Part B: SCM Operations

Sources:
Principles of Supply Chain Management: A Balanced Approach, 4 th Edition, Wisner, Tan, Leong
Supply Chain Management: A Global Perspective, 1st Edition, Sanders
Operations Management: Sustainability and Supply Chain Management, 11 th Global Edition, Heizer & Render

Anoud Bani-hani, EngD

CTI362: IT in SCM/L
Zayed University
 Learning Objectives
Understand forecasting, its types, and use in supply chain’s
operations management
Be familiar with collaborative forecasting and demand
planning
 Understand the basics of inventory management and systems
 Distinguish between independent and dependent demand
 Understand the role of inventory management in supply
chain management and impact of the bullwhip effect

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Forecasting & Demand Planning

3
 What is Forecasting?
The process of predicting a future event

Underlying basis of all business decisions

 Marketing - estimates of demand, future trends
 Finance - set budgets, predict stock prices
 Operations - capacity planning, scheduling, inventory levels
 Sourcing - make purchasing
decisions, select suppliers
??

4
Forecasting vs. Planning

 Forecasting drives all other

business decisions

 Planning requires organizing

resources in anticipation of the
forecast

5
 Demand Management
 Demand management is the process of influencing demand
(promotional campaigns, advertisements, etc.)

6
 Principles of Forecasting
 Forecasting realities:
 Forecasts are seldom perfect
 Most techniques assume an underlying stability in the system
 Forecasts are more accurate for shorter than longer time horizons
 Aggregated forecasts are more accurate than individual forecasts
Product family vs. individual product

 Types of Forecasting Methods

 Qualitative
 Quantitative

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 Qualitative Forecasting Methods
 Generally used when data are limited, unavailable, or not
currently relevant.

 Forecast depends on skill & experience of forecaster(s) &

available information

 Four qualitative models used are –

 Jury of executive opinion
 Delphi method
 Sales force composite
 Market survey

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 Quantitative Forecasting Methods
 Quantitative methods are:
based on mathematical techniques
based on historical data exist (objective and consistent)
can handle large amounts of data and uncover complex relationships

 Types of quantitative methods

 Time series forecasting – based on the assumption that the future is an
extension of the past. Historical data (the time series) is used to predict
future demand
 Cause & Effect forecasting – assumes that one or more factors
(independent variables) predict future demand

 It is generally recommended to use a combination of quantitative &

qualitative techniques
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 Quantitative Forecasting Methods

Time series
forecasting

Sales Ice Cream Sales

AED750

AED650
Cause & effect AED550
forecasting
AED450

AED350

AED250
10 12 14 16
Temperature
18 20 22 24
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 Quantitative Forecasting Methods
Components of Time Series

 Trend variations: increasing or decreasing over

many years

 Cyclical variations: wavelike movements that

are longer than a year
(e.g., business/economy cycle)

 Seasonal variations: show peaks & valleys that

repeat over a consistent interval such as hours,
days, weeks, months, seasons, or years

 Random variations: due to unexpected or

unpredictable events

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 Components of Demand
Trend
component
Demand for product or service

Seasonal peaks

Actual demand
line

Average demand
over 4 years

Random variation
| | | |
1 2 3 4
Time (years)

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 Forecasting in
Supply Chain Management

 Collaborative Forecasting & Demand Planning

 Two common processes:
 Sales and Operations Planning (S&OP)
 Collaborative Planning, Forecasting and Replenishment
(CPFR)

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 Forecasting in
Supply Chain Management
 S&OP is a collaborative process for generating forecasts that
all functional areas agree upon

 Five-Step Process:
1. Generate quantitative sales forecast
2. Marketing adjusts the forecast
3. Operations checks forecast against existing capability
4. Marketing, operations, and finance jointly review forecast and
resource issues
5. Executives finalize forecast and capacity decisions

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S&OP Continued

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 Forecasting in
Supply Chain Management
 CPFR is a collaborative process of developing joint forecasts
and plans with supply chain partners

 Five-Step Process:
1. Create joint objectives
2. Develop a business plan
3. Create a joint forecast
4. Agree on replenishment strategies
5. Agree on a technology partner to bring CPFR to fruition

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Inventory Management

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Retail Inventory Management
Example

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 Inventory Management

The objective of
inventory management
is to strike a balance between
inventory investment and customer
service

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 Functions of Inventory
1. To provide a selection of goods for anticipated demand

2. To separate the firm operations from fluctuations in demand

3. To decouple or separate various parts of the supply chain

4. To take advantage of quantity discounts

5. To hedge (protect) against inflation

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 Types of Inventory
 Raw material – Purchased but not processed
 Work-in-process (WIP) – Undergone some change but not completed
 Maintenance/repair/operating (MRO) – Necessary to keep machinery
and processes productive

 Finished goods – Completed product awaiting shipment

95% 5%

Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time

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 Inventory Systems
Inventory systems answer the questions: when to order and
how much to order

There are two categories:

 Fixed-Order Quantity System
 an order of fixed quantity, Q, is placed when
inventory drops to a reorder point, ROP

 Fixed-Time Period System

 inventory is checked in fixed time periods, T, and the
quantity ordered varies

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Inventory Systems

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 Inventory Models
 Independent demand - the demand for item is independent of
the demand for any other item in inventory (e.g. demand for a
finished product)

 Dependent demand - the demand for item is dependent upon

the demand for some other item in the inventory (e.g. demand for a
parts and sub-assemblies)

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 Independent demand
 The Economic Order Quantity (EOQ) Model –
 A quantitative decision model based on the trade-off between
annual inventory holding costs & annual order costs
 The EOQ model seeks to determine an optimal order quantity,
where the sum of the annual order cost & the annual inventory
holding cost is minimized.

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 Independent demand
Inventory Costs:

1. Holding Cost
 costs that vary with the amount of inventory held
 typically described as a % of inventory value
 also called carrying cost

2. Ordering Cost
costs involved in placing an order
sometimes called setup cost

3. Shortage Cost
 occur when we run out of stock

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 Independent demand
• Safety stock is inventory carried in addition to the
demand during lead time

• It is common to carry safety stock when demand (d)

or lead time (L) are not constant
Minimum demand during lead time
Inventory level

Maximum demand during lead time

Mean demand during lead time

ROP = 350 + safety stock of 16.5 = 366.5
ROP 

Expected demand during lead time (350 kits)

Safety stock 16.5 units

0 Place Lead
order
time
Receive
order
Time 27
 Dependent Demand
 Demand for components parts or subassemblies
 Order quantities computed with Material Requirements Planning (MRP)
 Relationship between independent and dependent demand is shown in a
bill of materials (BOM)

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Managing Supply Chain Inventory
In addition to the quantitative models, there are a number of
practical implications to consider:
 ABC Inventory Classification
 Measuring Inventory Performance
 Vendor Managed Inventory

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 Managing Supply Chain Inventory
 ABC Analysis – Divides inventory into three
classes based on annual sales volume
 Class A - high annual sales volume
Percentage of annual dollar usage

80 – A Items  Class B - medium annual sales volume

70 –
 Class C - low annual sales volume
60 –
50 –  Used to establish policies that focus on the few
40 –
critical parts and not the many trivial ones
30 –
20 –
B Items
10 –
C Items
0 –
| | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percentage of inventory items 30
 Managing Supply Chain Inventory
ABC Calculation
(1) (2) (3) (4) (5) (6) (7)
PERCENT
OF PERCENT
ITEM NUMBER ANNUAL ANNUAL OF ANNUAL
STOCK OF ITEMS VOLUME UNIT DOLLAR DOLLAR
NUMBER STOCKED (UNITS) x COST = VOLUME VOLUME CLASS
#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A
72%
#11526 500 154.00 77,000 33.2% A
#12760 1,550 17.00 26,350 11.3% B
#10867 30% 350 42.86 15,001 6.4% 23% B
#10500 1,000 12.50 12,500 5.4% B
#12572 600 $ 14.17 $ 8,502 3.7% C
#14075 2,000 .60 1,200 .5% C
#01036 50% 100 8.50 850 .4% 5% C
#01307 1,200 .42 504 .2% C
#10572 250 .60 150 .1% C
8,550 $232,057 100.0%

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Managing Supply Chain Inventory
Measuring Inventory Performance

 Common metrics for inventory:

 Units
# units available
 Capital investment
dollars or AED tied up in inventory
 Weeks of Supply
 (avg. on-hand inventory) / (avg. weekly usage)
 Inventory Turns
 (cost of good sold) / (avg. inventory value)

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 Managing Supply Chain Inventory
Vendor Managed Inventory (VMI) – the vendor takes on
responsibility for managing the inventory located at a
customer’s facility

The vendor:
 stocks inventory
 places replenishment orders
 arranges the display
 typically owns inventory until purchased
 is required to work closely with customer

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 Managing Supply Chain Inventory
The Bullwhip effect:
Volvo found itself with extra inventories of green cars. To get them off
the dealers’ lots, Volvo’s sales department offered special deals, so
demand for green cars increased. Production, unaware of the promotion,
saw the increase in sales and ramped up production of green cars.

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 The Bullwhip Effect
 Fluctuation and distortion of information increases as it moves up the
supply chain
 “the magnification of safety stocks and costs based on separate forecasts and
uncoordinated planning and sharing of information along the supply chain”
 Each stage of the chain carries progressively more inventory
 The longer the supply chain, the greater the opportunity for the Bullwhip
Effect

 IT can help with information sharing and coordinating planning

Sharing point-of sale information with all members of the supply chain can
combat the Bullwhip Effect

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Bullwhip effect

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End of Slides

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