Supply Chain Management

• Refers to all the management functions related to the flow of materials from the company’s direct suppliers to its direct customers.

• Includes purchasing, traffic, production control, inventory control, warehousing, and shipping.

• Two alternative names:– Materials management– Logistics management

Supply Chain Managementin a Manufacturing Plant

Receivingand

Inspection

RawMaterials,Parts, andIn-process

Ware-Housing

Production

FinishedGoodsWare-

housing

Inspection,Packaging,

AndShippingS

uppl

iers

Cus

tom

ers

Materials Management

PurchasingProduction

ControlWarehousing andInventory Control

Shippingand Traffic

Physical materials flowInformation flow

Drivers Of Supply Chain Performance

• Facilities• Inventory• Transportation• Information• Sourcing• Pricing

Supply Chain Drivers

Information

Facilities

Sourcing

Inventory Transportation

Pricing

Formulas for Measuring Supply-Chain Performance

• One of the most commonly used measures in all of operations management is “Inventory Turnover”

• In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time

valueinventory aggregate Average

sold goods ofCost turnoverInventory

weeks52 sold goods ofCost

valueinventory aggregate Averagesupply of Weeks

10-5

Example of Measuring Supply-Chain Performance

Suppose a company’s new annual report claims their costs of goods sold for the year is $160 million and their total average inventory (production materials + work-in-process) is worth $35 million. This company normally has an inventory turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it mean?

Suppose a company’s new annual report claims their costs of goods sold for the year is $160 million and their total average inventory (production materials + work-in-process) is worth $35 million. This company normally has an inventory turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it mean?

10-6

Example of Measuring Supply-Chain Performance (Continued)

= $160/$35 = 4.57

Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.

= $160/$35 = 4.57

Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.

valueinventory aggregate Average

sold goods ofCost turnoverInventory

10-7

Designing The Supply Chain Network:

I. Designing Distribution Networks II. Network Design in Supply Chain

III. Network Design in Uncertain Environment

Designing Distribution Networks in Supply Chain

• What is a Distribution Network?• Distribution comes into

Supply Chain StructureSalient Features

• Number of layers: Supply chain always involves multiple layers• Delays in the chain: There are finite delays between each pair of

layers to receive and send information and goods• Decision making patterns: Decisions of “how much” and “when” to

order are taken independently by each member in the chain• Independence of each member of the supply chain: Since each

member is organisationally a separate unit, there is considerable independence in policy and decision making

Bullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

n tit

y

Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chainThe magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

A lot of retailers each with little variability in their orders….

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

10-11

What causes Bullwhip effect?

• The more – the number of layers, – the delay, – the rate of change,

the greater the fluctuations• Each layer

– updates its forecast in varying patterns– places order at different times– price fluctuations (promotions)– rationing of supply

How to avoid Bullwhip effect?

• Devise new strategies for minimising the number of layers, delay in information exchanges and rate of change– Improve quality of demand forecast update

• use of point of sales data, EDI, Internet– Share sales, capacity and inventory data across the

supply chain partners– Lead time reduction, reduction in fixed costs in

ordering

Bullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

n tit

y

Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chain

The magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

A lot of retailers each with little variability in their orders….

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

10-14

Hau Lee’s Concepts of Supply Chain Management

• Hau Lee’s approach to supply chain (SC) is one of aligning SC’s with the uncertainties revolving around the supply process side of the SC

• A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies

• Types of SC’s– Efficient SC’s– Risk-Hedging SC’s– Responsive SC’s– Agile SC’s

10-15

Hau Lee’s SC Uncertainty Framework

Demand Uncertainty

Low (Functional products)

High (Innovative products)

Efficient SC

Ex.: Grocery

Responsive SC

Ex.: Computers

Risk-Hedging SC

Ex.: Hydro-electric power

Agile SC

Ex.: Telecom

Low(Stable Process)

High(Evolving Process)

Supply

Uncertainty

10-16

What is Outsourcing?

Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers

10-17

Reasons to Outsource

• Organizationally-driven

• Improvement-driven

• Financially-driven

• Revenue-driven

• Cost-driven

• Employee-driven

10-18

Value Density

• Value density is defined as the value of an item per pound of weight

• It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped

10-19

Sourcing/Purchasing-SystemDesign Matrix

10-20

Mass Customization

• Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers

• The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network

10-21

What is Logistics?

• The movement of goods through the supply chain

• “the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities”

11-22

Decisions Related to Logistics

• How to best transport goods– Modes of transportation

• Truck, ship, rail pipelines

– Warehouses• Consolidation• Cross Docking• Hub-and-Spoke systems

• Facility Location

11-23

Aggregate Production Plan & Master Production Scheduling (MPS)

• Time-phased plan specifying how many and when the firm plans to make or buy each component / parts of the main productAggregate Plan(Plan for Production of Product Groups)

Aggregate Plan(Plan for Production of Product Groups)

Master Production Scheduling (MPS)(Scheduling Production ofSpecific Components & Parts)

18-24

18-25

Firm orders from knowncustomers

Forecastsof demand from randomcustomers

Aggregateproductplan

Bill ofmaterialfile

Engineeringdesignchanges

Inventoryrecord file

Inventorytransactions

Master productionSchedule (MPS)

Primary reportsSecondary reports

Planned order schedule for inventory and production control

Exception reportsPlanning reportsReports for performance control

Materialplanning(MRP computer program)

Material Requirements Planning

• Materials requirements planning (MRP) is a means for determining the number of parts, components, and materials needed to produce a product

• MRP provides information regarding requirement of materials, components & parts for scheduled production. It specifies:

How Much to Order ( Right Quantity) When to Order ( Right Time)

18-26

Example of MRP Logic and Product Structure Tree

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

Product Structure Tree for Assembly A Lead TimesA 1 dayB 2 daysC 1 dayD 3 daysE 4 daysF 1 day

Total Unit DemandDay 10 50 ADay 8 20 B (Spares)Day 6 15 D (Spares)

Given the product structure tree for “A” and the lead time and demand information below, provide a materials requirements plan that defines the number of units of each component and when they will be needed

Given the product structure tree for “A” and the lead time and demand information below, provide a materials requirements plan that defines the number of units of each component and when they will be needed

18-27

LT = 1 day

Day: 1 2 3 4 5 6 7 8 9 10A Required 50

Order Placement 50

First, the number of units of “A” are scheduled backwards to allow for their lead time. So, in the materials requirement plan below, we have to place an order for 50 units of “A” on the 9th day to receive them on day 10.

First, the number of units of “A” are scheduled backwards to allow for their lead time. So, in the materials requirement plan below, we have to place an order for 50 units of “A” on the 9th day to receive them on day 10.

18-28

Next, we need to start scheduling the components that make up “A”. In the case of component “B” we need 4 B’s for each A. Since we need 50 A’s, that means 200 B’s. And again, we back the schedule up for the necessary 2 days of lead time.

Next, we need to start scheduling the components that make up “A”. In the case of component “B” we need 4 B’s for each A. Since we need 50 A’s, that means 200 B’s. And again, we back the schedule up for the necessary 2 days of lead time.

Day: 1 2 3 4 5 6 7 8 9 10A Required 50

Order Placement 50B Required 20 200

Order Placement 20 200

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A (1)

SparesLT = 2

4x50=200

18-29

Total Unit DemandDay 10 50 ADay 8 20 B (Spares)Day 6 15 D (Spares)

18-30

Day: 1 2 3 4 5 6 7 8 9 10A Required 50

LT=1 Order Placement 50B Required 20 200

LT=2 Order Placement 20 200C Required 100

LT=1 Order Placement 100D Required 55 400 300

LT=3 Order Placement 55 400 300E Required 20 200

LT=4 Order Placement 20 200F Required 200

LT=1 Order Placement 200

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

40 + 15 spares

Part D: Day 6

Finally, repeating the process for all components, we have the final materials requirements plan:

Finally, repeating the process for all components, we have the final materials requirements plan:

Lead TimesA 1 dayB 2 daysC 1 dayD 3 daysE 4 daysF 1 day

Total Unit DemandDay 10 50 ADay 8 20 B (Spares)Day 6 15 D (Spares)

Material Requirements Planning System

• Based on a master production schedule, a material requirements planning system:– Creates schedules identifying the

specific parts and materials required to produce end items

– Determines exact unit numbers needed

– Determines the dates when orders for those materials should be released, based on lead times

18-31

MRP Reports

• Planned orders to be released at a future time

• Order release notices to execute the planned orders

• Changes in due dates of open orders due to rescheduling

• Cancellations or suspensions of open orders due to cancellation or suspension of orders on the master production schedule

• Inventory status data

18-32

Types of Time Fences

• Frozen– No schedule changes allowed within

this window• Moderately Firm

– Specific changes allowed within product groups as long as parts are available

• Flexible– Significant variation allowed as long as

overall capacity requirements remain at the same levels

18-33

Example of Time Fences

8 15 26

Weeks

FrozenModeratelyFirm Flexible

Firm Customer Orders

Forecast and availablecapacity

Capacity

18-34