ISBM_Supply Chain Management_Sept 2010

Essentials of Supply Chain

Supply Chain

Life cycle processes comprising physical, information,

financial and knowledge flows whose purpose is to

satisfy end-user requirements with products and

services from multiple linked suppliers

The Supply ChainSuppliers Manufacturers Warehouses &

Distribution Centers

Customers

Material Costs

Transportation

CostsTransportation

CostsTransportation

CostsInventory CostsManufacturing Costs

Supply Chain View

Suppliers Manufacturers Warehouses &

Distribution Centers

Customers

Material Costs

Transportation

CostsTransportation

Costs Transportation

CostsInventory CostsManufacturing Costs

Plan Source Make Deliver

What is Supply Chain Management

A set of approaches used to efficiently integrate

Suppliers

Manufacturers

Warehouses

Distribution centers

So that the product is produced and distributed

In the right quantities

To the right locations

And at the right time

System-wide costs are minimized and

Service level requirements are satisfied

Historical Perspective of SCM

1960‘s - Inventory Management Focus, Cost Control

1970‘s - MRP & BOM - Operations Planning

1980‘s - MRPII, JIT - Materials Management, Logistics

1990‘s - SCM - ERP - ―Integrated‖ Purchasing,

Financials, Manufacturing, Order Entry

2000‘s - Optimized ―Value Network‖ with Real-Time

Decision Support; Synchronized & Collaborative

Extended Network

Challenges in Supply Chain Management

Uncertainty is inherent to every supply chain

Travel times

Breakdowns of machines and vehicles

Weather, natural catastrophe, war

Local politics, labor conditions, border issues

The complexity of the problem to globally optimize a supply chain

is significant

Minimize internal costs

Minimize uncertainty

Deal with remaining uncertainty

Significance of SCM in Organizational

Performance

Dealing with uncertain environments – matching supply and

demand

Boeing announced a $2.6 billion write-off in 1997 due to ―raw

materials shortages, internal and supplier parts shortages and

productivity inefficiencies‖

Hewlett-Packard and Dell found it difficult to obtain important

components for its PC‘s from Taiwanese suppliers in 1999 due to a

massive earthquake

Shorter product life cycles of high-technology products

Less opportunity to accumulate historical data on customer demand

Wide choice of competing products makes it difficult to predict

demand

Significance of SCM in Organizational

Performance

The growth of technologies such as the Internet enable

greater collaboration between supply chain trading partners

If you don‘t do it, your competitor will

Major buyers such as Wal-Mart demand a level of ―supply chain

maturity‖ of its suppliers

Availability of SCM technologies on the market

Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD

Edwards) with which to integrate internal processes

Supply Chain Alignment with Business Plan

Supply Chain and Uncertainty

11

Inventory and back-order levels fluctuate considerably

across the supply chain even when customer demand

doesn‘t vary

The variability worsens as we travel ―up‖ the supply chain

Forecasting doesn‘t help!

ManufacturerWholesale

Distributors ConsumersMulti-tierSuppliers Retailers

Time

Sale

s

Sale

sTime

Sale

s

Time

Sale

s

Time

Bullwhip Effect

Factors Contributing to Bullwhip effect

Demand forecasting practices

Min-max inventory management (reorder points to bring inventory up

to predicted levels)

Lead time

Longer lead times lead to greater variability in estimates of average

demand, thus increasing variability and safety stock costs

Batch ordering

Peaks and valleys in orders

Fixed ordering costs

Impact of transportation costs (e.g., fuel costs)

Sales quotas

Price fluctuations

Promotion and discount policies

Lack of centralized information


Forecasts are never right

Very unlikely that actual demand will exactly equal forecast demand

The longer the forecast horizon, the worse the forecast

A forecast for a year from now will never be as accurate as a forecast

for 3 months from now

Aggregate forecasts are more accurate

A demand forecast for all CV therapeutics will be more accurate than

a forecast for a specific CV-related product


Sales &

Distribution

(Demand)

Manufacturing

(Capacity)

Procurement

(Material)

C

U

S

T

O

M

E

R

Subordinate to

Manufacturing

objectives

Subordinate to

Logistics objectives

Subordinate to

Sales & Marketing

objectives

Current Supply Chain Approach leads to achieving

‗Local‘ rather than ‗Global‘ Optima


ISSUE CONSIDERATIONS

Network Planning • Warehouse locations and capacities

• Plant locations and production levels

• Transportation flows between facilities to minimize cost and time

Inventory Control • How should inventory be managed?

• Why does inventory fluctuate and what strategies minimize this?

Supply Contracts • Impact of volume discount and revenue sharing

• Pricing strategies to reduce order-shipment variability

Distribution Strategies • Selection of distribution strategies (e.g., direct ship vs. cross-docking)

• How many cross-dock points are needed?

• Cost/Benefits of different strategies

Integration and Strategic Partnering • How can integration with partners be achieved?

• What level of integration is best?

• What information and processes can be shared?

• What partnerships should be implemented and in which situations?

Outsourcing & Procurement

Strategies

• What are our core supply chain capabilities and which are not?

• Does our product design mandate different outsourcing approaches?

• Risk management

Product Design • How are inventory holding and transportation costs affected by product

design?

• How does product design enable mass customization?

Supply Chain Imperatives for Success

View the supply chain as a strategic asset and a differentiator

Wal-Mart‘s partnership with Proctor & Gamble to automatically replenish inventory

Dell‘s innovative direct-to-consumer sales and build-to-order manufacturing

Create unique supply chain configurations that align with your company‘s strategic objectives

Operations strategy

Outsourcing strategy

Channel strategy

Customer service strategy

Asset network

Reduce uncertainty

Forecasting

Collaboration

Integration

Supply Chain Drivers

Drivers of Supply Chain

Inventory

Transportation

Facilities

Information

Inventory

All of the raw materials, work in process (WIP), and

finished goods within the supply chain. Inventory

policies can dramatically alter a supply chain‘s

efficiency and responsiveness.

Why hold inventory?

Unexpected changes in customer demand (always

hard to predict, and uncertainty is growing)

Short product life cycles

Product proliferation

Uncertain supply

Quantity

Quality

Costs

Delivery time

Impact of Inventory

Inventory can increase amount of demand that can be

met by increasing product availability.

Inventory can reduce costs by exploiting economies of

scale in production, transportation, and purchasing.

Inventory can be used to support a firm‘s competitive

strategy. More inventory increases responsiveness, less

inventory increases efficiency (reduces cost).

Types of Inventory Needed

Cycle Inventory

Think convenience (no customer buys eggs one by one)

The average amount of inventory used to meet demand between

replenishments.

Seasonal Inventory

Think bathing suits and snow-shovels

Inventory that is built up to meet predictable variation in demand.

Amount of seasonal inventory depends on how quickly and inexpensively a firm

can change its rate of production.

Safety Inventory

Random, unpredictable, unexpected

Inventory held to counter uncertainty in demand or supply

(―just-in-case‖ inventory).

Transportation

Modes and routes for moving inventory

throughout the supply chain.

Transportation Impact

Faster transportation allows a supply chain to be more

responsive but generally less efficient.

Less than full truckloads allows a supply chain to be

more responsive but generally less efficient.

Transportation can be used to support a firm‘s

competitive strategy. Customers may demand and be

willing to pay for a high level of responsiveness.

Transportation Decisions

Mode of transportation is the manner in which a

product is moved (air, truck, rail, ship, pipeline,

electronic). Each mode differs with respect to speed,

size of shipments, cost, and flexibility.

Routes are paths along which a product can be shipped.

In house or outsource the transportation function. Many

companies use third-party logistics providers (3PL) to

perform some or all of their transportation activities

Facilities

Places within the supply chain where inventory

is stored, assembled, or fabricated. Decisions

on location, capacity, and flexibility of

facilities have a significant impact on

performance.

Facilities Impact

Facilities either store inventory between supply chain

stages (warehouses, distribution centers, retailers) or

transform inventory into another state (fabrication or

assembly plants).

Centralization of facilities uses economies of scale to

increase supply chain efficiency (fewer locations and

less inventory) usually at the expense of responsiveness

(distance from customer).

Facilities Decisions

Location - Centralize to gain economies of scale or decentralize to

be more responsive. Other issues include quality and cost of

workers, cost of facility, infrastructure, taxes, quality of life, etc.

Capacity - Excess capacity allows a company to be more responsive

to changes in the level of demand, but at the expensive of

efficiency.

Manufacturing Methodology - Decisions between a product or

functional focus, between flexible or dedicated capacity.

Warehousing Methodology - Chose between SKU storage (stores all

of one type of product together), Job lot storage (stores different

products together to satisfy a particular customer or job), or cross-

docking.

Information

Data and analysis regarding inventory,

transportation, facilities, and customers

throughout the supply chain. It is potentially

the biggest driver since it affects all the other

drivers.

Information‘s Role

Information connects various supply chain stages and allows them to coordinate activities.

Information is crucial to the daily operations of each stage of the supply chain.

An information system can enable a firm to get a high variety of customized products to customers rapidly

An information system can enable a firm to understand changing consumer needs more quickly

Information Decisions

Push versus Pull. Push systems (like MRP) need information on

anticipated demand to create production and purchasing schedules. Pull

system (like JIT) need accurate and quick information on actual demand to

move inventory and schedule production in the chain.

Coordination and Information Sharing. How will the goal of maximizing

supply chain profitability be achieved through the coordination of

activities and sharing of appropriate information?

Forecasting and Aggregate Planning. How will future demand and market

conditions be forecast, and to what extent will collaborative forecasting be

used? How will aggregate planning be used to meet forecasted demand and

to what extent will it be shared throughout the supply chain?

Enabling Technologies. Which information technologies will be used and

integrated throughout the supply chain? electronic data interchange (EDI),

the Internet, enterprise resource planning (ERP) systems, supply chain

management (SCM) software.

Considerations for Supply Chain Drivers

Driver Efficiency

(Cost)

Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation /

Dedicated

Proximity /

Flexibility

Information Low cost / slow High cost /

streamlined /

reliable

Supply Chain Strategies

Supply Chain Push Strategies

Classical manufacturing supply chain strategy

Manufacturing forecasts are long-range

Orders from retailers‘ warehouses

Longer response time to react to marketplace changes

Unable to meet changing demand patterns

Supply chain inventory becomes obsolete as demand for certain products disappears

Increased variability (Bullwhip effect) leading to:

Large inventory safety stocks

Larger and more variably sized production batches

Unacceptable service levels

Inventory obsolescence

Inefficient use of production facilities (factories)

How is demand determined? Peak? Average?

How is transportation capacity determined?

Examples: Auto industry, large appliances, others?

Bullwhip effect in Push based Supply Chains

Leads to inefficient resource utilization

Planning and managing are much more difficult.

Not clear how a manufacturer should determine production capacity? Transportation capacity? Peak demand?

Average demand?

Results: Higher transportation costs

Higher inventory levels and/or higher manufacturing costs

more emergency production changeovers

Supply Chain Pull Strategies

Production and distribution are demand-driven

Coordinated with true customer demand

None or little inventory held

Only in response to specific orders

Fast information flow mechanisms

POS data

Decreased lead times

Decreased retailer inventory

Decreased variability in the supply chain and especially at manufacturers

Decreased manufacturer inventory

More efficient use of resources

More difficult to take advantage of scale opportunities

Examples: Dell, Amazon

Implementation of Pull Based Strategies

Often difficult to implement

when lead times are long

impractical to react to demand information.

more difficult to take advantage of economies of

scale

Advantages and disadvantages of push and pull

supply chains:

new supply chain strategy that takes the best of

both.

Push–pull supply chain strategy

Supply Chain Push-Pull Strategies

Hybrid of ―push‖ and ―pull‖ strategies to overcome disadvantages

of each

Early stages of product assembly are done in a ―push‖ manner

Partial assembly of product based on aggregate demand forecasts

(which are more accurate than individual product demand forecasts)

Uncertainty is reduced so safety stock inventory is lower

Final product assembly is done based on customer demand for

specific product configurations

Supply chain timeline determines ―push-pull boundary‖

Supply Chain Timeline

Raw

Materials

End

Consumer

Push Strategy Pull Strategy

Push-

Pull

Boundary―Generic‖ Product ―Customized‖ Product

Choosing Between Push-Pull

Pull Push

Pull

Push

Economies of ScaleLow High

Low

HighD

em

and U

ncert

ain

tyIndustries where:

• Customization is High

• Demand is uncertain

• Scale economies are Low

Computer

equipment

Industries where:

• Standard processes are the

norm

• Demand is stable

• Scale economies are High

Grocery,

Beverages

Industries where:

• Uncertainty is low

• Low economies of scale

• Push-pull supply chain

Books, CD’s

Industries where:

• Demand is uncertain

• Scale economies are High

• Low economies of scale

Furniture

Where do the following

industries fit in this

model:

Automobile?

Aircraft?

Fashion?

Petroleum refining?

Pharmaceuticals?

Biotechnology?

Medical Devices?

General Strategy

Make a part of the product to stock – generic

product

The point where differentiation has to be

introduced is the push-pull boundary

Based on extent of customization, the position of

the boundary on the timeline is decided

Impact of demand uncertainty & economies of

scale

Demand Uncertainty: Higher demand uncertainty leads to a preference for pull

strategy.

Lower demand uncertainty leads to an interest in managing the supply chain based on a long-term forecast: push strategy.

Economies of scale: The higher the importance of economies of scale in reducing

cost

The greater the value of aggregating demand

The greater the importance of managing the supply chain based on long-term forecast, a push-based strategy.

Economies of scale are not important

Aggregation does not reduce cost

A pull-based strategy makes more sense.

Implementing Push-Pull Strategy

Achieving the appropriate design depends on many

factors:

product complexity

manufacturing lead times

supplier–manufacturer relationships.

Many ways to implement a push–pull strategy

location of the push–pull boundary.

Dell locates the boundary at the assembly point

Furniture manufacturers locate the boundary at the

production point

Impact of Push-Pull Strategy

Push portion Low uncertainty

Service level not an issue

Focus on cost minimization.

Long lead times

Complex supply chain structures

Cost minimization achieved by:

better utilizing resources such as production and distribution capacities

minimizing inventory, transportation, and production costs.

Supply Chain Planning processes are applied.

Impact of Push-Pull Strategy

Pull portion

High uncertainty

Simple supply chain structure

Short cycle time

Focus on service level.

Achieved by deploying a flexible and responsive

supply chain

Order-fulfillment processes are applied

Impact of Push-Pull portions of the supply chain

Portion Push Pull

Objective Minimize cost Maximize service

level

Complexity High Low

Focus Resource allocation Responsiveness

Lead time Long Short

Processes Supply chain

planning

Order fulfillment

Interaction of two points

Only at the push-pull boundary

Typically through buffer inventory

Different role for the inventory in each portion In the push portion, buffer inventory is part of the output

generated by the tactical planning process

In the pull system, it represents the input to the fulfillmentprocess.

Interface is forecast demand Forecast based on historical data obtained from the pull portion

Used to drive the supply chain planning process and determinethe buffer inventory.

Impact of Lead Time

Longer the lead time, more important it is to implement a push based

strategy.

Typically difficult to implement a pull strategy when lead times are so long

that it is hard to react to demand information.

Demand Driven Strategies

Requires integrating demand information into thesupply chain planning process

Demand forecast:

Use historical demand data to develop long-term estimatesof expected demand

Demand shaping:

Firm determines the impact of various marketing planssuch as promotion, pricing discounts, rebates, new productintroduction, and product withdrawal on demandforecasts.

Supply Chain Performance Measures

The Growth Curve Envisaged…

TODAYTHE PAST THE FUTURE

TIME

CURRENT LEVEL

TARGET LEVEL

a. Customer Needs

b. Meet them effectively

Customer needs impacted by Supply Chain

Response time

Product variety

Product availability

Customer experience

Order visibility

Return ability

Need for KPI‘s

• Why ?

• Accountability

• Predictability

• Risk Management

• How ?

• aligned to strategic objectives

• have accountability at all levels

• cross-functional

• Data based

KPI‘s

― metric: a standard for measurement ‖

― measurement: an observation that reduces the

amount of uncertainty about the value of a

quantity ‖

Metrics

Are linked to business objectives

Highlights the gap in performance

Standard metrics allow benchmarking (across

departments, companies and industries)

SCOR Developed by Supply Chain Council (SCC)

SCC: Independent, not-for-profit corporation organized in 1996 by:

Global management-consulting firm, Pittiglio Rabin Todd &

McGrath (PRTM) and

Market research firm, Advanced Manufacturing Research (AMR)

in Cambridge, Massachusetts.

Started with 69 voluntary companies; now close to 1000 members.

SCC Objective: To develop a standard supply-chain process reference

model enabling effective communication among the supply chain

partners, by

Using standard terminology to better communicate and learn the supply

chain issues

Using standard metrics to compare and measure their performances

SCOR Boundaries SCOR spans:

All customer interactions, from order entry through paid invoice.

All product (physical material and service) transactions, from supplier‘s

supplier to customer‘s customer, including equipment, supplies, spare parts,

bulk product, software, etc.

All market interactions, from the understanding of aggregate demand to the

fulfillment of each order

SCOR does not attempt to describe every business process or activity,

including:

Sales and marketing (demand generation)

Research and technology development

Product development

Some elements of post-delivery customer support

SCOR Basic Management Processes

Supplier‘s

Supplier

Make Delive

r

Sourc

e

Make DeliverMakeSourceDeliver SourceDeliverSource

Customer‘s

Customer

Plan

Supplier

(Internal or

External)Your Company

Customer

(Internal or

External)

Retur

n

Return ReturnReturn

Retur

n

Return

Plan-Source-Make-Deliver-Return provide the organizational structure of the SCOR-

model

Plan-Source-Make-Deliver-Return

The SCOR MetricsPerformance Attribute Description

Custo

mer F

acin

g

Supply Chain Reliability The performance of the supply chain in delivering

the correct product, to the correct place, at the

correct time, in the correct condition and

packaging, in the correct quantity, with the correct

documentation, to the correct customer.

Supply Chain Responsiveness The velocity at which a supply chain provides

products to the customer.

Supply Chain Flexibility The agility of a supply chain in responding to

marketplace changes to gain or maintain

competitive advantage.

Inte

rnal F

acin

g

Supply Chain Costs The costs associated with operating the supply

chain.

Supply Chain Asset Management The effectiveness of an organization in managing

assets to support demand satisfaction. This includes

the management of all assets: fixed and working

capital.

Level 1 Metrics

Performance Attribute Level 1 Metrics

Custo

mer F

acin

g

Supply Chain Reliability i. Delivery performance

ii. Fill Rates

iii. Perfect order fulfillment

Supply Chain Flexibility a. Supply Chain Response Time

b. Production Flexibility

Supply Chain

Responsiveness

Order Fulfillment cycle time

Inte

rnal F

acin

g

Supply Chain Costs a. Cost of Goods Sold

b. Total Supply Chain Cost

c. Value Added Productivity

d. Returns Processing Cost

Supply Chain Asset

Management

a. Cash to Cash Cycle Time

b. Return on Supply Chain Fixed

Assets

c. Inventory days of Supply

Metrics Definition

Performance

Attribute

Definition

Supply Chain

Reliability

The performance of Supply Chain in delivering the correct

product, to correct place, at the correct time, in the

correct condition and packaging, in the correct quantity,

with the correct documentation to correct customer

Performance Metric Definition

Delivery performance Measures the percentage of orders delivered ―on time and in full‖ to

customer request date and/or to customer commit date

Fill Rates Measures the percentage of ship from stock orders shipped within 24

hours of order receipt

a. Line Fill Rate

b. Order Fill rate

Perfect order

fulfillment

Measures the percentage of orders delivered ―on time and in full‖ to

customer request date AND flawless match of purchase order,

invoice and receipt

Metrics Definition

Performance

Attribute

Definition

Supply Chain

Responsiveness

The velocity at which the supply chain provides products to

the customer


Order Fulfillment Lead

time

Measures the number of days from order receipt in customer service

to the delivery receipt at the customers dock

Metrics Definition

Performance

Attribute

Definition

Supply Chain

Flexibility

The agility of a supply chain in responding to market place

changes to gain or maintain competitive advantage


Supply Chain Response

Time

Measures the number of days it takes a supply chain to respond to

(plan, source, make and delivery orders) an unplanned significant

increase or decrease in demand without cost penalty

Production Flexibility Measures the number of days to achieve an unplanned 20% increase

or decrease in orders without penalty.

Metrics Definition

Performance

Attribute

Definition

Supply Chain Cost The costs associated with operating the supply chain


Cost of Goods Sold

(COGS)

Measures the direct cost of material and labour to produce a product

or a service

Total Supply Chain Cost Measures the direct and indirect costs to plan, source and delivery

products and services. Make and return costs are captured in COGS

and Return processing costs respectively

Value Added

Productivity

Is calculated by subtracting direct material cost from the revenue

and dividing the results by the number of employees. (similar to

sales per employee)

Returns Processing cost Measures the direct and indirect costs associated with returns

including defective, planned maintenance and excess inventory. This

includes the entire reverse logistics process

Metrics Definition

Performance

Attribute

Definition

Supply Chain Asset

Management

The effectiveness of an organization in managing assets to

support demand satisfaction. Includes management of all

assets : fixed and working capital


Cash to Cash cycle

time

Measures the number of days cash is tied up as working capital

Inventory Days of

Supply

Measures the number of days cash is tied up as inventory.

Asset Turns Is calculated by dividing revenue by total assets including both

working capital and fixed assets

Level Metrics Facts

Level 1 Metrics are primary, high level measures that may cross multipleSCOR processes.

They do not necessarily relate to a SCOR Level 1 process (Plan-Source-Make-Deliver-Return).

There is hierarchy among the metrics in different levels.

Level 1 Metrics are created from lower level calculations (Level 2 metrics)

Level 2 Metrics: Associated with a narrower subset of processes.

Example: Metric related with Delivery Performance: Total number of products

delivered on time and in full based on a commit date.

Metric related with Production: Ratio Of Actual To Theoretical Cycle Time LSCM course circulation only

Level 2 Metrics

Performance

Attribute

Level 1 Metrics Level 2 Metrics

Supply Chain

Reliability

a. Delivery

Performance

b. Fill Rates

c. Perfect

Order

Fulfillment

• Supplier On-time and in full

• Manufacturing Schedule

Attainment

• Warehouse on time and in full

shipment

• Forecast Accuracy

• % Orders placed without error

• % Orders scheduled to customer

request date

• % of orders received damage free

• % Orders with correct shipping

documents

(these are in addition to delivery)

Level 2 Metrics

Performance

Attribute

Level 1

Metrics

Level 2 Metrics

Supply Chain

Responsiveness

Order

Fulfillment

Lead time

i. For stock items

a. Order receipt to order entry

b. Order entry to order shipment

c. Order shipment to order delivery

ii. For Order items

a. Order receipt to order entry

b. Order entry to complete

manufacturing to order shipment

c. Order shipment to order delivery

iii. Back order duration

Level 2 Metrics

Performance

Attribute


Supply Chain

Flexibility

a. Supply Chain

Response Time

b. Production

Flexibility

• Source Lead time

• Order Fulfillment lead

time for To order items

• Days to increase or

decrease production

labour, material, and/or

capacity

Level 2 MetricsPerformance

Attribute


Supply Chain

Cost

a. Cost of Goods

Sold

b. Total Supply

Chain Cost

c. Value Added

Productivity

d. Returns

Processing Cost

• Material Cost, direct & indirect cost of

production

• Order Management Cost

• Material Acquisition Cost

• Finance and Planning related cost

• MIS cost

• Inventory Carrying cost

• Revenue, Direct Material cost, Number

of employees in FTE‘s

• Returns Warehouse cost

• Returns authorizing processing cost

• Returns maintenance cost

• Transportation cost (from the customer,

intercompany and outbound to

supplier)

Level 2 Metrics

Performance

Attribute


Supply Chain

Asset

Management

a. Cash to Cash

Cycle Time

b. Return on

Supply Chain

Fixed Assets

c. Inventory days

of Supply

• Days Payable outstanding

• Days of inventory

• Days Sales (receivables)

outstanding

• Revenue

• Working Capital

• Fixed Assets

• Days RM inventory

• Days WIP inventory

• Days FG inventory

Example

Process Category: Source Stocked Product Process Number: S1

Process Category Definition

The procurement, delivery, receipt and transfer of raw material items, subassemblies, product and

or services.

Performance Attributes Metric

Reliability % Orders/lines processed complete

Responsiveness Total Source Cycle Time to Completion

Flexibility Time and Cost related to Expediting the

Sourcing Processes of Procurement,

Delivery, Receiving and Transfer.

Cost Product Acquisition Costs

Assets Inventory DOS

Best Practices Features

Joint Service Agreements

Alliance and Leverage agreements

None Identified

Example

Process Element: Transfer Product Process Element Number: S1.4

Process Element Definition

The transfer of accepted product to the appropriate stocking location within the supply chain. This includes all of

the activities associated with repackaging, staging, transferring and stocking product. For service this is the

transfer or application of service to the final customer or end user.

Performance Attributes Metric

Reliability % Product transferred damage free

% Product transferred complete

% Product transferred on-time to demand requirement

% Product transferred without transaction errors

Responsiveness Transfer Cycle Time

Flexibility Time and Cost Reduction related to Expediting the

Transfer Process.

Cost Transfer & Product storage costs as a % of Product

Acquisition Costs

Assets Inventory DOS

Best Practices Features

Drive deliveries directly to stock or point-of-use in

manufacturing to reduce costs and cycle time

Pay on receipt

Specify delivery location and time (to the minute)

Specify delivery sequence

Capability Transfer to Organization None Identified

How to select Metrics

Work groups ability to measure

Impact on

“Customer”

&

“Consumer”

•Balancing of Metrics is critical – e.g. Inv. Turns and Svs levels

•Build ―Engagement‖ & ―Effective‖ models

People competency

Process fix (systemizing)

Org architecture – roles & accountability

Simplification & Automation

Development and Management of Indices

Control

(Sustain)

Publish

(Pilot)

Data Collection

(Pre Condition)Definition

(Agreement)Identification

(Relevance)

EXECUTE

Improve

(Benefits)Monitor

(Process)

Benchmark

(Basis for

Improvement)

Hierarchy of Supply Chain Metrics

Source: AMR Benchmark Analytics 2004

A tiered system of metrics to improve supply chain effectiveness—the top tier assesses a

company‘s supply chain health, while the two successive tiers diagnose the root cause of

performance gaps and provide insight for corrective action.

Supply Chain Network Design

Supply Chain Network - Definition

Network definition outlines the

a. Assets

b. Material flows and

c. Rules by which raw materials are sourced, converted to

finished goods and subsequently delivered to customers.

Network definition includes reverse flows for returns,

repairs, reuse, refurbishment, recycling and disposal.

Network Decisions

Network Design

What product lines should be produced at what manufacturing plants?

How many warehouses are needed?

Where should they be located?

Network Utilization

What vendors should supply what material?

Where should each product be produced?

Where should each product be stored?

How many periods should inventory be held?

What facilities should source what products?

What transportation modes and carriers should be used on our freight lanes?

Benefits of Network Definition

Optimizing the network will reduce costs while

providing superior customer services

Reduce inventory carrying costs

Reduce fixed facility costs

Reduce facility operating costs

Reduce transportation costs

Improve customer service levels

Improve customer response time

Improve customer satisfaction

Increase sales

Increase market share

Formulating Network Strategy

Rationalize (Incremental) or Reengineer (Fundamental

Shift)

Trade Offs between

Operating Cost (Inter-facility Transportation, Customer

Transportation, Storage and Inventory Handling) v/s

Investment (Locations)

Service (Lead Time, Customer Comfort) v/s Investment (Locations)

Strategic Considerations for Network Design

Understanding customer service requirements and identifyingdifferentiated service segments

Developing a transportation strategy to most efficiently meet thecustomer‘s service requirements

Identifying the number, size, and roles of distribution centers andwarehouses required to meet customer lead time expectations andanticipated future volume growth

Evaluating inventory management implications of alternativedistribution strategies

Analyzing the financial implications of alternative networkstrategies and performing detailed financial analysis ofrecommendations

Factors Influencing Supply Chain Network

Design

Customer Needs are met

Response time

Product variety


Customer experience

Order visibility

Return-ability

Cost of meeting customer needs

Inventory

Transportation

Facilities and handling

Information

Distribution Network Design choices

Manufacturer storage with direct shipping

Manufacturer storage with direct shipping and in-transit merge

Distributor storage with package carrier delivery

Distributor storage with last mile delivery

Manufacturer / distributor storage with customer pickup

Retail storage with customer pickup

Manufacturer storage with direct shipping and

in-transit merge

In-transit merge combines pieces of the order comingfrom different locations so that the customer gets asingle delivery

The ability to aggregate inventories and postponeproduct customization is a significant advantage of in-transit merge

Will have the greatest benefits for products with highvalue whose demand is hard to forecast, in particular ifproduct customization can be postponed.

A very sophisticated information infrastructure isneeded to allow the in-transit merge

Manufacturer Storage with direct shipping

Product is shipped directly from the manufacturer to the endcustomer

The biggest advantage is the ability to centralize inventoriesat the manufacturer

A manufacturer can aggregate demand and provide a highlevel of product availability with lower levels of inventorythan individual retailers.

Transportation costs are high because two stages (retailerand manufacturer) do not need to be integrated.

Response times tend to be large

Distributor storage with package carrier

delivery

Inventory is not held by manufacturers at the factories but is held by distributors / retailers in intermediate warehouses and package carriers are used to transport products from the intermediate location to the final customer.

Distributor storage will require a higher level of inventory

Facility costs are somewhat higher with distributor storage because of a loss of aggregation

Response time with distributor storage is better than with manufacturer storage

Customer convenience is high with

Distributor storage because a single shipment reaches the customer in response to an order

Distributor storage with last mile delivery

Last mile delivery refers to the distributor / retailerdelivering the product to the customer's home instead ofusing a package carrier

Distributor storage with last mile delivery requires higher levels of inventory than all options other than retail stores

Transportation costs are highest using last mile delivery

Facility and processing costs are very high using this option given the large number of facilities required

The cost of providing product availability is higher than every option other than retail stores

Manufacturer / distributor storage with

customer pickup

Inventory is stored at the manufacturer or distributor warehousebut customers place their orders online or on the phone and thencome to designate pickup points to collect their orders.

Inventory costs using this approach can be kept low with eithermanufacturer or distributor storage to exploit aggregation

Transportation cost is lower than any solution using package carriers

A significant information infrastructure is needed to provide visibility of the order

Variety and availability comparable to any manufacturer or distributor storage option can be provided

Retail storage with customer pickup

Inventory is stored locally at retail stores. Customers either walkinto the retail store and pick it up at the retail store

Local storage increases inventory costs because of lack ofaggregation

Transportation cost is much lower than other solutions becauseinexpensive modes of transport can be used to replenish product atthe retail store

Very good response times can be achieved in this case because oflocal storage

Product variety stored locally will be lower than other options.

Warehouse / Distribution Centers Design

Traditional Warehousing

Regional Distribution Centre

Central Distribution Centre

Multiple CDC‘s

Direct to Store Delivery

Consumer Direct

Pool Point

Pool Point – Local Delivery

Cross Dock

Quick Response Centre

Demand Management

Demand Planning

Demand planning is ―the function of recognizing all demands for goods and

services to support the market place. It involves prioritizing demand when

supply is lacking. Proper demand management facilitates the planning and

use of resources for profitable business results.‖ (source: APICS Dictionary)

Types of Demand

Independent Demand

Dependant Demand

Characteristics Independent Demand Dependant Demand

Source Market Company documents

Computation method Forecast / Customer

Pull

Predetermined and

fixed calculation

Base Data Historical, Market

Research, Customer

orders

Bill of Materials,

Schedules

Ability to Influence Little to NIL High

e.g. Finished Goods Raw Materials, Packing

Material

Components of Demand

Independent Demand Dependant Demand

Backorders

All customer orders received, but not yet shipped

Forecasts

Statistical

Subjective/management override

Custom Orders

Distribution Requirements Planning (DRP)

Demand for an item that is derived from demand for the same item in another distribution location

Material Requirements Planning (MRP)

Demand for an item (or component) derived from demand for another item (or parent)

Demand Planning

Benefits

Planning instead of reacting

Generating one number

Forward visibility

Better vision of the impact of change

Parameters impacting demand

Business and economic conditions

Sources of demand

Trend

Seasonality

Random variation

Cyclical variation

Characteristics of Demand

Trend - a general direction or shift in demand that can be increasing, decreasing, or flat

Seasonality - variation of demand that can occur throughout the year (weekly, daily, quarterly) based on the season

Random variation - unexpected variation (i.e.; demand changing in a given season as compared to the same season in previous years)

Cyclical variation - long- and short-range cycles (i.e.; history of growth and recession)

Trends in Demand Planning

Key account level forecasting

Involvement of sales

Interest in point of sale data

Increased sophistication of techniques

Increased seasonality

Complex promotion

Reduced product life cycles

Laying down Demand Planning Process

Organization Level Perspective Micro Perspective

Who is involved in the process?

Who are the stakeholders?

Who ultimately owns the forecast?

Who has accountability for the number?

How will consensus be reached on the number?

At what level do we forecast?

How often do we forecast?

How will forecast performance be measured?

What method or technique should

be used?

Incorporating additional

information based on known

events

Holding a consensus meeting

Reviewing forecast performance

Improving Forecasting Accuracy

Including an average and range of probability

Grouping products (Principle of Aggregation)

Predicting what will happen in the near future

Recording historical data in the same terms needed for the forecast

Including events that influence demand

Accounting for customer segmentation

Typical Matrix for Forecasting Responsibility

Function Input to Forecast Interest

Marketing & Sales •Analysis of historical data

•Regional or stores level

data

•Promotion Plan

•Aligning Marketing goals

with supply chain

capabilities

•Customer Service

Research and Development •Product changes

•New product information


Operations Manufacturing constraints Decrease expediting Effect

on production costs

Finance

Budgetary - planned sales

volumes

Inventory investment

Shareholder value

Transportation Management

Transportation Management

Transportation management is the process of shippinginventory to places where it is needed

The purpose of the management process is to recognizediscrepancies between available inventory and requiredreplenishments throughout the network and makerecommendations on resolving such discrepancies

Transportation management evaluates the plan fordeploying goods and the actual process of managing theinbound, outbound, and inter-company traffic

Benefits of Transportation Management

Fulfill customer service requirements

Reduce transportation cost

Meet carrier business requirements

Effective management of a variety of shipping modes

Mutual considerations of inbound, outbound, and inter-company shipping

Integrated with the supply chain

Decision Making in Transportation Management

Using the latest production plan and receipt information

Releasing orders only supported by inventory

Meeting inventory targets at distribution centers

Sending inventory where it is most needed

Planning efficient loads considering capacity constraints

Supporting push or pull strategies

Controlling Transportation Costs

Minimizing shipping costs

Line-haul costs

Pickup and delivery costs

Terminal handling costs

Billing and collecting costs

Selecting the most

appropriate mode of

transportation

Rail

Road

Air

Water

Carrier Rates

Per distance

Typically, carriers using thisstructure transport loads point-to-point, but they can also makemultiple stops.

Per weight

This type of structure utilizes acode that represents a categoryof items and the weight of theitems to determine the rate.

Per package This structure utilizes zones

defined by the air (package)carrier and the weight of theitems shipped.

Per container This structure relies on the item

being shipped, the weight of theitems, and the container utilizedto determine the rate.

Flat rate The carrier is certain of the

origin and destination points andis not making multiple stopsalong the way.

Recent Trends in Transportation Management

Increasing rates

Increasing service demands

Compression of cycle time

Focus on delivery date

Shift in freight mix

Driver shortages

Central planning

Enterprise-wide planning

Strategic partnering

System integration

Transportation Planning While deployment focuses on recommending shipments and looking at the larger picture,

transportation planning actually handles the details of managinginbound, outbound, and inter-company traffic within anorganization

Challenges in Transportation Planning

Deregulation - Creates competition between carriers and decision problems for the shipper

Restructuring - Creates the need for timed shipments

Transportation infrastructures - Have not kept up with the enterprises they serve

Supply chain emphasis - Recognizes the impact to the overall cost and customer service to the transportation network‘s customer

Benefits of Transportation Planning

Honored customer servicerequirements

Reduced transportation cost as apercent of gross sales and/oroverall operational costs

Honored carrier businessrequirements

Effective management of avariety of shipping modes andpossibilities

Mutual consideration of inbound, outbound, and inter-company

Viewing inbound, outbound, and inter-company areas simultaneously is referred to as Enterprise Management

Integrated with the supply chain

Transportation Decisions

How do we maximize customer service at the best transportation cost?

Which mode should we use?

Who‘s the best carrier to deliver on time?

How do we manage and control inbound shipments?

Where and when do we cross-dock?

How do we plan an enterprise-wide transportation solution?

How do we know of an exception before it occurs?

If the carrier can‘t deliver, who needs to know?

What is the best ship date?

Is our shipment moving according to plan?

ISBM_Supply Chain Management_Sept 2010

Documents

Transcript of ISBM_Supply Chain Management_Sept 2010