tre () False 11, True or false? One of the benefits of supply chain management is increased visibility of flows. () Tne (False 12, True or false? An income statement shows the net income over a given period of time. (Tre () False 13, Which of the following is a primary purpose of the cash flow statement? ) a. To show net profit or loss (-)_b. To show key stakeholders if the company has sufficient cash to pay debts, bills, and dividends to owners () & Toshow the cash-to-cash eycle time (To show dollars tied up in inventory © 202.anes 166 Version 3.0, 2012 Eaton Asie Q roeSection A: Supply Chain Management Concepts Progress check answers 1. c@15) 2, False (p. 1-6) 3. e(p. 1-13) 4, a(p. 1-15) 5. e@. 117) 6 d@.14t7) 7. dQ. 118) 8, True(p. 1-23) 9. a(p.1-29) 10, False (p. 1-47) Itrefers to visibility, velocity, and variability 11. True (p. 1-47) 12, Tre (p. 1-57) 13. b(p.1-61) fe 2012 mcs, Ls Vern 3.02012 Eon ‘hee Q reais nner empireSection B: Supply Chain Alignment with Business Strategy ‘This section is designed to * Describe the relationship between the business strategy, the organizational strategy, and the supply chain strategy + Explain the factors used to select strategie partners + Enumerate the building blocks of collaborative relationships + Identify the features and benefits of collaboration + Describe how to overcome obstacles to collaboration * Define four types of organizational strategies and how they are used * Explain how strategic decisions are made concerning customers and markets, technology, key processes, and sourcing ‘Discuss the trends in outsourcing and its potential consequences (positive and negative) for the organization * Identify competitive priorities for gaining customers for a company product or service * Describe how each supply chain’s capabilities are based on its design, processes, systems and technology, human resources, and metrics * Identify three factors that can cause an organization to alter its supply chain strategy. ce There's a kind of magic in some words, “strategy” and “strategic” being key examples. Place “strategic” in front of the name of any business process and suddenly that process acquires an aura of great importance. Strategic objectives cry out to be achieved in a way that simple objectives do not. Strategic planning sounds considerably more sophisticated and powerful than plain old planning. ‘There's a reason those words have such power. Strategy, originally a military tem, is how generals marshal all available resources in pursuit of vietory Strategy wins football games and chess matchtes—or loses them. It’s really the same in the business world, Each company has a business strategy that paints a broad picture of how they will compete in the marketplace, Since business strategy is like military strategy in that it requires the marshaling ‘and organizing of all its resources, then it becomes clear that the business's © anizanies 18 Version 3.0, 2012 Baton Alig resered aSection B: Supply Chain Alignment with Business Strategy supply chain can be its most potent strategic resource, Designing and building the right supply chain, one that promotes the business strategies, may just be the ‘most powerful way to gain an edge on the competition, to move faster, deliver ‘more value, and be more flexible in the face of both steady change and surprises. The supply chain stretegy is a complex and evolving means that organizations use to distinguish themselves in the competitive contest to create ‘value for their customers and investors. As illustrated in Exhibit 1-23, you can see how the direction of a firm or organization is predicated on its business strategy. Of course many organizations now also use mission and vision statements to give clarity to their purpose. Exhibit 1-23: Alignment of Strategies pees Sere ere Stee Sree Strategy IE these strategies are not aligned, the direction and fit will be askew. All three strategies are linked and dependent. The APICS Dictionary, 13th edition, differentiates between business and organizational strategy (Tisted as “strategy” in the Dictionary) as follows «Business strategy. A plan for choosing how to compete. Three generic business strategies are (1) least cost, (2) differentiation, @) focus ‘+ Strategy (organizational). The strategy of an enterprise identifies how a company will function in its environment. The strategy specifies how to satisfy customers, how to grow the business, how-— = to compete in its environment, how to manage the organization and. develop capabilities within the business, and how to achieve financial objectives. Supply chain strategy is then a strategy for how the supply chain will function ints environment to meet the goals of the organization’ business and organization strategies. Prior to discussing organizational and supply chain strategy in more detail, the first topic in the section addresses business strategy and competitive advantages. Competitive advantages are closely related to business strategy because they outline the advantages the organization should realize once it has decided how it will compete. © 2m2.arics 168 Version 3.0, 2012 Baton Alih seved aModule 1: Fundamentals of Supply Chain Management Other concepts covered in this section include * Organizational and supply chain strategy * Prioritization options * Organizational capabilities * Alignment of capabilities and strategy + Resolving misalignment or gaps. + Topic 1: Business Strategy and Competitive Advantages Business strategy Competitive advantages © 2012 aPIcs All sights reserved Typically a business strategy will outline how to grow the business, how to distinguish the business from the competition and outperform them, haw to achieve superior levels of financial and market performance, and how to create or maintain a sustainable competitive edge. As per the definition provided previously, business strategies include least cost, differentiation, and focus. Least cost relates to @ lower cost than the competition for an otherwise equivalent product or service. Differentiation relates to a product or service with more features, options, or models than the competition. Focus relates to whether the product or service is designed for a broad audience or a well-defined market segment or segments, There are many ways that these genetic strategies can be combined or made into hybrids. For example, common business strategies that are generic to many industries and manufacturers include the following variations: + Best cost—creates a hybrid, low-cost approach for providing a differentiated product or service + Low cost—focuses on delivering low price and no-frills basics with prices that are hard to match + Broad differentiation—creates product and service attributes that appeal to many buyers looking for variety of goods ‘+ Focused differentiation—develops unique strategies for target market niches to meet unique buyer needs + Focused low cost—designed to meet well-defined buyer needs at a low cost Competitive advantages mirror the strategies used to create them: A competitive advantage exists when an organization is able to provide the same benefits from a product or service at a lower cost than a competitor (low cost advantage), deliver benefits that exceed those of a competitor's product or service (differentiation advantage), or create a product or service that is better suited to a given customer segment than what the competition can offer (focus advantage). The result ofthis 1-70 ‘Version 3.0, 2012 Edition Q ress tennSection B: Supply Chain Alignment with Business Strategy competitive advantage is superior value creation for the organization and its customers. If this advantage is successfully implemented and marketed, it should result in improved profits and market share. To explore how low-cost, differentiation, and focus-based competitive ‘advantages could be interpreted in an organization and its supply chain, we will explore each of these strategies and their competitive advantages in more detail next. Low-cost Supply chain strategies consistent with a low-cost approach to competition advantage include a variety of methods to reduce cost in all areas of the chain, including strategies resource extraction, transportation, warehousing, and location and design of retail facilities. A powerful nucleus firm with a low-price strategy and a large ‘market share can exert great leverage on its suppliers. Such a firm may be able to require suppliers to cut facility costs, relocate, adopt lean manufacturing, change employment practices, and so forth. A low-cost strategy should not be confused with target cost. Target costing is, defined in the APICS Dictionary, 13th edition, as the process of designing a product to meet a specific cost objective. ‘Target costing involves setting the planned selling price, subtracting the desired profit as well as marketing and distribution costs, thus leaving the required manufacturing or target cost. ‘In many cities, this strategy had resulted in the opening of numerous “dollar stores” where the majority of the products are only one dollar and the selection is huge. Note that providing a product or service at the lowest price is generally not compatible with either differentiation or focus (niche marketing) strategies. ‘The lower profit margins provided by this approach are more consistent with ‘mass marketing. However, even low-cost products have to meet some quality standards to remain competitive. Also, price competition can exist within a niche or differentiated market. One luxury automobile may undercut another in price, for example, if it maintains a level of quality and a sterling reputation. Product or service Determining how to differentiate a product or service begins with a competitive jeiterentaton analysis of other firms in the market to see what they have to offer. According eee to the APICS Dictionary, 13th edition, competitive analysis is “an analysis of a competitor that includes its strategies, capabilities, prices, and costs.” © 212 arics re Version 30, 2012 Eaition All rights reserved @ riartertos pocen mse meee:Module I: Fundamentals of Supply Chain Management Focus advantage strategies © 2012 APICS All ight reserved Once a firm has analyzed the offerings of competitors, it may differentiate its products and services in a number of ways. The following are some types of differentiation: ‘+ High quatity—durability, appearance, performance, type of materials, and so on (Quality is often an order “qualifier,” or an element necessary to even ‘consider the purchase of a particular product.) ‘+ Diversity of the product line, offering customers many options (The ‘opposite ofthis approach was Henry Ford's alleged claim that people could have his cars in any color they wanted as long as they wanted black.) + Greater reliability (which could be considered a type of quality) + Special features not available from competing products or services Supply chain strategies appropriate to product differentiation include + Modular design combined with postponement to allow last-minute customization to meet specific consumer demands ‘+ Minimal inventory of the base model to prevent obsolescence and expand the inventory of options + Collaboration with suppliers to develop innovative designs, numerous options appealing to different customer tastes, artistic design, and so on. ‘The following discussion is divided into two ways to create a focus advantage: © Niche marketing (versus mass marketing) + Responsiveness Niche marketing (versus mass marketing) Firms can choose to develop products and services for a mass market or for a relatively small slice of a larger market—a market niche. Some examples of niche market approaches include + Catering to high-net-worth customers with products such as luxury automobiles, yachts, large homes, or specialized services such as estate planning, personal training, or expensive cruises + Designing for a limited age group, such as children or senior citizens with special needs instead of serving a broader population + Providing products or services for residents of a particular geographic area, such as growing vegetables for a neighborhood market rather than for packaging and shipping around the nation or world. ‘Niche marketing shares some characteristics with product/service differentiation. In both cases, the product or service provided to customers has special features. Differentiation by quality, for example, can be the same thing Ln ‘Version 3.0, 2012 EditionChoosing business strategies © 2012 APICS All sights reserved Section B: Supply Chain Alignment with Business Strategy as catering to high-net-worth customers. (Low-net-worth customers, or value shoppers, can also be niche.) Therefore, some supply chain strategies will work for both approaches, Collaboration to achieve distinctive design is one example. Depending upon the niche, sourcing may focus more on finding special expertise or high-quality materials rather than on low-cost labor. Responsiveness Perhaps the most obvious example of responsiveness is the fast-food industry that grew up in the last half of the 20th century, led by McDonald's. Diners at fine restaurants will happily wait half an hour for their specially cooked steak, ‘but employees on short lunch breaks become impatient with even a few minutes in line as their sandwiches are prepared. In the early days of the Toyota Prius automobile—e highly differentiated car—buyers were known to wait for ‘months for a new vehicle. (The same phenomenon occurred when the Volkswagen “Beetle” first came to the United States, where it was both highly differentiated and a low-cost option.) But businesspeople or diplomats on assignment expect a rental car or limousine to be ready immediately when they arrive at the airport. Manufacturers of clothing prosper or go bankrupt by their ability to bring the latest seasonal designs to market rapidly. Perishable products, such as raw food items, must be delivered rapidly, unlike preserved foods. Services may also compete on the basis of speed by cutting time spent waiting on the phone, standing in line, or processing paperwork. ‘Supply chains designed for responsiveness may rely on substantial supplies of safety stock to avoid outages. (Overstocked seasonal items typically go on sale at the end of the season.) They may also have multiple warehouses to place ‘products nearer to users: Third-party providers of rapid transportation, suchas package delivery services, were developed to suit the needs of such supply chains. ‘While some firms may focus primarily on one business strategy, others may pursue a mix of strategies. Note, however, that making one strategy the priority ay make other strategies difficult to achieve, For example, providing high quality at the lowest price is a challenge, But not all the strategies are mutually exclusive, Product differentiation and niche marketing fit well together. Either responsiveness or low cost may be a key competitive factor that differentiates @ firm from its market rivals Once an organization has decided on a business strategy, it uses these choices to rive the organizational strategy and eventually the supply chain strategy. ‘Version 3.0, 2012 Edition CQ eoModule 1: Fundamenials of Supply Chain Management + Topic 2: Organizational and Supply Chain Strategy, Prioritization, Capabili Organizational strategy Goals of organizational strategy © 2012 aPICS All rights reserved ies, and Alignment Recall that the strategy of an enterprise identifies how e company will function in its environment, The strategy specifies how to satisfy customers, how to grow the business, how to compete in its environment, how to manage the organization and develop capabilities within the business, and how to achieve financial objectives. Where do you start when building an organization's strategy’? As author and business consultant Stephen R. Covey says in The Seven Habits of Highly Effective People, “begin with the end in mind,” that is, think first about the goals of the strategy. ‘Whatever strategy the corporation adopts to satisfy customers, grow. compete, organize itself, and make money, the supply chain has to operate in a manner that furthers those goals. To give a simple example, if customers are clamoring for deeply discounted prices on durable, high-volume goods with stable demand, a supply chain strategy that invests heavily in sourcing lower-cost ‘materials in emerging markets would be on target for accomplishing that goal Low-cost sourcing is probably the best option for this strategy because purchasing machines involves a high capital investment and lower labor expenses could help offset the investment costs. However, you might also look {nto investing in equipment, as the high investment is covered by lower labor costs and increased revenue. (It is possible for an organization to do both— invest in automation and move into a geographic area where labor costs are less, That decision would be based on volume, payback period, product life cycle, etc.) Horizontal supply chains will contain a number of independent organizations, each with its own goals, processes, operations, technology, and strategy. So, when we refer to the necessity of aligning supply chain strategy with organizational strategy, we are referring to the strategies of a cham nucleus firm, Traditionally, that’s the manufacturer of a product—the company that sits right atthe center of the chain (or network) with suppliers in tiers on one side and customers on the other. master or However, if supply chain has a dominant firm with a dominating strategy (one that is dictating its requirements to others), for example, 2 lange retailer, then supplier and manufacturer strategies and goals must align with that retailer’s 14 Version 30, 2012 aon Q_ rm ithre neStrategy: customer focus and alignment © 2012 aPICS All sights reserved Section B: Supply Chain Alignment with Business Seracegy organizational and supply chain strategies. The suppliers of suppliers also have strategies to be brought into alignment. Finally, the strategies, once aligned, have to do two things: serve the end customers’ needs and be profitable for the chain as a whole and each company individually. The following looks at four types of organizational strategy in detail: customer focus and slignment, forecast-driven enterprise, demand-driven enterprise, and ‘umber of supply chains, ‘When it comes to supply chains, it's what's good for the customer that counts— ‘not what’s good for the nucleus company or even what seems to be good for the supply chain itself. Supply chain management needs to be focused on giving the final customer the right product atthe right time and place forthe right price. It isn’t necessarily about the most advanced product or service, nor is it always about the lowest price, the fastest time, or the most convenient place. It's about the balance of quality, price, and availability (timing and place) that's just right for the supply chain’s customer. How does one determine what is the right amount of each of those factors? There isn’t a simple formula that will help the supply chain manager with this decision, But there are some basic premises that will help you get started in determining the appropriate balance: ‘© Serving the end-user customer is the primary driver of supply chain decisions. ‘+ Organizations in the supply chain have to make a profit and stay in business to serve the customer. ‘Punctional teams in the organization will provide their input and research onthe ‘optimal balance for the supply chain to meet customer needs. Design engineers— or, better yet, design teams from across the network—design products that are right for the end customer and can be sold profitably. Market research looks for the rus, and not always obvious, needs in potential consumers that the supply — chain can be engineered to satisfy profitably. Logistics strategy begins with data about customer demands for availability—of materials, components, service, or finished products, depending upon the customer—and then it looks for ways to move products in @ cost-effective way with acceptable risk. Decisions are not just about product features or price or speedy delivery. They are about the right features at the right price on the right schedule, DOS was not a ‘great operating system: it was just the right operating system for the time and the market ® Version 3.0, 2012 EditionModule 1: Fundamentals of Supply Chain Management Strategy: forecast- driven enterprise © 2012 APICS All sights reserved TThe term “customer” can be a complex concept in relation to supply chains because there are multiple customers with different stakes in the process. When ‘we talk about customer focus, we mean the end user, the consumer of the product, But usually only the retailer actually sees the end user and has a direct relationship with that person or entity. Everyone efse in the supply chain has a more immediate customer downstream to our right in the supply chain diagram. If the supply chain is completely aligned! in its focus on the end customer, then, at least in theory, serving the customer just to an organization's downstream side would automatically serve the end user and also be in the supplying organization's best interest as well as the interest of investors Moreover, within each supply chain partner there are internal “customers” whose needs also must be aligned with corporate and supply chain strategies. Each manager must understand his or her role in making the supply chain profitable, and staff, too, must be rewarded, motivated, and trained in alignment with the needs of the supply chain’s end customer. Consider sustainable supply chain management, Successfully managing for sustainability requires a strategic mindset, involving numerous personnel and financial resources and a commitment from suppliers from first to lower tiers of the supply chain as well as consumers further up the supply chain, Departments ‘must cooperate with other departments in their organization (e.g., purchasing and environmental or design departments) and with their counterparts at suppliers. This type of collaboration between supply chain partners necessitates breaking down cultural barriers and building a culture of trust to ensure that the focus is on end-to-end supply chain activities and not just discrete supply chain processes. Creating and managing a sustainable supply chain requires an organization to be informed, exercise leadership, and cooperate with all supply chain partners in achieving positive results on the triple bottom line. ‘A second organizational strategy is the forecast-driven enterprise. Simply put, this strategy is one in which the nucleus firm, usually the manufacturer, utilizes a forecast, an estimate of future demand, asthe basis of its organizational strategy. Here is the complicating factor: It is difficult to know what customer requirements will be from day to day, month to month, quarter to quarter, and so 1-76 Version 3.0, 2012 Edition @ mst p nea ronoeSection B: Supply Chain Alignment with Business Strategy on. For instance, if'a manufacturer was guaranteed that its wholesale or retail customers were going to need 1,000 SKUs (stockkeeping units) every Wednesday aftemoon, then getting those products to customers at the right time and place would be a matter of simple calculation based upon lead times for production and delivery, In tur, the manufacturer would look at the bill of ‘material, determine the lead time for each, and submit schedules to its suppliers. Unfortunately, its difficult to predict even the most stable demand—say, for a product like diapers. There is some variability in demand for diapers, even though they aren’t subject to seasonal style changes or rapid peaks and valleys in response to outside influences affecting ability to pay. (That's why Procter & Gamble cooperates with Walmart to plan for demand and replenishment of diapers.) The chain of demand begins at the far retail end of the supply chain and works its way back toward the source of raw materials used in making the product. The traditional way of attempting to satisfy this demand is to forecast it. In tis retail example, forecasting along the chain works like this: The retailer forecasts demand from parents who purchase diapers. ‘+ The wholesaler forecasts demand from all its retailers. ‘+The manufacturer forecasts demand from the wholesale distributors. © The component suppliers forecast demand from manufacturers. ‘©The raw materials suppliers forecast demand from the component ‘manufacturers, How effective is this strategy? Let’s say you don’t want to be placing large bets on the accuracy ofall those forecasts. Here's what actually happens: Parents vary their diaper-buying pattems in fairly small increments due to “factors nobody Tully understands: They may go to different stores Tore change ————= shop on Tuesday instead of Wednesday, or buy two or three weeks’ worth at one time because the diapers are on sale. So, actual demand never quite meets the forecast, —— ‘+ Meanwhile the retailer had already ordered enough to allow a little extra “safety stock” to put in its storeroom. (For retailers, safety stock is a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.) Or maybe the retailer runs a promotion that is not communicated to the distributor, thus resulting in needing a larger order than was previously forecasted. These fluctuations impact forecasting for the distributor. ‘+ The wholesale distributor had forecasted demand based on past orders from its retailers. But now those demand pattems have a wider variability than the demand pattern at the retailer's checkout counters due to that safety stock the retailer held on to, Sometimes the safety stock accumulates because demand is © 201 abies ut Version 3.0, 2012 Eton Alig eared SLModule I: Fundamentals of Supply Chain Management Strategy: demand- driven enterprise © 2012 APICs All rights reserved less than the forecast, and this means that the retailer's next order is for less than its forecast—or perhaps it doesn’t have to order at the ustal time at all, because it has a glut of diapers—which it probably sells off in a promotion. ‘The upshot of all this is that the small variations in end-user demand are ‘magnified at the distributor. + Up the chain, the manufacturer of those diapers looks at the demand pattern from the distributor and makes its own forecasts, which show an even wider swing in variability + And this variability goes up the chain with ever-wider swings. ‘As mentioned earlier in this module, this pattern of variability is called the bullwhip effect, and it affects all manner of supply chains that are based on serial forecasting by each independent division or firm that touches the product as it travels from raw material to finished retail item. ‘The next organizational strategy we'll look at is the demand-driven enterprise ‘The bullwhip effect is driven by demand forecasts; the solution is to replace the forecasts with actual demand information, This isn’t necessarily a simple matter either, but supply chain professionals have evolved techniques for lcting actual orders (not forecasts) drive production and distribution, In the demand-driven chain, supply management is focused on customer demand. Instead of manufacturers planning their operations based on factory capacity and asset utilization, the demand-driven supply model operates on a customer-centric approach that allows demand to drive supply chain planning and execution—moving ‘the “push-pull frontier,” as it’s called, back up the chain at least to the factory. Instead of producing to the forecast and sending finished products to inventory, the production process is based on sales information. There is, in other words, no fixed production schedule in a strictly demand-driven supply chain, Product is turned out only in response to actual orders, “on demand,” in other words. (Note, however, that on the supplier side of the plant, forecasts still determine delivery of raw material ‘The art of forecasting remains crucial, even in a demand-driven chain.) This is also known as a “pull system,” and it entails the following ‘+ In production, the production of items only as demanded for use or to replace ‘those taken for use ‘+ In material control, the withdrawal of inventory as demanded by the using operations, Material is not issued until a signal comes from the user. ‘In distribution, a system for replenishing field warehouse inventories where replenishment decisions are made at the field warehouse itself, not at the central warehouse or plant. 1-78Section B: Supply Chain Alignment with Business Strategy ‘When a supply chain works in response to forecasts, its called a “push” chain, and it entails the following: In production, the production of items at required times based on a given schedule planned in advance. ‘+ In material control, the issuing of material according to a given schedule or issuing material to a job order at its start time, ‘+ In distribution, a system for replenishing field warchouse inventories where replenishment decision making is centralized, usually at the manufacturing site or central supply facility Everything in a push system is pushed downstream from one point to the next according to schedules based on the forecasts. The supplier delivers components in the amounts determined by the schedule to inventory, where they await use in ‘manufacturing, The plant tums them into finished products and pushes the products to the distribution center or the retailer, where they await an order from downstream, ‘The challenge in changing from forecast-driven (push) to demand-driven (pull) systems is in reducing inventory without also lowering customer satisfaction. ‘When a demand- inside the supply chain. Whatever the process you're aiming to improve, ~ technology can almost certainly help. But it has to be selected by specialists ‘who know what is current and can guide process stakeholders in choosing the right hardware and software at the right price to conform to overall strategy. The collateral effects of new technology have to be taken into account as well, The theory of constraints tells us that there is no point in buying expensive hardware and software to speed up the flow of information, materials, or payments if they will just be sent speeding into a bottleneck (or constraint) that will stop their progress. Most importantly, each organization needs the right technology applied to the right process by the right people. You will learn more about technology available for supply chains in Section F of Module 2. © 2012 APICS 197 Version 3.0, 2012 Edition Allrights reserved BD rrnetea tok econ wetrtt npModule 1: Fundamentals of Supply Chain Management Process decisions Sourcing Organizational capabilities © 2012 APICs All rights reserved A supply chain isa set of processes, and they can be fine-tuned to suil each ‘customer segment. When planning improvement initiatives, select the processes that are central to the supply chain strategy, measure and benchmark them, and focus your attention on one process or a small manageable number of processes. The APICS Dictionary, 13th edition, defines sourcing as “the process of identifying a company that provides a needed good or service.” Sourcing involves complex, challenging decisions. Manufactured goods, components. and services can be acquired by purchasing a firm that delivers them by an arm’s length transaction or by outsourcing. ‘The trend in the latter decades of the 20th century and early in this century has been toward outsourcing non-core activities to supply chain partners. These partners may be located near at hand or offshore. As supply chains grow in length and global dispersion, they can locate each partner in the country or region best suited by climate, culture, resources, tax policy, clc., to support cach specific activity. At this time, it remains to be seen whether rising fuel and transportation costs will put a limit on the length of supply chains. Outsourcing was initially a strategy in manufacturing supply chains. However, advances in computer hardware and software and global broadband networking has enabled global outsourcing of service activities, such as help desks, accounting, and medical testing, Accounting activities, for example, can be carried out across multiple time zones. Working half a world away with immediate Internet file transfers, a day-shift accountant can perform services during the customer's nighttime hours. Documents can be e-mailed ‘cross oceans faster than they can be printed out and carried to an office down, the hall. ‘You will leam more about outsourcing later in Section I of this module. Every supply chain is made up of organizations, people, processes, and information. Each supply chain’s capabilites are based on its Organizational design * Processes ‘Systems and technology © Human resources + Metrics (measurement techniques), 198 Version 30,2012 Bion @ rina repreOrganizational design © 2012 Pics All sights reserved Section B: Supply Chain Alignment with Business Strategy The success of any supply chain in achieving its goals of creating value for customers as well as financial value requires thoughtful, strategic planning regarding these capabilities, Organizational design refers to the creation of an organizational structure to support the strategic business plans and goals of an enterprise (in both for- profit and not-for-profit companies). Given the mission and business strategy, the organizational structure design provides the framework within which the operational and management activities will be performed, Organizational design also encompasses how the organization communicates intemally and externally, the chains of authority and responsibility, financial management, and job hierarchy and descriptions. In the previous section we looked at the stages of supply chain evolution; each stage was linked to a significant alteration of organizational design. Here we will focus on the developmental stages of organizations. In the first stage, decisions about matters related to supply and distribution might be made almost on an ad hoc basis. Formal communication may be limited to tactical, job-related matters. Meetings are scattered and poorly organized. Training may be nonexistent. With an ad hoc design, an organization has no possibility of forming or participating in an effective supply chain. Material requirements planning (MRP) takes place at a basic level, with a bill of material and curreit on-hand/on-order data. In the second stage, organizational design follows functional lines, with marketing and sales, production, warehousing, distribution, and so forth each ensconced in its own silo and focused on meeting its own goals. Supply chain decisions, such as number and location of warehouses, inventory ‘management, or modes.of transportation are made entirely within their separate silos. Communication flows upward through the chain of command or, pethaps, horizontally in departmental teams. There is little or no formal communication through the silo walls to coordinate supply- and distribution- related decisions. Systems with functions may be automated with specific software applications. MRP Hl (manufacturing resource planning) replaces MRP, and the firm implements cross-functional planning. Jobs may be enriched to include more variety and wider responsibility. Training in some areas includes “soft skill” seminars in management, commaunications, and needs-based sales, laying the groundwork for more strategic and innovative approaches to marketing and operations. 19 Version 3.0, 2012 dion ——Module 1: Fundamentals of Supply Chain Management © 2012 PICS All sights reserved In the third stage, cross-functional teams are formed to measure and improve businesswide processes, building on continuous improvement initiatives undertaken within functional areas. The company adopts eross- functional team approach to product design. Marketing and sales team up with operations in a continuous sales and operations planning process to coordinate aggregate planning across the enterprise to maintain alignment with the strategic and business plans of the organization. Formal communication occurs among members of structured peer groups, and the topies become multidisciplinary. Training follows suit by adding coaching, ‘and team formation workshops. Automation crosses functional boundaries, following the early historical breakthrough with MRP 1! that ties the bill of material together with finance. ERP (enterprise resource planning) replaces MRP Il, adding functional modules until it makes data accessible across the entire enterprise. Supply chain decisions can now become more effectively aligned with corporate strategy because of the focus on companywide processes and improved communication. In the fourth stage, the orgenization takes advantage of its integrated operations to begin forming partnerships with suppliers or customers. For example, a retailer may send point-of-sale data directly up the chain to manufacturers through synchronized intranet and extranet ot Internet connections. This level of collaboration can’t take place until suppliers and customers have overcome barriers in their own organizations—such as, functional organization and lack of technological sophistication. Electronic communication and point-of-sale scanners give other partners in a chain instant access to POS data—no matter where they are, The organization may begin outsourcing its peripheral functions in order to concentrate on one or a few core competencies. A logistics specialist, such as UPS, may step in to further integrate warehouse-inventory-transportation processes. Both components and services can be supplied from multiple trading partners located anywhere in the world where local infrastructure permits and labor with necessary skills is available at a competitive price. The internal systems at this point may be thoroughly merged with external systems so that trade partners function in seamless harmony to form a virtual company. Cross- functional teams in charge of supply chain processes are centrally coordinated. To give the proper organizational visibility to supply chain activities, these activities are directed from the executive level. 1-100 Version 3.0, 2012 Baition QD) rinse pacman peSection B: Supply Chain Alignment with Business Strategy Supply chain Supply chain management covers a series of linked processes. It’s tue that Processes organizations have always been involved in managing such functions as planning, buying, manufacturing and delivering products, and getting paid. But supply chain management (and organizational design) has evolved from control of discrete business functions like procurement, manufacturing planning, and logistics to an emphasis on business process excellence and the management of a network of relationships tied together by complex information flows. Although management of any one activity or link in the chain may be straightforward, effective supply chain management requires mastery of these connected processes. Systems and Being able to implement and manage sophisticated software that can automate technology various supply chain activities is a critical capability. Organizations that have developed integrated networks, like intranets and extranets as well as those that ‘can harness the power of the Internet, will be prepared to handle the complex and numerous transactions involved in supply chain management. Some sophisticated organizations may even have software that uses computer networks to tie together the various software applications supporting specific activities within supply chain processes. They may use packages that enable them to manage operations at various levels: from one plant, to enterprisewide integration, and on to cross-company functionality. fan organization has a need for immediate information accessible by many users, it may need to purchase an enterprise resource planning system, or one may already exist. ERP is a framework for organizing, defining, and =a standardizing the business processes used to plat aid controt an organization’s internal knowledge to gain extemal advantage. ERP systems enable critical links between strategy and operations. They can be designed to support the specific capabilities that a firm desires. At its core, however, ERP is an accounting-oriented database system that can coordinate information flow between various parts of the organization and the extended enterprise, There will be more information on ERP in the next module. fan organization decides it needs the capability to pick up sales data and send it instantaneously throughout a network for use in revising forecasts and. triggering operations along the chain, then it may purchase the technology to use bar codes on products and radio frequency devices. These companies might ‘then further employ such data to be fed into databases for marketing analysis to gain insight into customer behavior. © zm2anics sot Version 3.0, 2012 ion Allighsrseed LrModule J: Fundamentals of Supply Chain Management Human resources © 2012 aPICs All ight reserved This plethora of technological advances does not come without its challenges, however—for any organization, There have been, and still are, technological hurdles to surmount in this evolution, such as the incompatibility of programming languages and different software applications and network protocols. There are also human and organizational barriers that can prevent taking full advantage of available technology. Despite the steady moderation of price and user-friendly electronic linkages, ay question its usefulness and related costs. New users of this technology have 10 be trained, and, in some cases, they also have to be converted from a skeptical some departments or us to an accepting atitude toward new technologies. ‘The most significant challenge might be a lack of trust among companies along the chain and even across functional areas or teams within organizations Integrating supply chain processes means sharing data, and that is generally seen as a risk. But there's little point in network connectivity if supply chain partners can’t use those connections to process shared information, ‘An organization is significantly impacted by the manner in which it creates and organizes its functions and how the people within the departments manag business operations and key processes. Admittedly, very few organizations have ‘a department called “supply chain management.” Horizontally organized chains typically have no unified ownership or management structures (unlike vertically integrated supply chains). Yet the development of supply chain strategy and the control of supply chain processes depend entirely on having the right people in place—people educated in supply chain thinking rather than functional thinking, the Supply chain pariner organizations need to have the capability to develop expertise in hiring and training end to properly deploy highly skilled, process oriented, and knowledgeable supply chain specialists to design and monitor supply chain processes. Of necessity, supply chain management sometimes draws upon personnel attached to multiple functions, yet they may be available only part-time to the supply chain team Unlike specialists in traditional functions—production, logistics, procurement, tc. —an organization needs supply chain personnel with expertise that extends beyond deep knowledge of one area (or highly developed skills in one functional discipline). They need to be broadly knowledgeable about the enterprise as a whole and trained in the art of inspiring people with different skills and attitudes to work harmoniously in pursuit of a common goel. People 1-102 ‘Version 3.0, 2012 Edition Q rninttnpe cnrSection B: Supply Chain Alignment with Business Strategy on supply chain teams may represent every function, from procurement to marketing. On occasion, the supply chain manager may need to work as @ diplomatic go-between when mistrust and misunderstanding prevent team members from cooperating with one another. In addition to the multidisciplinary, communication-savvy, holistically oriented supply chain manager, the company needs people with other special skills that will contribute to the success of supply chain initiatives. For instance, a team member with cost-management skills comes in handy when planning an initiative. With so much pressure to keep costs low, an initiative to upgrade supply chain technology or optimize the logistics network must be skillfully ‘managed to keep costs in line and avoid driving up product prices. Modeling the process in advance with data from supply chain partners can help increase efficiency when the real work begins. In addition, supply chain management initiatives need the help of technology specialists with skill in business software, Web development, and electronic networks. Finding and developing the level of talent required to manage supply chains implies skilled and knowledgeable human resources management and skilled staff, Especially in large organizations with complex bureaucratic structures, human resources policies may work against, rather than in conjunction with, the supply chain strategy. This further underscores the rationale of the supply chain being the responsibility of an executive-level champion. In sum, an organization needs to be staffed with supply chain professionals, full- or part-time, who can do the following: a =e See the supply chain as one continuous entity made up of linked processes ‘© Manage relationships among team members and between teams to coordinate ~~~ Company used competitive benchmarking to make a truly remarkable breakthrough in improving their accounts payable process. Their first restructuring of accounts payable, without a benchmarked goal, yielded a 20 percent reduction in personnel. For a second pass at improving the . Process, Ford benchmarked its performance against Mazda and was able to cut personnel from 500 to 75. Seeing a competitor exceeding performance in a key process lets an enterprise know that change is possible. And yet, despite the dramatic, example from the automobile industry, restricting the search for benchmarks to a company’s direct competitors may be too limiting. Best- in-class benchmarking provides another method of goal setting, with some advantages © 2012 aPics 1-139 ‘Version 3.0, 2012 Edition Ai reseed @ rete meme nensertireeModule 1: Fundamentals of Supply Chain Management © 2012 APICS All rghts reserved Best-in-class benchmarking. With the best-in-class benchmarking strategy, a firm looks to the best anywhere to develop a goal for improvement. Widening the search for a benchmark makes it possible to find even more dramatic and inspiring possibilities, Accounts payable doesn’t differ radically from industry to industry; Ford might have been able to find an even more efficient model for the process than Mazda's by looking outside the car industry Even in areas where at first the dissimilarities s best-in-class approach may still help develop the most inspiring goals. A major health-care provider in Minnesota revamped the procedures in its endoscopy m an overwhelming barrie clinic by borrowing from Toyota's lean production system. While receiving some criticism for borrowing assembly-line methods to improve delivery of a service, in fact the provider not only enabled doctors to reduce the backlog of patients waiting for exams but it allowed the doctors to have at least as much time with each patient. The improvements also saved substantial money. The decision to process patients with the same efficiency Toyota achieves in its ‘manufacturing plants tumed out to be good for the doctors, the patients, and the clinic. The health-care provider benefited from getting outside its own industry—not only for a benchmark but for innovative process improvement techniques. Process benchmarking. Another approach to improving a process is to benchmark it against a checklist of world-class process descriptions. Rather than focusing on measurable aspects of process performance such as duration of cycle time, a process checklist draws attention to the features of the process, to its qualitative aspects. The Oliver Wight group of business excellence consultants provides such a checklist for use in all industries. ‘The process descriptions reflect the consultants’ experiences around the world, and they include considerations such as: © Use of strategy to drive supply chain planning and execution ‘* Optimization of capacity, inventory, and other supply chain elements ‘+ Use of monthly reviews for monitoring capability and flexibility + Presence of data-sharing processes, financial integration, and teams cluding suppliers and customers, In sum, benchmarking your goals against the best in your industry or the best in class provides an effective way to choose realistic yet inspiring goals. It's only natural to have more faith in your ability to reach a goal if you know someone else has been there before, Not long after British athlete Roger Bannister reset the benchmark for running a mile at slightly less than four minutes in 1954, other runners not only broke four minutes but ran past Bannister’s own mark. vo Version 3.0, 2012 Eton =Managing change © 2012 aPICS All sights reserved Section C: Supply Chain Design and Improvement Considerations It's worth noting that Bannister himself did not use another runner's performance as his benchmark. He reached beyond any other current or historical le runners for a pioneering goal. Sometimes, even the best-in-class ‘mark may be too limited a goal for a firm to follow. Someone—or some centerprise—has to be first. But even a pioneer like Bannister followed a strategy of continuous improvement to reach his goal. He got there through years of ‘taining, continuously shaving small amounts of time off his previous performances until he surpassed the speed that some believed was physiologically impossible. He reached his goal, quite literally, one step at a time. Here are some guidelines for teams working with KPIs and benchmarks: Establish a set of key performance indicators using a balanced scorecard approach and determine baselines for each indicat Limit the KPIs to a workable number. ‘Be sure to include the four general areas of the balanced scorecard: business process improvement (which you should have covered in the design of your initiative), customer considerations, financial impact, and growth and earning. Growth and learning can be crucial to the success of supply chain process improvements. Establish baseline measures for each KPI and set targets (using benchmarks 1s you did for process improvement) Be sure the change provides a measurable, positive effect on customers and ‘your bottom line; otherwise, your process improvement won’t be fully successful. ‘Monitor the performance of the KPIs. Let's take a look atthe next step—how you and your team implement the improvement and manage the changes brought about by these CI initiatives, ‘The following are some steps to take as you put your process improvement initiative into action and track progress made over time. Develop both a master plan and a set of project plans. ‘You need two implementation plans, each identifying milestones, tasks, and resources: The master plan contains all improvements in sequence and delineates the end of the implementation and the beginning of the continuous improvement for each. Project plans schedule all steps required to achieve the targets for each KPI, set deadlines, and assign accountability for achieving results 14 ® Version 3.0, 2012 EditionModule 1: Fundamentals of Supply Chain Management ‘Communicate plans and measures to all participants in the process. You can't change one part of a system without affecting other parts, All firms and functional areas involved in the process must know precisely what the improvement initiative involves so they can develop their own objectives snd strategies to contribute to a synchronized effort. Consider conducting a pilot. ‘A successfil pilot study with a limited number of firms may inspire confidence in other supply chain partners and make full implementation easier. In eflect. the outcome of the pilot sets a benchmark for the of the partners Proactively address change management issues. Change can be enormously disruptive across a large organization if i isn't hhandled property. To ease a firm, let alone several supply chain partners, into a TOM project, the team, along with executives, must prepare the ground carefully before the initiative and maintain communication during, and possibly long after, implementation. Some organizational and personal progress toward goals if they aren’t addressed in the beginning: ssues may hinder + Some firms may need to change from a functional (o a process-oriented structure—to undergo Stage 3 supply chain evolution, in other words. Structural changes may be major and should be included in the master and project plans. * Highly competent management of change is important. But leadership from the top ranks of the organization is crucial to the success of continuous process improvement, Ifthe leaders inthe affected partner firms aren't brought into the process as full partners and passionate advocates, getting the employees to commit to the change will be difficult or impossible, * Growth and leaning will most likely have to be integral to the initiative People must not be introduced to new roles and new expectations without being thoroughly prepared. Training can take different forms depending on roles and responsibilities. New sbills may best be fearned in a person-to- person or classroom context with follow-up on the job. New procedures may best be taught on the job with easy-to-use job aids for reinforcement. (If the processes are computer-based, the training should also be computer-based.) ‘+ Incentives, too, should be adjusted to reflect a balanced scorecard, The measures of success must reflect the four quadrants of the scorecard—not only the success of the initiative in meeting its process improvement goals. © 2012 antes waa Version 3.0, 2012 Fain ‘eis served @_vosctoepremesn essenSection C: Supply Chain Design and Improvement Considerations ‘+ All firms involved in the revised process will have to work together in true partnership, sharing information and adjusting their strategies with an eye to the success of the overall chain and the positive impact on the end customer. Information sharing may have to be approached diplomatically, with an emphasis on what can be gained in terms of enhanced value for the customer and smoother operation of the chain. Monitor results and make adjustments. Set periodic targets for KPIs from the balanced scorecard, being sure to meet financial goals as well as other scorecard goals, Work under the The most successful continuous improvement programs rely on more than one improvernent technique. And you will be learning much more about these other quality umbrella philosophies in Module 3, Section E, “Continuous Improvement”: © Lean atid Just-in-Time (JIT), for example, are completely compatible in their goals of squeezing waste out of all processes in the supply chain. ‘When a lean system is running on “tai” time, in fact, JIT delivery of supplies is virtually a necessity to honor the commitment to zero ‘accumulation of inventory in production queues. © Atthe same time, six sigma attention to the reduction of errors keeps the focus on achieving high-quality processes, not just fast ones. Errors inevitably introduce waste into a process. ‘© The theory of constraints (TOC) has a different focus than the other quality initiatives. Rather than reducing waste (lean), optimizing delivery timing (IID), oF removing variability (six sigma), the theory of constraints emphasizes the need to achieve organizational goals by removing limits imposed by a constraint. Part of that effort involves maintaining buffers at the constraints, which may seem to be incompatible with lean and JIT, but as the buffers are added only just before the current constraint, the other oe parts of the system could have reduced busters. a Summing up _ In competitive markets, success goes only to those organizations that are strongly committed to continuous improvement and share the enthusiasm with their supply chain partners. Bringing the right product to customers at the right price and at the right time and place means never being satisfied with current levels of product quality or supply chain performance. Supply chains, markets, customer demand, and improvement strategies themselves are constantly evolving, ensuring that today’s best-in-class benchmarks will be entry-level performance tomorrow—just as the four-minute mile changed from a superhuman ideal goal to back-of-the-pack perf yrmance. © 2012 aPICS 1-143 Version 3.0, 2012 Edition All rights reserved QQ) weet on ope conane mane ppModule 1: Fundamentals of Supply Chain Management Progress Check ‘The following questions are included as study aids and may not follow the format used for questions in the APICS CSCP examination. Read each question and respond in the space provided. Answers and page references appear on the page following the progress check questions. |. ‘The systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and servic defines which of the following? (0) Market plan (0) b. Marketing research (0) c. Market strategy (0d Marketplace 2, What factors should be taken into consideration when designing a supply chain? ) a. Inventory location and levels ‘Support systems and information technology Network configuration Product design All of the above ) b. de a ) o 3. True or false? In the ideal supply chain, product design is best managed by the engineering department without input from other functions. () Tne () False 4, True or false? Continuous improvement is one aspect of total quality management, () Tne () False 5. What are the two major components of quality? () a. Absence of customer returns () be Absence of defects (Ce Degree of customer satisfaction with a product’s traits and features () 4 aandb () & bande 6. Number the following stages of the continuous improvement model from I to 4, with | being the first stage. (.) @ Project planning (Cd. Process assessment (.) @& Implementation and change management (.) d._ Process analysis © 2012 APICS 114g Version 3.0, 2012 Edition suighereeved QD vwesn tormentSection C: Supply Chain Design and Improvement Considerations ‘What symbol signifies a decision point in a process map or flowchart? (a Rectangle (.) b. Two opposite-pointing arrows (Diamond () @ Oval 8. What does a SIPOC diagram show? (.) & Subprocesses within a larger supply chain process (Supply chain revenues from various product lines () c. Least expensive manufacturing flow (.) d. Relationships between suppliers 9, Internal failure costs are (.) a those used to determine the degree of conformance. () d. those incurred to keep appraisal costs to a minimum, ()c. those associated with the customer's receipt of the product. (those associated with defects found before the customer receives the product, 10. True or false? The balanced scorecard is intended as a tool for tracking business performance without reference to financial impact. () True ( ) False 11, Agility isa SCOR model metric. What does it refer to? (.) & Supply chain’s ability to quickly bounce back from price increases by suppliers (.) b. Supply chain’s ability to respond to unplanned decreases in customer orders (ye Supply chain’s ability to develop competitive sales strategies () d Supply chain’s ability to complete a customer order 12. Which of the following might be a supply chain KPI for product merchandizing? () a. Scrap () b. Holding cost (.) & Total supply chain inventory tums () a Visibility 13, Which of the following is true of a supply chain process key performance indicator (KPI? (.) @ Itshould promote collaborative behavior across functions. () b. Itshould focus on one area or department. () G. Itshould be disconnected from overall strategies. (.) @ Itshould ignore interrelationships and interdependencies. © 2012 aPICS 114s Version 3.0, 2012 Eaition ‘Alii seed @ vera itnyecnan neModule 1: Fundamentals of Supply Chain Management 14, Thue or false? Visibility should be low in a supply chain in order to help synchronize operations and inerease value (eine () False 1S. Ifa financial services firm designs an initiative to improve its sales process to the point that its closing ratio atleast equals a best-in-class benchmark, it wants the average ratio to be equal to which of the following? () a Ratio of the best salesperson in the firm (Cb. Ratio of the best salesperson in the financial industry () & Ratio of the best firm in the financial industry () 4. Ratio ofthe best firm in any industry © 2012 APICS 1-146 Version 3.0, 2012 Edition ‘All ights reserved QD) riven ory cre we etSection C: Supply Chain Design and Improvement Considerations Progress check answers 1. b@.1-16 2. e(p. 1-119) 3. False (p. 1-122) 4, True (p. 1-124) 5. e(p. 1-124) 6. db,a,c(p. 1-127) 7. ¢(p.1-127) 8. a(p. 1-129) 9. d(p.1-131) 10. False (p. 1-132) 11, b (p. 1-133) 12. ¢(p. 1-136) 13. a(p. 1-136) 14, False (p. 1-137) 15. d(p. 1-139) © 2012 aPICS 1147 Version 3.0, 2012 Edition All tights reserved BD roeetco sence atermSection D: Inventory Management section is designed to Define inventory and inventory management Identify key supply chain performance indicators relevant to inventory ma Describe the factors that must be weighed when setting an inventory policy Identify the reasons why inventory would be managed in aggregate and al the item level Identify the main types of inventory Deserie vatid reasons for holding inventory Differentiate between inventory cost calegories Describe the effects of inventory on financial statements Understand the use of inventory turnover as an inventory control tool Comprehend that inventory can be given different values on the balance sheet based on how itis valued by accountants. $$ ++ Topic 1: The Need for Inventory Inventory ‘The APICS Dictionary, 13th edition, defines inventory as follows: basics © 2012 aPIcs All sights reserved ‘Those stocks or items used to support production (raw materials and ‘work-in-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts) Organizations that carry inventory do so because it is a necessary cost of doing business, However, since itis a cost, organizations are continually working to find the optimum levels of inventory that can maximize profits, production efficiency, and customer service. Inventory can also be seen as an investment that, if managed correctly. can be a strategic asset to the organization, For example, inventory can decouple demand and supply, so proper management of inventory can provide protection against variability in either supply or demand, Inventory comes in several different types, classified according to where along ‘the chain itis being held. Each type serves particular functions all of them adding to the chain’s flexibility. A basic understanding of inventory depends ‘upon knowing the types of inventory and the functions performed by each type. as Version 30,2012 Baton Q rims tipec ripSection D: Inventory Management A major portion of a supply chain’s invested capital—from 20 to 60 percent of total assets on the balance sheet—can be tied up in inventory, all those ‘materials, parts, and products that are stocked somewhere or are in transit to their next stop along the chain Inventory ‘The APICS Dictionary, 13th edition, defines inventory management as “the management _ branch of business management concemed with planning and controlling inventories.” Inventory management is required at any organization that carries es planning and controlling inventory from a supply inventory. This role invoh chain perspective and an internal process perspective. The supply chain perspective of inventory management is concemed with the inflows and outflows at each stage, from the ordering of raw materials to customer handoff of finished goods. Therefore this area can benefit strongly from inventory visibility and supply chain collaboration, Inventory visibility is “the extent to which inventory information is shared within a firm and with supply chain parmers” (APICS Dictionary, 13th edition) Inventory management is also integrally connected to production management, s0 the second perspective of inventory management is an internal or centerprisewide view of inventory processing. Inventory feeds into production and/or is a result of production, so planners, master planners, and production schedulers coordinate with each other at each level of production planning refinement. (Operations planning and control is discussed in Module 3, Section B, “Managing Supply from Internal Resources.”) Inventory management is a role that may be the responsibility or concen of many different competing interests at an organization, as shown in Exhibit 1-36. Exhi 41-36; Inventory Management Roles pare reiterates rere gecene ager pretirrsrtenrent rmmtesrenrerenet iy production balanced against low inventory co: PS rirrecerter get Toatn se ae gS srs ecg © 2012 anics Las Version 30,2012 Baton ‘Arihts eeved Q) restore var ttpeModule I: Fundamentals of Supply Chains Management Inventory management KPIs Inventory policy © 2012 aPICS All ight reserved From the supply chain management perspective, there are (wo key performance indicators for inventory: * Reduction of inventory costs related to holding, ordering, and transporting materials, supplies, and finished goods al various points, along the chain © Achievement of customer service targets related to the quality, availability, and on-time delivery of products and services (which may depend upon availability of supplies) Since inventory represents such a large investment, improving inventory ‘management promises a significant boost in return on investment. It also ‘means that poor inventory management can lead to very large problems. Keeping too little inventory in the system can result in such dilemmas as frustratingly long lead times or broken orders, which in turn could lead to lost customers and lower market share, On the other hand, too much inventory could have a negative financial impact and greater risk of @ reduction in inventory value or write-offs of obsolete inventory. In some businesses, obsolescence sneaks up on a product so fast that an inventory overhang can actually cause the products to become outmoded before they ever get sold. ‘The tightrope you walk with inventory management is to reduce the cost of holding and transporting goods while meeting or exceeding customer service goals, Setting and regularly updating an inventory policy is one way organizations perform this balancing act. Inventory policy is a way of formalizing the results of strategic inventory decisions so that they can be implemented consistently. Inventory policy codifies both broad and specific inventory management decisions. On a broad level, inventory policy could specify centralized or decentralized inventory planning and/or warehousing, frequency of communications and coordination, or a geographical inventory positioning strategy such as postponement. On a more specific level, inventory policy can specify rules for order quantities, order timing, when to act on exceptions to rules, and amounts of specific items to purchase versus produce. Organizations weigh a number of factors when setting an inventory policy: © Customer demand. Customer demand is known in advance of production and/or is forecasted, Inventory policy must compensate for variability in demand forecasts. 1-150 ‘Version 3.0, 2012 Edition ® rms tine rennetSection D: Inventory Management + Planning horizon. The duration of the planning horizon affects necessary inventory levels; long-term plans may provide sufficient time to change system capacity. . + Replenishment lead time, The time required to replenish stock at various locations in the supply chain is @ key inventory policy input, especially for long or highly variable lead times. + Product variety. Similar products may compete for budget allocations or retail shelf space and thus need interconnected inventory policies. Product families are also planned together. + Inventory costs. Inventory costs include order costs (production and ‘ransportation) and inventory carrying costs. These costs are discussed later in this section. + Customer service requirements, Inventory policy specifies a level of safety stock per item and location that balances minimizing failure to fill customer orders within an acceptable time (e.., stockouts) against increasing inventory costs, Some of these factors are discussed more later in this section, while others are discussed elsewhere in these modules. + Topic 2: Aggregate and Item Inventory Management Inventory is managed as an overall strategic concem (in aggregate) and at the individual item level. Each method is necessary. Together these two methods provide inventory managers with sufficient information to meet both strategic and operational requirements. Aggregate Aggregation is “the concept that pooling random variables reduces the inventory relative variance of the resulting aggregated variable. For example, the management _ “eative variance in sales of all models of automobiles sold by a firm is less than that for a single model” (APICS Dictionary, 13th edition). Ageregate inventory management is primarily concerned with the financial impact of inventories, which means getting to an optimal level of inventory that can produce the greatest overall profit for the organization and the supply chain, The objectives of aggregate inventory management are shown in Exhibit 1-37 ® 2013 anics st Version 3.0, 2012 aion sii aModule 1: Fundamentals of Supply Chery Management © 2012 APICS All sights reserved Exhibit 1-37: Objectives of Aggregate Inventory Management ‘Support organizational strategy and operations. upport financial objectives. Balance: + Customer service + Operations efficiency + Inventory investment cost objectives. Aggregating, or grouping, inventory helps inventory managers determine the costs and benefits ofa particular group of inventory. Inventory can be aggregated by: + Demand pattern (e.g., women’s running shoes versus men’s running shoes) ‘+ Production process (¢.g., men’s and women’s running shoes produced on the same production line) Stage of production flow (e.g, raw materials, finished goods) ‘+ Relative value to the organization (e.g. ABC inventory analysis, which is discussed in Module 2, Section J, “Inventory Planning and Control”) ‘+ Product or SKU family or type (e.g. finished goods with similar functions but variations in models, packaging, colors or styles) (The APICS Dictionary, 13th edition, defines stockkeeping unit as “an inventory item {or] ina distribution system, an item at ¢ particular geographic location.”) ‘+ Distribution pattern (e.g., products that originate at the same source and/or are to be delivered to the same location or customer zone). Inventory is aggregated prior to analysis not only because the large number of individual items in some organizations would be impractical to analyze individually but also because when forecasting supply and demand patterns, aggregate-level forecasts are more accurate than item-level forecasts. This is because, as noted in the definition, aggregation reduces the variability in data, ‘Note that ageregation is performed only to the level that the groupings provide effective analysis 1-152 ‘Version 3.0, 2012 Edition @ reece vr‘Section D: Inventory Management Aggregate inventory management can be used to: © Determine the types of inventory to hold * Optimize the flow of inventory and provide suitable buffers between stages + Match supply with demand + Set inventory objectives and inventory policy * Calculate inventory costs by category ‘Perform sales and operations planning, including demand management and production and resource planning, Item inventory Item inventory management is used in short-term operational decision making. management — Management specifies rules to follow for individual inventory items using inventory policy and/or information technology systems. These rules specify: © When to order inventory How to determine order size per order + Relative importance of each inventory item * Inventory control procedures for individual items. ‘The goal of item inventory management is to enable planners to translate strategic inventory goals into measurable results: proper production and distribution of each product or SKU. While master planning plans production at the family (aggregate) level, master scheduling plans inventory production at the item level (involves generation of the item-level master production schedule). Item inventory management is also necessary at retail locations, ‘which must anticipate demand for inventory both at the aggregate and item level to ensure that individual items are available for purchase. Item inventory ‘management is implemented through inventory planning, inventory models, and inventory control, which are discussed in Module 2, Section J, “Inventory Planning and Control.” + Topic 3: Flow of Material ‘The flow of material is a representation of where the inventory is located in the manufacturing process. It can also be seen as an assessment of the value that has been added to the inventory to date as it proceeds through the manufacturing stages. Types of Classification of inventory type depends on the point of reference, meaning that inventory ‘raw material supplier's finished good becomes a manufacturer's raw material ‘upon transfer. © 2012 aPics, 1153, Version 3.0, 2012 Ealtion ‘lahore Q ne csonponeenanmneeMedlule 1: Furdamenuals of Supply Chain Management © 2012 aPIcs, All ight reserved Firms along the supply chain maintain various types of inventory + Raw materials inventory. Raw materials are purchased parts, materials, or subassemblies to @ production process that have been acquired but have not yet entered production. ‘+ Work-in-process (WIP) inventory. Work-in-process (WIP) inventory includes “goods in various stages of completion throughout the plant including all material from raw material that has been released! for intial processing up to completely processed material awaiting final inspection and acceptance as finished goods inventory” (APICS Dictionary, 13th edition), In other words, work-in-process inventory is inventory in which value has been added but itis not yet a finished good. + Finished goods inventory. These are the finished, ready-to-use products ‘waiting to be purchased by the customer. + MRO (maintenance/repair/operations) inventory. MRO inventory includes spare parts, lubricants, hand tools, and cleaning supplies that are needed to maintain production but are not in the final product, Because of this, MRO is expensed rather than being an asset on the balance sheet like the other types of inventory (see Topic 6). Maintaining reliable production requires keeping an inventory of supplies for both routine maintenance and emergency repairs. Attention to production machinery and MRO forecasting can reduce equipment costs and downtime. One additional type of inventory that is often overlooked is in-transit inventory. ‘+ In-transit (distribution or pipeline) inventory. In-transit inventory is “inventory in the transportation network and the distribution system, including the flow through intermediate stocking points” (APICS Dictionary, 13th edition). Some amount of raw materials, WIP, finished goods, or MRO inventory is in transit at any given time due to the never- ending cycle of production and replenishment; an example is inventory on container ships for international shipments. Counting only the inventory that is currently in stock could be omitting a significant percentage of total inventory. In-transit inventory is measured by the average annul inventory in transit, which is a function of transit time in days and annual demand. Reducing this cost requires finding ways to reduce transit time because less volume needs to be in transit ata given time, 1-154 ® Version 3.0, 2012 EditionSection D: Inventory Management In summary, inventory can pile up at all stages along the supply chain, from harvested raw materials, through work in process, to finished goods waiting to bbe purchased, ‘The management alternatives to inventory include the following: + Reduced variability in the quality, amount, and timing of supply deliveries ‘+ Shorter production cycle times ‘+ Careful maintenance of produetion equipment ‘Improved demand forecasting and/or use of actual demand orders + Topic 4: Functions of Inventory Why have Inventory can be seen as both an asset and a liability. The following functions, inventory? cr purposes, of inventory answer the question “Why have inventory in the supply chain?” ‘+ Anticipation inventory. Anticipation inventory is the inventory kept in stock at each location to cover the demand projected in the organization’s demand plan, The demand plan will include anticipation of demand peaks and valleys due to promotions or changes in seasonal demand. In a level production strategy, anticipation inventory may require building additional inventory before itis needed in order to cover the anticipated increased demand later in the year. © Safety stock (fluctuation inventory). The APICS Dictionary, 13th edition, defines safety stock (fluctuation inventory) as follows: 1) In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. 2) Inthe context of master production scheduling, the additional inventory and-capacity planned as protection against foreoest errors and short-term changes in the backlog. Overplanning can be used to create safety stock. Safety stock is held as a buffer against miscalculations of timing ot quantity. It decouples adjacent manufacturing processes or partners along the supply chain so the problems of the upstream process/partner won’t cause difficulties for the downstream process/partner—at least, not right away. Ifa supplier goes bankrupt suddenly, for instance, safety stock can, bbe used to continue production while looking for a replacement supplier. Safety stock helps meet customer service targets and reduces stockouts costs. Use of safety stock to satisfy unplanned demand should be © 2012 aPics ass Version 30,2012 Eton ‘Asis revered Qtr net poeModule 1: Fundamentals of Supply Chain Management © 2012 APICS All sights reserved considered normal to a point, Inventory policy can be used to set an acceptable frequency for use of safety stock; increased frequency of use over this target is an exception indicating there may not be enough inventory. Decreased frequency of use under this target may indicate there may be too much inventory. Infrequent or non-use of safety stock is a red flag that there is too much inventory. Lot-si wentory or eycle stoek. Lot-size inventory is the purchase or manufacture of inventory in quantities greater than needed to reevive ‘quantity discounts or full truck discounts or to match batch sizes for production, A more general term that encompasses other types of reordering systems other than in full lots is eycle stock. The APICS Dictionary, 13th edition, defines cycle stock as inventory that “depletes sradually as customer orders are received and is replenished cyclically when supplier orders are received.” Hedge inventory. Hedge inventory is not a commonly used term in organizations, but many organizations do practice hedging when it comes to inventory. Hedging involves managing risk by building, buying, or contractually guaranteeing additional inventory at a set price if supply could be threatened or prices could be rising. These decisions involve speculating on events such as the weather, the economy, labor strikes, civ strife, or political events. Buffer inventory. Buffers are materials maintained to keep production throughput steady at work centers. It isa term related to the theory of constraints discussed elsewhere in these materials. Decoupling. The APICS Dictionary, 13th edition, defines decoupling as follows: Creating independence between supply and use of material ‘Commonly denotes providing inventory between operations so that fluctuations in the production rate ofthe supplying operation do not canstrain production or use rates of the next operat Decoupling allows supply functions and demand functions to operate at differing, independent rates. Holding a supply of raw materials inventory, for example, decouples the manufacturer from its suppliers. The sawmill operator wants to have a ready supply of trees to turn into dimensional lumber. The furniture manufacturer wants enough dimensional lumber to process, vase Version 3.02012 Baton Qtr tnSection D: Inventory Management Since many products are produced in batches when there are competing uses for the same work centers, decoupling also allows scheduling use of a work center So that some production may occur earlier than needed to avoid bottlenecks in overall production. While this adds to inventory build- up because some WIP inventory will be ready for the next work center before it is needed, it is an example of the need to optimize the overall flow of materials in production. While decoupling is often necessary, supply chain managers look for ways to achieve the same goals without the holding costs by reducing variability in quality, quantity, or delivery time. + Topic 5: Inventory-Related Cost Categories Inventory A number of specific costs are associated with inventory, including acquisition costs costs; landed costs; carrying costs (also called holding costs); ordering costs; backorder, lost sale, and lost customer costs; and capacity variance costs. Acquisition costs The APICS Dictionary, 13th edition, defines acquisition cost as “the cost required to obtain one or more units of an item, It is order quantity times unit cost.” It is also referred to as product cost or purchase price. Landed costs According to the APICS Dictionary, 13th edition, landed costs include “the product cost plus the costs of logistics, such as warehousing, transportation, and handling fees.” Landed costs for purchased inventory are the sum of al direct costs, including the price paid (ie., acquisition cost), transportation to the site, customs, and insurance. Landed costs for intemally sourced inventory include direct labor, direct materials, and factory overhead costs. Carrying costs Carrying cost is “a percentage of the dollar value of inventory per unit of time (holding costs) (generally one year)” (APICS Dictionary, 13th edition). It is a variable cost that increases as the level of inventory increases, Carrying costs may be as high as 40 percent of the value of the inventory and are unlikely to be less than 15 percent. They include all the expenses involved in housing the inventory, such as the following: + Storage costs. Storage costs include allocations for rent, operating cost, taxes, material-handling costs, lease payments for equipment, depreciation, power, and operating costs. These material, labor, and overhead costs for storing and transporting inventory are allocated to individual SKUs based ‘on their volume (called cube), weight, or density. Large, dense, or difficult- to-handle goods have higher storage costs. © 2012 aPIcs 1.157 ‘Version 3.0, 2012 Eeéition ‘sarod ®rst vseModule 1: Fundamentals of Supply Chait Management Ordering costs © 2012 APICS All rights reserved ‘+ Capital costs. inventory requires financing, and capital costs refer to the return expected by creditors and investors because the money could be invested elsewhere (called opportunity cost). Companies get financing from debt or equity sources. Debt sources include borrowing arrangements that charge interest and require repayment; equity sources include money from investors (who get an ownership stake in the organization) plis retained earnings (past profits). The relative proportion or weight of each of thes sources is called the weighted average cost of capital (WACC). WACC ean be used as a required percentage return on inventory sales that must be exceeded, + Risk costs. Risk is related to the sensitivity ofthe inventory to loss of value, such as its perishability, speed of obsolescence, or likelihood of the? Risk costs include the cost of insurance, inventory value reductions, and inventory write-offs. Subjective quantifications of risk can be added to inventory, such as a two percent per day decline in inventory value due to obsolescence. In this example, inventory remaining in stock for more than 50 days is considered valueless. The APICS Dictionary, 13th edition, defines ordering costs as follows: Used in calculating order quantities, the costs that increase as the number of orders placed increases. It includes costs related to the clerical work of preparing, releasing, monitoring, and receiving orders, the physical handling of goods, inspections, and setup costs, as applicable. Ordering costs are all those costs that do not vary due to quantities ordered but, only vary by the frequency of ordering, Ordering costs include costs incurred when ordering inventory and setup costs resulting from the process of preparing to go into production to fill the order. For purchased materials, ordering costs include all the costs associated with the purchasing process. Use of electronic forms and payment transfers can reduce ordering costs. Less frequent ordering can also reduce these costs but at the price of additional inventory holding costs. Setup costs, which are all those expenses incurred when preparing machines and processes to manufacture an order, include labor for cleaning machinery and making any necessary adjustments or modifications. This requires shutting down the machines, but it is sometimes possible to reduce the shutdown time by doing some preparation work off the work site while the machines are still processing previous orders, 1-158 Version 3.0, 2012 Edition ———Backorder, lost sale, and lost customer costs Capacity variance costs Cost balancing Section D: Inventory Management The cost of backorders, lost sales, and lost customers are costs related to customer service, A backorder (also known as a stockout) is “an unfilled customer order or commitment. .an immediate (or past due) demand against an item whose inventory is insufficient to satisfy the demand” (APICS Dictionary, 13th edition). The cost of backorders, lost sales, and lost customers can be difficult to quantify financially but can be measured using various means such as percentage of orders shipped on schedule (see Module 2, Section H, “Customer Relationship Management”), which can help quantify the safety stock investment needed for a particular item at @ particular location to keep this risk at acceptable levels. Capacity variance costs are the costs of changing capacity beyond a “normal” range, including the costs of overtime, additional shifts, Layofs, or plant closings. Capacity variance costs can be minimized by production leveling strategies (producing a consistent amount throughout the year), but this strategy increases inventory holding costs during periods of low demand. Inventory managers aim to determine order amounts and timing with an eye to reducing acquisition, carrying, and ordering costs without sacrificing customer service. (Remember, an order schedule is necessary for managers all along the chain—the retailer and the distributor order more finished goods, the ‘manufacturer orders more components and supplies, the supplier orders its own materials and supplies, and so on.) +* Topic 6: Effects of Inventory on the Financial Statements Balancing inventory with cash flow © 2012 API All rights reserved Tn addition to inventory describing the things the company owns that are available for sale or used in the production of things available for sale, inventory can also be viewed as all the money currently tied up in the supply ‘chain, What is critical to know is this: As much as 40 to 50 percent of a supply chain’s invested working capital can be tied up in inventory. While inventory can be seen as the buffer that hides the flaws in the supply chain, it can also be seen as the lubricant that keeps a supply chain flexible. A flexible supply chain is able to respond quickly to intemal or external (market) changes, such as fluctuations in demand. Therefore, inventory management is an integral supply chain management role because it strongly affects the company's cash flows and financial position. In order to Keep the cash flow turning over, the goal is to efficiently manage the comipany’s inventory level and cost while maintaining and improving customer 1-159 ‘Version 3.0, 2012 Edition @ ronson nnaModule I: Fundamentals of Supply Chain Management Balance sheet Inventory as an asset © 2012 aPIcs All fights reserved satisfaction. If company has fast delivery and strong customer satisfaction because it keeps a large inventory, it can also face financial failure because of all of the capital tied up in inventory. On the other hand, if a company does @ ‘reat job at reducing its inventory and associated costs down to next to nothing, it may run the risk of being unable to deliver the requested products, This may cause customers to take their business elsewhere, Balancing cost. inventory level, and customer service are vital. Use of the financial statements for inventory management is an exercise in He inventory management at the aggregate level. As noted earlier, ayerew inventory management views inventory in total to determine if the flow of ‘materials through the various inventory classifications is efficient and effective enough to maximize profits, Discussions surrounding the financial impacts of inventory are generally framed around reducing inventory, reducing inventory costs, or increasing the number of times per year that cash is invested into inventory and returned in the form of revenue, called inventory turnover. The financial statements introduced in Section A, “Supply Chain Management Concepts,” are revisited here with an emphasis on inventory. Recall that the balance sheet has two major sections that have to be in balance as per the accounting equation: Assets = Liabilties + Owners’ Equity Exhibit 1-38 on the next page displays a sample balance sheet for a publicly traded company. Inventory is a current asset that is broken down in this example by raw materials, work-in-process inventory, and finished goods inventory. Note that most externally available balance sheets will only list total inventory, ‘while intemal reports made for management purposes often have more details such as these, ‘Raw materials, WIP, and finished goods are carried as current assets on the balance sheet. However, maintenance/repair/operations (MRO) inventory is a period expense. As such, itis expensed on the income statement during the period in which it is purchased. The balance sheet items do not impact the income statement until the inventory is sold, reduced in fair market value, or ‘written off (sometimes called junked inventory). 1160 ® Version 3.0, 2012 EditionSection D: Inventory Management Exhibit 1-38: Sample Balance Sheet Showing Two Years of Results J Statement of financial Ta Thousands (000 [reo pecomperse value ata pointin =F 20102014 iment on | aS time (end of year) the books at| wpa gon dre >> CURRENT ASSETS ‘sacurrent (CASH AND CASH EQUIVALENTS asset on the [i 0 = balance sheet orate ol a ona) ah READ EXPENSES al ‘become an '// ACCOUNTS RECEIVABLE sid 562. ‘expense on the /TOTAL OURRENT ASSETS (400+ 4372 = 4697 4,907 Rem taon| oe ene ey acsera Boa GROSS PROPERTY PLANT AND EUPUERT oon” 70 Tathctne| LESS ADCUMAIATED CEPRECIATN re fer eecee en Pian OO ENE eee “$2222 7 § 2,400 | ers ACCOR E ad eeeer aieesaee ae TOTAL GURAENY LNBs ra Love Tera ABLTES one Tere : cuaaiag crAC DAU eee florea a Comin stock AR VALUE) aaa DOTeRUCEA RETA be RETARD EARNS aos TOTAL LIABILITIES AND an © 212 APICS Allrights reserved ‘While it sounds good that inventory is an asset, what this means to finance is that some amount of the organization's current assets are less liquid than others. (Liquidity is how quickly assets can be converted into cash.) Therefore, optimum inventory holdings are those that equal projected sales in the organization’s demand plan (plus an optimal amount of safety stock), because inventory that is projected to be sold soon is considered more liquid, while inventory in excess of the demand plan is less liquid, 1-161 Version 3.0, 2012 Edition @ weenie penmenn toreModule 1: Fundamentals of Supply Chain Management Finding average inventory ona balance sheet Accounting value of inventory © 2012 APICS All sights reserved ‘Another reason too much inventory is not good is that the value of the inventory on the balance sheet includes the costs involved in producing the inventory. When the inventory is sold, the portion of inventory value that comprises direct materials (the raw materials), direct labor, and factory overhead will become an expense on the income statement that offsets revenue and reduces cash (an asset). In other words, inventory is an asset on the balance sheet until itis sold, at which point only its profit margin contributes to net income, Unnecessary inventory can also magnify quality issues. Ifa defect or other quality issue is discovered, more inventory with the same defect will magnify the quality issue and quality costs for sorap, repair, and/or replacement, ‘An additional risk of carrying too much inventory is the risk of obsolescence or spoilage. As a general rule, the longer the inventory remains on the books, the more likely it will not be sold and will have to be written down to fair market value (what the market will currently pay) or written off completely, Inventory that has to be written off requires physical removal of the items and financial recording of the direct materials, direct labor, and factory overhead as an expense without any offsetting revenue, Note that there are strict accounting, rules for inventory write-offs that organizations will need to Follow. A calculation of average inventory for a period of time is frequently used in ‘managing inventory. With today’s software systems, average inventory can easily be determined at any time. However, to quickly estimate average inventory levels one can add the inventory value at the start of a period to the value at the end of the period and divide by two. As an example, using the data in the balance sheet shown in Exhibit 1-38, we can calculate the average inventory for 201 as follows (amounts in thousands) Us$400 + US8437 2 Average Inventory IS$418.5 Average inventory (however your organization calculates it is used in performance measures and calculations for inventory space requirements. How is the value of inventory on the balance sheet calculated? Inventory ‘valuation is @ financial accounting process that follows specific rules based on the age distribution of inventory. Various accounting methods such as first-in, first-out (FIFO) or last-in, first-out (LIFO) can cause the accounting value of 1-162 Version 3.0, 2012 Ealtion @ rinseIncome statement © 2012. APICS. Allis exved Section D: Inventory Management inventory over time to be more or less in alignment with the actual market value of inventory. These methods are not defined in this text. A commonly used method is standard costing, which was described in Section A, “Supply Chain Management Concepts.” Standard costing applies the standard cost to inventory expenses. Any variances from actual costs are accounted for at the period end and would be reflected in the financial statements. Other reasons that the reported level of inventory on the balance sheet could Giffer from the actual market value of the inventory is that this reported amount of inventory may include inventory that is reserved, obsolete, damaged, or otherwise unsalable, Some of this obsolete or damaged inventory will be written off as it becomes clear that it cannot be sold. Since changes to inventory levels can affect accounting values of inventory and financing needed to sustain the inventory, supply chain managers should consult with financial managers with enough advance notice so the organization can determine how to change inventory levels while keeping the organization solvent and in good standing with creditors and investors, Recall that the income statement shows the cumulative, dynamic relationship of earnings to expenses over a given period of time. Exhibit 1- 39 on the next page provides an example. “Managers, investors, and creditors use the income statement to determine ‘whether the company has made-or lost money during some period of time; such as a quarter or a year. Ain income statement measures profitability in ‘more than one way. Gross profit is determined by subtracting cost of goods sold (COGS) from revenues. COGS includes inventory costs of direct labor, direct materials, and factory overhead for all goods that sold that year. Reducing elements in COGS can therefore directly increase gross profit, Reducing these costs is more effective in increasing profits than increasing revenues through an increase in sales volume because variable costs increase as revenues increase. By reducing costs, you are effectively increasing the profit margin on inventory without having to raise prices. This shows that increasing sales cannot produce higher profits as quickly as lowering costs. It also shows that lowering variable costs in the supply chain can strongly impact profits 1-163 ® ‘Version 3.0, 2012 EditionModule 1: Fundamentals of Supply Chain Management Exhibit 1-39: Sample Income Statement Showing Two Years of Results - See saiainanas oo] Product | For the Years Ending” — — ————— 2010. 2014 evra These | REVENUE (SALES) area 3008 voataem me s TESS Gost OF Goons SOLD eter] (cose) zoo 011 inventory are sol.) | DIRECT LABOR 380 «410 DIRECT MATERIALS $0 4120 FACTORY OVERHEAD Pons rota cogs sett emer) | S*05S PROT ose 97 prog orperses ||, LESS: OPERATING EXPENSES 2010 2014 * are booked in the SELLING EXPENSES 249 272 paesinvith(| GENERAL AND ADMINISTRATIVE 105.182 | LEASE EXPENSE ae TOTAL OPERATING EXPENSES 98 LESS: DEPRECIATION ~0 LESS: INTEREST EXPENSE Ps NET INCOME (PROFIT) BEFORE TAXES a2 INCOME TAXES: 169 NET INCOME (PROFIT) ua baer NET INCOME (AS A PERCENTAGE OF REVENUE) ro COGS is an expense that is matched to the revenue being generated, Strategies that build inventory far in advance of actual sales can defer accounting for expenses that make up COGS until that inventory is sold. However, supply chain managers should understand that operating expenses (see Exhibit 1-39) are expensed on a periodic basis. These immediately booked expenses could cause problems with maintaining financial ratios at the proper levels, However, the actual cash outflows for both the product (depending on payment terms) and period costs would occur as the inventory is being built up (¢g., salaries, uuiilities, maintenance), so cash flow could be an issue without proper ad planning for the inventory build-up on the part of finance. Statement of Exhibit 1-40 on the next page shows the statement of cash flows. Insufficient cash flows cash can cause an organization to fail quickly if it cannot raise funds in some © 2012 APICS All ights reserved other way. Note that an increase in inventory lowers the cash position, while a decrease in inventory increases the cash position (the parentheses show which actions reduce cash), 1164 ‘Version 3.0, 2012 Edition @ roseSection D: Inventory Management Exhibit 1-40: Sample Statement of Cash Flows Showing Two Years of Results [A wiabie firm needs positive cashflow I Ghange ncaa |} | fomenentine | rs Ta Thousands [00 [rate ya—p << ee | ee f Increase in] [OPERATING SECTION. : pen eae nee econ Le AFTERCTAX NET INCOME $33 8267 reduces cas] DEPRECIATION ADD-BACK | 40 46 | Soepezz celta [iNCREASEVOECREASE IN INVENTORY | @ en = LINCREASE)IDECREASE IN ACCOUNTS RECEIVABLE (87) (48) ay INCREASE/(DECREASE) IN ACCOUNTS PAYABLE 102 56. emer cash FLOW FROM OPERATIONS Ean aos | doe) 2 a A CAPEX SPEND (CAPITAL EXPENDITURES) 100) (100 financing means | CASH FLOW FROM OPERATIONS AND INVESTMENT _| 230 185, more debtor equity | “rwvestments were issued: reduced ‘cash means debt was paid down or iidende were paid ‘ 5 : FINANCING SECTION. ‘ADDITIONAL EQUITY CAPITAL | a LESS DIVIDENDS PAID (0) 3) teouners | iNCREASE/(DECREASE) IN LONG-TERM DEBT = [Taroom] INOREASE:(DECREASE) IN SHORT-TERM NOTES _ 15) 15 sce | | CASH FLOW FROM OPERATIONS, INVESTMENTS AND] Cherny | LFINANCING | 165 125 +h ainvesting 1 + Beanie Gace || BEGINNING CASH BALANCE 618 783 [Ending Cash) ENDING CASH BALANCE $763 $ 908 Changes to Inventory can strongly affect cash flows, which in tum can affect covenants inventory affect with Jenders (contractual agreements that may include lender requirements that eee the borrower maintain certain financial ratios at certain levels). Even a - reduction in inventory can create one-time adjustments for finance that impact reporting, However, once the adjustments are made, the long-term financial impact of inventory reductions is usually positive For example, considera situation in which a supply chain manager discovers that some types of inventory at his organization are not selling and have been hheld for long periods of time. He suggests that reducing these types of inventory will allow the organization to reduce inventory by €60 million (m). However, the organization’s chief financial officer raises a major concer. The corganization’s bank hes a financial covenant on its loans that requires the organization to maintain a ratio of 2:1 between owners’ equity and liabilities © 2o12apics L165 Allright reserved BD setenv porcomnner nieceModule I: Fundamensals of Supply Chain Management Inventory turnover ratio Inventory Tumover Ratio = © 2012 APICS All rights reserved (twvice as much in equity). IF inventory is reduced by 60m, in the best case, cash would increase by a few million euros and, in the worst case, the organization would have to pay to serap the inventory. Assuming the transaction could be completed with no net change in income, in order to keep the balance sheet in balance, owners’ equity (retained earnings) would be lowered by the same €60m. To maintain the financial covenant, the organization would need to decrease its liabilities by half’ as much, or €30m. These requirements could put a large burden on cash flow. Failure to maintain the covenant would place the organization in technical default, and its debts, could become immediately due and payable, The result is that the organization is unable to perform the change immediately. The supply chain manager learns the value of consulting with finance prior to making suggestions for a major change in inventory so that finance can determine ways to accommodate the change while keeping the company solvent. The financial officer recommends that to prevent such a situation from recurring that the organization should make financial reservations for aging or obsolete stock, which would help the finance department understand how to prepare for the inventory write-off. ‘The discussion now turns to two financial ratios that have relevance for inventory management, ‘The inventory tumover ratio (also called inventory turns) measures the efficiency of inventory in supporting sales, Inventory tumover can be calculated as follows (using average inventory calculated from the balance sheet and cost of goods sold from the income statement): cocs ___ uss1,830 re = EE = aa ti ‘Average Inventory USS418.5 mes ‘The ratio implies that this average amount of inventory was bought and sold 4.4 times throughout the year to support that amount of sales. Higher inventory ‘turnover ratios are preferted and can result from increasing sales and/or decreasing average inventory. Increasing this ratio means that there is lower investment in inventory relative to sales volume, lower risk of obsolescence, and greater liquidity. It is expressed as higher inventory velocity. The AP/CS Dictionary, 13th edition, tells us that inventory velocity is “the speed with which inventory passes through an organization or supply chain at a given point in time as measured by inventory tumover.” 1-166 Version 3.0, 2012 Edition QD) rrsson rors coscomime waar reeSeotion D: Inventory Management Inventory turnover is important because of the profit margin built into each product, Sales of manufactured products convert inventory and its associated costs into revenue. The profit margins directly add to cash (an asset) and increase owners’ equity on the balance sheet. Therefore, a major objective of supply chain management is to increase the speed that inventory can be converted to cash, ‘The appropriate level of this ratio depends on the organization’s industry. For example, in a French bakery, the tumover of baguettes is close to 365 times per year. However, organizations in the slow-moving spare parts service industry average turnover of less than one to four times per year. Most manufacturing plants experience tumover of between six and 26 times per year. Cash-to-cash — Cash-to-cash cycle time is a metric that can be used as ¢ continuous measure of cycle time how many days the organization's working capital is invested in managing the supply chain, The data needed to calculate cash-to-cash cycle time (average inventory, accounts receivable, and accounts payable) can be found on the balance sheet. One advantage of using this metric is that it can be easily ‘benchmarked to information found in public financial statements such as those of a competitor. Note that while cash-to-cash cycle time can be calculated using historical data, a preferred method for supply chain management is to base the inventory portion of the calculation on more current data such as dividing the current inventory level by average daily demand. Cash-to-cash cycle time is discussed in detail in Module 2, Section E, “Managing the Supply Chain.” © am anics 1167 Veson 3.0, 2012 aon ‘leer @ ronnie setModule 1: Fundamentals of Supple Chain Management +* Progress Check ‘The following questions are included as study aids and may not follow the format used for questions in the APICS CSCP examination, Read each question and respond in the space provided. Answers and page references appear on the page following the progress check questions, |. Which of the following is @ definition of inventory? (a Items to support production, supporting activities, and customer service () b. Speed at which items pass through an organization (ce Branch of management concerned with planning and controlling items (Cd. Cost roll-up as a part goes through a manufacturing process Which of the following is an objective of aggregate inventory management? (a Perform master scheduling at optimum efficiency and effectiveness (.)b. Translate strategic inventory goals into tactical plans for execution () © Balance customer service, operations efficiency, and inventory investment cast objectives. (.) a. Determine the relative importance of inventory by placing it in categories. 3, True or false? Customer service requirements play very little role in setting inventory policy. ( ) True () False 4, ‘True or false? Item inventory management is used in short-term operational decision making rather than aggregate inventory management. (Tre () False 5. Which of the following would be classified as work-in-process inventory? (.) & A lubricant intended to keep production equipment running (.) b. Accomponent part that has just been received at the factory () & Amite that is on its way to a customer ina truck () d. Acompletely processed item awaiting inspection 6. Which of the following is an example of holding inventory in anticipation of future demand? )& Aretailer who orders inventory based on what marketing thinks will be sold ) b, A manufacturer who builds up inventory to reduce the risk of supply failures ) ©. Aretailer who purchases more now because the price is going up ) dA manufacturer who buys in bulk to get a discount © 2012 aPIcs 1-168 ‘Version 3.0, 2012 Edition All rights reserved BD riectonce psn as eyeSection D: Inventory Management 7. Define the inventory function called decoupling and state briefly why it’s a benefit for the partner holding the inventory as well as for the supply chain, 8. Which of the following inventory costs is a variable cost that increases as the level of inventory increases? C) a () >. ( )« C) 4 Ordering costs Backorder costs, Capacity variance costs Carrying costs 9. Which of the following costs will increase if a setailer requests the same amount of inventory to be delivered in twice as many shipments? a b q Ordering costs Item costs Backorder costs Carrying costs 10. Which of the following measures the efficiency of an organization’s inventory? C) Cc) c) C) C) C) 2 i) © 212APICs Allnights reserved a b. Gross profit Inventory tumover Cost of goods sold Standard costing 1169 Version 3.0, 2012 Edition @ roe opera voyModule 1: Fundamentals of Supple Chain Management Progress check answers 1. ap. 1-148) 2. e(p. 1-151) 3. False (p. 1-151) 4, True (p. 1-153) 4(p. 1-154) 6. a(p. 1-155) 7. Decoupling is the inventory function that allows two supply chain partners or funetions in the same company to oper rate at two different rates, For example, a manufacturer can produce product at level rates while distributors are purchasing in choppy periodic batches, (p. 1-156) 8. d(p. 1-157) 9, a(p, 1-158) 10. b(p. 1-166) © 22 anes 170 Version 3.0, 2012 Baton ‘Alig eterved Q rete nePs] HEED EPP RRO wala acas ve Fa baa