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Supply ChainManagement Guide
© Imants
the
The Supply Chain Management Guide
1. Introduction
1. Introduction 1.1. Key Concepts1.1.1. 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. Introduction 1.1. Key Concepts1.1.2. Logistics
Logistics is:• the management of the storage and flow of
goods, services and information throughout your organisation.
1. Introduction 1.1. Key Concepts1.1.3. 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. Introduction 1.1. Key Concepts1.1.4. A Philosophy
1.2 Principal Issues1.2.1. 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 Issues1.2.1. 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 Issues1.2.2. 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 Issues1.2.3. Logistic Goal
1. Introduction
Logistic goal and objectives
The right products
The right quantity
The right moment
At minimalcost
FlexibilityDeliveryreliability
Delivery time/lead time
Inventorylevel
1.2. Principal Issues1.2.4. 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. Principal Issues1.2.5. Evolution
1. Introduction
Quality productsLowest possible cost
Order fulfillment
Integration of supply chainsCustomer service
Preferred partnersCommunication
Supply chain communitiesCommon goals, objectives
Supply
Chain
Evolution
1. Introduction 1.2. Principal Issues1.2.6. 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. Introduction 1.2. Principal Issues1.2.7. Focus
Supply Chain Management focuses on business processes:
• product change• planning• order management• stock management
instead of functions:• sales• purchasing• production
1. Introduction 1.2. Principal Issues1.2.8. Drivers of Change (1)
Drivers of change:• outsourcing trend• actual customer demand: speed, flexibility and
cheap products• new software: ERP, sophisticated application
software
1. Introduction 1.2. Principal Issues1.2.8. Drivers of Change (2)
• new technologies• Electronic Data Interchange (EDI)• internet, intranet, extranet• wireless communications• teleconferencing and telecommuting• bar coding.
1.2. Principal Issues1.2.9. 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. Analysis1.3.1. Diagram
1. Introduction
Understand thecustomer
Understand theproduct
Understand theprocess
Understand the information flow
1. Introduction 1.3. Analysis1.3.2. 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. Introduction 1.3. Analysis1.3.2. 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. Introduction 1.3. Analysis1.3.3. 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. Introduction 1.3. Analysis1.3.4. 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. Introduction 1.3. Analysis1.3.5. 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 measures need to be focused on what factors add to total performance, total value or total cost.
The principle measure of performance 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 InputsAddingvalue
Outputs Customers Results
EffectivenessEfficiency
Productivity
Profitability
Customer Service + Quality
CustomerService
1. Introduction 1.4. Performance Indicators (3)
Effectiveness: • accomplishment of the right things, on time,
within the requirements specified.
Efficiency:• resources expected to be consumed divided by
resources actually consumed.
1. Introduction 1.4. Performance Indicators (4)
Productivity:• measures of output divided by measures of input
for a given period of time.
Profitability:• relationship between revenues and costs.
The Supply Chain Management Guide
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 Issues2.2.1. 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. Procurement 2.2. Principal Issues2.2.2. 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. Procurement 2.2. Principal Issues2.2.2. 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. Principal Issues2.2.3. 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. Procurement 2.2. Principal Issues2.2.4. 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).
2.1. Principal Issues2.2.5. 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
2.1. Principal Issues2.2.5. 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 Indicators2.5.1. 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
scheduledS = number of line items scheduled for delivery
during month
Different tolerances for A, B, C-articles (seechapter 6)
Q%=100-(R*100)/N
2. Procurement 2.4. Performance Indicators2.5.2. 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
The Supply Chain Management Guide
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. Principal Issues3.2.1. 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. Principal Issues3.2.2. 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. Principal Issues3.2.3. 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
3.2. Principal Issues3.2.3. Sales Forecasting Methods (2)
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
3.2. Principal Issues3.2.3. Sales Forecasting Methods (3)
• 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
3.2. Principal Issues3.2.3. Sales Forecasting Methods (4)
• 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
3.2. Principal Issues3.2.3. Sales Forecasting Methods (5)
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. Principal Issues3.2.4. 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
3.2. Principal Issues3.2.4. Major Uses of Sales Forecasts (2)
• 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
3.2. Principal Issues3.2.4. Major Uses of Sales Forecasts (3)
• top management:• overall planning and control of operations of the
company.
3.2. Principal Issues3.2.5. 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. Principal Issues3.2.5. Advantages Forecasting (2)
• improved customer service levels as supply and demand balance
• more economic purchasing power.
3. Sales Forecasting
3. Sales Forecasting
3.2. Principal Issues3.2.6. 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
3.4. Suggestions (2)
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
3.4. Suggestions (3)
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
3.4. Suggestions (4)
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.
The Supply Chain Management Guide
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. Principal Issues4.2.1. 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. Principal Issues4.2.1. 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. Principal Issues4.2.2. 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. Principal Issues4.2.2. 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. Principal Issues4.2.3. Order Decoupling Point
How far does a customer order penetrate in the production process?
Purchasing Production Warehouse Distribution
Manufacture tostock
Manufacture toorder
Position of the order decoupling point
4.2. Principal Issues4.2.4. Planning Hierarchy
Aggregate plan: works with aggregate (grouped) units
Master Production Schedule: indicates the quantity and timingof the production of specific end items.
(actual orders are incorporated)
Materials planning: what material is needed when?
Capacity requirements planning: which equipment, work forceand 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. Principal Issues4.2.5. 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.
The Supply Chain Management Guide
5. Material Handling
5.1. Key Concepts5.1.1. 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 Concepts5.1.1. 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. Principal Issues5.2.1. 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. Principal Issues5.2.1. 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. Principal Issues5.2.2. 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. Principal Issues5.2.3. 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
5.2. Principal Issues5.2.3. Material Handling System
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
5.2. Principal Issues5.2.3. Material Handling System
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
5.2. Principal Issues5.2.3. Material Handling System
Components (4)
Storage and retrieval equipment:• unit load storage equipment• unit load retrieval equipment• small load storage and retrieval equipment.
5. Material Handling
5.2. Principal Issues5.2.3. Material Handling System
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. Principal Issues5.2.4. 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.
5.2. Principal Issues5.2.4. Cost-effective Means of Transport (2)
5. Material Handling
Movement distance (m)
Unitsmoved/ hour Conveyors Motorized trolleys
Forklift trucks
Manual trolley
Manual
5. Material Handling
5.2. Principal Issues5.2.4. Cost-effective Means of Transport (3)
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. Principal Issues5.2.5. 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.
5.2. Principal Issues5.2.5. Warehousing (2)
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
5.2. Principal Issues5.2.5. Warehousing (3)
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
5.2. Principal Issues5.2.5. Warehousing (4)
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.
The Supply Chain Management Guide
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. Principal Issues6.2.1. 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. Principal Issues6.2.1. Types of Inventory (2)
• finished goods: • Items ready for sale to a customer
• MRO:• maintenance, repair and operation supplies.
6. Inventory Management
6.2. Principal Issues6.2.2. 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. Principal Issues6.2.2. Functions of Inventory (2)
• speculative stocks: • expected price increase
• promotional stocks:• additional inventory accumulated for a promotional
event.
6.2. Principal Issues6.2.3. Elements of Inventory (1)
6. Inventory Management
Safety stock
Excess stock
Replenishments
InventoryLevel
Time
Elements of inventory
6. Inventory Management
6.2. Principal Issues6.2.3. Elements of Inventory (2)
Elements of inventoryOver 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. Principal Issues6.2.4. 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. Principal Issues6.2.5. 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. Principal Issues6.2.5. 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. Principal Issues6.2.6. Inventory Management (1)
Objectives of inventory management:• minimize costs:
• working capital• carrying costs• scrap and rework
• highest level of customer service.
6. Inventory Management
6.2. Principal Issues6.2.6. Inventory Management (2)
Inventory management tasks:• make decisions about:
• safety stock• replenishment production runs• excess stock.
6. Inventory Management
6.2. Principal Issues6.2.6. Inventory Management (3)
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
6.2. Principal Issues6.2.6. Inventory Management (4)
A
B C
D E
Independent demand
Dependentdemand
6.2. Principal Issues6.2.7. 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
6.2. Principal Issues6.2.7. ABC-Analysis (2)
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
6.2. Principal Issues6.2.7. ABC-Analysis (3)
• 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
6.2. Principal Issues6.2.7. ABC-Analysis (4)
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%
6.2. Principal Issues6.2.7. ABC-Analysis (5)
ABC - Analysis Chart
0
100
200
300
400
500
600
Product 1 Product 2 Product 3 Product 4
Nu
mb
er o
f it
ems
C
B
A
6. Inventory Management
6. Inventory Management
6.2. Principal Issues6.2.7. 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. Principal Issues6.2.8. 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
6.2. Principal Issues6.2.8. Inventory Management Systems (2)
• 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
6.2. Principal Issues6.2.8. Inventory Management Systems (3)
• 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
6.2. Principal Issues6.2.8. Inventory Management Systems (4)
6. Inventory Management
6.2. Principal Issues6.2.9. 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.
6.2. Principal Issues6.2.9. How Much to Order: EOQ (2)
Q - Lot size of the orderH - Average annual holding cost per unitD - Annual demandS - Cost per order
Q - Lot size of the orderH - Average annual holding cost per unitD - Annual demandS - Cost per order
Annualcarryingcost
Annualorderingcost
Total cost = +
Q2
H DQ
STC = + --
6. Inventory Management
Q/2 = Average inventory on handD/Q = Number of orders per year
Q/2 = Average inventory on handD/Q = Number of orders per year
6.2. Principal Issues6.2.9. How Much to Order: EOQ (3)
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 CostOPT
Cost
6. Inventory Management
6.2. Principal Issues6.2.9. How Much to Order: EOQ (4)
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. Principal Issues6.2.10. 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. Principal Issues6.2.10. 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. Principal Issues6.2.11. 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. Principal Issues6.2.12. 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. Principal Issues6.2.13. 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. Principal Issues6.2.13. 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. Suggestions6.3.1. 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. Suggestions6.3.2. Inventory Matrix
6.3. Suggestions6.3.3. Rationalize Products
• Print and analyze lists of slow-moving and Class C items
• Monthly evaluation• Action plans• Follow-up
6. Inventory Management
6.3. Suggestions6.3.4. 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 salesInventory 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
The Supply Chain Management Guide
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.
7. Distribution 7.1. Key Concepts (2)
Transport operator:• who does the moving.
Intermodal:• interchange point from one transportation mode
provider to another.
7. Distribution 7.1. Key Concepts (3)
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.
7. Distribution 7.1. Key Concepts (4)
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.
7. Distribution 7.1. Key Concepts (5)
Containerization: • the process of combining several unitized loads
into a single well-protected load.
7. Distribution 7.2. Principal Issues7.2.1. 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. Distribution 7.2. Principal Issues7.2.2. Distribution Decisions
Important distribution decisions:• Which transport mode?• Number and location of distribution warehouses?• Own or contract-out warehousing and transport?
7.2. Principal Issues7.2.3. 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
7.2. Principal Issues7.2.3. Transport Modes (2)
Methods of transport:• trucks• railroads• water• airways• pipelines
7. Distribution
Rail
Truck
PipelineWater
Air
Piggyback Birdyback
Fishyback
7. Distribution 7.2. Principal Issues7.2.3. Transport Modes (3)
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.
7.2. Principal Issues7.2.3. Transport Modes (4)
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
7.2. Principal Issues7.2.3. Transport Modes (5)
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
7.2. Principal Issues7.2.3. Transport Modes (6)
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
7.2. Principal Issues7.2.3. Transport Modes (7)
Pipelines:• slow but dependable, continuous flow of liquids
or slurries• harder to establish today due to government
regulations.
7. Distribution
7. Distribution 7.2. Principal Issues7.2.4. Outsourcing
Decisions for owning or contracting-out transport consider:
• total cost• control• customer service• flexibility• management skills• operators• return on investment.
7. Distribution 7.2. Principal Issues7.2.5. 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).
The Supply Chain Management Guide
8. Customer Service
8.1. Key Concepts
A statement of goals and acceptable performance for the quality of service
that a company expects to deliverto its customers.
Customer Service Standard
8. Customer Service
8. Customer Service
8.2. Principal Issues8.2.1. 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
8.2. Principal Issues8.2.1. What Customers Look for (2)
• 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
8.2. Principal Issues8.2.1. What Customers Look for (3)
• 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
8.2. Principal Issues8.2.1. What Customers Look for (4)
• 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. Principal Issues8.2.2. 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. Principal Issues8.2.2. 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)
ShippingSalesService
Customer(end)
8.2. Principal Issues8.2.3. 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. Principal Issues8.2.4. 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. Principal Issues8.2.5. 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 wantsCustomer 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. Analysis8.3.1. 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. Analysis8.3.1. Customer Analysis (2)
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. Analysis8.3.1. Customer Analysis (3)
8. Customer Service
8.3. Analysis8.3.2. 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. Analysis8.3.3. 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. Analysis8.3.4. 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. Performance Indicators 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. Performance Indicators 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. Performance Indicators 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. Performance Indicators 8.5.5. Quality
Quality performance indicators:• Ability to deliver:
• items without errors• shipped goods without damage.
The EndSupply Chain Management Guide
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