Operation and Supply Chain

Management
 A linear map of the way in which value is added by means of a process from raw
Value chain material to finisched delivered product (including sevice after delivery
 Is the collection of business entities or assets involved in obtaining raw materials,
Supply chain converting them into goods in the hands of customer
 Supply chain concept emphazises on aspects of availability and provision-
including cash flow processes, in contrast to value chain concept
 is an integrated and process-oriented planning and steering of all material-,
Supply chain information- and cash flows alongside the whole value chain,from customer to raw
Management material suppliers, with the goals:
o Quality
o Speed
o Dependability
o Flexibility
o Cost

Impact of strategic performance objectives on process design objectives and performance

Operation
Typical process design Some benefit of good process
performance
objective design
objective
 Provide appropriate resources,  Products and services
capable of achieving the produced ”on-specification”
Quality
specification of product or service  Less recycling and wasted
 Error-free processing effort within the process
 Minimize throughput time  Short customer waiting time
Speed  Output rate appropriate for  Low in-process inventory
demand
 Provide dependable process  On-time deliveries of products
resources and services
Dependability
 Reliable process output timing  Less disruption, confusion and
and volume rescheduling within the process
 Provide resources win an  Ability to process a wide range of
appropriate range of capabilities products and services
 Change easily between processing  Low cost/fast product and service
states (what how or how much is change
Flexibility being processed)  Low cost/fast volume and timing
change
 Ability to cope with unexpected
events (e.g. supply or processing
failure)
 Appropriate capacity to meet  Low processing costs
demand  Low resource cost (capital costs)
 Eliminate process waste in terms  Low delay and inventory costs
of (working costs)
o Excess capacity
Cost
o Excess process capacity
o In-process delays
o In-process errors
o Inappropriate process
inputs
Supply chain Bullwhip effect
dynamics is used to describe how a small disturbance at the downstream end
of a supply chain causes increasingly large disturbances, errors, inaccuracies and volatility as
it works its way upstream

What contributes to the bullwhip effect?

 Disorganization between each supply chain link
 Lack of communication between each supply chain link
 Free return policies
 Order batching
 Price variation
 Wrong forecasting of demand

Different processes in an organization

Business  Management processes  work at the process
processes  Business processes  work in the process
 Support processes  work for the process

 The core processes are those processes by which the organization creates its
most value-added and essential transformation for the customer
Design of business processes

Process –Measurement parameters

Steps to describe business processes

1. Define customer(s) and required output
2. Define input and supplier(s)
3. Set up performance objectives and target values
4. Determine process steps
5. Define person for overall-process-, and sub-process responsibility
6. Add specific data (involved parties, employees, resources, …)
Supply chain What is SCOR?
reference  a broad, but highly structured and systematic, framework to supply chain
model (SCOR) improvement.
 uses a methodology, diagnostic and benchmarking tools that are increasingly widely
accepted for evaluating and comparing supply chain activities and their
performance.
 links business processes, performance metrics, practices and people skills into a
unifier structure.
 The model uses three well-known individual techniques over three standardized
levels turned into an integrated approach. These are:
o Business process modelling
o Benchmarking performance
o Best practice analysis
o
Different Levels of SCOR

Level 1 Top Level (Process Types)

Defines the scope and content for the Supply Chain Operations
Reference-model
 Plan processes manage each of these customer–
supplier links and balance aggregate demand
and supply to develop a course of action which
best meets the established business rules.
 Source processes procure goods and services to meet
planned or actual demand.
 Make processes transform goods to a finished state
to meet planned or actual demand.
 Deliver processes perform all customer-facing order
management and fulfilment activities including
outbound logistics.
 Return All processes associated with returning or
receiving returned products for any reason.
These processes extend into post-delivery
customer support.

Level 2 Configuration Level (Process Categories)

In this level, companies configure their supply chain. A company’s
supply chain can be “configured-to-order” at Level 2 from 30 core
“process categories.” Basis for this configuration is

 Make-to-stock Production for warehouse

 Make-to-order Production because of an incoming
customer order
 Engineer-to-order Customer order specific engineering

The Process Categories are defined by the relationship between a

SCOR Process and a Process Type. Each product or product type may
have its own supply-chain.
Level 3 Process Element Level (Decompose Processes)
In this level, detailed process element information for each level 2
process category is presented. Level 3 defines a company’s ability to
compete successfully in its chosen markets, and consists of:
 Process element definitions
 Process element information inputs, and outputs
 Process performance metrics
 Best practices, where applicable
 System capabilities required to support best practices
 Systems/tools
Level 1-3 use Framework Language thanks to standard SCOR definitions
Level 4 and Company and industry defined levels for describing the workflow and
5 the transaction.
Level 4 Workflow
Level 5 Transaction
Level 4 and 5 use industry or company specific language
Forecasting, Time range for forecast, planning and scheduling
Planning and Short-term planning and control
Scheduling  Uses totally disaggregated forecasts or actual demand
 Makes interventions to resources to correct deviations from plans
 Ad hoc consideration of operation objectives

Medium-term planning and control

 Uses partially disaggregated demand forecasts
 Determines resources and contingencies
 Objectives set in both financial and operation terms

Long-Term planning and control

 Uses aggregated demand forecasts
 Determines resources in aggregated form
 Objectives set in largely financial terms

Responding to demand
Dependent and independent demand concepts are closely related to how the operation
chooses to respond to demand.

 resource-to-order: operations that buy-in resources and produce only when they
are demanded by specific customers
 create-to-order or make-to-order: operations that produce products only when
they are demanded by specific customers, resources are permanently stored
 make-to-stock: operations that produce products prior to their being demanded by
specific customers.

P and D in forecast, planning and scheduling

 D = demand time
o time between asking for the productor service and receiving it
 P = throughput time
o Throughput time is how long the operation takes to obtain the resources,
and produce and deliver the product or service.
  P:D ratios indicate the degree of speculation
o The larger P is compared with D, the higher the proportion of speculative
activity in the operation and the greater the risk the operation carries.
Reducing the P:D ratio becomes, in effect, a way of taking some of the risk
out of operations planning and control.

Properties of forecasting
Forecasting focus  Demand (company-level or market-level
 Supply (volume per producer or supplier, aggregated supply
levels on projects, volumes on technology level,…)
 Price (cost of supplies and services, revenues)
Law of forecasting  Forecasts are almost always wrong at least to a certain extend
(yet useful)
 Short term forecasts tend to be more accurate.
 Forecasts on aggregated level tend to be more accurate.
 Forecasts are no substitute for calculated values
Methodology  Qualitative forecasting techniques
Forecasting techniques based on intuition or qualified
estimation. In Use when data are scarce, not available, or
irrelevant.
 Quantitative forecasting models
Forecasting models based on actual or historical data to
generate forecasts.

o Last period model Uses demand of the current

period as a forecast for the
next period
o Moving average Specifies that the output
variable depends linearly on
current and various past
values of stochastic term
o Weighted moving Like moving average but put
average more weight on observations
that are closer to the time
period being forecast (sum
must be 1)
o Exponential smoothing Whereas in the moving
model average the past observations
are weighted equally,
exponential functions are used
to assign exponentially
decreasing weights over time.
Methods of material planning

Demand driven Material planning is based on orders (only).

(deterministic) material
planning
Required data  Orders on hand
 Bill of material
 Throughput times
 Inventory
Fields of application  Customer specific products
 High value
 Consumption driven Historical data provide basis for forecast models
(stochastic) material Required data  Recent consumption
planning  Forecats
Fields of application  Lead times to the customer
less than replenishment
time
 Medium value
Material planning on Comparison of similar products or intuitive proceeding
estimation (heuristic) Required data  No numerical data required
Fields of application  Mass articles with low value
 Ramp up
Sourcing, Terms
Purchasing Procurment Procurement is a business management function. Procurement is
and essentially an acquisition of products and services, especially for the
Procurement business purpose. It covers a complete range of activities from
Operations identifying the need of goods and services to its allotment. In a more
broader sense if we talk, Procurement involves activities like;
 Selecting vendors
 Establishing payment terms
 Negotiating Contracts
 Regulatory compliance
 Analysis and sourcing
Purchasing  Purchasing is a subset of Procurement.
 Purchasing simply involves buying and selling of the goods
and services.
 Purchasing can be best known as the transaction-oriented
function of Procurement.
Scourcing Sourcing, as the name implies, is a finding a source from where the
goods and services can be procured. It is a subsection of the
procurement, where, procurement is concerned with acquiring of
goods and services, sourcing is finding a least expensive supplier for
those goods.
Evaluation of suppliers (portfolio matrix)
Standard  Availability adequate
supplier  Standard specifications of goods and services
 Substitution possible
 low-volume purchase, low-opportunitiy, lower-risk
commodities
Core supplier  Availabilzy adequate
 Alternative suppliers acailable
 Standard product specification
 Substitution possible
 high-volume purchase, low-opportunitiy, lower-risk
commodities
Bottleneck  Substitution difficult
supplier  Monopolistic markets
 High entry barriers
 Critical geographic or political situation
 low volume purchase, High-opportunitiy, higher-risk
commodities
Strategic  Strategically important
supplier  Substitution or alternate supplier difficult to find
 Of major importance for purchasing overall
 high-volume purchase, High-opportunitiy, higher-risk

Evaluation of supplied good and services (portfolio matrix)

Standard Purchasing approaches for these items include using standardized
items products, monitoring and/or optimizing order volume, and optimizing
inventory levels.
 low profit impact, low supply risk
Core items Purchasing approaches to consider here include using your full
purchasing power, substituting products or suppliers, and placing
high-volume orders.
 high profit impact, low supply risk
Bottleneck Useful approaches here include overordering when the item is
items available (lack of reliable availability is one of the most common
reasons that supply is unreliable), and looking for ways to control
vendors
 low profit impact, high supply risk
Strategic These items deserve the most attention from purchasing managers.
items Options include developing long-term supply relationships, analyzing
and managing risks regularly, planning for contingencies, and
considering making the item in-house rather than buying it, if
appropriate
 high profit impact, high supply risk

Categories of goods (items)

Class A item First 20% or so of high value with account for 80% of the total usage
value
Class B item Next 30% of items with around 10% of the total usage value

Class C item Remaining 50% of the items with around 10% of the total usage value
 Comparison of 3 (+1) standard policy

Replenishment Definition
Replenishment is the movement of inventory from upstream -- or reserve -- product storage
locations to downstream -- or primary – storage, picking and shipment locations. The
purpose of replenishment is to keep inventory flowing through the supply chain by
maintaining efficient order and line item fill rates. The process helps prevent costly
inventory overstocking.
Existing replenishment concepts

(Individual)Stock Building up stocks at purchasing site in order to protect

procurement against procurement risks or to derive optimal economic
batch sizes.
Application criteria  High price savings through
quantity discounts
 High requirement of short-term
delivery
 Long replacement times
 Distant suppliers with long
procurement routes
 Volatile consumption that is hard
to forecast
 Consistent production quality is
not ensured
 Low logistics performance of the
supplier (On-time delivery,
deliver flexibility)
 Supplier power forces minimum
purchasing volumes per order
KO criteria  A-Products with high risks of
change
 Highly restricted storability of
materials
Execution criteria  Costly controlling processes
required
 Inventory risks due to product
changes and product outlets
Consignment Supplier is in charge of warehousing operations at purchasing
concept site. Supplier defrays financial risks. Joint planning of target
inventory at vendor-managed inventory (VMI). Transfer of
ownership at delivery
Application criteria  High requirement of short-term
delivery
 A- and B-products
 Continuous consumption in the
mid-term
 High to medium volumes (high
stock turn rate)
KO criteria  Individual demand
Execution criteria  Inventory risks due to product
changes and product outlets
 Supplier change
Contract warehouse Building up stocks at the supplier‘s site to the amount of
concept contractually defined minimum inventory.
Application criteria  High requirement of short-term
delivery
 A- and B-products
 Continuous consumption in the
mid-term
 High to medium volumes (high
 stock turn rate)
 Contractually agreed minimum
stock volume
KO criteria  Individual demand
Execution criteria  Inventory risks due to product
changes and product outlets
 Supplier change
Management of Contractual determination of prices, volumes, delivery
standardized parts conditions, quality, warrantee, etc. between supplier and
purchaser. Delivery release on call.
Application criteria  Standard products / marginal
products
 Continuous demand /
consumption
KO criteria  Individual demand
 Core materials
Execution criteria  Securing confidential product or
price information
 Parts of low value. Goal is to
reduce procurement efforts
Individual Supply site order according to an incoming customer order
procurement (especially at piece production or customer specific
production) Focus is on securing the supply.
Application criteria  Infrequent individual
Requirement
 Highly restricted storability of
materials
 Short delivery times on supplier’s
site
 Absolute on-time delivery
performance of the supplier
 High and consistent product
quality
 Buyer´s markets (more product
available than there are people
who want to buy it)
KO criteria  Replacement time > acceptable
reaction time
 Seller’s market (characterized by
a shortage of goods available for
sale, resulting in pricing power
for the seller)
Execution criteria  Replacement times determine
lead times
Synchronized Procurement without inventory by coordinating the
procurement production of supplier and purchaser.

Forms of synchronized procurement

Just in time (JIT) Rolling delivery forecast gets a
binding customer order with
delivery conditions in
accordance with the framework
 contract

Influencing variables
 Demand quantity: the larger the
demand quantity, the larger the
call-off quantity
 Costs of transportation: The
larger the distance, the larger the
call-off quantity, the less
transport processes
 Container size: Call-off of
completely packed containers
 Delivery reliability and delivered
quality: The more reliable the
delivery, the lower planned stock
level (safety stock)
 Rate: Partitioning of delivery
quantities on several suppliers

Applications of call-off control/JIT

 Serial production
 Recurrent demand
 Long-term supplier relationships
 High diversity of products and
variants – with high similarity
however (call-off the required
quantity of every parts number)
Example: Automotive industry:
Delivery call-offs (VDA 4905) are
common methods to order serial
material within the European
automotive industry

Problems
 Limited standardization of data
transmission via EDI, every
customer has its own data
protocol
 Direct communication of
quantity planning systems
between customer and supplier
only via special solutions
 Bad forecast reliability and
frequent changeovers

Supportive controlling process is

the concept of cumulative
quantities
Just in sequence Delivered material is assorted
(JIS) according to the demand sequence
and is delivered at the right
moment directly to the point of
demand (e.g. assembly line)

Requirements
 High reliability within all
processes
 Minor effects of disruptions at
the supplier (parts are
retrofittable)
 Frequent necessity of
redesigning the delivery process
(Process Reengineering)

Applications of JIS
 Mainly automotive industry-
established for a long time
 Serial production, preferably
flow line production
 Defined lead time
 Defined sequence
 Large, diverse, expansive
modules
 Supplier partnerships
(interdependence)
 Carefully planned, secured
production- and assembly
processes, disruptions are
reduced by:
o Reserve systems (hot or cold
redundancies)
o Overcapacity, to reduce the
effect of disruptions

Supportive controlling process is

the concept of cumulative
quantities
Manufacturing KPI of Process Flow
and supply  Throughput rate (or flow rate) is the rate at which units emerge from the process,
models i.e. the number of units passing through the process per unit of time.
 Throughput time is the average elapsed time taken for inputs to move through the
process and become outputs.
 The number of units in the process (also called the ‘work in process’ or in-process
inventory), as an average over a period of time.
 The utilization of process resources is the proportion of available time that the
resources within the process are performing useful work.

Process types
Jobbing processes  High variety and low volumes.
 Each product has to share the operation’s resources with
many others
 Degree of repetition is low
 Process map relatively complex
Example: specialist toolmakers, furniture restorers, bespoke
tailors
Batch processes  Lower variety and higher volumes as jobbing processes (but
can be found over a wide range of volume and variety levels)
 Each part of the operation has periods when it repeating itself
Example: machine tool manufacturing, the production of some
special gourmet frozen foods
Mass processes  Relatively narrow variety and higher volumes
 Degree of repetition is high (seems almost totally repetitive)
 Largely predictable
Example: automobile plant, a television factory
Continuous processes  Often even lower variety and higher volumes as mass
processes
 Production in a continuous repetition (endless flow)
 Relatively inflexible, capital-intensive technologies with highly
predictable flow.
Example: petrochemical refineries, electricity utilities, steel
making and some paper making.
Project processes  High variety and low volumes.
 discrete, usually highly customized products
 timescale for production and service relatively long
 Process map very complex
Example: shipbuilding, most construction companies, movie
production companies
Classification of manufacturing systems

Process type of production

Organizational structure in production

Theory of constrains
An approach to visualize and manage capacity which recognizes that nearly all products and
services are created through a series of linked processes, and in every case, there is at least
one process step that limits throughput for the entire chain.

Throughput efficiency
This idea that the throughput time of a process is different from the work content of
whatever it is processing has important implications. What it means is that for significant
amounts of time no useful work is being done to the materials, information or customers
that are progressing through the process.

Operating curve and throughput efficiency (flow factor)

Throughput time of an order

Effect of process variability

There are many reasons why variability occurs in processes. These can include: the late (or
early) arrival of material, information or customers, a temporary malfunction or breakdown
of process technology within a stage of the process, the recycling of ‘mis-processed’
materials, information or customers to an earlier stage in the process, variation in the
requirements of items being processed. All these sources of variation interact with each
other, but result in two fundamental types of variability.

 Variability in the demand for processing at an individual stage within the process,
usually expressed in terms of variation in the inter-arrival times of units to be
processed.
 Variation in the time taken to perform the activities (i.e. process a unit) at each
stage.

Example: the simple process shown in the figure is composed of one

stage that performs exactly 10 minutes of work. Units arrive at the
process at a constant and predictable rate. If the arrival rate is one unit
every 30 minutes, then the process will be utilized for only 33.33% of
the time, and the units will never have to wait to be processed. This is
shown as point A on the Figure. If the arrival rate increases to one
arrival every 20 minutes, the utilization increases to 50%, and again
the units will not have to wait to be processed. This is point B on the
Figure. If the arrival rate increases to one arrival every 10 minutes, the
process is now fully utilized, but, because a unit arrives just as the
previous one has finished being processed, no unit has to wait. This is
point C on the Figure. However, if the arrival rate ever exceeded one
unit every 10 minutes, the waiting line in front of the process activity
would build up indefinitely, as is shown as point D in the Figure. So, in
a perfectly constant and predictable world, the relationship between
process waiting time and utilization is a rectangular function as shown
by the red dotted line in the Figure. However, when arrival and
process times are variable, then sometimes the process will have units
waiting to be processed, while at other times the process will be idle,
waiting for units to arrive. Therefore the process will have both a ‘non-
zero’ average queue and be under-utilized in the same period. So, a
more realistic point is that shown as point X in the Figure. If the
average arrival time were to be changed with the same variability, the
blue line in the Figure would show the relationship between average
waiting time and process utilization.
 The three options to process designers wishing to improve the waiting time or utilization
performance of their processes

 Accept long average waiting times and achieve high utilization (point X);
 Accept low utilization and achieve short average waiting times (point Y); or
 Reduce the variability in arrival times, activity times, or both, and achieve higher
utilization and short waiting times (point Z).

Inventory Inventory, or ‘stock’ as it is more commonly called in some countries, is defined here as the
Management stored accumulation of material resources in a transformation system. Inventory is created
to compensate for the differences in timing between supply and demand.

Impact on optimal stock level

Reasons for (excessive) stock

The economic order quantity (EOQ)

This approach attempts to find the best balance between the advantages and disadvantages
of holding stock.

Generally, holding costs are taken into account by including:

 working capital costs
 storage costs
 obsolescence risk costs.
Order costs are calculated by taking into account:
 cost of placing the order (including transportation of items from suppliers if
relevant);
 price discount costs.
Available and physical inventory
Available inventory is the sum of physical stock and warehouse
access, but reduced by the safety stock and other pre-reserved stock
(For example, already assigned to sales orders).