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Supply Chain

Operations: Planning
and Sourcing

Chapter 2

Objectives

Gain a conceptual appreciation of the


business operations in any supply
chain
Exercise an executive level
understanding of operations involved
in supply chain planning and sourcing
Start to access how well these
operations are working within your own
company

Model of Supply Chain


Operations

Plan: means all operations needed to plan and

organize the operations in the other three categories.

Source: the activities necessary to acquire the


inputs to create products or services.

Make: the operations required to develop and build


the products and services that a supply chain provides.

Deliver: the activities that are part of receiving

customer orders and delivering products to customers.

Model of Supply Chain


Operations

Plan

Demand forecasting and Planning

Variables:

Supply
Demand
Product characteristics
Competitive environment

Forecasting methods

Qualitative
Causal
Time series
simulation

Product pricing

Relationship of Cost Structure to Pricing

Inventory management

Cycle inventory

Economic order quantity

Seasonal inventory
Safety inventory

Source

Procurement

Purchasing
Consumption management
Vendor selection
Contract negotiation
Contract management

Credit and collection

Set credit policy


Implement credit and collections practices
Manage credit risk

Make

Product design
Production scheduling
Facility management

Deliver

Order management
Delivery scheduling
Return processing

Plan:

Demand Forecasting and

Planning

Supply chain management


decisions are based on forecasts
that define:
which products will be required,
what amount of these products
will be called for, and
when they will be needed.

Demand Forecasting and


Planning
All forecasts deal with four major variables:

Supply: is determined by the number of producers of a


product and by the lead times that are associated with a
product.
Demand: refers to the overall market demand for a group
of related products or services.
Product Characteristics: includes the features of a
product that influence customer demand for the product.
Competitive Environment: refers to the actions of a
company and its competitors.

Forecasting Methods
There are four basic methods to use
when forecasting:

Qualitative: these methods rely upon a persons


intuition or subjective opinions about a market.
Causal: assume that demand is strongly related to
particular environmental or market factors.
Time Series: are the most common form of
forecasting. They are based on assumption that
historical patterns of demand are a good indicator of
future demand.
Simulation: use combinations of causal and time
series methods to imitate the behavior of consumers
under different circumstances.

Aggregate Planning

After the demand is forecasted, the next step


is to create a plan for the company to meet the
expected demand. This is aggregate planning.
The aggregate plan becomes the framework
within which short-term decisions are made
about production, inventory, and distribution.
There are three approaches to take in creating
aggregate plan.

Amount of production capacity


Level of utilization of the production capacity
Amount of inventory to carry

Plan:

Product Pricing Product


Promotion & Company Cost
Structure

The question here is whether it is


better to do price promotions during
peak periods to increase revenue or
during slow periods to cover cost?

If company has flexibility to quickly vary size of


work force and productive capacity then peak
periods.
If company cannot quickly vary size of workforce
and productive capacity then slow periods.

Plan:

Effects of Price Decrease

Growth in market size: increase in


product consumption by existing and
new customers.
Growth in market share: customers buy
this product instead of competing
product, market size remain unchanged.
Forward buying: customers buy product
now than later, market share and size
remain unchanged.

Plan:

Inventory Management

Cycle Inventory: the inventory required to


meet product demand over the time period
between placing orders for the product.

Seasonal Inventory: when a company or


supply chain with a fixed amount of productive
capacity decides to produce and stockpile
products in anticipation of future demands.

Safety Inventory: necessary to

compensate for the uncertainty that exits in a


supply chain.

Plan:

4 Ways to Reduce Safety

Inventory

Reduce demand uncertainty: do


better demand forecasts.

Reduce order lead times: shorter lead


time means less safety inventory.

Reduce lead time variability: further


reduces safety inventory need.

Reduce availability uncertainty:


ensure product availability when demand
occurs.

Source: Procurement

Procurement function can be


divided into five main activities:
Purchasing
Consumption management
Vendor selection
Contract negotiation
Contract management

Source: Procurement - Purchasing

Routine activities of issuing


purchasing orders.
Two types of orders are made:
Direct or strategic materials for
production
Indirect or MRO (maintenance,
repair, and operations)

Source: Procurement Consumption


Mgt.

Understand what categories of


product are being bought
throughout the company.
Set expected levels of
consumption.
When consumption is irregular,
bring this to the attention of
authorities.

Source: Procurement Vendor


Selection

Understand the current


purchasing situation.
Search for suppliers who have
both products and service
capabilities needed.
Narrow down the number of
suppliers to do business with.

Source: Procurement Contract


Negotiation

Work out specific items, prices,


and service levels.
Simplest negotiations are for
contracts to purchase indirect
products.
Complex negotiations are for
contracts to purchase direct
materials.

Source: Procurement Contract


Mgt.

Measure and manage vendor


performance.
Track performance of suppliers
and hold them accountable to
meet the service levels.
Routinely collect data about
performance of suppliers.

Source: Credit and Collections

Procurement is the sourcing process


for goods and services while credit and
collections is process of getting money.
Credit operation selects potential
customers to do business with.
Three main activities are:
Set credit policy
Implement credit and collections practices
Manage credit risk