Essentials of Supply Chain

Supply Chain

Life cycle processes comprising physical, information,

financial and knowledge flows whose purpose is to
satisfy end-user requirements with products and
services from multiple linked suppliers
The Supply Chain
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

Transportation Transportation
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory Costs Costs
Supply Chain View

Plan Source Make Deliver

Suppliers Manufacturers Warehouses & Customers

Distribution Centers

Transportation Transportation
Material Costs Costs Costs Transportation
Manufacturing Costs Inventory Costs Costs
What is Supply Chain Management

 A set of approaches used to efficiently integrate

 Suppliers
 Manufacturers
 Warehouses
 Distribution centers

 So that the product is produced and distributed

 In the right quantities
 To the right locations
 And at the right time

 System-wide costs are minimized and

 Service level requirements are satisfied

Historical Perspective of SCM
 1960‘s - Inventory Management Focus, Cost Control

 1970‘s - MRP & BOM - Operations Planning

 1980‘s - MRPII, JIT - Materials Management, Logistics

 1990‘s - SCM - ERP - ―Integrated‖ Purchasing,

Financials, Manufacturing, Order Entry

 2000‘s - Optimized ―Value Network‖ with Real-Time

Decision Support; Synchronized & Collaborative
Extended Network
Challenges in Supply Chain Management

 Uncertainty is inherent to every supply chain

 Travel times
 Breakdowns of machines and vehicles
 Weather, natural catastrophe, war
 Local politics, labor conditions, border issues

 The complexity of the problem to globally optimize a supply chain

is significant
 Minimize internal costs
 Minimize uncertainty
 Deal with remaining uncertainty
Significance of SCM in Organizational
Performance
 Dealing with uncertain environments – matching supply and
demand
 Boeing announced a $2.6 billion write-off in 1997 due to ―raw
materials shortages, internal and supplier parts shortages and
productivity inefficiencies‖

 Hewlett-Packard and Dell found it difficult to obtain important

components for its PC‘s from Taiwanese suppliers in 1999 due to a
massive earthquake

 Shorter product life cycles of high-technology products

 Less opportunity to accumulate historical data on customer demand

 Wide choice of competing products makes it difficult to predict

demand
Significance of SCM in Organizational
Performance
 The growth of technologies such as the Internet enable
greater collaboration between supply chain trading partners

 If you don‘t do it, your competitor will

 Major buyers such as Wal-Mart demand a level of ―supply chain

maturity‖ of its suppliers

 Availability of SCM technologies on the market

 Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD

Edwards) with which to integrate internal processes
Supply Chain Alignment with Business Plan
Supply Chain and Uncertainty
 Inventory and back-order levels fluctuate considerably
across the supply chain even when customer demand
doesn‘t vary
 The variability worsens as we travel ―up‖ the supply chain
 Forecasting doesn‘t help!
Multi-tier Wholesale
Suppliers Manufacturer Distributors Retailers Consumers

Sales

Sales
Sales

Sales

Time Time Time

Time

Bullwhip Effect
11
Factors Contributing to Bullwhip effect

 Demand forecasting practices

 Min-max inventory management (reorder points to bring inventory up
to predicted levels)
 Lead time
 Longer lead times lead to greater variability in estimates of average
demand, thus increasing variability and safety stock costs
 Batch ordering
 Peaks and valleys in orders
 Fixed ordering costs
 Impact of transportation costs (e.g., fuel costs)
 Sales quotas
 Price fluctuations
 Promotion and discount policies
 Lack of centralized information
Challenges in Supply Chain Management

 Forecasts are never right

 Very unlikely that actual demand will exactly equal forecast demand

 The longer the forecast horizon, the worse the forecast

 A forecast for a year from now will never be as accurate as a forecast
for 3 months from now

 Aggregate forecasts are more accurate

 A demand forecast for all CV therapeutics will be more accurate than
a forecast for a specific CV-related product
Challenges in Supply Chain Management

C
U
Procurement Manufacturing Sales & S
(Material) (Capacity) Distribution T
(Demand) O
M
E
R
Subordinate to Subordinate to Subordinate to
Manufacturing Logistics objectives Sales & Marketing
objectives objectives

Current Supply Chain Approach leads to achieving

‗Local‘ rather than ‗Global‘ Optima
Challenges in Supply Chain Management
ISSUE CONSIDERATIONS

Network Planning • Warehouse locations and capacities

• Plant locations and production levels
• Transportation flows between facilities to minimize cost and time
Inventory Control • How should inventory be managed?
• Why does inventory fluctuate and what strategies minimize this?

Supply Contracts • Impact of volume discount and revenue sharing

• Pricing strategies to reduce order-shipment variability

Distribution Strategies
Integration and Strategic Partnering
Outsourcing & Procurement
Strategies
Product Design
• Selection of distribution strategies (e.g., direct ship vs. cross-docking)
• How many cross-dock points are needed?
• Cost/Benefits of different strategies
• How can integration with partners be achieved?
• What level of integration is best?
• What information and processes can be shared?
• What partnerships should be implemented and in which situations?
• What are our core supply chain capabilities and which are not?
• Does our product design mandate different outsourcing approaches?
• Risk management
• How are inventory holding and transportation costs affected by product
design?
• How does product design enable mass customization?
Supply Chain Imperatives for Success

 View the supply chain as a strategic asset and a differentiator

 Wal-Mart‘s partnership with Proctor & Gamble to automatically
replenish inventory
 Dell‘s innovative direct-to-consumer sales and build-to-order
manufacturing
 Create unique supply chain configurations that align with your
company‘s strategic objectives
 Operations strategy
 Outsourcing strategy
 Channel strategy
 Customer service strategy
 Asset network
 Reduce uncertainty
 Forecasting
 Collaboration
 Integration
Supply Chain Drivers
Drivers of Supply Chain

 Inventory

 Transportation

 Facilities

 Information
Inventory

 All of the raw materials, work in process (WIP), and

finished goods within the supply chain. Inventory
policies can dramatically alter a supply chain‘s
efficiency and responsiveness.
Why hold inventory?

 Unexpected changes in customer demand (always

hard to predict, and uncertainty is growing)

 Short product life cycles

 Product proliferation

 Uncertain supply
 Quantity
 Quality
 Costs
 Delivery time
Impact of Inventory

 Inventory can increase amount of demand that can be

met by increasing product availability.

 Inventory can reduce costs by exploiting economies of

scale in production, transportation, and purchasing.

 Inventory can be used to support a firm‘s competitive

strategy. More inventory increases responsiveness, less
inventory increases efficiency (reduces cost).
Types of Inventory Needed
 Cycle Inventory
 Think convenience (no customer buys eggs one by one)
 The average amount of inventory used to meet demand between
replenishments.

 Seasonal Inventory
 Think bathing suits and snow-shovels

 Inventory that is built up to meet predictable variation in demand.

 Amount of seasonal inventory depends on how quickly and inexpensively a firm
can change its rate of production.
 Safety Inventory
 Random, unpredictable, unexpected
 Inventory held to counter uncertainty in demand or supply
(―just-in-case‖ inventory).
Transportation

 Modes and routes for moving inventory

throughout the supply chain.
Transportation Impact

 Faster transportation allows a supply chain to be more

responsive but generally less efficient.

 Less than full truckloads allows a supply chain to be

more responsive but generally less efficient.

 Transportation can be used to support a firm‘s

competitive strategy. Customers may demand and be
willing to pay for a high level of responsiveness.
Transportation Decisions

 Mode of transportation is the manner in which a

product is moved (air, truck, rail, ship, pipeline,
electronic). Each mode differs with respect to speed,
size of shipments, cost, and flexibility.

 Routes are paths along which a product can be shipped.

 In house or outsource the transportation function. Many

companies use third-party logistics providers (3PL) to
perform some or all of their transportation activities
Facilities

 Places within the supply chain where inventory

is stored, assembled, or fabricated. Decisions
on location, capacity, and flexibility of
facilities have a significant impact on
performance.
Facilities Impact

 Facilities either store inventory between supply chain

stages (warehouses, distribution centers, retailers) or
transform inventory into another state (fabrication or
assembly plants).

 Centralization of facilities uses economies of scale to

increase supply chain efficiency (fewer locations and
less inventory) usually at the expense of responsiveness
(distance from customer).
Facilities Decisions
 Location - Centralize to gain economies of scale or decentralize to
be more responsive. Other issues include quality and cost of
workers, cost of facility, infrastructure, taxes, quality of life, etc.

 Capacity - Excess capacity allows a company to be more responsive

to changes in the level of demand, but at the expensive of
efficiency.

 Manufacturing Methodology - Decisions between a product or

functional focus, between flexible or dedicated capacity.

 Warehousing Methodology - Chose between SKU storage (stores all

of one type of product together), Job lot storage (stores different
products together to satisfy a particular customer or job), or cross-
docking.
Information

 Data and analysis regarding inventory,

transportation, facilities, and customers
throughout the supply chain. It is potentially
the biggest driver since it affects all the other
drivers.
Information‘s Role

 Information connects various supply chain stages and

allows them to coordinate activities.

 Information is crucial to the daily operations of each

stage of the supply chain.

 An information system can enable a firm to get a high

variety of customized products to customers rapidly

 An information system can enable a firm to understand

changing consumer needs more quickly
Information Decisions
 Push versus Pull. Push systems (like MRP) need information on
anticipated demand to create production and purchasing schedules. Pull
system (like JIT) need accurate and quick information on actual demand to
move inventory and schedule production in the chain.

 Coordination and Information Sharing. How will the goal of maximizing

supply chain profitability be achieved through the coordination of
activities and sharing of appropriate information?

 Forecasting and Aggregate Planning. How will future demand and market
conditions be forecast, and to what extent will collaborative forecasting be
used? How will aggregate planning be used to meet forecasted demand and
to what extent will it be shared throughout the supply chain?

 Enabling Technologies. Which information technologies will be used and

integrated throughout the supply chain? electronic data interchange (EDI),
the Internet, enterprise resource planning (ERP) systems, supply chain
management (SCM) software.
Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

(Cost)
Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost / slow High cost /
streamlined /
reliable
Supply Chain Strategies
Supply Chain Push Strategies
 Classical manufacturing supply chain strategy
 Manufacturing forecasts are long-range
 Orders from retailers‘ warehouses
 Longer response time to react to marketplace changes
 Unable to meet changing demand patterns
 Supply chain inventory becomes obsolete as demand for certain
products disappears
 Increased variability (Bullwhip effect) leading to:
 Large inventory safety stocks
 Larger and more variably sized production batches
 Unacceptable service levels
 Inventory obsolescence
 Inefficient use of production facilities (factories)
 How is demand determined? Peak? Average?
 How is transportation capacity determined?
 Examples: Auto industry, large appliances, others?
Bullwhip effect in Push based Supply Chains

 Leads to inefficient resource utilization

 Planning and managing are much more difficult.
 Not clear how a manufacturer should determine
production capacity? Transportation capacity?
 Peak demand?
 Average demand?
 Results:
 Higher transportation costs
 Higher inventory levels and/or higher manufacturing costs
 more emergency production changeovers
Supply Chain Pull Strategies
 Production and distribution are demand-driven
 Coordinated with true customer demand
 None or little inventory held
 Only in response to specific orders
 Fast information flow mechanisms
 POS data
 Decreased lead times
 Decreased retailer inventory
 Decreased variability in the supply chain and especially at
manufacturers
 Decreased manufacturer inventory
 More efficient use of resources
 More difficult to take advantage of scale opportunities
 Examples: Dell, Amazon
Implementation of Pull Based Strategies

 Often difficult to implement

 when lead times are long
 impractical to react to demand information.

 more difficult to take advantage of economies of

scale
 Advantages and disadvantages of push and pull
supply chains:
 new supply chain strategy that takes the best of
both.
 Push–pull supply chain strategy
Supply Chain Push-Pull Strategies
 Hybrid of ―push‖ and ―pull‖ strategies to overcome disadvantages
of each
 Early stages of product assembly are done in a ―push‖ manner
 Partial assembly of product based on aggregate demand forecasts
(which are more accurate than individual product demand forecasts)
 Uncertainty is reduced so safety stock inventory is lower
 Final product assembly is done based on customer demand for
specific product configurations
 Supply chain timeline determines ―push-pull boundary‖

Push-
Pull
Boundary
―Generic‖ Product ―Customized‖ Product

Push Strategy Pull Strategy

Raw End
Materials Supply Chain Timeline Consumer
Choosing Between Push-Pull
Pull High Industries where: Where do the following
Industries where: industries fit in this
• Demand is uncertain
model:
• Customization is High
• Demand is uncertain • Scale economies are High
• Scale economies are Low • Low economies of scale  Automobile?
Demand Uncertainty

 Aircraft?
Computer Furniture  Fashion?
equipment  Petroleum refining?
 Pharmaceuticals?
Industries where: Industries where:  Biotechnology?
• Uncertainty is low • Standard processes are the  Medical Devices?
• Low economies of scale norm
• Push-pull supply chain • Demand is stable
• Scale economies are High

Books, CD’s Grocery,

Push Low Beverages
Low Economies of Scale High

Pull Push
General Strategy

 Make a part of the product to stock – generic

product

 The point where differentiation has to be

introduced is the push-pull boundary

 Based on extent of customization, the position of

the boundary on the timeline is decided
Impact of demand uncertainty & economies of
scale

 Demand Uncertainty:
 Higher demand uncertainty leads to a preference for pull
strategy.
 Lower demand uncertainty leads to an interest in managing the
supply chain based on a long-term forecast: push strategy.
 Economies of scale:
 The higher the importance of economies of scale in reducing
cost
 The greater the value of aggregating demand
 The greater the importance of managing the supply chain based on
long-term forecast, a push-based strategy.
 Economies of scale are not important
 Aggregation does not reduce cost
 A pull-based strategy makes more sense.
Implementing Push-Pull Strategy

 Achieving the appropriate design depends on many

factors:
 product complexity
 manufacturing lead times
 supplier–manufacturer relationships.
 Many ways to implement a push–pull strategy
 location of the push–pull boundary.
 Dell locates the boundary at the assembly point
 Furniture manufacturers locate the boundary at the
production point
Impact of Push-Pull Strategy

 Push portion
 Low uncertainty
 Service level not an issue
 Focus on cost minimization.
 Long lead times
 Complex supply chain structures
 Cost minimization achieved by:
 better utilizing resources such as production and distribution
capacities
 minimizing inventory, transportation, and production costs.
 Supply Chain Planning processes are applied.
Impact of Push-Pull Strategy

 Pull portion
 High uncertainty
 Simple supply chain structure
 Short cycle time
 Focus on service level.
 Achieved by deploying a flexible and responsive
supply chain
 Order-fulfillment processes are applied
Impact of Push-Pull portions of the supply chain

Portion Push Pull

Objective Minimize cost Maximize service
level
Complexity High Low

Focus Resource allocation Responsiveness

Lead time Long Short
Processes Supply chain Order fulfillment
planning
Interaction of two points

 Only at the push-pull boundary

 Typically through buffer inventory

 Different role for the inventory in each portion

 In the push portion, buffer inventory is part of the output
generated by the tactical planning process
 In the pull system, it represents the input to the fulfillment
process.

 Interface is forecast demand

 Forecast based on historical data obtained from the pull portion
 Used to drive the supply chain planning process and determine
the buffer inventory.
Impact of Lead Time
 Longer the lead time, more important it is to implement a push based
strategy.

 Typically difficult to implement a pull strategy when lead times are so long
that it is hard to react to demand information.
Demand Driven Strategies

 Requires integrating demand information into the

supply chain planning process

 Demand forecast:
 Use historical demand data to develop long-term estimates
of expected demand

 Demand shaping:
 Firm determines the impact of various marketing plans
such as promotion, pricing discounts, rebates, new product
introduction, and product withdrawal on demand
forecasts.
Supply Chain Performance Measures
The Growth Curve Envisaged…

TARGET
LEVEL

CURRENT
LEVEL

THE PAST TODAY THE FUTURE

TIME
a. Customer Needs

b. Meet them effectively

Customer needs impacted by Supply Chain
 Response time

 Product variety

 Product availability

 Customer experience

 Order visibility

 Return ability
Need for KPI‘s

• Why ?
• Accountability
• Predictability
• Risk Management

• How ?
• aligned to strategic objectives
• have accountability at all levels
• cross-functional
• Data based
KPI‘s
 ― metric: a standard for measurement ‖

 ― measurement: an observation that reduces the

amount of uncertainty about the value of a
quantity ‖

 Metrics
 Are linked to business objectives
 Highlights the gap in performance
 Standard metrics allow benchmarking (across
departments, companies and industries)
SCOR
 Developed by Supply Chain Council (SCC)

 SCC: Independent, not-for-profit corporation organized in 1996 by:

 Global management-consulting firm, Pittiglio Rabin Todd &
McGrath (PRTM) and
 Market research firm, Advanced Manufacturing Research (AMR)
in Cambridge, Massachusetts.

 Started with 69 voluntary companies; now close to 1000 members.

 SCC Objective: To develop a standard supply-chain process reference

model enabling effective communication among the supply chain
partners, by
 Using standard terminology to better communicate and learn the supply
chain issues
 Using standard metrics to compare and measure their performances
SCOR Boundaries
 SCOR spans:
 All customer interactions, from order entry through paid invoice.

 All product (physical material and service) transactions, from supplier‘s

supplier to customer‘s customer, including equipment, supplies, spare parts,
bulk product, software, etc.

 All market interactions, from the understanding of aggregate demand to the

fulfillment of each order

 SCOR does not attempt to describe every business process or activity,

including:
 Sales and marketing (demand generation)
 Research and technology development
 Product development
 Some elements of post-delivery customer support
SCOR Basic Management Processes

Plan-Source-Make-Deliver-Return

Plan

Deliver Source Make Deliver

Sourc Make Delive Source Make Deliver Source
Return Return Return

Supplier‘s
Return
e
Retur r
Retur
Customer‘s
Supplier n n Customer Customer
Supplier
(Internal or (Internal or
Your Company External)
External)

Plan-Source-Make-Deliver-Return provide the organizational structure of the SCOR-

model
The SCOR Metrics
Performance Attribute Description

Supply Chain Reliability The performance of the supply chain in delivering

the correct product, to the correct place, at the
correct time, in the correct condition and
packaging, in the correct quantity, with the correct
documentation, to the correct customer.
Customer Facing

Supply Chain Responsiveness The velocity at which a supply chain provides

products to the customer.

Supply Chain Flexibility The agility of a supply chain in responding to

marketplace changes to gain or maintain
competitive advantage.

Supply Chain Costs The costs associated with operating the supply
Internal Facing

chain.

Supply Chain Asset Management The effectiveness of an organization in managing

assets to support demand satisfaction. This includes
the management of all assets: fixed and working
capital.
Level 1 Metrics
Performance Attribute Level 1 Metrics
Supply Chain Reliability i. Delivery performance
Customer Facing

ii. Fill Rates

iii. Perfect order fulfillment
Supply Chain Flexibility a. Supply Chain Response Time
b. Production Flexibility
Supply Chain Order Fulfillment cycle time
Responsiveness
Supply Chain Costs a. Cost of Goods Sold
b. Total Supply Chain Cost
Internal Facing

c. Value Added Productivity

d. Returns Processing Cost
Supply Chain Asset a. Cash to Cash Cycle Time
Management b. Return on Supply Chain Fixed
Assets
c. Inventory days of Supply
Metrics Definition
Performance Definition
Attribute
Supply Chain The performance of Supply Chain in delivering the correct
Reliability product, to correct place, at the correct time, in the
correct condition and packaging, in the correct quantity,
with the correct documentation to correct customer
Performance Metric Definition

Delivery performance Measures the percentage of orders delivered ―on time and in full‖ to
customer request date and/or to customer commit date
Fill Rates Measures the percentage of ship from stock orders shipped within 24
hours of order receipt

a. Line Fill Rate

b. Order Fill rate
Perfect order Measures the percentage of orders delivered ―on time and in full‖ to
fulfillment customer request date AND flawless match of purchase order,
invoice and receipt
Metrics Definition

Performance Definition
Attribute
Supply Chain The velocity at which the supply chain provides products to
Responsiveness the customer
Performance Metric Definition

Order Fulfillment Lead Measures the number of days from order receipt in customer service
time to the delivery receipt at the customers dock
Metrics Definition

Performance Definition
Attribute
Supply Chain The agility of a supply chain in responding to market place
Flexibility changes to gain or maintain competitive advantage
Performance Metric Definition

Supply Chain Response Measures the number of days it takes a supply chain to respond to
Time (plan, source, make and delivery orders) an unplanned significant
increase or decrease in demand without cost penalty
Production Flexibility Measures the number of days to achieve an unplanned 20% increase
or decrease in orders without penalty.
Metrics Definition
Performance Definition
Attribute
Supply Chain Cost The costs associated with operating the supply chain
Performance Metric Definition

Cost of Goods Sold Measures the direct cost of material and labour to produce a product
(COGS) or a service

Total Supply Chain Cost Measures the direct and indirect costs to plan, source and delivery
products and services. Make and return costs are captured in COGS
and Return processing costs respectively
Value Added Is calculated by subtracting direct material cost from the revenue
Productivity and dividing the results by the number of employees. (similar to
sales per employee)
Returns Processing cost Measures the direct and indirect costs associated with returns
including defective, planned maintenance and excess inventory. This
includes the entire reverse logistics process
Metrics Definition
Performance Definition
Attribute
Supply Chain Asset The effectiveness of an organization in managing assets to
Management support demand satisfaction. Includes management of all
assets : fixed and working capital
Performance Metric Definition

Cash to Cash cycle Measures the number of days cash is tied up as working capital
time

Inventory Days of Measures the number of days cash is tied up as inventory.

Supply
Asset Turns Is calculated by dividing revenue by total assets including both
working capital and fixed assets
Level Metrics Facts

 Level 1 Metrics are primary, high level measures that may cross multiple
SCOR processes.

 They do not necessarily relate to a SCOR Level 1 process (Plan-Source-

Make-Deliver-Return).

 There is hierarchy among the metrics in different levels.

 Level 1 Metrics are created from lower level calculations (Level 2 metrics)

 Level 2 Metrics:
 Associated with a narrower subset of processes.
 Example:
 Metric related with Delivery Performance: Total number of products
delivered on time and in full based on a commit date.
 Metric related with Production: Ratio Of Actual To Theoretical Cycle
Time LSCM course circulation only
Level 2 Metrics
Performance Level 1 Metrics Level 2 Metrics
Attribute
Supply Chain a. Delivery • Supplier On-time and in full
Reliability Performance • Manufacturing Schedule
Attainment
• Warehouse on time and in full
shipment

b. Fill Rates • Forecast Accuracy

c. Perfect • % Orders placed without error

Order • % Orders scheduled to customer
Fulfillment request date
• % of orders received damage free
• % Orders with correct shipping
documents
(these are in addition to delivery)
Level 2 Metrics

Performance Level 1 Level 2 Metrics

Attribute Metrics
Supply Chain Order i. For stock items
Responsiveness Fulfillment a. Order receipt to order entry
Lead time b. Order entry to order shipment
c. Order shipment to order delivery

ii. For Order items

a. Order receipt to order entry
b. Order entry to complete
manufacturing to order shipment
c. Order shipment to order delivery

iii. Back order duration

Level 2 Metrics
Performance Level 1 Metrics Level 2 Metrics
Attribute
Supply Chain a. Supply Chain • Source Lead time
Flexibility Response Time • Order Fulfillment lead
time for To order items

• Days to increase or
b. Production decrease production
Flexibility labour, material, and/or
capacity
Level 2 Metrics
Performance Level 1 Metrics Level 2 Metrics
Attribute
Supply Chain a. Cost of Goods • Material Cost, direct & indirect cost of
Cost Sold production

• Order Management Cost

b. Total Supply • Material Acquisition Cost
Chain Cost • Finance and Planning related cost
• MIS cost
• Inventory Carrying cost

c. Value Added • Revenue, Direct Material cost, Number

Productivity of employees in FTE‘s

d. Returns • Returns Warehouse cost

Processing Cost • Returns authorizing processing cost
• Returns maintenance cost
• Transportation cost (from the customer,
intercompany and outbound to
supplier)
Level 2 Metrics

Performance Level 1 Metrics Level 2 Metrics

Attribute
Supply Chain a. Cash to Cash • Days Payable outstanding
Asset Cycle Time • Days of inventory
Management • Days Sales (receivables)
outstanding

b. Return on • Revenue
Supply Chain • Working Capital
Fixed Assets • Fixed Assets

c. Inventory days • Days RM inventory

of Supply • Days WIP inventory
• Days FG inventory
 Example
Process Category: Source Stocked Product Process Number: S1
Process Category Definition
The procurement, delivery, receipt and transfer of raw material items, subassemblies, product and
or services.
Performance Attributes Metric
Reliability % Orders/lines processed complete
Responsiveness Total Source Cycle Time to Completion
Flexibility Time and Cost related to Expediting the
Sourcing Processes of Procurement,
Delivery, Receiving and Transfer.
Cost Product Acquisition Costs
Assets Inventory DOS
Best Practices Features
Joint Service Agreements None Identified
Alliance and Leverage agreements
Example

Process Element: Transfer Product Process Element Number: S1.4

Process Element Definition
The transfer of accepted product to the appropriate stocking location within the supply chain. This includes all of
the activities associated with repackaging, staging, transferring and stocking product. For service this is the
transfer or application of service to the final customer or end user.
Performance Attributes Metric
Reliability % Product transferred damage free
% Product transferred complete
% Product transferred on-time to demand requirement
% Product transferred without transaction errors
Responsiveness Transfer Cycle Time
Flexibility Time and Cost Reduction related to Expediting the
Transfer Process.
Cost Transfer & Product storage costs as a % of Product
Acquisition Costs
Assets Inventory DOS
Best Practices Features
Drive deliveries directly to stock or point-of-use in Pay on receipt
manufacturing to reduce costs and cycle time Specify delivery location and time (to the minute)
Specify delivery sequence
Capability Transfer to Organization None Identified
 How to select Metrics

Impact on
“Customer”
&
“Consumer”

 People competency
 Process fix (systemizing)
 Org architecture – roles & accountability
Work groups ability to measure  Simplification & Automation

•Balancing of Metrics is critical – e.g. Inv. Turns and Svs levels

•Build ―Engagement‖ & ―Effective‖ models

 Development and Management of Indices

Identification Definition Data Collection Publish

(Relevance) (Agreement) (Pre Condition) (Pilot)

EXECUTE

Benchmark
Control Improve Monitor
(Basis for
(Sustain) (Benefits) (Process)
Improvement)
Hierarchy of Supply Chain Metrics
A tiered system of metrics to improve supply chain effectiveness—the top tier assesses a
company‘s supply chain health, while the two successive tiers diagnose the root cause of
performance gaps and provide insight for corrective action.

Source: AMR Benchmark Analytics 2004

Supply Chain Network Design
Supply Chain Network - Definition

 Network definition outlines the

a. Assets
b. Material flows and
c. Rules by which raw materials are sourced, converted to
finished goods and subsequently delivered to customers.

 Network definition includes reverse flows for returns,

repairs, reuse, refurbishment, recycling and disposal.
Network Decisions
 Network Design
 What product lines should be
produced at what manufacturing
plants?
 How many warehouses are needed?
 Where should they be located?
 Network Utilization
 What vendors should supply what
material?
 Where should each product be
produced?
 Where should each product be
stored?
 How many periods should inventory
be held?
 What facilities should source what
products?
 What transportation modes and
carriers should be used on our
freight lanes?
Benefits of Network Definition

 Optimizing the network will reduce costs while

providing superior customer services

 Reduce inventory carrying costs

 Reduce fixed facility costs
 Reduce facility operating costs
 Reduce transportation costs
 Improve customer service levels
 Improve customer response time
 Improve customer satisfaction
 Increase sales
 Increase market share
Formulating Network Strategy

 Rationalize (Incremental) or Reengineer (Fundamental

Shift)

 Trade Offs between

 Operating Cost (Inter-facility Transportation, Customer

Transportation, Storage and Inventory Handling) v/s
Investment (Locations)

 Service (Lead Time, Customer Comfort) v/s Investment

(Locations)
Strategic Considerations for Network Design
 Understanding customer service requirements and identifying
differentiated service segments

 Developing a transportation strategy to most efficiently meet the

customer‘s service requirements

 Identifying the number, size, and roles of distribution centers and

warehouses required to meet customer lead time expectations and
anticipated future volume growth

 Evaluating inventory management implications of alternative

distribution strategies

 Analyzing the financial implications of alternative network

strategies and performing detailed financial analysis of
recommendations
Factors Influencing Supply Chain Network
Design

 Customer Needs are met  Cost of meeting customer

needs
 Response time
 Inventory
 Product variety
 Transportation
 Product availability
 Facilities and handling
 Customer experience
 Information
 Order visibility

 Return-ability
Distribution Network Design choices

 Manufacturer storage with direct shipping

 Manufacturer storage with direct shipping and in-transit

merge

 Distributor storage with package carrier delivery

 Distributor storage with last mile delivery

 Manufacturer / distributor storage with customer pickup

 Retail storage with customer pickup

Manufacturer storage with direct shipping and
in-transit merge
 In-transit merge combines pieces of the order coming
from different locations so that the customer gets a
single delivery

 The ability to aggregate inventories and postpone

product customization is a significant advantage of in-
transit merge

 Will have the greatest benefits for products with high

value whose demand is hard to forecast, in particular if
product customization can be postponed.

 A very sophisticated information infrastructure is

needed to allow the in-transit merge
Manufacturer Storage with direct shipping

 Product is shipped directly from the manufacturer to the end

customer

 The biggest advantage is the ability to centralize inventories

at the manufacturer

 A manufacturer can aggregate demand and provide a high

level of product availability with lower levels of inventory
than individual retailers.

 Transportation costs are high because two stages (retailer

and manufacturer) do not need to be integrated.

 Response times tend to be large

Distributor storage with package carrier
delivery
 Inventory is not held by manufacturers at the factories but is held
by distributors / retailers in intermediate warehouses and package
carriers are used to transport products from the intermediate
location to the final customer.

 Distributor storage will require a higher level of inventory

 Facility costs are somewhat higher with distributor storage because

of a loss of aggregation

 Response time with distributor storage is better than with

manufacturer storage

 Customer convenience is high with

 Distributor storage because a single shipment reaches the customer

in response to an order
Distributor storage with last mile delivery
 Last mile delivery refers to the distributor / retailer
delivering the product to the customer's home instead of
using a package carrier

 Distributor storage with last mile delivery requires higher

levels of inventory than all options other than retail stores

 Transportation costs are highest using last mile delivery

 Facility and processing costs are very high using this option
given the large number of facilities required

 The cost of providing product availability is higher than every

option other than retail stores
Manufacturer / distributor storage with
customer pickup

 Inventory is stored at the manufacturer or distributor warehouse

but customers place their orders online or on the phone and then
come to designate pickup points to collect their orders.

 Inventory costs using this approach can be kept low with either
manufacturer or distributor storage to exploit aggregation

 Transportation cost is lower than any solution using package

carriers

 A significant information infrastructure is needed to provide

visibility of the order

 Variety and availability comparable to any manufacturer or

distributor storage option can be provided
Retail storage with customer pickup

 Inventory is stored locally at retail stores. Customers either walk

into the retail store and pick it up at the retail store

 Local storage increases inventory costs because of lack of

aggregation

 Transportation cost is much lower than other solutions because

inexpensive modes of transport can be used to replenish product at
the retail store

 Very good response times can be achieved in this case because of

local storage

 Product variety stored locally will be lower than other options.

Warehouse / Distribution Centers Design

 Traditional Warehousing
 Regional Distribution Centre
 Central Distribution Centre
 Multiple CDC‘s
 Direct to Store Delivery
 Consumer Direct
 Pool Point
 Pool Point – Local Delivery
 Cross Dock
 Quick Response Centre
Demand Management
Demand Planning

 Demand planning is ―the function of recognizing all demands for goods and
services to support the market place. It involves prioritizing demand when
supply is lacking. Proper demand management facilitates the planning and
use of resources for profitable business results.‖ (source: APICS Dictionary)
Types of Demand

 Independent Demand
 Dependant Demand

Characteristics Independent Demand Dependant Demand

Source Market Company documents
Computation method Forecast / Customer Predetermined and
Pull fixed calculation
Base Data Historical, Market Bill of Materials,
Research, Customer Schedules
orders
Ability to Influence Little to NIL High
e.g. Finished Goods Raw Materials, Packing
Material
Components of Demand

Independent Demand Dependant Demand

 Backorders  Distribution Requirements Planning

(DRP)
 All customer orders received,
but not yet shipped  Demand for an item that is
derived from demand for the
same item in another
distribution location
 Forecasts
 Material Requirements Planning
 Statistical (MRP)

 Subjective/management  Demand for an item (or

override component) derived from
demand for another item (or
 Custom Orders parent)
Demand Planning

 Benefits  Parameters impacting

demand
 Planning instead of reacting
 Business and economic
 Generating one number conditions

 Forward visibility  Sources of demand

 Better vision of the impact of  Trend

change
 Seasonality

 Random variation

 Cyclical variation
Characteristics of Demand

 Trend - a general direction or shift in demand that can be

increasing, decreasing, or flat

 Seasonality - variation of demand that can occur throughout

the year (weekly, daily, quarterly) based on the season

 Random variation - unexpected variation (i.e.; demand

changing in a given season as compared to the same season in
previous years)

 Cyclical variation - long- and short-range cycles (i.e.; history

of growth and recession)
Trends in Demand Planning
 Key account level forecasting

 Involvement of sales

 Interest in point of sale data

 Increased sophistication of techniques

 Increased seasonality

 Complex promotion

 Reduced product life cycles

Laying down Demand Planning Process
Organization Level Perspective Micro Perspective
 Who is involved in the process?
 What method or technique should
 Who are the stakeholders?
be used?
 Who ultimately owns the forecast?
 Incorporating additional
 Who has accountability for the number?
information based on known
 How will consensus be reached on the events
number?

 At what level do we forecast?  Holding a consensus meeting

 How often do we forecast?

 Reviewing forecast performance
 How will forecast performance be
measured?
Improving Forecasting Accuracy

 Including an average and range of probability

 Grouping products (Principle of Aggregation)

 Predicting what will happen in the near future

 Recording historical data in the same terms needed for

the forecast

 Including events that influence demand

 Accounting for customer segmentation

Typical Matrix for Forecasting Responsibility

Function Input to Forecast Interest

Marketing & Sales •Analysis of historical data •Aligning Marketing goals
•Regional or stores level with supply chain
data capabilities
•Promotion Plan •Customer Service

Research and Development •Product changes Product availability

•New product information
Operations Manufacturing constraints Decrease expediting Effect
on production costs

Finance
Budgetary - planned sales Inventory investment
volumes Shareholder value
Transportation Management
Transportation Management

 Transportation management is the process of shipping

inventory to places where it is needed

 The purpose of the management process is to recognize

discrepancies between available inventory and required
replenishments throughout the network and make
recommendations on resolving such discrepancies

 Transportation management evaluates the plan for

deploying goods and the actual process of managing the
inbound, outbound, and inter-company traffic
Benefits of Transportation Management

 Fulfill customer service requirements

 Reduce transportation cost

 Meet carrier business requirements

 Effective management of a variety of shipping modes

 Mutual considerations of inbound, outbound, and inter-

company shipping

 Integrated with the supply chain

Decision Making in Transportation Management

 Using the latest production plan and receipt information

 Releasing orders only supported by inventory

 Meeting inventory targets at distribution centers

 Sending inventory where it is most needed

 Planning efficient loads considering capacity constraints

 Supporting push or pull strategies

Controlling Transportation Costs

 Minimizing shipping costs  Selecting the most

appropriate mode of
 Line-haul costs transportation

 Pickup and delivery costs  Rail

 Terminal handling costs  Road

 Billing and collecting costs  Air

 Water
Carrier Rates

 Per distance  Per package

 This structure utilizes zones
 Typically, carriers using this defined by the air (package)
structure transport loads point- carrier and the weight of the
to-point, but they can also make items shipped.
multiple stops.
 Per container
 Per weight  This structure relies on the item
being shipped, the weight of the
 This type of structure utilizes a items, and the container utilized
code that represents a category to determine the rate.
of items and the weight of the
items to determine the rate.
 Flat rate
 The carrier is certain of the
origin and destination points and
is not making multiple stops
along the way.
Recent Trends in Transportation Management

 Increasing rates  Driver shortages

 Increasing service  Central planning

demands
 Enterprise-wide planning
 Compression of cycle
time  Strategic partnering

 Focus on delivery date

 System integration

 Shift in freight mix

Transportation Planning
 While deployment focuses on recommending shipments and looking at the larger picture,
transportation planning actually handles the details of managing
inbound, outbound, and inter-company traffic within an
organization

 Challenges in Transportation Planning

 Deregulation - Creates competition between carriers and decision

problems for the shipper

 Restructuring - Creates the need for timed shipments

 Transportation infrastructures - Have not kept up with the

enterprises they serve

 Supply chain emphasis - Recognizes the impact to the overall cost

and customer service to the transportation network‘s customer
Benefits of Transportation Planning

 Honored customer service  Mutual consideration of inbound,

requirements outbound, and inter-company

 Viewing inbound, outbound, and

 Reduced transportation cost as a inter-company areas
percent of gross sales and/or simultaneously is referred to as
overall operational costs Enterprise Management

 Honored carrier business  Integrated with the supply chain

requirements

 Effective management of a
variety of shipping modes and
possibilities
Transportation Decisions

 How do we maximize customer  How do we plan an enterprise-

service at the best wide transportation solution?
transportation cost?
 How do we know of an
 Which mode should we use? exception before it occurs?

 Who‘s the best carrier to  If the carrier can‘t deliver,

deliver on time? who needs to know?

 How do we manage and  What is the best ship date?

control inbound shipments?
 Is our shipment moving
 Where and when do we cross- according to plan?
dock?