Operations Management II (ORM2BJ[D]22-3)

Session 20 → Supply Chain Management

Why Design Supply Chain –
Conflicting Objectives
◼ Purchasing
◼ Stable volume requirements/Flexible delivery
time/Little variation in mix/Large quantities
◼ Manufacturing
◼ Long run production/High quality/High
productivity/Low production cost
◼ Warehousing
◼ Low inventory/Reduced transportation costs/Quick
replenishment capability
◼ Customers
◼ Short order lead time/High in stock/Enormous variety
of products/Low prices
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Why is SCM Important

◼ Efficient supply chain management benefits

◼ Logistics cost control → 20% to 40% of total product
costs
◼ Critical service factors → Inventory availability/ Speed
of delivery
◼ Strategic Advantage
◼ Manufacturing is becoming more competitive
◼ Opportunity for differentiation or cost reduction
◼ Globalization is effective ONLY IF
◼ Greater coordination of production and distribution
◼ Robust and flexible supply chains to counter
◼ Increased risk of supply chain interruption
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SCM Philosophy

◼ The entire supply chain is

◼ ONE single, integrated entity

◼ The cost, quality, flexibility and delivery requirements of

the customer are objectives shared by
◼ EVERY organization in the chain

◼ The STRENGTH of the supply chain depends on

◼ The WEAKEST link in the supply chain

◼ Inventory
◼ LAST resort for resolving supply and demand
imbalances Dipankar Bose - XLRI
Evolution of SCM

◼ Stage 1
◼ Vendor – Purchase – Production – Distribution –
Retailer

◼ Stage 2
◼ Materials Management – Logistics Management

◼ Stage 3
◼ Supply Chain Management

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Cycle View of Supply Chain

◼ Customer Order Cycle

◼ Customer arrival → Customer order entry → Customer
order fulfillment → Customer order receiving
◼ Replenishment Cycle
◼ Retail order trigger → Retail order entry → Retail order
fulfillment → Retail order receiving
◼ Manufacturing cycle
◼ Order arrival from the distributor, retailer, or customer
→ Production scheduling → Manufacturing and
shipping → Receiving at the distributor, retailer, or
customer

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Supplier as a Partner

Aspect Adversary Partner

Number of suppliers Many One or a few
Length of relationship May be brief Long-term
Low price Major consideration Moderately important
Reliability May not be high High
Openness Low High
Quality May be unreliable; At the source; vendor
buyer inspects certified
Volume of business May be low High
Flexibility Relatively low Relatively high
Location Widely dispersed Nearness is important

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Supply Chain – Key Contributions

◼ Integrated activity
◼ Among functions such as logistics, manufacturing,
distribution, design/engineering, marketing, finance
etc.
◼ Multiple organizations
◼ Suppliers/Customers/3 PL providers
◼ Coordination of conflicting goals, metrics, etc.
◼ Responsible for multiple flows
◼ Information Flow → Orders/Inventory
status/Contracts
◼ Physical Flow → Inventory of RM/WIP/FG
◼ Financial → Payment/Credits
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Supply Chain – Key Contributions –
Continued
◼ Each interface in the supply chain represents
◼ Movement of goods
◼ Information flows
◼ Transfer of title
◼ Purchase and sale

◼ Analysis involves trade-offs

◼ Across different entities
◼ Across metrics → Cost/Quality/Service/Time/Risk

◼ Tracks one-way information flows about

◼ Forecast and Actual Demand and their imbalance
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Managing Uncertainty in Supply
Chain
◼ Point forecasts are invariably wrong
◼ Plan for forecast range – use flexible contracts to go
up/down
◼ Aggregate forecasts are more accurate
◼ Aggregate the forecast – postponement/risk pooling
◼ Longer term forecasts are less accurate
◼ Shorten forecasting horizons – Multiple orders/Early
detection
◼ In many cases, somebody else knows what is going to
happen
◼ Collaborate

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Improvements in Supply Chain –
Benefits and Drawbacks

Potential Possible
Problem Benefits
Improvement Drawbacks

Smaller, more Reduced holding Traffic congestion/

Large inventories
frequent deliveries costs Increased costs
Delayed May not be feasible/
Quick response
Long lead times differentiation/ May need absorb
Disintermediation functions
Large number of Fewer parts
Modular design Less variety
parts Simpler ordering
Cost versus
Reduced cost,
Quality trade-off Outsourcing Loss of control
higher quality
decision

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Risk Management in Supply Chains –
Some Important Terms
◼ Resiliency
◼ Visibility
◼ Event-response capability
◼ Capability sourcing
◼ Inventory velocity
◼ Cross-docking
◼ Closed loop supply chain
◼ Clicks-or-bricks/Clicks-and-mortar/Omnichannel Selling
◼ Not in Exam Syllabus
◼ Bullwhip effect and Responsive supply chain
◼ Vendor managed inventory
◼ SCOR Model – Supply Chain Operations Reference®
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Out-of-Syllabus Slides

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 Conceptual Evolution of Responsive
Supply Chain Management
Vendor
Quick Continuous Consignment Direct Selling/
Managed
Response Replenishment Selling Store Delivery
Inventory
◼ In ALL cases → POS data is supplier to Vendor
Inventory Vendor’s Skill
Type Decision Maker
Ownership Improvement
Quick response Retailer Retailer Forecasting
Continuous Contractually
Depends Inventory control
replenishment agreed levels
Vendor Managed
Vendor Depends Retail management
Inventory (VMI)
Consignment selling Vendor Vendor Cost management
Direct Selling Vendor Vendor Distribution network
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Vendor Managed Inventory – Types

◼ Vendor shows up at customer’s facility → Physically

reviews inventory levels
◼ Immediately replenishes with inventory (i.e., physically
stocks the inventory on the customer’s shelves)

◼ Vendor shows up at customer’s facility → Places an order

for replenishment inventory that
◼ Will be delivered at a later date
◼ Depending on delivery method
◼ Vendor may do the physical restocking
◼ May leave it for the customer to do

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Vendor Managed Inventory – Types –
Continued
◼ Customer periodically (daily, weekly, etc) provides vendor
information on current inventory levels
◼ Vendor reviews inventory levels and creates
replenishment orders
◼ Replenishment orders are shipped to customer
◼ Customer performs all physical tasks related to the
inventory at his facility

◼ Vendor has direct access to customer’s inventory system

◼ Can get real-time information related to on-hand
levels/open orders/forecasts/production schedules
◼ Vendor makes replenishment decisions based on this
data and ships orders to customer Dipankar Bose - XLRI
Vendor Managed Inventory – Types –
Continued
◼ Vendor appoints on-site inventory planner
◼ Who works full-time at the customer’s facility
◼ Manages the inventory supplied by that vendor

◼ Vendor leases space within the customer’s facility

◼ Run’s their own warehouse and inventory planning
operation
◼ With their own employees from within the
customer’s facility

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Supply Chain Operations Reference®
(SCOR) Metrics
Perspective Metrics
Reliability ◼ Perfect Order Fulfillment – % of Orders Delivered In Full/
Delivery Performance to Customer Commit Date/
Documentation Accuracy/ Perfect Condition
Responsiveness ◼ Order Fulfillment Cycle Time – Source Cycle Time/ Make
Cycle Time/ Deliver Cycle Time/ Delivery Retail Cycle Time
Agility ◼ Upside Supply Chain Flexibility
◼ Upside Supply Chain Adaptability
◼ Downside Supply Chain Adaptability
◼ Overall Value at Risk (VAR)
Costs ◼ Supply Chain Management Cost – Includes Risk Mitigation
Cost
◼ Cost of Goods Sold
Assets ◼ Cash-to-cash cycle time – Days Sales Outstanding/Inventory
Utilization Days of Supply/Days Payable Outstanding
◼ Return on Supply Chain Fixed Assets
◼ Return on Working Capital – Payables Outstanding/ Sales
Outstanding/ Inventory Dipankar Bose - XLRI
 SOCR – Order Fulfillment Lead Time

◼ Used when products are Make-to-order type

Customer Order Order Order Start Deemed Ready for Customer Installation
authorization receipt entry release make shippable shipment receipt complete
by Make

Make cycle time Total

transportation
time
Order fulfillment lead time

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SOCR – Supply Chain Response Time
Identification of Prepare order Start supplier Receipt of materials Receipt of materials
need for materials for supplier cycle time from supplier at production
1 2 Supplier cycle time 3 facility

Source cycle time

◼ Average time for metric

◼ 1 = 3 day, 2 = 5 days, 3 = 4 days
◼ Value of total annually purchased materials = 20000
◼ 20 suppliers in total
◼ 12 suppliers represent 95% of 20000
◼ Longest supplier cycle time among these 12 suppliers
= 2 months
◼ Supply Chain Response time
[3 + 5 + 60 + 4] = 72 days + Order fulfillment lead time
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Supply Chain Operations Reference®
(SCOR) Metrics – Agility
◼ Upside Supply Chain Flexibility
◼ Example → The number of days required to achieve
◼ An unplanned sustainable X = 20% increase in
quantities delivered
◼ Upside Supply Chain Adaptability
◼ Example → The maximum sustainable percentage
increase in quantity delivered that can be
◼ Achieved in X = 30 days
◼ Downside Supply Chain Adaptability
◼ Example → The reduction in quantities ordered
sustainable (without inventory or cost penalties)
◼ At X = 30 days prior to delivery
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Components of the Formula Used to
Compute the Cash-to-Cash Cycle
Component
Inventory
Days Cash is Locked-Up as Inventory Number of Days in the Reporting Period)
Receivables
Days Cash is Locked-Up in
Receivables
Unpaid Bills
Days Cash Is Free Because the
Business Has Not Paid Its Bills
How to Calculate It
Average Inventory/(Cost of Goods Sold /
Average Accounts Receivable/(Sales /
Number of Days in the Reporting Period)
Average Accounts Payable/(Cost of
Goods Sold / Number of Days in the
Reporting Period)

◼ Calculation
◼ Inventory Days of Supply + Days Receivables
Outstanding – Days Payable Outstanding
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Return on Supply Chain Fixed Assets

◼ Includes the fixed assets used to Plan, Source, Make,

Deliver and Return

◼ Calculation
◼ ([Supply Chain Revenue] – [COGS] – [Supply Chain
Management Costs]) / [Supply Chain Fixed Assets]

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Payment Terms in Supply Chain

◼ PIA → Payment in advance

◼ Net 30 → Payment 30 days after invoice date
◼ EOM → End of month
◼ 21 MFI → 21st of the month following invoice date
◼ 1% 10 Net 30 → 1% discount if payment received within
ten days otherwise payment 30 days after invoice date
◼ 1MD → Monthly credit payment of a full month's supply
◼ Contra → Payment from the customer offset against the
value of supplies purchased from the customer
◼ Letter of credit → A documentary credit confirmed by a
bank, often used for export
◼ Bill of exchange → A promise to pay at a later date, usually
supported by a bank Dipankar Bose - XLRI
End of Out-of-Syllabus Slides

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ORM2BJ[D]22-3 – End Term
Instruction
◼ Total marks = 50 (Maximum possible = 40 marks)
◼ Duration → 2 hours
◼ Rules → Same as Quiz 4
◼ Syllabus
◼ Comment type (10-20 marks) → Sessions 15-20
◼ Includes articles on TPS, APP & Quality
◼ Numerical (30-40 marks) → CPM/CCPM/Waiting
Line/OEE/APP/MPS/MRP/Quality

◼ Missing End-term → Syllabus will be Sessions 01-20

◼ For Grading → Refer Course Outline

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Operations Management Scopes in a
Nutshell (Covered in ORM2)
Forecasting

Long-term Medium-term Short-term

Capacity Planning Aggregate Production MPS/ Material

Location & Layout Planning Requirements Planning

Process Analysis Inventory Management

Quality Management
Service Process and Control
and Control
Product and Service Design Scheduling and Sequencing
Waiting Line Management Performance Management

Theory of Constraints JIT and Lean Manufacturing

Project Management and CCPM Supply Chain Management
Industry 4.0
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 Thank You!
Best of Luck for Summer
Internship!
Have a Good and Safe Time Ahead….

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