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Supply Chain

Operations: Planning
and Sourcing

Chapter 2


Gain a conceptual appreciation of the

business operations in any supply
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

Model of Supply Chain


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



Demand forecasting and Planning


Product characteristics
Competitive environment

Forecasting methods

Time series

Product pricing

Relationship of Cost Structure to Pricing

Inventory management

Cycle inventory

Economic order quantity

Seasonal inventory
Safety inventory



Consumption management
Vendor selection
Contract negotiation
Contract management

Credit and collection

Set credit policy

Implement credit and collections practices
Manage credit risk


Product design
Production scheduling
Facility management


Order management
Delivery scheduling
Return processing


Demand Forecasting and


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

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
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


Product Pricing Product

Promotion & Company Cost

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


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.


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.


4 Ways to Reduce Safety


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

Source: Procurement

Procurement function can be

divided into five main activities:
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
Indirect or MRO (maintenance,
repair, and operations)

Source: Procurement Consumption


Understand what categories of

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

Source: Procurement Vendor


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


Work out specific items, prices,

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

Source: Procurement Contract


Measure and manage vendor

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