M1: Strategic Sourcing for Successful Supply Chain
Management  A Global awareness to protect the earth’s environment
STRATEGIC SOURCING
 Managing the firm’s external resources in ways that
support the long-term goals of the firm
 Includes the development of ethical and sustainable
sourcing initiatives that are also tied to the make-or-
buy decisions, managing and improving supplier
relationships and capabilities, identification and
selection of environmentally and socially conscious
suppliers, monitoring and rewarding supplier
performance, developing and managing second and
third tier supplier relationships and use of technology
to support these many important sourcing activities
ETHICAL AND SUSTAINABLE SOURCING
 That which attempts to take into account the public
consequences of organizational buying or bring about
positive social change through organizational buying
behavior
 Include promoting diversity by intentionally buying
from small firms, ethnic minority businesses, and
women-owned enterprises; discontinuing purchases
from firms that use child labor or other unacceptable
labor practices; or sourcing from firms with good
labor treatment or environmental protection
credentials
Purchasing goods from suppliers in developing countries
can be risky due to the following reasons:
 If human rights, animal rights, safety or
environmental abuses become associated with the
firm’s suppliers or foreign manufacturing facilities,
which could lead to negative publicity for the buyer,
along with product boycotts, a tarnished company
image, brand degradation, lower employee morale and
ultimately lower sales, profits and stock prices.
To minimize those risks, ethical sourcing policies should
include:
1. Determining where all purchased goods come from
and how they are made
2. Know if suppliers promote basic workplace
principles
3. Use of ethical ratings
4. Provide detailed ethical sourcing expectations to
vendors
Some companies use:
ETI - Ethical Training Initiative - is a standard code for
ethical practices
Purchase of “Fair Trade” Products
 A popular sourcing activity as firms seek to
demonstrate a more ethical approach to purchasing.
A Fair Trade Product
 Is one manufactured or grown by a disadvantaged
producer in a developing country that receives a fair
price for their goods.
Fair Trade
 Most often refers to farming products such as coffee,
cocoa, sugar, tea, and cotton that are produced in
developing countries and exported to large firms in
developed countries.
SUSTAINABLE SOURCING
 A process of purchasing goods and services that takes
into account the long-term impact on people, profits
and planet
GREEN PURCHASING
 Is a practice aimed at ensuring that purchased
products or materials meet environmental objectives
of the organization such as waste reduction, hazardous
materials elimination, recycling, re-manufacturing and
material reuse
 Defined as making environmentally conscious
decisions throughout the purchasing process
beginning with product and process design and
product disposal
Sustainability
 As applied to supply chains, includes green
purchasing as well as some aspects of social
responsibility and financial performance
 Defined as the ability to meet the needs of current
supply chain members without hindering the needs of
future generations in terms of economic,
environmental and social challenges.
Goals of Sustainable Sourcing
1. Grow Revenues - Introduce new sustainable products
2. Reduce Costs - Avoid non compliant suppliers
3. Manage Risks - Manage brand and reputation
4. Build Intangible Assets - Further enhancement of brand
& reputation through social and environmental
responsibility
Supply Base Rationalization Program
 Also known as Supply Base Reduction or Supply
Base Optimization
 Have the benefits of reduced prices due to quantity
discounts, fewer supplier management problems,
closer and more frequent collaborations between
buyer and supplier, and greater overall levels of
quality and delivery reliability, since only the best
suppliers remain in the supply base
Ethical & Sustainable Supplier Certification Program
Strategic Supplier Alliances
 A more formalized type of collaborative relationship,
involving commitments to long-term cooperation,
shared benefits and costs, joint problem solving,
continuous improvement and information sharing
Ethical and Sustainable Supplier Certifications
 Are one way to identify strategic alliance candidates
or further develop existing alliances
Outsourcing Products and Services
 Firms are outsourcing non core products and service
functions (e.g. maintenance, janitorial) and in some
supply chain situations more strategic products or
services are outsourced that can impact the
competitiveness of the firm
Insourcing
 The result when the outsourcing arrangement is
unsuccessful
 Also termed as back sourcing
 The process of bringing back in-house some activities
which had been previously outsourced
Co-sourcing M2: COLLABORATIVE PLANNING, FORECASTING,
 Also referred to as selective sourcing AND REPLENISHMENT
 Refers to the sharing of a process or function between
internal staff and an external supplier
 Gives a firm the flexibility to decide what areas to Demand Forecasting
outsource  An important element of demand management
 In co-sourcing, firms will retain the more strategic  It provides an estimate of future demand and sound
activities while outsourcing the more resource- business decisions
intensive, non-value adding activities
Forecasting Techniques
Early Supplier Involvement (ESI)
 Buyers and suppliers working together-sharing QUALITATIVE METHODS
proprietary design and manufacturing information that
their competitors would love to see, establishes a level 1. Jury of Executive Opinion
of trust and cooperation that can result in many future  A group of senior management executives who are
collaborative and potentially successful projects knowledgeable about the market, their competitors
and the business environment, collectively develop
Vendor Managed Inventories (VMI) the forecast.
 Services for key customers
 From the customer’s perspective, allowing their 2. Delphi Method
suppliers to track inventories and determine delivery  A group of internal and external experts are surveyed
schedules, and order quantities saves time, which may during several rounds in terms of future events and
be better spent on more strategic sourcing activities long-term forecasts of demands.
 Allows supplier to profile demand and determine on
accurate forecast and then ship an order quantity when 3.Sales Force Composite
the inventory level become low-enough - known as  This type of forecast is generated based on the
the reorder point. salesforce’s knowledge of the market and estimates of
 VMI is also called co-managed inventories - where customer needs.
the buyer and supplier reach an agreement regarding
the buyers periodic demand forecasts, how 4.Consumer Survey
information is shared, the order quantity, when an  A questionnaire is developed that seeks input from
order is generated and the delivery timing and location customers on important issues such as future buying
habits, new product ideas and opinions about existing
Supplier Co-Location products.
 Refers to a situation wherein a supplier’s employee is  The survey is administered through telephone,
permanently housed in the purchasing department of mail/email, or personal interviews.
the buyer’s organization, acting as both buyer and
supplier representative
QUANTITATIVE METHODS
Strategic Alliance Development
 An extension of supplier development Time Series Forecasting
 Refers to increasing the firm’s key or strategic  Based on the assumption that the future is an
supplier capabilities extension of the past
 Uses historical data to predict future demand
Negotiating Win-Win Strategic Alliance Agreements
 Buyers and suppliers utilize collaborative negotiations Cause-and-Effect of Forecasting
(also called integrative or win-win negotiations)  Assumes that one or more factors (independent
 Both sides work together to maximize the joint variables) are related to demand and, therefore, can be
outcome, or to create a joint optimal result used to predict future demand.
Rewarding Supplier Performance Components of Time-Series
 Rewarding suppliers for improving or maintaining  Trend variation
high levels of performance  Cyclical variation
 Giving incentives to all suppliers to meet and surpass  Seasonal variation
specific performance goals  Random variation
Performance motivation also include punishment such as in Naive Forecast
the form of reduction or elimination of future business  Using this forecast, the estimate for the next forecast
with the local firm on the so called Billback penalty , equal is equal to the actual demand for the immediate past
to the incremental cost resulting from late deliveries or period.
poor materials.
Simple Moving Average Forecast
Benchmarking Successful Sourcing Practices  Uses historical data to generate a forecast and works
BENCHMARKING well when the demand is fairly stable over time.
 Is the practice of copying what other businesses do
best Exponential Smoothing
 An effective way to quickly improve sourcing  Forecasts for the next period’s demand is the current
practices and supply chain performance period’s forecast adjusted by a fraction of the
difference between the current period’s actual demand
Triple Bottom Line (3 p's) - people, profit, planet and forecast.
Linear Trend Forecast
 Can be estimated using linear regression to fit a line t
a series of data occurring over time.
Forecast Accuracy
Measures of Forecasting Accuracy:
 Mean Absolute Deviation (MAD)
 Mean Absolute Percentage Error (MAPE)
 Mean Square Error (MSE)
 Running Sum of Forecast Errors (RSFE)
The RSFE - Running Sum of Forecast Errors
 Is an indicator of bias in the forecasts.
Forecast Bias
 Measures the tendency of a forecast to be
consistently higher or lower than the actual
demand.
 A positive RSFE indicates that the forecasts are
generally lower than actual demand which can lead to
stockouts.
 A negative RSFE shows that the forecasts are
generally higher than actual demand, which can result
in inventory carrying costs.
The Tracking Signal is used to determine if the forecast
bias is within the acceptable control limits.
Collaborative Planning, Forecasting & Replenishment
(CPFR)
 A registered trademark of VICS (Voluntary
Interindustry Commerce Standards)
 Aims to enhance supply chain integration by
supporting and assisting joint practices
 Objective of CPFR is to optimize the supply chain by
improving demand forecast accuracy delivering the
right product, at the right time to the right location,
reducing inventories across the supply chain, avoiding
stockouts and improving customer service.
Cloud Computing
 Can also be used to track and forecast demand
 It is an internet based computing, whereby shared
resources, software and information are provided to
computers and other devices on-demand.
M3: Enterprise Resource Planning System (ERP)
Operations Planning
3 Broad Categories
1. Long Range - established first and used to guide the
medium-range plans.
2. Intermediate/Medium Range - 6 to 18 months
3. Short Range - most detailed and specify the exact
end items and quantities to make on a weekly, daily
or hourly basis
Aggregate Production Plan
 Long range materials plan
 Sets the aggregate output rate, workforce size,
utilization and inventory and/or backlog levels for an
entire facility
 PRODUCT FAMILY
 Consists of different products that share similar
characteristics, components or manufacturing
process.
Master Production Schedule (MPS)
 A medium-range plan and is more detailed than the
APP
Material Requirements Planning (MRP)
 Short range materials plan
 Detailed planning process for component parts to
support the MPS
Distribution Requirements Planning (DRP)
 Describes the time-phased net requirements from
central supply warehouses and distribution centers
 It links production with distribution planning by
providing aggregate time-phased net requirements
information to the master production schedule
Costs relevant to the aggregate planning decision include
inventory cost, set-up cost, machine operating cost, hiring
cost, firing cost, training cost, overtime cost and costs
incurred for hiring part-time and temporary workers to
meet peak demands.
There are 3 basic production strategies that firm use for
completing the aggregate plan:
1. Chase Strategy/Pure Chase Strategy
 Adjusts capacity to match the demand pattern
 Using this strategy, the firm will hire and lay off
workers to match its production rate to demand
 Pure chase production strategy works well for make-
to-order manufacturing firms.
2. The Level Production Strategy
 A pure level production strategy relies on a constant
output rate and capacity while varying inventory and
backlog levels to handle the fluctuating demand
pattern
 Works well for make-to-stock manufacturing firm
3. The Mixed Production Strategy
 Many firms use a mixed production strategy that
strives to maintain a stable core workforce while
using other short term means such as overtime, an
additional shift, subcontracting or the hiring of part-
time and temporary workers to manage the short-term
high demand
Master Production Scheduling (MPS)
 Is a time phased detailed disaggregation of the
aggregate production plan, listing the exact end items
to be produced It is more detailed than APP
 MPS time fence:
 Many firms uses time fence to deal with problems on
missed delivery due dates where the firm needs
sufficient lead time to purchase items and
manufacture the end items, especially if
manufacturing lead times and lot sizes are large
 The time fence system separates the planning horizon
into two segments
1. A firmed segment is also known as a demand time
fence and it usually stretches from the current period to a
period several weeks into the future.
2. The tentative segment is also known as the planning
time fence and it typically stretches from the end of the
firmed segment to several weeks further into the future.
 It usually covers a longer period than the firmed
segment.
 The RCCP takes the master production schedule
(MPS) and converts it from production to capacity
required, then compare it to capacity available during
each production period.
 Capacity Requirements Planning (CRP) - is a short-
range capacity planning technique that is used to
check the feasibility of the materials requirements
plan.
Capacity Strategy
1. Lead Capacity Strategy
 A proactive approach that adds or subtracts capacity
in anticipation of future market conditions and
demand.
2. Lag Capacity Strategy
 Is a reactive approach that adjusts its capacity in
response to demand.
3. Match or Tracking Capacity Strategy
 Is a moderate strategy that adjusts capacity in small
amounts in response to demand and changing market
conditions.

Available to Promise Quantities (ATP)

 The uncommitted portion of the firm's planned
production (or scheduled MPS)
 It is the difference between confirmed customer
orders and the quantity the firm planned to produce
based on the MPS
 Frequent changes to the MPS can be costly and may
create system nervousness

 SYSTEM NERVOUSNESS
 Is a situation wherein a small change in the upper
level production plan causes a major change in
the lower level production plan.

The Bill of Materials (BOM)

 Is an engineering document that shows an inclusive
listing of all component parts and subassemblies
making up the end items

Material Requirements Planning (MRP)

 A software - based production planning and
inventory control system that has been used widely
by manufacturing firms for computing dependent
demand and timing requirements.

Key Benefits of MRP

 Production information - such as scheduled receipts,
on-hand inventories, net requirements, and planned
order releases- is available for the entire planning
horizons, thus, it provides visibility for schedulers to
plan ahead.

Capacity Planning
 Capacity - refer to a firm's labor and machine
resources
 Capacity Planning - follows the basic hierarchy of
the materials planning system. At the aggregate level,
Resource Requirements Planning (RRP) - a long-
range capacity planning module, is used to check
whether aggregate resources are capable of satisfying
the aggregate production plan
 The medium-range capacity plan, or Rough-Cut
Capacity Plan (RCCP), is used to check the feasibility
of the master production schedule.