Supply Chain Operations: Planning and Sourcing

Chapter 2

Objectives

Gain a conceptual appreciation of the business operations in any supply chain Exercise an executive level understanding of operations involved in supply chain planning and sourcing Start to access how well these operations are working within your own company

Model of Supply Chain Operations

Plan:

means all operations needed to plan and organize the operations in the other three categories.

Source:

the activities necessary to acquire the inputs to create products or services.

Make: the operations required to develop and build the

products and services that a supply chain provides.

Deliver: the activities that are part of receiving customer

orders and delivering products to customers.

Model of Supply Chain Operations

Plan

Demand forecasting and Planning

Variables:
Supply Demand Product characteristics Competitive environment Qualitative Causal Time series simulation

Forecasting methods

Product pricing

Inventory management

Relationship of Cost Structure to Pricing

Cycle inventory

Seasonal inventory Safety inventory

Economic order quantity

Source

Procurement

Credit and collection

Purchasing Consumption management Vendor selection Contract negotiation Contract management Set credit policy Implement credit and collections practices Manage credit risk

Make

Deliver

Product design Production scheduling Facility management Order management Delivery scheduling Return processing

Plan: Demand Forecasting and Planning

Supply chain management decisions are based on forecasts that define: which products will be required, what amount of these products will be called for, and when they will be needed.

Demand Forecasting and Planning

All forecasts deal with four major variables:

Supply: is determined by the number of producers of a product and by the lead times that are associated with a product. Demand: refers to the overall market demand for a group of related products or services. Product Characteristics: includes the features of a product that influence customer demand for the product. Competitive Environment: refers to the actions of a company and its competitors.

Forecasting Methods
There are four basic methods to use when forecasting:

Qualitative: these methods rely upon a persons intuition or subjective opinions about a market. Causal: assume that demand is strongly related to particular environmental or market factors. Time Series: are the most common form of forecasting. They are based on assumption that historical patterns of demand are a good indicator of future demand. Simulation: use combinations of causal and time series methods to imitate the behavior of consumers under different circumstances.

Aggregate Planning

After the demand is forecasted, the next step is to create a plan for the company to meet the expected demand. This is aggregate planning. The aggregate plan becomes the framework within which short-term decisions are made about production, inventory, and distribution. There are three approaches to take in creating aggregate plan.
Amount of production capacity Level of utilization of the production capacity Amount of inventory to carry

Plan: Product Pricing Product

Promotion & Company Cost Structure

The question here is whether it is better to do price promotions during peak periods to increase revenue or during slow periods to cover cost?

If company has flexibility to quickly vary size of work force and productive capacity then peak periods. If company cannot quickly vary size of workforce and productive capacity then slow periods.

Plan: Effects of Price Decrease

Growth in market size: increase in product consumption by existing and new customers. Growth in market share: customers buy this product instead of competing product, market size remain unchanged. Forward buying: customers buy product now than later, market share and size remain unchanged.

Plan: Inventory Management

Cycle Inventory:

the inventory required to meet product demand over the time period between placing orders for the product.

Seasonal Inventory:

when a company or supply chain with a fixed amount of productive capacity decides to produce and stockpile products in anticipation of future demands.

Safety Inventory:

necessary to compensate for the uncertainty that exits in a supply chain.

Plan: 4 Ways to Reduce Safety Inventory

Reduce demand uncertainty: do better

demand forecasts.

Reduce order lead times: shorter lead time

means less safety inventory.

Reduce lead time variability: further

reduces safety inventory need.

Reduce availability uncertainty: ensure

product availability when demand occurs.

Source: Procurement

Procurement function can be divided into five main activities: Purchasing Consumption management Vendor selection Contract negotiation Contract management

Source: Procurement - Purchasing

Routine activities of issuing purchasing orders. Two types of orders are made:
Direct or strategic materials for production Indirect or MRO (maintenance, repair, and operations)

Source: Procurement Consumption Mgt.

Understand what categories of product are being bought throughout the company. Set expected levels of consumption. When consumption is irregular, bring this to the attention of authorities.

Source: Procurement Vendor Selection

Understand the current purchasing situation. Search for suppliers who have both products and service capabilities needed. Narrow down the number of suppliers to do business with.

Source: Procurement Contract Negotiation

Work out specific items, prices, and service levels. Simplest negotiations are for contracts to purchase indirect products. Complex negotiations are for contracts to purchase direct materials.

Source: Procurement Contract Mgt.

Measure and manage vendor performance. Track performance of suppliers and hold them accountable to meet the service levels. Routinely collect data about performance of suppliers.

Source: Credit and Collections

Procurement is the sourcing process for goods and services while credit and collections is process of getting money. Credit operation selects potential customers to do business with. Three main activities are:
Set credit policy Implement credit and collections practices Manage credit risk