Scm v20

Supply Chain
Management Guide
© Imants
the

The Supply Chain Management Guide
1. Introduction

1. Introduction 1.1. Key Concepts
1.1.1. Supply Chain
The Supply Chain is:
• the sequence of suppliers that contribute to the
creation and delivery of a good or service to end
customers.

1.1.2. Logistics
Logistics is:
• the management of the storage and flow of
goods, services and information throughout your
organisation.

1.1.3. Supply Chain Management
Supply Chain Management is:
• organizing the cost effective flow and storage of
materials, in-process inventory, finished goods
and related information from point of origin to
point of consumption to satisfy customer
requirements.

A Business Philosophy
A way of doing business with your
customers and suppliers.
1.1.4. A Philosophy

1.2 Principal Issues
1.2.1. Supply Chain (1)
Supply Chain
The supply chain of a company consists of different
departments, ranging from procurement of
materials to customer service.
The supply chain includes activities associated with
inventory (materials) acquisition, storing, use in
production, transit, and delivery to customers.
1. Introduction

1.2 Principal Issues
1.2.1. Supply Chain (2)
The activities are planned, executed, and monitored
under the guidelines set by the company’s chosen
customer service levels and in line with the
company’s other operating goals.
1. Introduction

1. Introduction 1.2. Principal Issues
1.2.2. Elements of Logistics
Elements of Logistics:
• materials management:
• sourcing and receiving of raw materials or unfinished
products for subsequent use
• material flow system:
• the ability to locate and schedule material through to
end production and disposition
• physical distribution:
• the delivery of finished goods to customers

1.2. Principal Issues
1.2.3. Logistic Goal
1. Introduction
Logistic goal and objectives
The right
products
The right
quantity
The right
moment
At minimal
cost
Flexibility
Delivery
reliability
Delivery time/
lead time
Inventory
level

1.2.4. Logistic Steps
Logistic steps:
• accepting a customer order
• receive and enter
• credit clearance / authorize
• delivery commitment
• supplier ordering
• forecasting demand
• scheduling manufacturing
• inventory management
• delivery to customer.
1. Introduction

1.2.5. Evolution
1. Introduction
Quality products
Lowest possible cost
Order fulfillment
Integration of supply chains
Customer service
Preferred partners
Communication
Supply chain communities
Common goals, objectives
Supply
Chain
Evolution

1.2.6. The Goal
Supply Chain Management Goal
To evolve a company’s supply chain into an optimally
efficient, customer-satisfying process, where the
effectiveness of the whole supply chain is more important
than the effectiveness of each individual department.

1.2.7. Focus
Supply Chain Management focuses on business
processes:
• product design
• planning
• order management
• stock management
instead of functions:
• sales
• purchasing
• production

1.2.8. Drivers of Change (1)
Drivers of change:
• outsourcing trend
• actual customer demand: speed, flexibility and
competitive pricing
• new software: ERP, sophisticated application
software

1.2.8. Drivers of Change (2)
• new technologies
• Electronic Data Interchange (EDI)
• internet, intranet, extranet
• wireless communications
• teleconferencing and telecommuting
• bar coding.

1.2.9. Activities
Supply chain management activities:
• Forecasting demand
• Selecting suppliers
• Ordering material
• Managing inventory
• Scheduling production
• Shipping and delivery
• Organizing information exchange
1. Introduction

1.3. Analysis
1.3.1. Diagram
1. Introduction
Understand the
customer
Understand the
product
Understand the
process
Understand the
information flow

1. Introduction 1.3. Analysis
1.3.2. Understand the Customer (1)
Know and understand the customers:
• Your existing customers, i.e.,
• demographics
• existing and potential number
• income levels?
• Who are your potential customers?
• How might these customers be grouped?
• For which percentage of sales is each group
responsible?

1.3.2. Understand the Customer (2)
• What is the effect of various methods of
communications (i.e., telephone, fax, e-mail,
internet telephoney systems) in your relation with
your customers?
• What do your customers want from you?
• How well do your competitors meet customers
needs?

1.3.3. Understand the Products
Understand the products:
• How many?
• Where are they?
• Which percentage of sales?
• What is the product life cycle?
• What is the product mix?

1.3.4. Understand the Process
Understand the production process:
• process flow
• linear flow
• job shop - batch flow
• assembly line
• continuous flow
• project flow
• order fulfillment strategy
• make-to-order
• make-to-stock.

1.3.5. Understand the Information Flow
Understand the information flow:
• What information is required for effective
decision-making at each stage in the supply
chain?
• What data has to flow between each part of the
supply chain?

1. Introduction 1.4. Performance Indicators (1)
A total view must be taken in assessing
performance.
Performance measurements need to be focused
on what factors add to total performance, total
value or total cost.
The principle performance indicator is customer
service. Optimum service levels are necessary
from each supplier to each customer throughout
the supply chain.

1.4. Performance Indicators (2)1. Introduction
Suppliers Inputs
Adding
value
Outputs Customers Results
EffectivenessEfficiency
Productivity
Profitability
Customer Service + Quality
Customer
Service

Effectiveness:
• accomplishment of the right things, on time,
within the requirements specified.
Efficiency:
• resources expected to be consumed divided by
resources actually consumed.

Productivity:
• measures of output divided by measures of input
for a given period of time.
Profitability:
• relationship between revenues and costs.

2. Purchasing and Procurement

2. Procurement 2.1. Key Concepts
Purchasing: implies the monetary transaction.
Procurement: the responsibility for acquiring the
goods and services the organization needs:
• goods:
• raw materials
• production parts
• maintenance, repair and operating supplies (MRO)
• services:
• consulting services
• utilities
• workers health care benefits.

2. Procurement 2.2. Principal Issues
2.2.1. Evolution in Purchasing
Evolution in Strategies for Purchasing
Focus on price
Focus on quality,
reliability,
responsiveness,
and total cost
Strategic focus
- supplier relationships
- forecasting
- cycle time

2.2.2. The Procurement Process (1)
The Procurement Process:
• preparation:
• identify needs, such as dependability, long term
availability
• evaluate user requirements to ensure suitability of
purchase
• forecast when and how purchase will be needed
• identify and select suppliers
• develop an efficient ordering system for control
• negotiation:
• bidding processes
• contracts

2.2.2. The Procurement Process (2)
• order placing via appropriate channels (i.e.
authorized purchase order)
• receiving including adjustments for damages,
short or over-shipping and incorrect costs
• monitoring supplier performance.

2.2.3. Supply Uncertainty
Elements of supply uncertainty:
• lead time to supply
• quantity supplied
• quality of supply
• data accuracy on products supplied and prices.
2. Procurement

2.2.4. Selecting a Supplier
In selecting a supplier, a number of factors must
be analyzed:
• price
• quality
• reliability
• credit terms
• shipping costs.
Look at the whole transaction cost of dealing with
a supplier (not just the cheapest price).

2.2.5. Positive Trends (1)
Positive trends in purchasing and procurement
include:
• reduced number of suppliers
• long-term relationships with suppliers
• suppliers located close to customers for
improved access
• integrated information infrastructure: EDI,
electronic catalogs
2. Procurement

2.2.5. Positive Trends (2)
• suppliers considered to be an essential part of the
business
• suppliers involved in future product development
programs.
2. Procurement

2. Procurement 2.3. Analysis
Key considerations in analyzing the purchasing
process:
• annual sales
• annual purchases
• number of suppliers
• number of supplier alliances
• total number of purchased products or parts
• short and long-term cost effective purchasing
• efficient business management of the purchasing
process.

2. Procurement 2.4. Suggestions
Analyze what the suppliers requirements are for:
• goods and services: lot sizes, packaging, delivery
frequency, and responsiveness
• information: how much and when
• financing arrangements and costs.
Compare your needs and abilities against these
requirements.

D%=100-(L*100)/S
2. Procurement 2.5. Performance Indicators
2.5.1. Delivery to Schedule
The following formula is used to assess suppliers
delivery to schedule performance.
D = monthly delivery performance (%)
L = number of line items delivered later than
scheduled
S = number of line items scheduled for delivery
during month
Different tolerances for A, B, C-articles (see
chapter 6)

Q%=100-(R*100)/N
2. Procurement 2.4. Performance Indicators
2.5.2. Quality to Specification
The following formula is used to assess quality
performance.
• Q = monthly quality performance (%)
• R = number of units rejected during month
• N = number of units delivered during month

3. Sales Forecasting

3.1. Key Concepts
Sales forecasting is
the process of organizing and analyzing
information in a way that makes it possible
to estimate future sales.
3. Sales
Forecasting

3.2.1. Demand Uncertainty
Elements of demand uncertainty:
• timing of order
• size and composition of order
• data accuracy on:
• products required
• delivery points
• timing.
3. Sales
Forecasting

3. Sales
Forecasting
3.2.2. Components of Demand
Components of demand:
• Trend:
• growth or decline over an extended period of time
• Cyclical:
• wavelike fluctuation around the trend
• Seasonal:
• pattern of change that repeats itself year after year
• Random:
• not accounted for by the other components (trend,
cyclical, or seasonal).

3.2.3. Sales Forecasting Methods (1)
Qualitative sales forecasting methods rely more on
judgment and intuition than on historical data:
• surveys of buyer intentions, such as
questionnaires, telephone polls, and consumer
interviews
• Delphi technique:
• a body of experts, consulted separately, is asked to
arrive at a consensus opinion
• sales force composite:
• based on the combined estimates of experienced sales
personnel.
3. Sales
Forecasting

3. Sales
Forecasting
Quantitative sales forecasting methods make use
of past data to predict future sales:
• market tests to gauge consumer response
(usually to a new or modified product) under
actual conditions
• trend projections/analysis (also called Time
Series) involves forecasting sales based on the
historical relationship between sales and time,
which is expressed as a growth rate (percentage)
and each measure is plotted on a growth curve:

3. Sales
Forecasting
• moving average: all observations are given equal weight
and only a few of the previous observations are
considered
• exponential smoothing: gives greater weight to more
recent observations and considers all past observations
• regression analysis can be used to forecast a
dependent variable (i.e., sales) as a result of
changes in one or more independent variables
(i.e., advertising)

3. Sales
Forecasting
• input-output models forecast the impact of the
change in the outputs (sales) of one industry on
the out-outs of the purchasing industry (i.e., a
reduction in the supply of tin cans produced by
the metal industry would effect the supply of
canned tuna that would be produced by the fish
canneries).

3. Sales
Forecasting
Computerized forecasting models include:
• spreadsheets, such as Microsoft Excel (with the
Data Analysis Toolpack) and Lotus 123, that can
perform calculations automatically with changes
in entered data
• forecasting application software:
• statistical packages, such as SAS, MYSTAT, and Minitab
• forecasting packages specifically designed for
forecasting applications, such as Forecast X, SAS,
Forecast Pro.

3. Sales
Forecasting
3.2.4. Major Uses of Sales Forecasts (1)
Sales forecasts are used for:
• production:
• production scheduling
• inventory control
• purchasing:
• determination of procurement requirements
• scheduling of purchases to get favorable prices

3. Sales
Forecasting
• marketing:
• formulation of marketing strategies for products
• setting of sales quotas
• scheduling of advertising expenditures and sales
promotions
• personnel:
• planning of manpower requirements
• finance:
• establishing of operating budgets
• cash flow planning
• capital budget / expenditure decisions

3. Sales
Forecasting
• top management:
• overall planning and control of operations of the
company.

3.2.5. Advantages Forecasting (1)
Accurate sales forecasting offers several
advantages:
• reduced excess inventory
• fewer stock shortages which result when demand
exceeds supply
• fewer unnecessary production line changes to
fulfill unanticipated demand
• less overtime hours through improved
predictions in personnel requirements
3. Sales
Forecasting

3.2.5. Advantages Forecasting (2)
• improved customer service levels as supply and
demand balance
• more economic purchasing power.
3. Sales
Forecasting

3. Sales
Forecasting
3.2.6. Forecast Accuracy
Factors that influence forecast accuracy:
• availability of product demand history
• capability of computer system
• other available history (i.e., new products, design
changes, changes in customer base, promotional
actions, economic indicators)
• responsibility for forecasting: a team effort is
required (Sales, Distribution and Manufacturing).

3. Sales
Forecasting
3.3. Checklist
Sales forecasting considerations:
• What are the items to be forecast?
• How far into the future should the forecast
extend?
• What is the length of the time period for stating
the forecast quantity?
• How frequently should the forecast be made,
reviewed and revised?
• What would constitute an acceptable tolerance of
forecast error?

3.4. Suggestions (1)
Prior to forecasting sales, scrub the data by
removing the effects of unusual events that are not
likely to happen again. Otherwise, the forecasting
model will show a distorted view of the past.
3. Sales
Forecasting

Examples of problems that may require data
adjustments:
• unusual weather
• addition or loss of major customers
• special promotions
• changes in price or package size.
3. Sales
Forecasting

3. Sales
Forecasting
Determine the most accurate forecasting method:
• regularly use a number of different methods to
generate forecasts
• maintain historical accuracy information on each
method
• use the most accurate method to generate
“official” forecasts.

3. Sales
Forecasting
Make an ABC-analysis of the items to forecast:
• A-items are reviewed each month by management
• only those B- and C-items with a significant
deviation between forecast and actual demand
need to be reviewed by management.

4. Production planning and control

4. Production
Control
4.1. Key Concepts
4.1.1. Production Planning and Control
The responsibility for:
• number of units of a specific product to be
produced
• time intervals over which production will occur
• availability of equipment, materials and work
force
• cost effective inventory and resource
management.

4. Production
Control
4.2.1. Production as a Goal or Means (1)
Production as a goal:
• resources are planned and used in the production
process regardless of actual demand
• often based on economies of scale, where lower
cost per item is presumed to generate end
product demand.

4. Production
Control
4.2.1. Production as a Goal or Means (2)
Production as a means:
• resources are planned and used in the production
process only as a result of product demand
• often based on economies of scope, where end
product demand has greater influence over
production units and costs.

4. Production
Control
4.2.2. Economies of Scope vs Scale (1)
Economies of scope production assumptions:
• responsive to demand
• flexible production plans
• variable cost per item
• smaller production runs
• increased total set up and change over costs
• lower product/inventory obsolescence
• minimized inventory carrying costs
• material is pulled through the production process
as needed.

4. Production
Control
4.2.2. Economies of Scope vs Scale (2)
Economies of scale production assumptions:
• responsive to profit margin gains
• fixed production plans
• lower cost per item
• larger production runs
• less production set up and change over cost
• greater risk of product/inventory obsolescence
• higher inventory carrying costs
• material is pushed through the production
process.

4. Production
Control
4.2.3. Order Decoupling Point
How far does a customer order penetrate in the
production process?
Purchasing Production Warehouse Distribution
Manufacture to
stock
Manufacture to
order
Position of the order decoupling point

4.2.4. Planning Hierarchy
Aggregate plan: works with aggregate (grouped) units
Master Production Schedule: indicates the quantity and timing
of the production of specific end items.
(actual orders are incorporated)
Materials planning: what material is needed when?
Capacity requirements planning: which equipment, work force
and facilities are required?
Loading: which job on which work center?
Sequencing: in which order have the jobs to be processed?
4. Production
Control

4. Production
Control
4.2.5. Production Control Systems
Formal production control systems for inventory
include:
• Economic Order Quantity (EOQ)
• Materials Requirements Planning (MRP)
• Just-in-Time concept
(See Chapter 6, Inventory Management)

4. Production
Control
4.3. Suggestions
Suggestions:
• pull rather than push material through the
production process
• produce nothing until it is needed
• reduce set up times
• reduce lot sizes
• try to move the order decoupling point to an early
stage in the supply chain
• try to remove transaction (steps which ad no
value) from the process.

5. Material Handling

5.1. Key Concepts
5.1.1. Material Handling (1)
Material Handling:
• moving of goods between incoming transport,
storage, processes and outgoing transport
• the set of activities that move production inputs
and other goods within plants, warehouses and
transportation terminals.
5. Material
Handling

5.1. Key Concepts
5.1.1. Material Handling (2)
Providing the right amount of material:
• in the right condition
• at the right place
• at the right time
• in the right position
• in the right sequence
• for the right cost
• by using the right methods.
5. Material
Handling

5. Material
Handling
5.2.1. Materials Handling Manager (1)
The task for the materials handling manager is to
find the methods, the routes, the layouts and the
right components to minimize handling.

5. Material
Handling
5.2.1. Materials Handling Manager (2)
Six main responsibilities of the materials handling
manager:
• packaging - unitizing
• internal transport
• storage
• retrieval
• identification
• communication.

5. Material
Handling
5.2.2. Material Handling System Design
The design of a material handling system depends
upon the the type and the characteristics of the
materials to be handled.

5. Material
Handling
5.2.3. Material Handling System
Components (1)
Material handling equipment:
• unitizing equipment
• material transport equipment
• storage and retrieval equipment
• automatic identification and communication
equipment.

5. Material
Handling
Components (2)
Unitizing equipment:
• containers, such as cartons, boxes, and bags
• carriers or support, such as pallets, skids, and
plywood
• stretch wrap
• shrink wrap.

5. Material
Handling
Components (3)
Material transport equipment:
• conveyors (belts and rollers)
• industrial vehicles, such as pallet trucks, lift
trucks, and automated guided vehicles (AGV)
• monorails
• hoists
• cranes.

5. Material
Handling
Components (4)
Storage and retrieval equipment:
• unit load storage equipment
• unit load retrieval equipment
• small load storage and retrieval equipment.

5. Material
Handling
Components (5)
Automatic identification and communication
equipment:
• bar coding
• radio frequency tag
• magnetic stripe
• smart cards
• voice headsets
• machine vision.

5. Material
Handling
5.2.4. Cost-effective Means of Transport (1)
Key factors to consider in selecting means of
transport:
• physical characteristics of loads
• the number of loads to be moved
• the distance to be moved
• the required speed of movement.

5. Material
Handling
Movement distance (m)
Units
moved/
hour Conveyors Motorized trolleys
Forklift trucks
Manual trolley
Manual

5. Material
Handling
Other factors which influence the means of
transport:
• cost of building/dismantling loads
• packaging costs
• space requirements
• interface with other storage, transport and
handling systems
• housekeeping issues.

5. Material
Handling
5.2.5. Warehousing (1)
The warehouse must be:
• located in the right place
• the right size
• organized
to allow:
• efficient delivery and placing
• cost-effective use of its space
• adequate access to stored materials
• security from theft and weather
• flexibility to deal with the various items.

5. Material
Handling
The mission (or goal) of a warehouse is set by
demand. The warehouse location is a means to
achieving the mission.
Mission Location Demand
Balance and buffer Near the manufacturer
Monthly/quarterly replenishments
of stocks
Accumulate and consolidate Central to production locations Weekly/monthly orders
Rapid response Close to customer Daily

5. Material
Handling
Within the warehouse, stock must be:
• put into known places and
• in known order
so that it can be:
• retrieved quickly and in the right quantity
• rotated properly (ex. first-in, first-out).

5. Material
Handling
Warehousing activities:
• receiving goods
• identifying goods
• sorting goods
• dispatching goods to storage
• holding goods
• picking goods
• preparing shipments
• dispatching shipments.

5. Material
Handling
5.3. Suggestions
Suggestions for materials handling:
• use identification systems, such as bar coding to
handle the right material:
• give a part identification number
• give a location identification number
• handle similar materials, packaging and size of
loads at the same time
• implement improvements in material handling
systems which will increase the efficiency of the
overall system.

6. Inventory Management

6. Inventory
Management
6.1. Key Concepts
Inventory:
• those stocks or items used to support production
and customer service.
Service level:
• probability (%) that stock will be available to meet
demand.

6. Inventory
Management
6.2.1. Types of Inventory (1)
Types of Inventory:
• raw materials:
• purchased parts used in manufacturing other items
• work-in-process:
• parts that are in the manufacturing process
• sub-assemblies:
• manufactured parts that are partially completed and
stocked in inventory

6. Inventory
Management
6.2.1. Types of Inventory (2)
• finished goods:
• Items ready for sale to a customer
• MRO:
• maintenance, repair and operation supplies.

6. Inventory
Management
6.2.2. Functions of Inventory (1)
Functions of inventory:
• safety stocks:
• protect against uncertainties of materials supply and
consumer demand
• cycle stocks:
• result from ordering or producing in lots
• transit stocks:
• materials must be moved from one location to another

6. Inventory
Management
6.2.2. Functions of Inventory (2)
• speculative stocks:
• expected price increase
• promotional stocks:
• additional inventory accumulated for a promotional
event.

6.2.3. Elements of Inventory (1)
6. Inventory
Management
Safety stock
Excess stock
Replenishments
Inventory
Level
Time
Elements of inventory

6. Inventory
Management
6.2.3. Elements of Inventory (2)
Elements of inventory
Over time, demand and the ability to service
demand (replenish inventory) can vary. Forecasts
may not be precise due to uncertainties, so, a
reserve of stock (safety stock) may be necessary to
reduce inventory shortages (stock-outs). Inventory
levels above the safety stock and normal demand
are considered excess inventory.

6. Inventory
Management
6.2.4. Inventory Holding
Reasons for holding inventory:
• purchased parts:
• variations in supplier lead time
• quantity discounts
• price changes
• scarcities of materials
• manufactured parts:
• cover period between production runs
• allow flexibility in production scheduling
• variations in product demand (safety stock)
• economies of scale.

6. Inventory
Management
6.2.5. Inventory Costs (1)
Cost of inventory production and holding:
• order/set-up costs:
• cost of replenishing inventory through changes in the
production run for a different item
• includes labour and other associated costs
• carrying costs:
• cost of capital
• insurance costs
• costs of space, staff
• inventory handling, deterioration, damage,
obsolescence, insurance

6. Inventory
Management
6.2.5. Inventory Costs (2)
• opportunity costs:
• restriction of other investments that could have been
made with the same money
• stock-out costs:
• lost sale
• halted production.

6. Inventory
Management
6.2.6. Inventory Management (1)
Objectives of inventory management:
• minimize costs:
• working capital
• carrying costs
• scrap and rework
• highest level of customer service.

6. Inventory
Management
Inventory management tasks:
• make decisions about:
• safety stock
• replenishment production runs
• excess stock.

6. Inventory
Management
Inventory must be managed differently for:
• independent demand: influenced by market
conditions
• dependent demand: derived from the production
of parent items.
(see following slide)

6. Inventory
Management
A
B C
D E
Independent demand
Dependent
demand

6.2.7. ABC-Analysis (1)
ABC analysis of inventory:
• select a criterion (sales / usage) based on
importance
• rank the inventory items on criterion
• calculate the cumulative sales and/or usage for all
items
• assign items into A, B, C groups
• assign inventory levels and warehouse locations
for each item.
6. Inventory
Management

6. Inventory
Management
ABC classification, where items are not of equal
importance:
• A-items
• few items (ex. 15 %) which have a high rate of usage
and/or high unit cost and account for 80 % of the total
value of usage in the inventory
• B-items
• number of items (ex. 25 %) which in total account for 15
% of the total value of usage

6. Inventory
Management
• C-items
• great many items (ex. 60 %) with low individual usage
and/or low unit value which in total account for only 5 %
of the total value of usage

6. Inventory
Management
ABC analysis chart demonstrates relative
importance of inventory items.
Class of Item % of Items % of Value
Class A 15% 80%
Class B 25% 15%
Class C 60% 5%

ABC - Analysis Chart
0
100
200
300
400
500
600
Product 1 Product 2 Product 3 Product 4
Numberofitems
C
B
A
6. Inventory
Management

6. Inventory
Management
6.2.7. ABC Analysis (6)
ABC and inventory control efforts:
• A-items
• very careful management
• careful estimates of future usage.
• B-items
• routine management
• routine effort in forecasting demand.
• C-items
• little effort in forecasting demand
• however be careful for strategic items (safety stock).

6. Inventory
Management
6.2.8. Inventory Management Systems (1)
Inventory management systems include:
• two-bin replenishment system:
• used for low value , non-critical items (i.e.. class C
items)
• relies on visual inspection of declining inventory
• one bin contains enough material to meet needs
between the time one order is received and another is
placed
• second bin (also called the “reserve bin”) contains
enough material to meet needs between placing an order
and receiving the materials
• if production taps into the reserve bin, additional
materials must be ordered immediately

6. Inventory
Management
• reorder point system:
• amount ordered when inventory declines to a
predetermined level
• considers:
• when to order (re-order point)
• how much to order (order quantity)
• periodic review systems:
• after predetermined fixed passages of time, orders are
placed for variable amounts
• consider:
• how much to order (order quantity)
• how long between orders (reorder time interval)

• Materials Requirements Planning (MRP):
• assumes variable demand throughout production
• calculates component requirements based on the Master
Production Schedule (MPS), Bill of Material and
inventory data
• materials are purchased only when the MPS has them
scheduled for use
• materials are pushed through a plant
6. Inventory
Management

• MRP II systems share information with other functional
departments, outside the operations area (i.e.,
purchasing, sales, cost accounting). These systems plan
the use of company resources, including scheduling raw
materials, vendors, production, equipment and
processes
• JIT: different approach to reordering:
• activities that add no value are waste
• material only is supplied when it is requested from the
next step in the production process (pull system)
• these requests are called kanbans.
6. Inventory
Management

6. Inventory
Management
6.2.9. How Much to Order: EOQ (1)
Economic Order Quantity (EOQ):
• the lot size that minimizes total annual inventory
holding and ordering costs
• assumptions:
• annual demand is constant.
• forecast is perfect (no random error)
• all costs are constant and linear
• lead time is known and constant.

Q - Lot size of the order
H - Average annual
holding cost per unit
D - Annual demand
S - Cost per order
Annual
carrying
cost
Annual
ordering
cost
Total cost = +
Q
2
H
D
Q
STC = + --
6. Inventory
Management
Q/2 = Average inventory
on hand
D/Q = Number of orders
per year

The Total-CostCurve
Ordering Costs
QO Order Quantity(Q)(optimal order quantity)
Holding costs
Q =
2DS
H
=
2(Annual Demand)(Order or Setup Cost)
Annual Holding Cost
OPT
Cost
6. Inventory
Management

Economic Order Quantity (EOQ): variations
• quantity discounts: product cost is function of the
order quantity
• variations in demand: safety stock
• variations in lead time: safety stock.
6. Inventory
Management

6.2.10. When to Order: ROP (1)
Reorder point (R.O.P.)
R.O.P. = (D/W) * L
D: annual demand W: working days L: lead time
6. Inventory
Management
ROP
time
Q
L

6.2.10. When to Order: ROP (2)
R.O.P. with uncertainties in demand, lead time and
supply: safety stock
R.O.P. = (D/W) * L + SS
ROP
time
Q
L
Safety Stock
6. Inventory
Management

6.2.11. Safety Stock
Level of safety stock with a set service level:
• track historical sales to find:
• average
• standard deviation
• establish % service level
• find Z-score from distribution table
• SS = (Z-score) * Standard Deviation
6. Inventory
Management

6.2.12. Excess Inventory
Reasons for excess inventory include:
• engineering changes
• spoilage
• defects
• technical obsolescence
• lack of market demand.
6. Inventory
Management

6. Inventory
Management
6.2.13. Inventory Counting Methods (1)
Inventory Counting Methods:
• Cycle counting:
• a few experienced people count continuously
throughout the year
• timely detection of errors
• fewer mistakes in item identification
• minimal loss of production time
• systematic improvement of record accuracy.

6.2.13. Inventory Counting Methods (2)
• End of year:
• many inexperienced people count inventory in a short
hectic period once per year
• no correction or cause of errors
• many mistakes in item identification
• plant and warehouse shutdown for inventory
• no improvement of inventory accuracy.
6. Inventory
Management

6. Inventory
Management
6.3. Suggestions
6.3.1. 6 Step Action Plan
• Find out why you have inventories
• Analyze the present situation:
• inventory matrix (slide 6.3.2)
• ABC-analysis
• Define the inventory levels
• Define the inventory system
• Define performance indicators
• Performance follow-up

Fill in the different amounts of inventory
Raw material WIP Sub-assemblies MRO Finished Goods
Safety
Cycle
Transit
Speculative
Promotional
-------
-------
6. Inventory
Management
6.3. Suggestions
6.3.2. Inventory Matrix

6.3. Suggestions
6.3.3. Rationalize Products
• Print and analyze lists of slow-moving and Class
C items
• Monthly evaluation
• Action plans
• Follow-up
6. Inventory
Management

6.3. Suggestions
6.3.4. Reduce Excess
Reduce excess:
• try to move the order decoupling point to an early
stage in the supply chain to reduce inventory
holding (carrying) cost:
• ABC - item management
• shorten replenishment cycles.
Sourcing Production Warehouse Distribution
6. Inventory
Management

6.4. Performance indicators (1)
Inventory turnover:
Stock coverage:
• stockholding x 52 weeks / annual usage
Customer satisfaction:
• comparison of % of demand actually satisfied
with the defined service level
• number of backorders
Annual cost of sales
Inventory value at cost
6. Inventory
Management

6.4. Performance indicators (2)
Excess inventory reduction:
R=inventory reduction during month (%)
PE=prior month excess inventory (value)
CE=current month excess inventory (value)
R%=((PE - CE)/PE)*100
6. Inventory
Management

7. Distribution

7. Distribution 7.1. Key Concepts (1)
Physical distribution:
• the activity that is concerned with:
• receiving parts or finished goods
• storing them until they are required
• and then delivering them to the customer.

Transport operator:
• who does the moving.
Intermodal:
• interchange point from one transportation mode
provider to another.

Consolidation:
• the process of receiving multiple lots in small
quantities, which are accumulated and then
repackaged into one larger lot.
Cross docking:
• unloading the cargo from several trucks and then
immediately reload it into one container for
delivery to a final destination.

Distribution warehouse:
• a facility designed to assemble and then
redistribute goods in a way that facilitates rapid
movement to customers.
Unitization:
• a technique for grouping boxes on a pallet or skid
for later movement by pallet jack, forklift,
conveyor and/or truck.

Containerization:
• the process of combining several unitized loads
into a single well-protected load.

7. Distribution 7.2. Principal Issues
7.2.1. Functions of Physical Distribution
Functions of physical distribution:
• inventory management
• order processing
• warehousing:
• the set of activities involved in receiving and storing
goods and preparing them for reshipment
• materials handling
• transportation.

7.2.2. Distribution Decisions
Important distribution decisions:
• Which transport mode?
• Number and location of distribution warehouses?
• Own or contract-out warehousing and transport?

7.2.3. Transport Modes (1)
Basis of transport mode selection:
• nature, volume, value and criticality of goods
• flexibility of transport mode: coping with demand
change.
7. Distribution

Methods of transport:
• trucks
• railroads
• water
• airways
• pipelines
7. Distribution
Rail
Truck
PipelineWater
Air
Piggyback Birdyback
Fishyback

Trucks:
• flexible, on-time, low loss and damage, tracing,
accuracy and wide geographical coverage
• weather and traffic conditions can delay
shipments
• still heavy price competition.

Railroads:
• inexpensive for carload lots
• requires more packing material or must allow for
rough handling
• somewhat slow
• freightforwarders, piggyback truck, and
doublestack containers offer cost savings for
users.
7. Distribution

Water transportation:
• ideal for heavy, low-value non-perishables, but
has high fixed costs
• weather can be a problem
• containerization and improved ports allow for
expansion in new products and markets.
7. Distribution

Airways:
• high costs, so only suitable for high value or
urgent or perishable items
• weight and locations limited
• saves inventory holding costs
• important in international trade.
7. Distribution

Pipelines:
• slow but dependable, continuous flow of liquids
or slurries
• harder to establish today due to government
regulations.
7. Distribution

7.2.4. Outsourcing
Decisions for owning or contracting-out transport
consider:
• total cost
• control
• customer service
• flexibility
• management skills
• operators
• return on investment.

7.2.5. Distribution Warehouses
Number and location of distribution warehouses
are based on:
• customer service needs
• available transportation services
• cost trade-off.

7. Distribution 7.3. Performance indicators
Performance can be assessed on the basis of:
• distribution system flexibility:
• response time to special requests
• distribution system information:
• speed, accuracy and message detail of response
• distribution system malfunction recovery:
• efficiency to recover from malfunction (errors in billing,
damage, claims).

8. Customer Service

8.1. Key Concepts
A statement of goals and acceptable
performance for the quality of service
that a company expects to deliver
to its customers.
Customer Service Standard
8. Customer
Service

8. Customer
Service
8.2.1. What Customers Look for (1)
What customers look for:
• Pre-transaction:
• accessibility of data (catalogue, price lists, literature)
• completeness of data (products, prices, instructions)
• availability of samples

8. Customer
Service
• accessibility of the organization:
• experts
• assurance of product suitability, quality, reliability
(employees should be knowledgeable about products)
• customers want to be noticed, appreciated and
recognized as important individuals
• efficiency of the information flow

8. Customer
Service
• Transaction:
• reliability: delivery on time, in the right quantities, and
error-free
• quality of products, packaging, palletisation
• information about order processing, dispatch, transport
• flexibility: time, product variants, volumes
• assurance of satisfaction after purchase.

8. Customer
Service
• Post-transaction:
• technical support, training, helpdesk
• availability of spare parts and repair instructions
• product traceability
• handling of complaints: speed, monitoring, evaluation
• administration: invoices, accounts receivable, and
payments
• performance measurements and evaluation.

8. Customer
Service
8.2.2. What Customers Experience (1)
The customer experience is:
• any episode in which the customer comes in
contact with the organization:
• personal contact
• telephone
• mail
• advertising
• internet (i.e., e-mail, forms)
• any event that forms a perception of the
organization in the mind of the customer.

8. Customer
Service
8.2.2. What Customers Experience (2)
The customer experience is a chain of contacts
the customer undergoes in obtaining a product.
Each link represents a contact. The total
experience depends on the weakest link.
Customer
(start)
ShippingSales
Service
Customer
(end)

8.2.3. What Customers Want
Fill in this table for all of your products
Customer
wants
Product
offered
Product
characteristic
Performance
measure
Performance
target
Fast car Sports car Speed mph
8. Customer
Service

8. Customer
Service
8.2.4. Customer Service Issues
Customer service issues include:
• accurate understanding of customer’s needs and
wants
• the ability to deliver necessary customer service
levels
• variations between plans and their actual
implementation
• effective communications with the customer’s
• difference between supplier’s and customer’s
perception of service level.

8. Customer
Service
8.2.5. Service Levels
Which service level approach to you use:
• cut costs and reduce or eliminate service
• maximum service at any cost
• the cost of stock-out is no greater than the cost of
carrying additional inventory (break-even point)
• competitive advantage, where service is
sufficiently higher than competitors’ service.

8. Customer
Service
Sales (value) % Total Sales % Cumul Products What the customer wants
Customer 1 92000 18,4 18,4 A 3 days ex stock
Customer 2 83500 16,7 35,1 A (75%), B(25%) 2 weeks
Customer 3 73200 14,6 49,7 B 5 days ex stock
Customer 4 31500 6,3 56,0 C 6 weeks order to delivery
-------
-------
-------
-------
Total Sales 500000
8.3. Analysis
8.3.1. Customer Analysis (1)
Customer Analysis: example table:
The following table helps to identify the customer
groups, their primary expectations, and their
contribution to total sales.

8. Customer
Service
8.3. Analysis
Pareto Analysis:
• in many cases, approximately 80% of the turnover
(i.e., stock) can be ascribed to approximately 20 %
of the customers, articles or orders
• Rank the customers, products, etc. in order of
magnitude
• Calculate % that each item contributes to total
value
• derive a cumulative % list
• evaluate the cumulative list and identify
appropriate breakpoints (A, B and C).

8. Customer
Service
8.3. Analysis

8. Customer
Service
8.3. Analysis
8.3.2. Know the Customer
Know the customer:
• Who is our customer?
• What are the important things we know about our
customers?
• What do our customers expect?
• What do our customers want?

8. Customer
Service
8.3. Analysis
8.3.3. Customer Service Levels
Customer service levels:
• Do we consistently meet and exceed
expectations?
• How well do we solve the problems that our
customers experience?
• What service levels will give us a relative edge
over our competitors?
• How, and how quickly, are we using customer
information?

8. Customer
Service
8.3. Analysis
8.3.4. Customer Response
Customer response
• What did you like most/least about doing
business with us?
• What will you tell others about us?
• How can we serve you better?

8. Customer
Service
8.4. Suggestions
Group (segment ) customers based on service
needs:
• Companies traditionally group customers by
industry or product, and then provide the same
level of service to everyone within the group.
• To improve customer satisfaction, customers
should be grouped by distinct service needs and
services should be tailored to each group.

8. Customer
Service
8.5. Performance Indicators
8.5.1. Customer Service Level
Customer service level
• The desired probability versus the actual
percentage that product demand can be met from
stock
• expressed in a number of ways:
• % of orders completely satisfied from stock
• % of units demanded which are met from stock
• % of units demanded which are delivered on time
• % of time there is stock available

8. Customer
Service
8.5.2. Availability
Performance indicators of availability:
• stock-out frequency:
• how many times does demand for a specific product
exceed its availability
• fill rate:
• how much of a specific product is available to satisfy
customer demand
• orders shipped complete:
• how often is customer demand fully met.

8. Customer
Service
8.5.3. Operational Performance
Operational performance indicators:
• speed:
• order cycle time
• flexibility:
• ability to handle extraordinary customer requests
• malfunction recovery:
• contingency plans for recovering from service failures.

8. Customer
Service
8.5.4. Reliability
Reliability performance indicators:
• ability to comply to:
• planned inventory availability
• operational performance
• capability and willingness to:
• provide accurate and timely customer logistical
information
• commitment to:
• continuous service quality improvement.

8. Customer
Service
8.5.5. Quality
Quality performance indicators:
• Ability to deliver:
• items without errors
• shipped goods without damage.

The End
Supply Chain Management Guide
Please forward any comments to: imants@skynet.be
Internet: http://www.managementsupport.com
Main trucking image © 1999 www.arttoday.com
All intellectual contents Copyright © Imants

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