Supply Chain

Management 1

SCM - Some Definitions
Supply Chain Management encompasses every effort involved in
producing and delivering a final product or service, from the
supplier’s supplier to the customer’s customer. Supply Chain
Management includes managing supply and demand, sourcing
raw materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry and order
management, distribution across all channels, and delivery to the
customer.

The Supply Chain Council, U.S.A.

Key Observations
• Integrated activity:
* Among functions such as logistics, manufacturing,
distribution,
design/engineering, marketing, finance, etc.
* Multiple organizations i.e., suppliers, customers & 3 PL
providers
* Coordination of conflicting goals, metrics, etc.
• Responsible for multiple flows:
* Information (orders, status, contracts)
* Physical (raw material, wip., finished goods)
* Financial (payment, credits, etc.)

Why is SCM Important?

Strategic Advantage – It Can Drive
Strategy
• Manufacturing is becoming more efficient
• SCM offers opportunity for differentiation (Dell) or
cost reduction (Wal-Mart or Big Bazaar) or
customer service (TATA steel)
Globalization
• Requires greater coordination of production and
distribution
• Increased risk of supply chain interruption
• Increases need for robust and flexible supply
chains

Why is SCM Important?
(continued)

At the company level, supply chain
management impacts
• COST – For many products, 20% to 40% of total
product costs are controllable logistics costs.
• SERVICE – For many products, performance
factors such as inventory availability and speed
of delivery are critical to customer satisfaction.
• Delinking of Production –it delinks
production from market volatility by providing
suitable buffers at appropriate place in the supply
chain

Why is SCM Important? (continued) Purpose of Supply chain • Time buffering – buffering the time between production and consumption • Distance – Spanning the location of Production & Consumption • Quantity – Producers specialize in large quantity of a limited assortment • Assortment – consumers seek small quantities and wide assortment .

Supply Chain Product Information Funds Dealer Custome RWH/ r PWH Distributo r Raw Plant Custome Custome Materials r r .

Primary Characteristics of Supply Chain SCM as an operating discipline can be summarized as the practice of these characteristics: • Performance excellence – customer satisfaction at the lowest total Cost • Collaboration with Supply chain partners - coordinating operating activities • Information Technology – Enabling SC resource optimization .

Complexities Involved in Supply Chain Management • The supply chain is a complex network of facilities and organizations with different. conflicting objectives • Matching supply and demand is a major challenge • System variations over time are also an important consideration • Many supply chain problems are new and there is no clear understanding of all the issues involved .

The Dynamics of the Supply Chain – a typical supply study Demand variability & schedule changes amplified through: • MRP’s network of demand dependencies • Latency – delayed communications re downstream demand level changes that cause upstream to overcompensate and ‘oscillate’ • Misreading of demand signals between trading partners • Excessive batching .

The Dynamics of the Supply Chain – a typical supply study Order Size Customer Customer Demand Demand Retailer RetailerOrders Orders Distributor Distributor Orders Orders Production Production Plan Plan Time Source: Tom Mc Guffry. 1998 . Electronic Commerce and Value Chain Management.

all rights reserved Peek .What is the basic Problem? Today’s formal planning systems are fundamentally broken! 6 DDMRP Sneak All material and © copyright Demand Driven Institute 2014.

all rights reserved . 6 Class 3 IndustryAverage 7 1 Laggards 8 4 0 2 40 80 0 60 100 DDMRP Intro All material and © copyright Demand Driven Institute 2014.Modern Planning Systems Broken?! Companies Using Spreadsheets for Demand Management Best-in.

Old Tools.Old Rules. all rights reserved . New Pressures • Forecast error is on the rise • Supply Chain Complexity and Volatility is increasing • Legacy planning tactics and tools are breaking down ► Inside most modern ERP systems is MRP ► 79% of ERP Buyers implement MRP ► Conceived in the 1950’s ► Codified in the 1960’s ► Commercialized in the 1970’s and… ► …it hasn’t changed All material and © copyright Demand Driven Institute 2014.

The “New Normal” • Global sourcing and • Pressure for leaner demand inventories • Shorter product life cycles • Inaccurate forecasts • Shorter customer tolerance • More product variety times • Long lead time parts & • More product complexity components and/or customization Worldwide there are more complex planning and supply scenarios than ever – the past is NOT an predictor for the future DDMRP Intro 9 .

Where to Start? .

Expectations from Supply Chain • Service • Revenue • Inventories • Expenses Requireme ntsthat Time is the ultimate constraint • Realization • Well defined and understood systems • Smooth linkage between points in the system All above lead to becoming Demand Driven .

The First Law of Supply Chain All benefits will be directly related to the speed of FLOW of materials and information. Informati on Suppliers Customers Materials & Information Corollary: Materials and Information must be RELEVANT!!! All material and © copyright Demand Driven Institute .

"All Benefits" Encompass: • Service is consistent and reliable when a system flows well • Revenue is maximized and protected • Inventories are minimized • Expenses ancillary and/or unnecessary are minimized • Cash flow follows the rate of product flow to market demand All material and © copyright Demand Driven Institute Protect and Promote Flow = ROI Maximization .

Flow is the enabler for the primary objectives of most functions in the company Planning Qualit Financ y e FLO W Plant/ Sale Operatio s ns Marketi ng All material and © copyright Demand Driven Institute .

Flow is the intersection of prevailing improvement methods Lean Primary Objective: Reduce Waste FLO Six-Sigma W Theory of Constraints Primary Primary Objective: Objective: Improve Reduce Throughput Variability All material and © copyright Demand Driven Institute .

to the wrong thing • We often have to spend more to get the right thing within a short window of time or…we risk service All material and © copyright Demand Driven Institute . time. materials.Committing to the Wrong Demand Signal • Forecasts are often converted to Planned Orders • Three Universal Truths about Forecasts • They start out wrong • The more remote in time they are the more wrong they are • The more detailed we make them the more wrong the are • When Planned Orders are wrong: • We commit capacity. space. etc.

5 or 6) schedules or orders. Blackstone.Planning and Scheduling Nervousness Nervousness: “The characteristic in an MRP system when minor changes in higher level (e.g.g. level 0 or 1) records or the master production schedule cause significant timing or quantity changes in lower level (e.” (APICS Dictionary 12th Edition. 86) FPA FP FPB A IC SA SAA SAA SA A A L SA PP IC ICB ◄Change PP IC PP PP B A B A B A Z PP PP SAG SA SA B C G G PP PPD PP PPE PP PP D E D E All material and © copyright Demand Driven Institute .

steps. steps. the less productive that system will be. or processes and connections in the system. Output Lead time Delays accumulate while gains do not. or processes in a system. the more erosive the effect to system productivity will be. • The more areas. All material and © copyright Demand Driven Institute . The Law of System Variability • The more that variability is passed between discrete areas.

12th Edition) Sub- Foundry Component Assembler OEM All material and © copyright Demand Driven Institute .” (APICS Dictionary. This is caused by the serial nature of communicating orders up the chain with the inherent transportation delays of moving product down the chain. Inventory can quickly move from being backordered to being excess.Variability at the Supply Chain Level More parts – worse the effect! Bull‐Whip Effect: “An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain.

A Further Complication – “Artificial Batches” • An artificial batch is any batch that is not function of actual demand or consumption • Examples would be: • Economic Order Quantities • Minimum Run Sizes • Minimum Order Quantities • Minimum Freight Policies • Minimum Order Cycles (imposed latency) • Artificial batches often impede the synchronization of supply with actual demand – they are a form of management variability All material and © copyright Demand Driven Institute .

An Example All material and © copyright Demand Driven Institute .

Two Universal Points of Inventory A B Too Little Warning Optimal Range Warning Too Much 0 Note: “Optimal” is from an on-hand perspective All material and © copyright Demand Driven Institute .

The MRP “Bi‐Modal” Distribution # of parts or SKU Too Little Warning Optimal Range Warning Too Much 0 All material and © copyright Demand Driven Institute .

The Effects of the Bi‐Modal Distribution Oscillation # of parts or SKU Optimal Range Warning Too Much Too Little Warning 0 Three Simultaneous Effects: “How can we have so much inventory 1. Chronic and Frequent Shortages “We paid for fast freight now we don’t 3. High Expedite and Waste Related need it?!” Expenses All material and © copyright Demand Driven Institute . Persistently High Inventories and not be able to ship orders?!” 2.

com All material and © copyright Demand Driven Institute .Something Must Change MRP MRP II ERP APS Deloitte University Press DUPress.

Establish CONTROL POINTS 4.Establish DECOUPLING POINTS 3.A Blue Print for Change – Mitigating the Effect of Variability on Flow 1.Measure for Flow All material and © copyright Demand Driven Institute .Buffer Both DECOUPLING and CONTROL POINTS 5.Use only ACTUAL DEMAND 2.

1 – Shift from Forecast Driven to Sales Order Driven Plan Plan t t Logisti Forec ast Plannin Logisti Sal Plannin es cs g cs g From: To: Ord er Supplie Supplie rs rs • Planned orders create supply orders in • Only qualified sales orders within a short anticipation of need range horizon qualify as demand • Forecast error associated with Planned allocations orders results in inventory • Sales orders give a near perfect demand misalignments and expedite expenses signal in terms of what will be sold and when it will be sold. All material and © copyright Demand Driven Institute .

page 34. page 34. 12th Edition. Blackstone 2008) Sub- Foundry Component Assembler OEM Decoupled Lead Times All material and © copyright Demand Driven Institute . (APICS Dictionary. Selection of decoupling points is a strategic decision that determines customer lead times and inventory investment. Commonly denotes providing inventory between operations so that fluctuations in the production rate of the supplying operation do not constrain production or use rates of the next operation. 12th Edition. Blackstone 2008) • decoupling points —The locations in the product structure or distribution network where inventory is placed to create independence between processes or entities.2 – Establish Decoupling Points • The only way to stop Nervousness and the Bull Whip Effect is to stop variation from being passed between the parts of the system • decoupling —Creating independence between supply and use of material. (APICS Dictionary.

Everything Dependent (MRP) versus Strategically Decoupled (DDMRP) MRP Everything Dependent Strategically Decoupled All material and © copyright Demand Driven Institute .

3. and amplify control through a defined area. Common Points are points where one place controls many things. • When set as a specific resource they are often called a “Drum” or a “Pacesetter” • Selection Criteria: 1. Exit and Entry Points are the boundaries of your effective control. . Points of Scarce Capacity determine the total system output potential.3 – Establish Control Points • Places to transfer. 2. Points that Have Notorious Process Instability can be planned for and controlled All material better and © copyright when Demand Driven visibility Institute and focus is placed on the resource and its variability. 4. impose.

A Decoupled System with Control Points Lead time = 4 week Lead time = 3 weeks Lead time = 1 week Outsour plat = Strategic ce e Decoupling points operatio C n C C = Control point she ar C wel d Raw sa assem pain configu C Custom bly t re er stoc w ks C machining lase r purchase hea d compone t nt stocks trea t All material and © copyright Demand Driven Institute .

4 – Buffer Decoupling and Control Points Stock Time Capacity All material and © copyright Demand Driven Institute .

Aggregated Supply Requirement Reliable Output/Availability Stock Level Cumulative Supply Variability Cumulative Demand Variability Pre-Buffer Sequence of Events Consumer of stock All material and © copyright Demand Driven Institute . They are commonly amounts of inventory that will provide reliable availability to the consumers of the stock while at the same time allowing for the aggregation of demand orders creating a more stable and efficient supply signal.Stock Buffers – Used at Decoupling Points Quantities of inventory or stock that are designed to decouple demand from supply.

Time Buffers – Used at Control Points Scheduled Entry to Scheduled Start at Buffer Control Point ▼ ▼ WO 1595 C WO 1781 Upstream WO 1626 WO 1601 Processes WO 3279 WO 2001 Early Green BUFFE Yellow Red Late R Example: 9 hour buffer All material and © copyright Demand Driven Institute .

Capacity Buffer Stable Output Total Capacity Cumulative Variation (including expedited orders) Preceding Sequence of Events Buffered Resource All material and © copyright Demand Driven Institute .Capacity Buffers – Used Around Decoupling and Control Points The protective capacity at resources that allow these resources to catch up (rebuild strike Over Capacity buffers) when variability s.

Demand Driven Design Model = Time buffer = Stock buffer = Capacity C = Control Lead time = 3 weeks buffer point Lead time = Outsour plat 4 week ce e Lead time = 1 week operatio n C C she ar C wel d Raw sa assem pain configu C Custom bly t re er stoc w ks C machining lase r purchase hea d compone t nt stocks trea t All material and © copyright Demand Driven Institute .

System Stability Pass on as little variation as possible. All material and © copyright Demand Driven Institute . System Speed/Velocity Pass the right work on as fast as possible.5 – Three Tactical Metric Objectives for Flow Metric Objectives The Message Day to Day Operations System Reliability Execute to the Control plan/schedule/market expectation.

awaiting start 0 15 5001 2/18/2014 13:14 2:12 2/18/2014 15:26 505001 505001-1 Released.System Reliability Execute to the plan/schedule/market expectation Measure: Monitor on-hand and available stock statuses at decoupling points Monitor . sequence C and on-time status of work at control points Dispatch List . awaiting start 0 15 5001 All material and © copyright Demand Driven Institute . awaiting start 0 18 2003 2/15/2014 13:08 3:10 2/15/2014 16:18 505001 505001-1 Released.Resource C1 Start Full Duration End Sales Order Work Order Status Sales Order Qty Work Order Qty Part 2/13/2014 17:57 11:05 2/14/2014 5:02 356010 356010-5 Released. release. awaiting start 0 18 2003 2/14/2014 22:42 9:05 2/15/2014 7:47 356010 356010-8 Released. awaiting start 0 22 2003 2/14/2014 5:02 8:35 2/14/2014 13:37 356009 356009-2 Released. awaiting start 0 17 2003 2/14/2014 13:37 9:05 2/14/2014 22:42 356009 356009-1 Released.

System Stability Pass on as little variation as possible Work Order Load Measure: Capacity Monitor capacity buffers in non- control point resources looking for potential overloads Monitor penetrations to time buffers focusing on red and late zones Monitor on-hand. available stock and projected on-hand at decoupling points All material and © copyright Demand Driven Institute .

awaiting start 0 15 5001 2/18/2014 13:14 2:12 2/18/2014 15:26 505001 505001-1 Released. LATE to Start Arrived. awaiting start Sales Order Qty Work Order Qty Part 0 0 0 22 2003 17 2003 18 2003 2/14/2014 22:42 9:05 2/15/2014 7:47 356010 356010-8 Released. awaiting start 0 15 5001 Monitor early buffer entry All material and © copyright Demand Driven Institute .Resource C1 C Start 2/13/2014 17:57 2/14/2014 5:02 2/14/2014 13:37 Full Duration End 11:05 2/14/2014 5:02 8:35 2/14/2014 13:37 9:05 2/14/2014 22:42 Sales Order Work Order 356010 356010-5 356009 356009-2 356009 356009-1 Status Arrived. LATE to Start Released. awaiting start 0 18 2003 2/15/2014 13:08 3:10 2/15/2014 16:18 505001 505001-1 Released.System Speed Velocity Pass the right work on as fast as possible Measure: Monitor Over the Top of Green (OTOG) Monitor backlog status and dispatch list sequence of control points Dispatch List .

Analytics – Use of Control Charts Starting Out Mature Implementation Initial Results All material and © copyright Demand Driven Institute .

Effects of de-coupling Replenishment stock buffers Grey – Over the recommended levels Green – comfort zone Yellow – Operating zone Red – Safety zone Deep red – Base .

stock. This can also be referred to as supply continuity variability. Demand The potential for swings and spikes in demand Variability that could overwhelm resources (capacity. cash. Inventory The places in the integrated BOM structure (the Leverage & Matrix BOM) or the distribution network that Flexibility leave a company with the most available options and the best lead-time compression to meet the business needs. Market The lead time that will allow an increase of price Potential Lead or the capture of additional business through Time either existing or new customer channels. etc. Supply The potential for and severity of disruptions in Variability sources of supply and/or specific suppliers.The Six Decoupling Point Positioning Factor FactorsDefinition Customer The amount of time potential customers are Tolerance Time willing to wait for delivery of a good or a service.). Critical The minimization of disruption passed to critical .

The yellow zone is the rebuild zone for replenished and replenished override buffers.Buffers Green – Determined on Lead Time. . Red Safety – Determined on Lead Time.The portion of the red zone sized by Variability factors. Consumption. Consumption & Lead time Variability Red Base . Consumption & Lead time factor Yellow – Determined on Lead Time.

that is 5 days. • After providing buffers in the diagram on right the lead time is reduced to 5 days.Lead time decompression - Effects $ 30 $ 30 $ $ $ $ 7 10 7 10 2 2 $ 1 $ 1 5 5 2 2 • Lead time in the BOM of part A on left is 35 day in one leg and 30 day in another. which will be a factor of longest led time. . buffer is required to be maintained at A also. The longest led time in the chain is 15 days and to be used for determining buffer level determination. • If customer tolerance time is nil. Thus forecast variability will have to be for a period of 35 days and stocks to be maintained accordingly.

reduced working capital requirement and better customer satisfaction • By distributing buffers at every control node in the critical chain. . Stocks outs are reduced greatly and overall working capital is reduced. the risk is reduced and the chain becomes more efficient. This facilitates improved order servicing. Buffer management Plant PWH RWH/ HUB Distributo Dealer r • Buffers are essential to decouple various nodes and make them independent in their operations.

Execution • Stock movement is continuously monitored to prevent stock build up in the system and preference is given to dispatches for SKU nearing stock-out. Demand driven planning . This makes chain highly efficient and frees working capital .

com/groups?home=& gid=3768677 All material and © copyright Demand Driven Institute 2014.demanddrivenmrp.com (free downloads of company presentations from the Demand Driven World Conference) • DDMRP LinkedIn group: http://www.com (free downloads and podcasts) • www.linkedin. all rights reserved .Where to Find out More? • Book s: • Online: • www.demanddrivenworld.

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