Supply Chain Management 2021-2022

Introduction
PRODUCT SERVICE
Tangible Intangeable
Visible Temporary
Physical Does not create inventory

 On-line order = often the combination of a product and service (examples: hellofresh, bol.com, …)
 Value of 1m3 depends on the product

Logistics = flows in your own company

Supply chain management (SCM) = network surrounding the flows

SCM exists of different stakeholders that all have a different role in the chain
- customer = last stakeholder, wants to buy the desired goods at the lowest price
- supply chains can be connected (eg to make chocolate: milk, cacao, sugar, transport chains)
 customer is the trigger for all supply chains, but customer doesn’t always order/know what they
want… although goods need to be supplied
- on the right time
- at the right spot
- under right conditions
 companies try to predict what customers want = forecasting

Overall demand on the market: independent demand = orders + forecast

- Dependent demand = from all the other products
- Independent = from the customer

Customer service (CS) = main goal of supply chain management

- how pleased is the customer with the total service?
- can we deliver the goods as ordered by the customer or are the goods on stock/available?
 How to achieve good CS:
1. Increase flexibility: there is a lot of competition and fast changing market
2. Decrease leadtimes: improve satisfaction, higher on time delivery rate, reduce inventory
levels, and increase flexibility
3. Improve delivery reliability: highest impact (short leadtime & no accurate delivery = painful)

Customer Order Decoupling Point (CODP) = point in the supply chain where product is linked to a
specific customer order
- demand changes trigger action
- company becomes responsible for determining the timing and quantity of material to be
purchased/produced/finished
- pull changes into push (higher risk)
- left = upstream side
- right = downstream side
 Position of CODP
depends on:
- desired order
leadtime
- business risk
- competition
- options on a certain
product

3 basic flows that stream simultaneously in SCM:

1. materials S (supplier  C (customer)
2. documents S  C
 3. money SC

ABC analysis = turnover contribution

 indicates how much a product contributes to the total turnover
 % revenue contribution is also calculated through ABC analysis
 based on the pareto principle (80/20 rule)

Turnover contribution product X = turnover product X / total turnover of all products (A = most
important and C = least important)
 Criteria:
1. sorting: what is important?
2. selecting: how many are selected?

Location policy

- keep handling cost minimal

- decide where to place products
- hit frequency method:
fast/medium/slow movers

Assortment policy

- select products for stock

- turnover contribution method

Part 2 Inventory levels

= current amount in stock for all products

Important to…
- financial manager
- warehouse manager
- planning and purchasing department
- sales department

Why we need stock:

- reduce delivery time to customers
- reduce uncertainties from customers and suppliers
- reduce costs  economies of scale in procurement, transportation, and warehousing

Stock stays in warehouses = leads to efficiency, productivity, less and cheaper transport
 Overstock: less cash flow to follow sales
 Understock: inability to fulfil purchase orders (signals unreliable and inefficient company)
 Goal is to find a balance = optimal stock levels

Characteristics of inventory level

- product related
 - stock levels can exceed annual turnover
- big influence on SC level
- big negative influence on ROI
ROI = turnover/ capital required, and capital required = current + fixed costs
- time related (dependent on life cycle and trends)

Inventory turnover rate = number of products sold / average number of products in stock
 shows operational efficiency over a year
- low = overstocking or obsolescence
- high = understocking
- normal = depends on the type of business  goal is to have a high ITR

Classification by position:
production Goods on order
Goods under inspection
Work in progress
distribution Finished products
Pipeline inventory
return Return goods

Inventory according to position: increasing value:

Inventory according to type:

Inventory costs

Ordering costs: administration related to placing an order and to process it (can be very high)
 fixed costs = company's facilities
 variable costs = preparation, creating and releasing order/ placing order, administration in follow
up/ tracking, transshipment, receiving/inspecting process, paying process for received goods, and
process of storing goods

How to limit costs?

1. ordering more goods by the same supplier
2. limit number of suppliers
3. automation (EDI, ..)
Ordering costs Kor = (D/Q) x Cor and D/Q is the total amount of orders
D = amount of goods sold over considered period
Q = quantity of goods ordered each time (constant)
Cor = cost PER order

Carrying costs: directly related to 'carry' or keep the goods in a warehouse

 sub costs = capital cost, cost of space, and risk cost

Carrying costs Kca = (Q/2) x Cca

D = amount of goods sold over considered period
Q = quantity of goods ordered each time (constant)
Cca = cost PER item over considered period (boxes or pallets)
 Cca as % related to economic value: Cca = p x P (p is a % and P is the purchase price)
1. Capital cost

Buying products (= spending) cost money in itself (opportunity cost)

 WACC = Weighted Average Cost of Capital
- depends on how liabilities have been raised over several sources with their typical costs
- depends on the period of time the money is used (shorter = better)
(Purchase cost or COGS are not included)

2. Cost of space

Proper conditions needed to store goods: (fixed/variable costs)

- building + heating + lighting + security
- racks
- handling equipment
- staffing
- maintenance

3. Risk cost

Financial risks from storing goods:

- cost of obsolescence = reduction in value  especially for perishables
- damage
- insurance cost

4. Aspect of time

Stocking time = time count that starts when goods are stocked

If one goes up, the other goes down… we cannot keep carrying and ordering costs low at the same
time  compromising is necessary = Camp's Formula

Camp's formula (CF)

 to achieve optimal order quantity
EOQ = economic order quantity
 order quantity with the lowest inventory cost

Prerequisites for Camp's formula:

 demand/unit is constant &

known
 delivery lead time is constant
 never out of stock
 ordering cost is known &
constant
 inventory cost is known &
constant

Factors that reduce the value of CF:

- relationship between 2 products
- mandatory fixed quantities orders
Delivery lead time = time in between your order and when the supplier shows up

L = delivery lead time

 can be expressed in
stockunits/hrs/weeks/days

Reorder point depends on…

1. avg demand during L (slope)
demand = reorder point
2. L supplier
L = reorder point

DL = avg demand x L
Stochastic ordering methods: safety stock (SS)
 previously demand during L was constant, stochastic methods = possible deviations

Demand during delivery lead time…

- more dan avg = stocking out  avoiding 'out-of-stock' = safety stock
- less than avg = surplus (overstocking)

Safety stock amount can be determined by using statistics:

  standard deviation

Calculating safety stock 

In excel: kx = normsinv(x/100)

Reorder point =

Cost of safety stock =

 carrying costs prove that safety stock comes at a price

The third Compound Inventory cost (beside ordering and carrying): Out-of-stock costs

Consequences:
- bad image
- turnover loss
- (risk of) losing customers
- expensive after service
- capital cost (delayed payments of invoices)
Compound Inventory cost model: sum of all costs  needs to be as low as possible and depends on
the customer service level (simulated in excel)
Part 3 MPS and MRP
(we don't take into account the capacity)

MRP: material resource/requirements planning  plans items that have dependent demand
MPS: master production schedule  plans items that have direct/independent demand

Replenishment methods:
1. MRP  plan/execute replenishment per period
 based on sales, purchase, and production
 steer through Bill of Material (= BOM)
(not really talked about:)
2. Re-orderpoint/ Kanban  push model & no BOM
3. Back-to-back  pull model

Pull: customization
Push: mass production

BOM = 'the ingredients': all the needed parts of material

 how MPS is translated into MRP
Routing = 'recipe': making of the final product
Yield: the amount we plan on having  used for 'average' production outputs

Example of a product and its BOM:

Nike schoes
 Polyester: recycled from bottles
 Rubber: vegetables oils  asia
 Eva foam  china (ethylene vinyl acetate)
 Cotton  organic cotton from china, turkey, US
 Synthetic leather  china and Taiwan (cheaper)
General rule: always calculate MPS first and then MRP based on the MPS

LLC = lowest level count: relationship between the completed product and the stage in the MRP
 for each SKU (stock keeping unit) at the top of BOM  LLC = 0 = MPS (LLC = 1 to the end = MRP)

Gross sales = independent demand (mix of sales orders and sales forecast)

Netting = calculate the net quantity that needs to be ordered in a specific time period (bucket).
This is the replenishment quantity, also known as order quantity (with Camp’s Formula)
1. Calculate rough planned stock
2. Compare with required safety stock and decide (yes/no) if replenishment is needed.
3. In case it is needed (2. = yes), take as much of the order quantity so inventory at the period’s end
increases above the safety stock (so we always order a multiple of the given order quantity in table of
parameters – see further)
4. Order Just-In-Time (not too soon or too late)

Planned stock at period 0 = starting bucket

Replenishment by MPS = we confront the market demand with what we already have in stock and
what we have already decided earlier we would produce. In MPS we take those
data and calculate the shortage in order to reach the market demand. That is
netting at the highest level of the BOM.

All SKUs of BOM except "LLC = 0"  replenishment with MRP

Gross requirements = dependent demand (production quantity that is netted, rounded, and ordered
in time)
 dependent because based on the MPS calculations

1) Calculations of replenishment by MPS? See slide 27 till 43

Short recap: (replenishment by MPS)

1. Calculate rough planned stock
2. Compare with required safety stock and decide (yes/no) if replenishment is needed.
3. In case it is needed (2. = yes), take as much of the order quantity so inventory at the period’s end
increases above the safety stock (so, we always order a multiple of the given order quantity in table
of parameters – see further)
4. Order Just-In-Time

Important formulas:
 End stock = end stock (P-1) – gross sales + confirmed production receipts + planned order
receipt
 Planned order receipt: round up to the next integer ((safety stock) – ( planned stock (P-1)
– gross sales / confirmed production receipts ))/order quantity)*order quantity

independent demand = based on forecasting

dependent demand = quantity of wheels is dependent on the number of bikes ordered
2) Calculating replenishment by MRP? Starts at slide 47

First: Connect the finished product with the materials needed  connection = BOM (presented in a
table)
Example:

How to use the Bill of Materials:

 Top-down
Do the MPS calculation for LLC 0 (=netting)
Transfer from LLC 0 to LLC1.
Do MRP calculations on LLC1 (=netting)
Transfer required data from LL1 to LLC2
Do MRP calculation on LLC2 (=netting)
Transfer required data from LL2 to LL3
And so on...

 Transfer = each time you descend one level (from LLC 0 to LLC 1 and so on) you have to take
the bottom row (planned order releases) x ‘quantity per’
 This ‘quantity per’ is given in BOM (see previous slide column on the right)
 be aware : to transfer data in the same period of time (= time bucket)

If the order quantity is completely adapted to the needed quantity = LFL: lot for lot = if you need 10
items, you will make 10 of them
Part 4 Forecasting (time series and quality)

Forecasting = estimating the future by a calculated guess  never fully correct

Characteristics:
- the further in the future, the less accurate
- 2 types: quantitative data (measurable and exact)/ qualitative data (needs interpretation)

Stability of demand: coefficient of variance = CoVa

 relative measure of volatility (stability of demand)
 CoVa = stdev/avg (CoVa  = volatility )  always between 0 and 1

Components of demand value

3 important components that lead to different forecasting methods:

1. the level (a)

- value a where demand hovers around
- constant if no other pattern is present
- time series models needed

2. the trend (b)

- rate of growth/decline
- persistent movement in 1 direction
- linear, exponential, quadratic, etc
- causal models needed

3. seasonal variations (F)

- repeated cycle around known/fixed period
 - hourly, daily, weekly, etc
- can be man-made or natural
- seasonal models needed

Time series components: different 3 components may be superposed  results in a complex set of
data

No trend or level? No forecast because the data shows an erratic pattern

Forecasted time series = series of numbers that have been measured over different moments of time
in the past

 time series models: cumulative or naïve forecasts

(Cumulative model is calmer than naïve model because naïve modeling is more responsive)

Moving average (MA)

- combo of cumulative (all data) and naïve (last one)
- M = number of measured values considered for the calculation of MA
- MA always lags (lags becomes bigger as M increases)
- can't be used for trends or seasonal fluctuations, it's a level model

Weighted moving average (WMA)

- in addition to MA, all observations are weighted
  differentiate between them in relevance to the forecast
- used when one observation is believed to be more important than older ones
- weighted factors can be expressed in percentages or fractions (these will be given on the
exam)

Exponential smoothing (ES)

- special variant of weighted average models
- applied in case of stationary demand (= level)
- you can choose how many observations to consider
- importance of observations degrades over time

Addresses the following concerns:

- small number of considerations for MA and WMA (danger of inaccurate prediction)
- importance of more recent observation vs older ones

 alpha factor = smoothing factor

 D = actual demand in previous period
 F = forecast of the previous period

Small alpha: stable forecast, less influence from peaks and valleys
Bigger alpha: more positive forecast

Forecasting quality
How well did we choose our method to predict the future? (time series, causal, etc)

A = actual demand for obs. t

F = forecasted value for obs. t
e = error of observation t
n = number of observations

Accuracy = closeness to actual observations

Bias = persistent tendency to over or under predict

Measuring bias through TS

Tracking signal = how often estimations have been
above/below actual value
Formula: TS = RSFE/MAD
 RSFE = running sum of all forecast errors

 positive TS: most values are above forecasted

 negative TS: most values are below forecasted

Qualitive methods
Scenario planning
 This method collects information from a panel of experts
1. they sit together to think about future events that might occur
2. virtual situation is created
3. the team starts to think of actions they would suggest given the situation
4. think of reactions from the counterpart (government, customers, competitors, …)
5. actions are described in a report and distributed amongst reviewers

Grassroot method
 requires a sophisticated knowledgeable sales force
 ‘grassroot’ = what info comes from the basic level (the roots)
- works best in non-retail environments where salespeople or account managers have deep
customer relationships and thoroughly understand their customer base
- asks those closest to the end user to determine what they will sell in the next accounting
period, then one sums all the values together to obtain an overall forecast

Delphi method
 collects information from a panel of ‘experts’ but experts don’t meet in real time
1. they receive a survey/questionnaire
2. answers are processed and compared, results are distributed amongst the team
3. simultaneously a new questionnaire is given (this time, the experts read the former opinions
from their fellow experts which influence their future thoughts/opinions)
4. circular process is repeated 3 to 4 times
5. end = consensus amongst the team of experts
 advantage = no peer pressure amongst the team

Part 5 Forecasting 2 (causal model)

Causal trends: "something must cause the output"/ there is a relationship
Causal models are used when demand is correlated with some known and measurable
environmental factor

Types of causal models:

- deterministic or exact relationships (not in real life)
- statistical relationships  relationship is not exact
 other option: no relationship

Causal model: linear regression

Goal = get the red dots as close as possible to
the orange line in the future

In real life:
 find the causes for the variations
 quantify the variation
 formulas get complicated quickly
 statistical software modules
 be pragmatic
Part 6 Forecasting 3 (seasonality)
Averages aren't very trustworthy in Supply Chain Management  solution: seasonal factor
Seasonal factor: contribution of every season to the (yearly) average
Seasonal factor = seasonal average / overall average

Overview Forecasting

Part 7 Reverse Logistics

Reverse logistics = operations related to re-use, repair, and disposal of products/materials
 planning, implementing, and controlling the flow of those products across the supply chain
 products can be from any point in the chain
Triggers for reverse logistics:
o Finished products  returns, product under or over warranty, end of life cycle
o Semi-finished products  reducing overstock
o Raw materials  materials with wrong characteristics that can't be used for production
o Packaging  return flows from re-usable packaging

Differences between forward and reverse logistics:

Easy forecasting Predictions = impossible
Distribution from 1 manufacturer to multiple Distribution from many points to one
customers (collecting)
Speed = important Speed is less necessary
Consistent inventory management Inventory management =/= consistent
Easy negotiations in supply chain Complicated negotiations
Clear and stable distribution costs Unclear distribution costs

Ways to give life to returned products:

 Repair = get broken products back to working
 refurbish = bring used products to specified quality
 remanufacturing = bring used products up to quality standards of new products
 cannibalism = recover parts and allocate to other items
 recycle = re-use materials or components from discarder products for new items (not
necessarily the same as original article)

(Exam) Explain the difference between open and closed loop supply chain:
o Closed: re-use, repair, or recycle  products are returned to initial production plant and
keep initial value
o Open: disposal or downcycle  products are re-used by other facilities and reduce in value

Cradle to grave = depletion of resources + increase of waste  negative effect in future generations
Cradle to cradle = all resources are 100% reusable (waste = food)
 C2C principle by McDonough and Braungart

Eco-efficiency by implementing the 3R's: slow cradle to grave ('less bad for future generations')
= efficient production that results from using a reduced amount of valuable resources to produce
more and more in time + reuse/recycle some products/parts
 3R's = reduce, reuse, recycle

Downcycling: decrease the amount wasted or slow down the process (better than disposal)
Recycling: re-use of raw material on same initial level of value
Upcycling: re-use the raw material on higher leveled products
Eco effectivity: cradle to cradle ('circular economy')
= borrow resources during the lifetime of a product, all resources are 100% reusable

Circular economy VS linear economy:

Linear = taking  energy from finite sources
Circular = using  energy from renewable sources

8 key elements of a circular economy

Core:
– Prioritize regenerative resources
– Stretch the lifetime
– Use waste as a resource
Enabling:
– Rethink the business model
– Team up to create joint value
– Design for the future
– Incorporate digital technology
– Strengthen & advance knowledge

Challenges of circular economy to logistics:

Poor predictability of material streams
Low value materials stay in the loop and need transportation
Small volumes (batches) resulting in a missing economy of scale factor (=higher cost per unit)
Much more upstream or reverse flows (total volume of reverse flow is almost = forward flow)
Network transportation flows (peer-to-peer instead of one-to-many or many-to-one)
 solution: innovations on different levels (example: collaboration and synchro modality)

Logistics can facilitate circular economy through:

1. Collaborations/ partnerships
1.1 vertical collab: different stages in one single supply chain are taken over
by different companies
1.2 horizontal collab = different companies work together in same level/stage of
supply chain but on different time schedule / area
Different ways of collaborating: sharing information, resources, knowledge, etc

2. Synchro-modality = combining different modes of transport

 modal shift + focus on efficiency in switching to reduce impact on environment
2.1 rethink transportation units, connectivity, location of different routes
2.2 combine transportation spaces across companies
2.3 rethink the benefit of 'short' lead times and give incentives for customers when they
allow longer delivery lead times

Extra class to replace the business game:

S&OP = sales and operations planning (a monthly cycle in units, with 5 steps)
 to synchronize plan/source/make/deliver