MS 491 Lecs

Supply Chain
Management
MS 491
Hassaan Tariq
School of Management Sciences
Fall 2021
Hassaan Tariq, SMGs, GIKI, Fall 2021, MS 491, SCM 1

Let’s Discuss Things!
• Marking Schemes stay the Same, Only Addition is Project instead of
Assignment
• What is SCM
• Vertical Integration
• Reverse Logistics
• Flows in SCM
• 1st and 2nd Tier Suppliers and Customers
• 3PL vs 4th Party Logistics
• Bull-Whip Effect
• Business Process Re-Engineering
• Supplier Management
• Supplier Evaluation and Certifications
• Expansion and Contraction of SCM  Nearshoring, Outsourcing,
Right-Shoring
• Agile, Lean and Green Supply Chains

• Chapter 2 – Purchasing Management
• Purchasing vs Procurement
• Traditional vs E-Procurement
• Tender , Bid, Purchase Order,
• Financial Impact of Purchasing  Return on Assets/ROI, Profit
Leverage Effect, Inventory Turnover
• Make or Buy in SCM and their Effect
• Breakeven Analysis
• Parameters for Supplier Selection  Technology, Info Sharing, Cost,
Quality, Reliability, Capacity, Ordering System, Communication
Capability, Location, Service Levels
• Chapter 2 – Purchasing Management
• Total Cost of Ownership  Order Processing Cost, Inventory Carrying
Cost, Cost of Working Capital, Back-Order Cost
• Single vs Multiple Suppliers
• Centralized and De-Centralized Purchasing
• Global Sourcing and Players
• Public Procurement and terms
• Problems and Numericals from the Chapter???

Current Supply Chain Scenario and
Reasons!
• Disruptions  Due to ????????????????????
• Impact on Pakistan?????
• Is CPEC a Game Changer?????

Cycle View
of Supply
Chain
Processes

Push/Pull
view of
SCM

Manufacturing Strategies and De-Coupling Points – SCM Perspective

Supply Chain Macro-Processes

What’s a Responsive SC
• Respond to wide ranges of quantities demanded
• Meet short lead times
• Handle a large variety of products
• Build highly innovative products
• Meet a high service level
• Handle supply uncertainty

Drivers of SC
Performance
12
Hassaan Tariq, SMGs, GIKI, Fall 2021, MS 491, SCM
Efficient vs Responsive SC

Supply Chain Flows
• Amazon
• Toyota
• Daraz

Forecasting & Demand
Management

• What is Forecasting??? E.g. Apple Iphone 4 – 600,000/ Pre-Orders
• Airbus delivered 29 planes out of the 202 ordered – A380
• Types of Forecasts?
• Where to Forecast and Where Not?
• Demand, Independent vs Dependent Demand?

• Demand Management in Pakistan?
• Ultimate aim of Supply Chain is to Balance Demand and Supply!

• Forecast A statement about the future value of a variable of
interest. Demand can be a variable.
• Long Term and Short Term Forecasting
• Famous Saying  Forecasting is In-Accurate
• Good Forecasting should be accurate, timely, reliable, meaningful

units, cost-effective and simple to use & understand.
Forecasting in different Business Environments
• Accounting. New product/process cost estimates, profit projections, cash
management.
• Finance. Equipment/equipment replacement needs, timing and amount of
funding/borrowing needs.
• Human resources. Hiring activities, including recruitment, interviewing, and
training; layoff planning, including outplacement counseling.
• Marketing. Pricing and promotion, e-business strategies, global competition
strategies.
• MIS. New/revised information systems, internet services.
• Operations. Schedules, capacity planning, work assignments and workloads,
inventory planning, make-or-buy decisions, outsourcing, project management.
• Product/service design. Revision of current features, design of new products
or services.
Benefits of Forecast
• Reduced Inventories
• Reduced Stockout
• Smooth Production plans
• Reduced Cost
• Improved Customer Service levels
• Demand Forecasting is done at various levels in Supply Chains!

Suppliers Buyers  Consumers ; Invetory Forms and Where forecasting is
Required
Companies understanding about
Forecasting
• To make forecast more reliable and accurate, a company must be
knowledgeable about the following factors.
• Past Demand
• Lead time of Product Replenishment
• Planned Advertising or Marketing Efforts
• Planned price and Discounts
• State of the Economy
• Actions that Competitors have taken

Steps in a Forecasting Process
• Determine the purpose of the forecast

• Establish a time horizon
• Obtain, clean, and analyze appropriate data
• Select a forecasting technique
• Make the forecast
• Monitor the forecast errors
Mandatory Reading.
https://hbr.org/1971/07/how-to-choose-the-right-forecasting-technique
2 Main types of Forecasting
• Qualitative  Qualitative techniques permit inclusion of soft
information (e.g., human factors, personal opinions, hunches) in the
forecasting process. Those factors are often omitted or downplayed
when quantitative techniques are used because they are difficult or
impossible to quantify
• Quantitative  Quantitative methods involve either the projection of

historical data or the development of associative models that attempt
to utilize causal (explanatory) variables to make a forecast

Classification of Forecasting Techniques
• Judgmental forecasts rely on analysis of subjective inputs obtained from
various sources, such as consumer surveys, the sales staff, managers and
executives, and panels of experts. For New Industries!
• Time-series forecasts simply attempt to project past experience into the

future. These techniques use historical data with the assumption that the
future will be like the past.
• Associative models use equations that consist of one or more explanatory

variables that can be used to predict demand. For example, demand for
paint might be related to variables such as the price per gallon and the
amount spent on advertising, as well as to specific characteristics of the
paint (e.g., drying time, ease of cleanup).
Qualitative Methods
• Jury of Executive Opinion  Dominated Discussions by Top Mgt, e.g.

Fashion Trends
• Sales Forces Composite  Individual Biasis
• Delphi Method  Technology, Projects,
• Consumer Survey  Focused Groups as well

Machine Learning based Forecasting

Machine Learning Forecasting Methods
• ARIMA and S-ARIMA
• Artificial neural network
• Long short-term-memory-based neural network
• Random forest
• Generalized regression neural networks
• K-nearest neighbours regression
• Classification and regression trees (CART)
• Support vector regression
• Gaussian processes
For Project every group needs to pick any one method, De-Code the backend
process and provide realistic Example by using the method of your choice.
ML vs Traditional Forecasting Results

Quantitative Methods – Traditional
Forecasting
• Time series forecasting is based on the assumption that the future is
an extension of the past; thus, historical data can be used to predict
future demand.
• Since these forecasts rely solely on past demand data, all quantitative
methods become less accurate as the forecast’s time horizon
increases.

Components/Behaviours of Time Series Method
• Trend A long-term upward or downward movement in data
• Seasonality Short-term regular variations related to the calendar or time

of day
• Cycle Wave like variations lasting more than one year
• Irregular variation Caused by unusual circumstances, not reflective of

typical behavior
• Random variations Residual variations after all other behaviors are

accounted for
Variations in Time Series

Naïve Forecasting
• A forecast for any period that equals the previous period’s actual
value. 2 Methods. Reliability is low but Simple to understand. Not
much previous data required.

Averaging Techniques

Simple Moving
Average
• Technique that
averages a number of
recent actual values,
updated as new values
become available.
•A moving average
forecast tends to
smooth and lag
changes in the data

MA 3 vs 5 Periods

• A weighted average is similar to a moving average,
except that it typically assigns more weight to the
most recent values in a time series.
Weighted
Moving
Average

Practice Question

Solution

Exponential Smoothing
• A weighted averaging method based on the previous forecast plus a
percentage of the forecast error.
• Next forecast = Previous forecast + α(Actual − Previous forecast)
• The closer α is to zero, the greater the smoothing

Numerical –Exponential Smoothing

Choosing Alpha – Exponential Smoothing
• Selecting a smoothing constant is basically a matter of judgment or
trial and error, using forecast errors to guide the decision.
• The goal is to select a smoothing constant that balances the benefits
of smoothing random variations with the benefits of responding to
real changes if and when they occur.
• Commonly used values of α range from .05 to .50.
• Low values of α are used when the underlying average tends to be
stable; higher values are used when the underlying average is
susceptible to change.

Trend based Forecasting
• Trend Line Forecasting
• Spear Man’s Co-Efficient

Trend-Line Equation

Trend Line Practice Question

Measuring Forecasting Accuracy
• Mean absolute deviation
(MAD) The average absolute
forecast error
• Mean squared error (MSE) The
average of squared forecast
errors.
• Mean absolute percent error
(MAPE) The average absolute
percent error.

Practice
Question

Demand Management
• Demand management includes activities that range from determining

or estimating the demand from customers, through converting
specific customer orders into promised delivery dates, to helping
balance demand with supply.
• Timely and honest customer order promises are possible. Physical

distribution activities can be improved significantly.
• Demand management is also concerned with identifying all sources of

demand for manufacturing capacity, including service-part demands,
intra company requirements, and promotional inventory buildup or
other needs for pipeline inventory stocking.
Demand Management VS Demand Driven Supply Chains
• Demand management is a process within an organisation which enables that organisation to
tailor its capacity to meet variations in demand or to manage the level of demand using
marketing or supply chain management strategies.
• Demand driven supply chain (DDSC), also known as demand-driven supply network (DDSN),
is a system of technologies and processes that sense and react to real-time demand across a
network of customers, suppliers and employees, this has been significantly enabled due to
the rise in the use of e-commerce systems and new technologies due to the onset of the
Internet of Things (IoT).
• In a traditional supply chain, inventory or services are provided based on a forecasted
demand and historical sales patterns, however, in a demand driven supply chain companies
that form part of the supply chain work closely to shape market demand by sharing and
collaborating information so avoiding time lags in information flow, with a view to avoiding
the bullwhip effect occurring across the supply chain.
• A demand driven supply chain focuses on the demand from the consumer data and feeds
this data through to the supply base so driving greater efficiency into inventory availability
giving a demand-pull technique.
Demand
Managemen
t Process
Objectives and Levers of Demand Management
• The objectives on the demand side are to (1) Grow market, (2) Steal market share from
competitors, or (3) Shift buying patterns of the customers
• Companies may deal with Limited Supplies through Demand Shaping
• ERP Systems can help to reduce Demand Variability through small and frequent orders, and
integrating Up and Down Stream SCM.
• Demand characteristics (sales volume, volatility, sales duration, etc.)
• Levers Include:-
• • Pricing – incentives (discounts, MOQ’s, etc.)  MOQ (Minimum Order Qty)
• • Advertising – increasing brand awareness, and
• • Promotions – price reduction over short period of time.
Demand Shaping
• Demand shaping involves finding ways to balance supply with

demand and it can take two basic forms: influencing demand and
managing and prioritizing demand
• Another way to distinguish among methods of demand shaping is

called external balancing versus internal balancing.
• External balancing works to change customer behavior while internal
balancing works to change organizational behavior
Influencing Demand
• Influencing demand describes the activities of product and brand
management, marketing, and sales to convince customers to purchase the
organization’s products and services so that the organization’s business
objectives are met or exceeded.
• Another aspect of influencing demand is the requirement for the demand

side of the organization to influence the product development, logistics,
and supply sides of the organization to recognize and support actual
customer expectations and requirements.
• Changing how customers order goods can also be called external balancing
and the two key external balancing levers that most organizations have are
adjustments in price and Promotions and adjustments in lead time.
Influencing Demand
• Positively influencing demand over the longer term involves
• Developing products that customers are actually demanding,
• Settling on the most profitable product mix,
• Setting strategic pricing,
• Placing products at various physical or online distribution points to establish a
presence and
• Level of customer convenience, and promoting products through
advertisement
Managing and Prioritizing Demand
• Organizations must manage and prioritize demand because sales will
differ on a regular basis from planned demand in total volume and/or in
product mix and because supply often cannot produce products in the
exact timing and mix specified by the demand plan.
• The primary internal balancing levers used to manage and prioritize

demand include production flexibility and inventory holding.
• Production flexibility involves small batches of production with fast
changeovers to produce more units that are in demand now. It can also involve
prioritizing production to increase supply of certain items or prioritizing items
within distribution systems to better distribute supply to meet demand.
• For inventory, safety stock helps manage supply-demand mismatches by

preventing stockouts or avoiding lead time issues; however, it only makes
oversupply situations worse.
Managing and Prioritizing Demand – External
Levers
• Management and prioritization from an external balancing perspective
can be based on customer segmentation strategies, such as fulfilling
orders to the most valuable customer segments first.
• Another example is rationing supply so that each warehouse or retailer
receives a portion of the full demand but no entity goes without a
certain minimum amount
Managing and Prioritizing Demand - Examples
Demand and Power Law Distribution
• Demand follows power law distribution, meaning large volume of
sales is concentrated in fewer products.
• The distribution of percent sales volume to percent of SKUs (Stock

Keeping Units) tends to follow a Power Law distribution (y = ax^k )
where y is percent of demand (units or sales or profit), x is percent of
SKUs, and a and k are parameters.
• The value for k should obviously be less than 1 since if k=1 the
relationship is linear.
Sources of Variation in Demand Management
Demand is also affected by Seasonality

Lumpy Demand  When items are really slow moving
The hockey stick effect is characterized by a sharp rise or fall of data points after a long flat period
Corporate cannibalism is when a product sees a decrease in sales volume or market share due to the release
of some new product that has been introduced by the same company.
Supply Chain Segmentation using Demand Profiling
• Good Luck for Mid-Terms

Post Mid’s Content
14/Dec/2021

Resource Planning Systems
Chapter 6

Resource Planning
• Resource planning is the process of determining the production
capacity required to meet demand.
• In the context of resource planning, capacity refers to the maximum

workload that an organization is capable of completing in a given
period of time.
• A discrepancy between an organization’s capacity and demand results

in an inefficiency, the aim of Resource planning is to minimize this
Discrepancy.
Approach towards Resource Planning
• Issues if Resource planning is not Carried??????
• Capacity is What???? Issues with High & Low Capacity!!!!!!
• Have a production plan to balance Capacity!!!

Manufacturing Operations & Planning Horizons!

Terminologies
• Aggregate production plan (APP) is a long-range materials plan. The
aggregate production plan sets the aggregate output rate, workforce
size, utilization and inventory and/or backlog levels for an entire
facility.
• Master production schedule (MPS) is a medium-range plan and is

more detailed than the aggregate production plan. It shows the
quantity and timing of the end items that will be produced.
• Material requirements planning (MRP) is a short-range materials

plan. MRP is the detailed planning process for component parts to
support the master production schedule.

Systems for Manufacturing Planning
• MRP 1  Material Requirement Planning
• MRP 2  Capacity planning Included
• ERP  Enterprise Resource Planning

• accounting/finance,
• sales and marketing,
• human capital management (HCM),
• customer relationship management (CRM),
• purchasing management,
• inventory management,
• distribution management, and
• quality management.
• DRP  Distribution Requirement Planning

SCM KPIs
– ERP for
Efficiency
Information flow in ERP for Cash to Cash
Cycle Time -
Flow of
Information in
ERP to
Calculate Cash
to Cash Cycle
Time
Aggregate Production Plan
• Aggregate production planning is a hierarchical planning process that translates
annual business plans and demand forecasts into a production plan for all products.
• Aggregate production plans are typically stated in terms of product families or groups.
A product family consists of different products that share similar characteristics,
components or manufacturing processes.
• The objective is to provide sufficient finished goods in each period to meet the sales
plan while meeting financial and production constraints.
• Costs relevant to the aggregate planning decision include inventory cost, setup cost,
machine operating cost, hiring cost, firing cost, training cost, overtime cost and costs
incurred for hiring part-time and temporary workers to meet peak demand.
• There are three basic production strategies that firms use for completing the
aggregate plan: (1) the chase strategy, (2) the level strategy and (3) the mixed
strategy. Hassaan Tariq, SMGs, GIKI, Fall 2021, MS 491, SCM 70
Aggregate Production Plan - Example

The pure chase production strategy adjusts capacity to
match the demand pattern.
Chase Using this strategy, the firm will hire and lay off workers to
match its production rate to demand.
Production The pure chase strategy obviously has a negative

Strategy motivational impact on the workers, and it assumes that
workers can be hired and trained easily to perform the job.
Best for MTO (Make to Order) and Low Skilled employees.
In this strategy, the finished goods inventories always

remain constant but the workforce fluctuates in response to
the demand pattern.
Chase Production Strategy Example

Chase
Strategy -
Continued

Level Production Strategy
• A pure level production strategy relies on a constant output rate and
capacity while varying inventory and backlog levels to handle the
fluctuating demand pattern.
• Using this strategy, the firm keeps its workforce levels constant and
relies on fluctuating finished goods inventories and backlogs to meet
demand.
• Suitable for highly skilled labor.
• The firm allows finished goods inventories to accrue while cumulative
demand remains less than cumulative production
• This strategy works well for make-to-stock manufacturing firms, which
typically emphasize immediate delivery of off-the-shelf, standard
goods at relatively low prices. Firms whose trading partners seek the
lowest prices of stock items might select the level production strategy
Level Production Strategy – Example

• Mixed production strategy that strives to
maintain a stable core workforce while using
other short-term means such as overtime, an
additional shift, subcontracting or the hiring of
part-time and temporary workers to manage
Hybrid/Mix short-term high demand.
ed
• Usually, these firms will then schedule
Production preventive maintenance, produce
Strategy complementary products that require similar
resources but different demand cycles, or
continue to produce the end items, holding
these as finished goods inventory during the off-
peak demand periods.

Enjoy the Supply Chain Videos!

• https://www.youtube.com/watch?v=DvEh04LNJ_I  DHL Supply Chain
• https://www.youtube.com/watch?v=rNVPdN4j-8o  BASF Intelligent SCM
• https://www.youtube.com/watch?v=IMPbKVb8y8s  Inside an Amazon

Warehouse
• https://www.youtube.com/watch?v=NssC-foGO9c  Toyota Pakistan

Factory
• https://www.youtube.com/watch?v=6sZntBOWiAQ  ERP
• https://www.youtube.com/watch?v=YKmFP5JuPTA  Digital Systems in

SCM
Master Production Schedule
• The master production schedule is a time-phased, detailed

disaggregation of the aggregate production plan, listing the exact end
items to be produced. It is more detailed than the aggregate
production plan.
• ATPs Available to Promise and PAB Projected Available Balance

MPS - Example

Master Scheduling Grid
Dependent vs Independent Demand
• Dependent demand that is directly related to or derived from the
bill of material structure for other items or end products. Such
demands are therefore calculated and need not and should not be
forecast.
• Independent the demand for an item that is unrelated to the

demand for other items. Demand for finished goods, parts required
for destructive testing, and service parts requirements are examples
of independent demand.
Sample BOM – Bill of Materials
Bill of
Materials
(BOM)
BOM -
Schematic
Snow Shovel
Product Structure –
Diagram for Snow Shovel
Inputs and Outputs
for an MRP –
Materials
Requirement Planning
Basic MRP Record
Basic MRP
Record
Gross Requirement  Anticipated Future Use/Demand
Scheduled Receipts  Existing Orders for any item, is at the

beginning of that period/Manufactured Items
Projected Available Balance  How much is available in Inventory
Planned Order Release  Planned replenishment Orders/

Replenishments that will be added to the system.
Capacity Management and
Planning in SCM
From Different Books – Use Slides for Preparation of this Topic – For Others book
only!

Capacity Management
• Can we do it? When is the Deadline? Can we do it now? How much?

Capacity Management
• The function of establishing, measuring, monitoring, and adjusting
limits or levels of capacity in order to execute all manufacturing
schedules (i.e., the production plan, master production schedule,
material requirements plan, and dispatch list). Capacity management
is executed at four levels:
• + Resource planning,
• + Rough-cut capacity planning,
• + Capacity requirements planning, and
• + Input/output control
• The overriding goal is to keep demand and supply in harmony by

ensuring that the network contains the right amount of capacity in
the right configuration to serve customers in a cost-effective manner
Capacity Planning
• The process of determining the amount of capacity required to

produce in the future. This process may be performed at an aggregate
or product-line level (resource requirements planning), at the master
scheduling level (rough-cut capacity planning), and at the material
requirements planning level ( capacity requirements planning).
• Capacity planning involves identifying required resources and

selecting methods of making capacity available when needed.

Capacity Control
• The process of measuring production output and comparing it with
the capacity plan, determining if the variance exceeds pre-established
limits, and taking corrective action to get back on plan if the limits are
exceeded.

Time
Horizon of
Capacity
Managemen
t

Resource Planning
• Part of the resource plan is

a long-range assessment of
capacity requirements at an
aggregate level. Given long-
range demand forecasts,
you need to ask about the
resources needed-including
plant, lab or, and
equipment-to create
enough supply to match
that demand one, two, or
even five years into the
future. E.g. Labor Hours,
Productivity Hassaan Tariq, SMGs, GIKI, Fall 2021, MS 491, SCM 95
Ways for Capacity Growth
96
Hassaan Tariq, SMGs, GIKI, Fall 2021, MS 491, SCM
Rough Cut Capacity Planning (RCCP)
• The process of converting the master production schedule into

requirements for key resources, often including labor; machinery;
warehouse space; suppliers' capabilities; and, in some cases, money.
Comparison to available or demonstrated capacity is usually done for
each key resource. This comparison assists the master scheduler in
establishing a feasible master production schedule

RCCP

Capacity Requirements Planning (CRP)
• Capacity requirements planning (CRP) determines in detail the

amount of labor and machinery required to carry out production tasks
specified in the MRP, translating MRP orders (measured in units) into
hours of work for each work center in each time period.

Measuring Capacity
• Available Time  e.g. Machines Operating at 8hrs a Days, 5 Days a
Week, so we have 40 Hrs available)
• Design Capacity  The maximum output rate or service capacity an

operation, process, or facility is designed for. 100 Bottles/ Day
• Effective Capacity  Design capacity minus allowances such as

personal time, and preventive maintenance. 80 Bottles/Day
• Actual Output  Looking into Human Errors and product failures, the
actual output is less than Effective Capacity. 75 Bottles/Day

Measuring Capacity
• Utilization  Actual Time

a machine is being utilized.
• Efficiency  Output to
Input as percentage. Can
be in hours as well.
• Hours utilized/Hours Work Done

Measuring Capacity
• Rated Capacity 
Rated Capacity = Available Time x Utilization x Efficiency
Kanban Cards !
Just Talk – Self
-Reminder

Distribution Requirement Planning - DRP
• Distribution requirements planning (DRP) is a time-phased finished-

goods inventory replenishment plan in a distribution network.
Distribution requirements planning is a logical extension of the MRP
system, and its logic is analogous to MRP.
• Distribution requirements planning ties the physical distribution
system to the manufacturing planning and control system by
determining the aggregate time-phased net requirements of the
finished goods, and provides demand information for adjusting the
MPS.
• DRP is driven by customer demand of the finished goods. So DRP is
independent whereas MRP deals with Dependent Demand.
• Practice Example 6.3 from Page

Hassaan 188
Tariq, SMGs, of2021,the
GIKI, Fall Primary
MS 491, SCM Book! 103
Capacity Utilization Chart
Other related Concepts
• Line Balancing
• Theory of Constraints (TOC)
• TOC scheduling provides improved performance by focusing on the

constraining resources.
• TOC implementation requires a change in plant culture in order to
obtain the full benefits of this approach.
Chapter Ends!
Thank You for your Patience!

Inventory Management
Chapter 7

Inventory - Introduction
• A stock or store of goods.
• Inventory management is at the core of all supply chain and logistics

management.
• Inventory has a huge financial impact on a Company
• Stocking the Right amount of Inventory helps save costs

Why do we hold Inventory
• • Cover process time and make process smooth
• • Allow for uncoupling of processes  Inventory Buffers
• • Anticipation of Demand/Speculation of Price rise/Currencies
• Delayed differentiation/postponement  ZARA/Benetton
Garments/Lear
• Buffer against uncertainties such as demand, supply, delivery, and
manufacturing
• To take advantage of Quantity Discounts

Types of Inventory
• Raw materials and purchased parts
• • Partially completed goods, called work-in-process (WIP)
• • Finished-goods inventories (manufacturing firms) or merchandise
(retail stores)
• • Maintenance and repairs (MRO) inventory
• • Goods-in-transit to warehouses, distributors, or customers (pipeline
inventory)

Two key Decisions in Inventory
Management
• How much ?
• When to Order?
• KPI to measure effectiveness of Inventory Management

• Inventory Turn-Over

Inventory Turn-Over Ratio Numerical

Essential Requirements for Inventory
Management
• 1. A system to keep track of the inventory on hand and on order.
• 2. A reliable forecast of demand that includes an indication of
possible forecast error.
• 3. Knowledge of lead times and lead time variability.  Time interval
between ordering and receiving the order.
• 4. Reasonable estimates of inventory holding costs, ordering costs,
and shortage costs.
• 5. A classification system for inventory items

Inventory Tracking Systems
• Periodic Inventory system Physical count of items in inventory made

at periodic intervals (weekly, monthly).
• Perpetual inventory system  System that keeps track of removals

from inventory continuously, thus monitoring current levels of each
item. Possible through RFID, POS, SKU
• 2 Bin and 3 Bin Systems  Use multiple bins to satisfy Inventory

requirements. Helps keep a track of existing Inventory and time to
exhaust it
Costs of Inventory
• Purchase: Cost per item or total landed cost for acquiring product.
• • Ordering: It is a fixed cost and contains cost to place, receive and process a
batch of good including processing invoicing, auditing, labor, etc. In
manufacturing this is the set up cost for a run.
• • Holding: Costs required to hold inventory such as storage cost (warehouse

space), service costs (insurance, taxes), risk costs (lost, stolen, damaged,
obsolete), and capital costs (opportunity cost of alternative investment).
• • Shortage: Costs of not having an item in stock (on-hand inventory) to

satisfy a demand when it occurs, including backorder, lost sales, lost
customers, and disruption costs. Also known as the penalty cost.
Total Cost of Inventory – Detailed
Breakdown
• Total cost of Inventory = Purchase (Unit Value) Cost + Order (Set Up)
Cost + Holding (Carrying) Cost + Shortage (stock-out) Cost

Classification system for Inventory
• The A-B-C approach classifies inventory items according to some

measure of importance, usually annual dollar value (i.e., dollar value
per unit multiplied by annual usage rate).
• Typically, three classes of items are used: A (very important), B

(moderately important), and C (least important).

ABC
Analysis

Finding A, B and C items! Pareto Analysis

Finding A, B and C items! Pareto Analysis, B and C
items! Pareto Analysis (80-20 Rule)

Applications of A,B and C items!
• Inventory Variation  Measure against physical checks
• Warehousing
• Product Analysis

Inventory Ordering Systems

Economic Order Quantity (EOQ)
• It is used to identify a fixed order size that will minimize the sum of
the annual costs of holding inventory and ordering inventory.
• It’s a fixed Quantity Model , so answers the basic question How much
to order?
• It suggests that the Total Cost of Inventory is minimum when Holding

Cost is equivalent to Ordering Cost.

EOQ – Total Cost

EOQ Assumptions and Replenishment Policy
• Assumptions
• – Demand is uniform and deterministic.
• – Lead time is instantaneous (0) – although this is not restrictive at all
since the lead time, L, does not influence the Order Size, Q.
• – Total amount ordered is received.
• • Inventory Replenishment Policy

• – Order Q∗ units every T ∗ time periods.
• – Order Q∗ units when inventory on hand (IOH) is zero.

EOQ – Inventory Profile
126
EOQ Focus
127
EOQ Formula’s

EOQ Numeral
• A local distributor for a national tire company expects to sell
approximately 9,600 radial tires of a certain size and tread design next
year. Annual carrying cost is $16 per tire, and ordering cost is $75. The
distributor operates 288 days a year.
• a. What is the EOQ?
• b. How many times per year does the store reorder?
• c. What is the length of an order cycle?
• d. What will the total annual carrying and ordering cost be if the EOQ
quantity is ordered?

EOQ Numeral Solution

MS 491 Lecs

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Supply Chain

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• Is CPEC a Game Changer?????

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• Demand, Independent vs Dependent Demand?

• Ultimate aim of Supply Chain is to Balance Demand and Supply!

• Long Term and Short Term Forecasting

• Famous Saying  Forecasting is In-Accurate

• Good Forecasting should be accurate, timely, reliable, meaningful

• Demand Forecasting is done at various levels in Supply Chains!

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• Determine the purpose of the forecast

• Quantitative  Quantitative methods involve either the projection of

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• Time-series forecasts simply attempt to project past experience into the

• Associative models use equations that consist of one or more explanatory

• Jury of Executive Opinion  Dominated Discussions by Top Mgt, e.g.

• Sales Forces Composite  Individual Biasis

• Delphi Method  Technology, Projects,

• Consumer Survey  Focused Groups as well

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• Seasonality Short-term regular variations related to the calendar or time

• Cycle Wave like variations lasting more than one year

• Irregular variation Caused by unusual circumstances, not reflective of

• Random variations Residual variations after all other behaviors are

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• Next forecast = Previous forecast + α(Actual − Previous forecast)

• The closer α is to zero, the greater the smoothing

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• Spear Man’s Co-Efficient

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• Demand management includes activities that range from determining

• Timely and honest customer order promises are possible. Physical

• Demand management is also concerned with identifying all sources of

• Companies may deal with Limited Supplies through Demand Shaping

• Demand characteristics (sales volume, volatility, sales duration, etc.)

• Demand shaping involves finding ways to balance supply with