Supply Chain Management (SCM)-SEM IV-GTU
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Keyur D Vasava MBA+Pharmacy Dist :- Narmada …………………………………………………………………………………………………………………………………. “Destiny is not a matter of chance, it is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”
Transcript of Supply Chain Management (SCM)-SEM IV-GTU
Keyur D Vasava
MBA+Pharmacy
Dist :- Narmada
………………………………………………………………………………………………………………………………….
“Destiny is not a matter of chance, it is a matter of choice. It is
not a thing to be waited for, it is a thing to be achieved.”
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(SCM)-SEM-II (GTU)
Supply Chain Management
Module I…!!!
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INTRODUCTION AND STRATEGIC VIEW:
1) MEANING,
SUPPLY CHAIN MANAGEMENT (SCM) is the control of the supply chain as a
process from supplier to manufacturer to wholesaler to retailer to consumer.
Supply chain management does not involve only the movement of a physical
product (such as a microchip) through the chain but also any data that goes
along with the product (such as order status information, payment schedules,
and ownership titles) and the actual entities that handle the product from
stage to stage of the supply chain.
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THERE ARE ESSENTIALLY THREE GOALS OF SCM:
to reduce inventory,
to increase the speed of transactions with real-time data exchange,
to increase revenue by satisfying customer demands more efficiently.
WHY IS SUPPLY CHAIN MANAGEMENT SO IMPORTANT?
– To gain efficiencies from procurement, distribution and logistics
– To make outsourcing more efficient
– To reduce transportation costs of inventories
– To meet competitive pressures from shorter development times, more
new products, and demand for more customization
• WHY IS SUPPLY CHAIN MANAGEMENT DIFFICULT?
– Different organizations in the supply chain may have different,
conflicting objectives
• Manufacturers: long run production, high quality, high
productivity, low production cost
• Distributors: low inventory, reduced transportation costs, quick
replenishment capability
• Customers: shorter order lead time, high in-stock inventory,
large variety of products, low prices
– Supply chains are dynamic - they evolve and change over time
• KEY ISSUES IN SUPPLY CHAIN MANAGEMENT INCLUDE
– DISTRIBUTION NETWORK CONFIGURATION
• How many warehouses do we need?
• Where should these warehouses be located?
• What should the production levels be at each of our plants?
• What should the transportation flows be between plants and
warehouses?
– INVENTORY CONTROL
• Why are we holding inventory? Uncertainty in customer demand?
Uncertainty in the supply process? Some other reason?
• If the problem is uncertainty, how can we reduce it?
• How good is our forecasting method?
– DISTRIBUTION STRATEGIES
• Direct shipping to customers?
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• Classical distribution in which inventory is held in warehouses and
then shipped as needed?
• Cross-docking in which transshipment points are used to take
stock from suppliers’ deliveries and immediately distribute to point
of usage?
– SUPPLY CHAIN INTEGRATION AND STRATEGIC PARTNERING
• Should information be shared with supply chain partners?
• What information should be shared?
• With what partners should information be shared?
• What are the benefits to be gained?
– PRODUCT DESIGN
• Should products be redesigned to reduce logistics costs?
• Should products be redesigned to reduce lead times?
• Would delayed differentiation be helpful?
– INFORMATION TECHNOLOGY AND DECISION-SUPPORT SYSTEMS
• What data should be shared (transferred)
• How should the data be analyzed and used?
• What infrastructure is needed between supply chain members?
• Should e-commerce play a role?
– CUSTOMER VALUE
• How is customer value created by the supply chain?
• What determines customer value? How do we measure it?
• How is information technology used to enhance customer value in
the supply chain?
– CREATING AN EFFECTIVE SUPPLY CHAIN
• Develop strategic objectives and tactics
• Integrate and coordinate activities in the internal portion of the supply
chain
• Coordinate activities with suppliers and customers
• Coordinate planning and execution across the supply chain
• Consider forming strategic partnerships
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A SUPPLY CHAIN IS THE STREAM OF PROCESSES OF moving goods from the customer
order through the raw materials stage, supply, production, and distribution of
products to the customer. All organizations have supply chains of varying degrees,
depending upon the size of the organization and the type of product manufactured.
These networks obtain supplies and components, change these materials into finished
products and then distribute them to the customer.
Managing the chain of events in this process is what is known as supply chain
management. Effective management must take into account coordinating all the
different pieces of this chain as quickly as possible without losing any of the quality
or customer satisfaction, while still keeping costs down.
The first step is obtaining a customer order, followed by production, storage and
distribution of products and supplies to the customer site. Customer satisfaction is
paramount. Included in this supply chain process are customer orders, order
processing, inventory, scheduling, transportation, storage, and customer service. A
necessity in coordinating all these activities is the information service network.
In addition, key to the success of a supply chain is the speed in which these
activities can be accomplished and the realization that customer needs and customer
satisfaction are the very reasons for the network. Reduced inventories, lower
operating costs, product availability and customer satisfaction are all benefits which
grow out of effective supply chain management.
The decisions associated with supply chain management cover both the long-term and
short-term. Strategic decisions deal with corporate policies, and look at overall
design and supply chain structure. Operational decisions are those dealing with every
day activities and problems of an organization. These decisions must take into account
the strategic decisions already in place. Therefore, an organization must structure
the supply chain through long-term analysis and at the same time focus on the day-
to-day activities.
Furthermore, market demands, customer service, transport considerations, and pricing
constraints all must be understood in order to structure the supply chain effectively.
These are all factors, which change constantly and sometimes unexpectedly, and an
organization must realize this fact and be prepared to structure the supply chain
accordingly.
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Structuring the supply chain requires an understanding of the demand patterns,
service level requirements, distance considerations, cost elements and other related
factors. It is easy to see that these factors are highly variable in nature and this
variability needs to be considered during the supply chain analysis process. Moreover,
the interplay of these complex considerations could have a significant bearing on the
outcome of the supply chain analysis process.
THERE ARE SIX KEY ELEMENTS TO A SUPPLY CHAIN:
Production
Supply
Inventory
Location
Transportation, and
Information
THE FOLLOWING DESCRIBES EACH OF THE ELEMENTS:
1. PRODUCTION
Strategic decisions regarding production focus on what customers want and the
market demands. This first stage in developing supply chain agility takes into
consideration what and how many products to produce, and what, if any, parts or
components should be produced at which plants or outsourced to capable suppliers.
These strategic decisions regarding production must also focus on capacity, quality
and volume of goods, keeping in mind that customer demand and satisfaction must be
met.
Operational decisions, on the other hand, focus on scheduling workloads, maintenance
of equipment and meeting immediate client/market demands. Quality control and
workload balancing are issues which need to be considered when making these
decisions.
2. SUPPLY
Next, an organization must determine what their facility or facilities are able to
produce, both economically and efficiently, while keeping the quality high. But most
companies cannot provide excellent performance with the manufacture of all
components. Outsourcing is an excellent alternative to be considered for those
products and components that cannot be produced effectively by an organization’s
facilities.
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Companies must carefully select suppliers for raw materials. When choosing a
supplier, focus should be on developing velocity, quality and flexibility while at the
same time reducing costs or maintaining low cost levels. In short, strategic decisions
should be made to determine the core capabilities of a facility and outsourcing
partnerships should grow from these decisions.
3. INVENTORY
Further strategic decisions focus on inventory and how much product should be in-
house. A delicate balance exists between too much inventory, which can cost
anywhere between 20 and 40 percent of their value, and not enough inventory to
meet market demands.
This is a critical issue in effective supply chain management. Operational inventory
decisions revolved around optimal levels of stock at each location to ensure customer
satisfaction as the market demands fluctuate. Control policies must be looked at to
determine correct levels of supplies at order and reorder points. These levels are
critical to the day to day operation of organizations and to keep customer
satisfaction levels high.
4. LOCATION
Location decisions depend on market demands and determination of customer
satisfaction. Strategic decisions must focus on the placement of production plants,
distribution and stocking facilities, and placing them in prime locations to the market
served. Once customer markets are determined, long-term commitment must be made
to locate production and stocking facilities as close to the consumer as is practical.
In industries where components are lightweight and market driven, facilities should be
located close to the end-user.
In heavier industries, careful consideration must be made to determine where plants
should be located so as to be close to the raw material source. Decisions concerning
location should also take into consideration tax and tariff issues, especially in inter-
state and worldwide distribution.
5. TRANSPORTATION
Strategic transportation decisions are closely related to inventory decisions as well as
meeting customer demands. Using air transport obviously gets the product out quicker
and to the customer expediently, but the costs are high as opposed to shipping by
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boat or rail. Yet using sea or rail often times means having higher levels of inventory
in-house to meet quick demands by the customer.
It is wise to keep in mind that since 30% of the cost of a product is encompassed by
transportation, using the correct transport mode is a critical strategic decision.
Above all, customer service levels must be met, and this often times determines the
mode of transport used. Often times this may be an operational decision, but
strategically, an organization must have transport modes in place to ensure a smooth
distribution of goods.
6. INFORMATION
Effective supply chain management requires obtaining information from the point of
end-use, and linking information resources throughout the chain for speed of
exchange. Overwhelming paper flow and disparate computer systems are unacceptable
in today's competitive world. Fostering innovation requires good organization of
information. Linking computers through networks and the internet, and streamlining
the information flow, consolidates knowledge and facilitates velocity of products.
Account management software, product configurators, enterprise resource planning
systems, and global communications are key components of effective supply chain
management strategy.
THE ISSUES
The supply chain has also been called the value chain and the service chain, depending
on the "fad of the moment", or sometimes, we think, the weather, or sun spot
activity.
Just like anything else, supply chain management is no panacea, nor should it be
embraced as a religion. It is an operational strategy that, if implemented properly,
will provide a new dimension to competing: quickly introducing new customer zed high
quality products and delivering them with unprecedented lead times, swift decisions,
and manufacturing products with high velocity.
Software companies have jumped on the bandwagon and attempted to claim SCM as
their own. However, as with ERP investments, the reality doesn't match the
hype. The true restructure of the supply chain starts with the physical elements,
not the virtual. Information transfer is critical to swiftly moving parts through the
chain of processes, but information is only one of six key elements.
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2) ROLE OF SUPPLY CHAIN MANAGEMENT,
WHAT IS THE IMPORTANCE OF SUPPLY CHAIN MANAGEMENT?
Supply chain management (SCM) is a business practice that aims to improve the way a
business sources its raw materials, and delivers it to end users. For any product or
service offered by any business, there are usually a number of different business
entities involved in the various stages of the supply chain, including manufacturers,
wholesalers, distributors and retailers; the last group in a supply chain is consumers.
SCM is important for modern businesses because it coordinates and synchronizes
activities of partner businesses, giving higher efficiency. The principles of supply
chain management are derived from five basic components.
PLAN
Planning is the first and most important strategic function in SCM. The
planning process lays down the strategy for managing and handling all resources
that are used in providing the service or product that the company is involved
in. Planning involves developing a set of metrics that enables the company to
maximize efficiency by monitoring the flow of materials through the supply
chain. Timely and effective planning makes a company's supply chain more
responsive and prepared for contingencies. SCM managers who plan are able to
keep costs low, and deliver high quality and high value to customers in time.
SOURCE
Sourcing is the next component that managers consider in SCM. Sourcing
involves studying supplier competencies and selecting one, based on one or more
criteria. When a supplier is chosen, they must be prepared to deliver goods
and services that the businesses need to create their products. Managers in
SCM develop policies for pricing, delivery and payment with each supplier, and
monitor and improve relationships by using metrics. The SCM managers
supervise inventory and execute tasks such as collecting and verifying
shipments, sending them to manufacturing plants and authorizing payments.
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MANUFACTURE
The next component involves the actual manufacturing process. SCM managers
schedule activities for manufacturing, quality testing, packaging and shipping by
coordinating the actions of each and every entity involved in the various
related processes. In SCM, manufacturing makes the most use of the metric
system, enabling managers to measure quality, output of production and
productivity of workers. These are important parameters that can be
evaluated, and remedied (if performance is sub-par) to enhance efficiency.
DELIVER
After the manufacturing process comes delivery. SCM managers in the delivery
process must synchronize activities of partner businesses involved in the
transportation of goods. Sometimes referred to as logistics, delivery is an
involved stage requiring large amounts of data from customer orders,
warehouses and carriers. For most efficient operation, managers make use of
an integrated system, developing a network of warehouses and carrier
companies. For the product to reach their customers in time, their carriage
must be seamless and without incident, each and every time. The delivery
process also involves preparation of an invoicing system for payment receipts.
RETURN
Often the trickiest component in SCM is establishing an efficient system for
returns of defective goods. Setting up a responsive and flexible network is a
very important aspect of SCM because excess and defective goods should
ideally be received by the company as quickly as possible. Defects and
excesses are causes for concern for a business's consumers and clients, and as
such, accepting goods back ensures future business relationships. Companies
that are unable to establish fluent transport of goods back to the warehouse
may lose customers and future business opportunities.
3) SUPPLY CHAIN STRATEGY AND PERFORMANCE MEASURES,
SUPPLY CHAIN STRATEGIES
PUSH-BASED SUPPLY CHAIN
PULL-BASED SUPPLY CHAIN
PUSH-PULL SUPPLY CHAIN
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MEASURING SUPPLY CHAIN PERFORMANCE
KEY PERFORMANCE INDICATORS
inventory turnover
cost of annual sales per inventory unit
inventory days of supply
total value of all items being held in inventory
fill rate
fraction of orders filled by a distribution center within a specific
time period
OTHER MEASURES OF SUPPLY CHAIN PERFORMANCE
Process Control
used to monitor and control any process in supply chain
Supply Chain Operations Reference (SCOR)
establish targets to achieve “best in class” performance
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MEASURING SUPPLY CHAIN PERFORMANCE
TRADITIONAL MEASURES INCLUDE;
Return on investment
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Profitability
Market share
Revenue growth
ADDITIONAL MEASURES
Customer service levels
Inventory turns
Weeks of supply
Inventory obsolescence
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FINANCIAL MEASURES OF SUPPLY CHAIN PERFORMANCE
Financial Measures
Market share
Stock
Valuation
Profits
ROI
Inventory Turns
Financial measures are lagging metrics, a result of past decisions
Operational, non-financial measures are excellent indicators of process health
OPERATIONAL,NON-FINANCIAL MEASURES
Cycle time
Customer service level
order fill rate
stock out rate
backorder level
probability of on time delivery
Inventory levels
Resource utilization
Capacity/Throughput
Quality
Reliability
Dependability/Perform ability
Flexibility
volume
product mix
routing
delivery time
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LEAD TIME REDUCTION
Cycle time is an all-encompassing measure
Provides competitive edge
Leads to increased customer satisfaction
Leads to reduced inventory, reduced obsolescence and increased quality
COMPONENTS OF SUPPLY CHAIN LEAD TIME
Procurement lead time
Manufacturing lead time
Distribution lead time
Logistics lead time
Setup times
Waiting times
Decision-making times
Synchronization times
4) SUPPLY CHAIN DRIVERS AND METRICS,
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1. INVENTORY
Convenience: Cycle inventory
o No customer buys eggs one by one
Unstable demand: Seasonal inventory
o Bathing suits
o Xmas toys and computer sales
Randomness: Safety inventory
o 20% more syllabi than the class size were available in the first class
o Compaq’s loss in 95
Pipeline inventory
o Work in process or transit
2. TRANSPORTATION
Air
Truck
Rail
Ship
Pipeline
Electronic
3. FACILITIES
Production
o Flexible vs. Dedicated
o Flexibility costs
Production: Remember BMW: “a sports car disguised as a sedan”
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Service: Can your instructor teach music as well as SCM?
Sports: A playmaker who shoots well is rare.
o Inventory-like operations: Receiving, Prepackaging, Storing, Picking,
Packaging, Sorting, Accumulating, Shipping
o Job Lot Storage: Need more space. Reticle storage in fabs.
o Cross docking: Wal-Mart
4. INFORMATION
Role in the supply chain
o The connection between the various stages in the supply chain
o Crucial to daily operation of each stage in a supply chain
E.g., production scheduling, inventory levels
Role in the competitive strategy
o Allows supply chain to become more efficient and more responsive at the
same time (reduces the need for a trade-off)
o Information technology
Andersen Windows
Wood window manufacturer, whose customers can choose
from a library of 50,000 designs or create their own.
Customer orders automatically sent to the factory.
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QUALITY OF INFORMATION
Information drives the decisions:
o Good information means good decisions
IT helps: MRP, ERP, SAP, EDI
Relevant information?
How to use information?
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5. SOURCING
Role in the supply chain
o Set of processes required to purchase goods and services in a supply
chain
o Supplier selection, single vs. multiple suppliers, contract negotiation
Role in the competitive strategy
o Sourcing is crucial. It affects efficiency and responsiveness in a supply
chain
o In-house vs. outsource decisions- improving efficiency and
responsiveness
TI: More than half of the revenue spent for sourcing.
Cisco sources: Low-end products (e.g. home routers) from China.
Components of sourcing decisions
o In-house versus outsource decisions
o Supplier evaluation and selection
o Procurement process:
Every department of a firm buy from suppliers independently, or
all together.
EDS to reduce the number of officers with purchasing
authorization.
6. PRICING
Role in the supply chain
o Pricing determines the amount to charge customers in a supply chain
o Pricing strategies can be used to match demand and supply
Price elasticity: Do you know yours?
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Role in the competitive strategy
o Use pricing strategies to improve efficiency and responsiveness
o Low price and low product availability; vary prices by response times
Amazon: Faster delivery is more expensive
Components of pricing decisions
o Pricing and economies of scale
o Everyday low pricing versus high-low pricing
o Fixed price versus menu pricing, depending on the product and services
Packaging, delivery location, time, customer pick up
Bundling products; products and services
OR
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WHY SUPPLY CHAIN METRICS?
Several factors are contributing to management’s need for new types of measures for
managing the supply chain including:
• The lack of measures that capture performance across the entire supply chain.
• The requirement to go beyond internal metrics and take a supply chain perspective.
• The need to determine the interrelationship between corporate and supply chain
performance.
• The complexity of supply chain management.
• The requirement to align activities and share joint performance measurement
information to implement strategy that achieves supply chain objectives.
• The desire to expand the “line of sight” within the supply chain.
• The requirement to allocate benefits and burdens resulting from functional shifts
within the supply chain.
• The need to differentiate the supply chain to obtain a competitive advantage.
• The goal of encouraging cooperative behavior across corporate functions and across
firms in the supply chain.
METRICS THE SITE DESCRIBES:
Fill Rate Measure
On Time Shipping/Delivery
Performance to Promise
Backorder Reporting
Cycle Time
Perfect Order Measure
Inventory Turns
Inventory Accuracy
Transportation
Balanced Scorecard
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RELATIONSHIP BETWEEN SUPPLY CHAIN METRICS AND STRATEGY
Implementing a supply chain strategy requires metrics that align performance with the
objectives of other members of the supply chain. Managers can no longer focus on
optimizing their own firm’s operations. Instead, they need to work collaboratively to
generate the greatest mutual gains and savings. Aligned metrics can assist in shifting
managers’ focus to attaining the operational goals of the enterprise-wide supply chain
. The alignment of metrics enables managers to identify and institutionalize the
organizational, operational, and behavioral changes needed to manage the key business
processes spanning their network. Aligned metrics can direct management attention
and effort to the areas requiring improvement leading to higher levels of performance
for the supply chain. By establishing metrics throughout the supply chain, managers
will be more likely to reach overall corporate goals and business strategies.
Integrating the key business processes across the supply chain is difficult because of
the many constituencies, each with their own metrics and individual objectives. Their
objectives may have little in common resulting in potential conflict and inefficiencies
for the supply chain. Conflicting objectives preclude managers from effectively
managing trade-offs across functions as well as across companies.
Supply chain metrics are needed to sustain competitiveness and to differentiate
product and service offerings. The commoditization of products and the number of
competitive product offerings are forcing management to differentiate the firm’s
offerings through increased performance. As a result, managers must examine the
supply chain to determine additional revenue opportunities and where they can obtain
the greatest leverage to differentiate the brand and/or to eliminate costs.
Integrated metrics allow management to assess the overall competitiveness of the
supply chain and to determine which internal improvement efforts produce the
greatest impact on overall competitiveness.
Supply chain metrics are also necessary to encourage the desired changes in behavior.
Rewards and incentives are usually based on performance measurements that are
focused internally rather than on the consumer or the supply chain. The metrics used
influence the behavior of individuals and determine supply chain performance. The
metrics provide the means for management to determine whether the performance of
the firm’s supply chain members has improved or degraded and what factors
have contributed to the situation. Behavior of managers in individual firms can be
modified and controlled through measurements such as increases in value or
competitiveness, or through the use of rewards and sanctions
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FRAMEWORK FOR DEVELOPING SUPPLY CHAIN METRICS
The framework consists of seven steps:
Map the supply chain from point-of-origin to point-of-consumption to identify
where key linkages exist.
Use the customer relationship management and supplier relationship
management processes to analyze each link (customer supplier pair) and
determine where additional value can be created for the supply chain.
Develop customer and supplier profit and loss (P&L) statements to assess the
effect of the relationship on profitability and shareholder value of the two
firms.
Realign supply chain processes and activities to achieve performance objectives.
Establish non-financial performance measures that align individual behavior with
supply chain process objectives and financial goals.
Compare shareholder value and market capitalization across firms with supply
chain objectives and revise process and performance measures as necessary.
Replicate steps at each link in the supply
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CRITICAL FACTORS IN SC PERFORMANCE METRICS
Establish performance objectives with customers in mind
Consider using order windows as the basis for order fulfillment metrics
Reflect reliability issues in the metrics they choose
Implement metrics consistently throughout the supply chain
Aggregate results as they move up the chain
Apply process control techniques to the business process
Avoid pitting players in the systems against one another
Collect only data you really intend to use
Communicate the actions and rational to everyone
HOW CAN YOU USE SUPPLY CHAIN METRICS TO IMPROVE YOUR LOGISTICS OPERATION?
Try following these basic steps....
1. The first step is to identify the metrics that you want to use. Do not use every
metric available. Rather, focus on the vital measurements the mean the most to your
business. These can be considered your KPI's (key performance indicators).
2. Next, you need to understand the meaning of these metrics. It is not enough for
management to simply view these measurements; they must also understand the
meaning behind them.
3. The next step is to learn the mechanics behind the measurements. What drives
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them...positive & negative? Try to understand the various factors that influence your
results.
4. using this information, identify any weak areas or areas of improvement in your
current processes.
5. Set goals based on these improvement areas. The goals should be aggressive, but
yet obtainable. Goals can be based on benchmarking against "like" companies or goals
can be set to reflect a specific percentage improvement over past performance.
6. Put corrective action in place to improve your processes. Make sure that these
corrective actions do not negatively affect other areas. Also, check that all affected
areas have a clear understanding of the changes.
7. Monitor your results.
METRICS
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5) OUTSOURCING –MAKE OR BUY
The act of choosing between manufacturing a product in-house or purchasing it from
an external supplier. In a make-or-buy decision, the two most important factors to
consider are cost and availability of production capacity.
An enterprise may decide to purchase the product rather than producing it, if is
cheaper to buy than make or if it does not have sufficient production capacity to
produce it in-house. With the phenomenal surge in global outsourcing over the past
decades, the make-or-buy decision is one that managers have to grapple with very
frequently.
Factors that may influence a firm's decision to buy a part rather than produce it
internally include lack of in-house expertise, small volume requirements, desire for
multiple sourcing, and the fact that the item may not be critical to its strategy.
Similarly, factors that may tilt a firm towards making an item in-house include
existing idle production capacity, better quality control or proprietary technology that
needs to be protected.
OUTSOURCING
Outsourcing decision is basically a financial one. The way in which the software and
systems that we need at lower price is outsourcing. It is a simple concept. All the
engineering activities are handed over to the third party who is responsible to
complete the work at low cost and most probably good quality.
At strategic level, decision of outsourcing is based on the fact whether a significant
portion of all software work can be contracted to others. At tactical level, decision
of outsourcing is based on the fact whether a part or all of a project can be
accomplished by sub-contracting the software work.
ADVANTAGE OF OUTSOURCING:
Cost savings are achieved by reducing number of people and facilities that support
them.
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DISADVANTAGE OF OUTSOURCING:
The company loses some control over the software that it needs.
Outsourcing is closely related to make or buy decision. The corporations made
decisions on what to make internally and what to buy from outside in order to
maximize the profit margins.
As a result of this, the organizational functions were divided into segments and some
of those functions were outsourced to expert companies who can do the same job for
much less cost.
Make or buy decision is always a valid concept in business. No organization should
attempt to make something by their own, when they stand the opportunity to buy the
same for much less price.
“MAKE-OR-BUY” DECISIONS
• Deciding whether to produce a product component “in-house”, or
purchase/procure it from an outside source.
• Issues to be considered while making this decision:
– Quality of the externally procured part
– Reliability of the supplier in terms of both item quality and delivery
times
– Criticality of the considered component for the performance/quality of
the entire product
– Potential for development of new core competencies of strategic
significance to the company
– Existing patents on this item
– Costs of deploying and operating the necessary infrastructure
REASONS FOR MAKING
There are number of reasons a company would consider when it comes to making in-
house. Following are a few.
1. Cost concerns
2. Desire to expand the manufacturing focus
3. Need of direct control over the product
4. Intellectual property concerns
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5. Quality control concerns
6. Supplier unreliability
7. Lack of competent suppliers
8. Volume too small to get a supplier attracted
9. Reduction of logistic costs (shipping etc.)
10. To maintain a backup source
11. Political and environment reasons
12. Organizational pride
REASONS FOR BUYING:
Following are some of the reasons companies may consider when it comes to buying
from a supplier.
1. Lack of technical experience
2. Supplier's expertise on the technical areas and the domain
3. Cost considerations
4. Need of small volume
5. Insufficient capacity to produce in house
6. Brand preferences
7. Strategic partnerships
THE PROCESS:
The make or buy decision can be in many scales.
If the decision is small in nature and has less impact on the business, then even one
person can make the decision. The person can consider the pros and cons between
making and buying and finally arrive at a decision.
When it comes to larger and high impact decisions, usually organizations follow a
standard method to arrive at a decision.
This method can be divided into four main stages as below.
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1. PREPARATION:
1. Team creation and appointment of the team leader
2. Identifying the product requirements and analysis
3. Team briefing and aspect/area destitution
2. DATA COLLECTION
1. Collecting information on various aspects of make-or-buy decision
2. Workshops on weightings, ratings, and cost for both make-or-buy
3. DATA ANALYSIS
1. Analysis of data gathered
4. FEEDBACK
1. Feedback on the decision made
By following the above structured process, the organization can make an informed
decision on make-or-buy. Although this is a standard process for making the make-
or-buy decision, the organizations can have their own varieties.
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OR
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Module II…!!!
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MANAGING MATERIAL FLOW:
1) INVENTORY MANAGEMENT,
INVENTORY-A physical resource that a firm holds in stock with the intent of
selling it or transforming it into a more valuable state.
INVENTORY SYSTEM- A set of policies and controls that monitors levels of
inventory and determines what levels should be maintained, when stock should
be replenished, and how large orders should be
DEF. - A physical resource that a firm holds in stock with the intent of selling
it or transforming it into a more valuable state.
Raw Materials
Works-in-Process
Finished Goods
Maintenance, Repair and Operating (MRO)
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REASONS FOR INVENTORIES
Improve customer service
Economies of purchasing
Economies of production
Transportation savings
Hedge against future
Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.)
To maintain independence of supply chain
NATURE OF INVENTORY: ADDING VALUE THROUGH INVENTORY
QUALITY - inventory can be a “buffer” against poor quality; conversely, low
inventory levels may force high quality
SPEED - location of inventory has gigantic effect on speed
FLEXIBILITY - location, level of anticipatory inventory both have effects
COST - DIRECT: purchasing, delivery, manufacturing
indirect: holding, stockout.
HR systems may promote this-3 year postings
NATURE OF INVENTORY:
FUNCTIONAL ROLES OF INVENTORY
Transit
Buffer
Seasonal
Decoupling
Speculative
Lot Sizing or Cycle
Mistakes
WHAT IS INVENTORY?
Stock of items kept to meet future demand
Purpose of inventory management
how many units to order
when to order
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TYPES OF INVENTORY
Raw materials
Purchased parts and supplies
Work-in-process (partially completed) products (WIP)
Items being transported
Tools and equipment
INVENTORY AND SUPPLY CHAIN MANAGEMENT
BULLWHIP EFFECT
demand information is distorted as it moves away from the end-use
customer
higher safety stock inventories to are stored to compensate
Seasonal or cyclical demand
Inventory provides independence from vendors
Take advantage of price discounts
Inventory provides independence between stages and avoids work stop-pages
TWO FORMS OF DEMAND
DEPENDENT
Demand for items used to produce final products
Tires stored at a Goodyear plant are an example of a dependent demand
item
INDEPENDENT
Demand for items used by external customers
Cars, appliances, computers, and houses are examples of independent
demand inventory
INVENTORY AND QUALITY MANAGEMENT
Customers usually perceive quality service as availability of goods they want
when they want them
Inventory must be sufficient to provide high-quality customer service in TQM
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INVENTORY COSTS
CARRYING COST
cost of holding an item in inventory
ORDERING COST
cost of replenishing inventory
SHORTAGE COST
temporary or permanent loss of sales when demand cannot be met
INVENTORY CONTROL SYSTEMS
Continuous system (fixed-order-quantity)
constant amount ordered when inventory declines to predetermined level
Periodic system (fixed-time-period)
order placed for variable amount after fixed passage of time
OBJECTIVES OF INVENTORY CONTROL
1) Maximize the level of customer service by avoiding understocking.
2) Promote efficiency in production and purchasing by minimizing the cost of
providing an adequate level of customer service.
ECONOMIC ORDER QUANTITY (EOQ) MODELS
EOQ
optimal order quantity that will minimize total inventory costs
Basic EOQ model
Production quantity model
ASSUMPTIONS OF BASIC EOQ MODEL
Demand is known with certainty and is constant over time
No shortages are allowed
Lead time for the receipt of orders is constant
Order quantity is received all at once
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EOQ FORMULA
• Notation
D = demand in units per year
H = holding cost in dollars/unit/year
S = cost of placing an order in dollars
Q = order quantity in units
Total Annual Cost for Purchase Lots
EOQ-
)2/()/( QHQDSTCp
H
DSEOQ
2
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THE TECHNIQUES USED IN STORE INVENTORY CONTROL.
Store / Inventory control technique is the important tool in the hands of the modern
management. It is indispensable for each and every manufacturing concern. The
following are the important techniques of store control.
FIXATION OF VARIOUS STOCK LEVEL: Under this method various stock levels are fixed
scientifically to avoid over stocking and under stocking of materials. Over stocking of
materials leads to unnecessary blockage of materials and investment and under
stocking of material leads to disputation in production. These are the following stock
levels which help for planning of materials.
ECONOMIC ORDERING QUANTITY: Economic ordering quantity is that quantity of
material which are to be ordered in one time in order to minimize ordering cost,
carrying cost as well as cost of holding stock.
PERPETUAL INVENTORY SYSTEM: Perpetual inventory system is defined as "a system of
records maintained by the controlling department which reflects the physical
movement of stocks and their current balances."
Bin card and store ledger constitute the bedrock of perpetual inventory system. It is
a method of recording store after every receipt & every issue and their current
balances to avoid closing down the firm for stock taking. To ensure accuracy the
physical verification may be made which must have to agree with the balance of Bin
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Card & store ledger. If there is any discrepancy between the two, it may be
adjusted by preparing debit note and credit note.
A.B.C. ANALYSIS: A. B. C. analysis is always a better control system. Under this
method inventory items are classified in to three categories such as A. B. C. basing
upon its value and cost significance. The number of items and the value of each class
is expressed as percentage of the total and categorize as under.
Items of high value and small in numbers termed as 'A'
Items of moderate value and moderate in number is termed as 'B'
Items of small in value and large in number is termed as 'C'
V.E.D. ANALYSIS: This method is used for control of spare parts. VED is the symbol
of
1. Vital spare parts: Are those spares whose cost of stock out is very high.
2. Essential spare parts: Are those spares which are essential for the production
to continue.
3. Desirable spare parts: Are those spares which are needed but their absence
even a week or more will not lead to stoppage of production.
INVENTORY TURNOVER RATIO: Inventory turnover ratio is one of the methods of store
control. It indicates how quickly the stocks are converted in to sale. Low inventory
turnover ratio indicates the inefficient management in inventory & high inventory
turnover ratio is always implies favorable situation.
2) PRODUCTION PLANNING AND SCHEDULING,
PRODUCTION PLANNING - It is a production process of looking ahead , anticipating
possible difficulties and deciding in advance as how to produce the products.
AIM
PRODUCTION PLANNING MAINLY AIMS TO PRODUCE….
Right product -> in right quantity -> of right quality -> in right time -> and by the
best and least costly method.
STEPS OF PRODUCTION PLANNING..
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1.ROUTING
It is a process of deciding the Sequence of operations (or ROUTE ) to be performed
during the production process.
It determines..,
What???
When???
How???
PROCEDURE OF ROUTING
Conduct an analysis of the product to determine Part/Components/Sub-
assemblies required .,
Determine the quality & type of material.
Determining the manufacturing operations & their sequence .
Determine the Lot size to be produced.
Determination of scrap and rejections at each stage of production.
Estimate Total cost of production.
2.SCHEDULING Is planning the Total time necessary to perform entire series of
operations in a particular sequence .
It is mainly concerned with element of time & priorities of a job.
Establishment of timetable at which to begin and complete operation.
OBJECTIVE :
Items are delivered on due date.
The production cost is minimum. M.imp
TYPES OF SCHEDULING
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1. OPERATIONAL
2. MASTER
1.OPERATIONAL SCHEDULING
Determines the total time to do a work (Operation) with a given machine or process,
details of types of materials, and labour etc.
2. MASTER SCHEDULING
It is a list showing how many of each item to make in each period of time in future.
The nature of master schedule depends on whether the manufacture is to order to
stock.
TOOLS OF SCHEDULING
GANTT CHARTS
Network analysis/ technique (CPM & PERT)
WORK BREAKDOWN STRUCTURE
MOTION STUDY (METHOD STUDY)
TIME STUDY (WORK MEASUREMENT)
JUST IN TIME (JIT)
3. LOADING
STUDY OF THE RELATIONSHIP BETWEEN .., LOAD AND CAPACITY OBJECTIVE :
LOAD - Assignment of work to be done in due date
CAPACITY OBJECTIVE- Ability to perform work
OBJECTIVE
It is used to ensure
-Efficient utilization of plant and labor
-Setting reliable delivery promises In due date
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TYPES OF PRODUCTION-PLANNING AND CONTROL SYSTEMS
Pond-Draining Systems
Push Systems
Pull Systems
Focusing on Bottlenecks
POND-DRAINING SYSTEMS
Emphasis on holding inventories (reservoirs) of materials to support production
Little information passes through the system
As the level of inventory is drawn down, orders are placed with the supplying
operation to replenish inventory
May lead to excessive inventories and is rather inflexible in its ability to
respond to customer needs
PUSH SYSTEMS
Use information about customers, suppliers, and production to manage material
flows
Flows of materials are planned and controlled by a series of production
schedules that state when batches of each particular item should come out of
each stage of production
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Can result in great reductions of raw-materials inventories and in greater
worker and process utilization than pond-draining systems
PULL SYSTEMS
Look only at the next stage of production and determine what is needed there,
and produce only that
Raw materials and parts are pulled from the back of the system toward the
front where they become finished goods
Raw-material and in-process inventories approach zero
Successful implementation requires much preparation
FOCUSING ON BOTTLENECKS
Bottleneck Operations
o Impede production because they have less capacity than upstream or
downstream stages
o Work arrives faster than it can be completed
o Binding capacity constraints that control the capacity of the system
Optimized Production Technology (OPT)
Synchronous Manufacturing
SCHEDULING is an important tool FOR MANUFACTURING AND ENGINEERING, where it
can have a major impact on the productivity of a process. In manufacturing, the
purpose of scheduling is to minimize the production time and costs, by telling a
production facility when to make, with which staff, and on which equipment.
Production scheduling aims to maximize the efficiency of the operation and reduce
costs.
PRODUCTION SCHEDULING TOOLS greatly outperform older manual scheduling methods.
These provide the production scheduler with powerful graphical interfaces which can
be used to visually optimize real-time workloads in various stages of production, and
pattern recognition allows the software to automatically create scheduling
opportunities which might not be apparent without this view into the data. For
example, an airline might wish to minimize the number of airport gates required for
its aircraft, in order to reduce costs, and scheduling software can allow the planners
to see how this can be done, by analyzing time tables, aircraft usage, or the flow of
passengers.
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Companies use backward and forward scheduling to allocate plant and machinery
resources, plan human resources, plan production processes and purchase materials.
FORWARD SCHEDULING is planning the tasks from the date resources become available
to determine the shipping date or the due date.
BACKWARD SCHEDULING is planning the tasks from the due date or required-by date to
determine the start date and/or any changes in capacity required.
THE BENEFITS OF PRODUCTION SCHEDULING INCLUDE:
Process change-over reduction
Inventory reduction, leveling
Reduced scheduling effort
Increased production efficiency
Labor load leveling
Accurate delivery date quotes
Real time information
3) TRANSPORTATION,
RAIL
low-value, high-density, bulk products, raw materials, intermodal
containers
not as economical for small loads, slower, less flexible than trucking
TRUCKING
main mode of freight transport in U.S.
small loads, point-to-point service, flexible
More reliable, less damage than rails; more expensive than rails for long
distance
AIR
most expensive and fastest, mode of freight transport
lightweight, small packages <500 lbs
high-value, perishable and critical goods
less theft
PACKAGE DELIVERY
small packages
fast and reliable
increased with e-Business
primary shipping mode for Internet companies
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WATER
low-cost shipping mode
primary means of international shipping
U.S. waterways
slowest shipping mode
INTERMODAL
combines several modes of shipping-truck, water and rail
key component is containers
PIPELINE
transport oil and products in liquid form
high capital cost, economical use
long life and low operating cost
4) NETWORK DESIGN AND OPERATIONS,
NETWORK DESIGN DECISIONS
Facility role
- flexibility of Toyota since 1997
Facility location
- Amazon.com : a single warehouse in Seattle
Capacity allocation
- Allocating too much poor utilization
- - Allocating too little poor responsiveness, high cost
Market and supply allocation
- Amazon.com : built new warehouses due to grown markets
FACTORS INFLUENCING NETWORK DESIGN DECISIONS
Strategic
Technological
Macroeconomic
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Political
Infrastructure
Competitive
Logistics and facility costs
A FRAMEWORK FOR NETWORK DESIGN DECISIONS
PHASE I: STRATEGY CONSIDERATIONS
• Understand where is the main emphasis:
– Cost leadership
– Responsiveness
– Product differentiation
• Who are the key competitors at each target market?
• Identify constraints on available capital
• Key mechanisms that will support growth
– Reuse of existing facilities
– Build new facilities
– Partner with other companies (mergers and acquisitions are potential
options here)
PHASE II: REGIONAL FACILITY CONFIGURATION
IMPORTANT FACTORS:
REGIONAL DEMAND
• Forecast the demand on a region by region basis
• Need to study its
• size
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• homogeneity
• Non-homogeneous demand will require a more localized network
• Frequently the final customization of a product for a particular market is done
at a local distribution center
• Labeling
• Manuals
• etc.
PRODUCTION TECHNOLOGIES AND ECONOMIES OF SCALE AND SCOPE
• Expensive dedicated production technologies will require large production
volumes and therefore a more centralized production network (e.g., chip
production).
• Lower fixed cost facilities can be duplicated more easily (e.g., bottling
factories).
• In case of non-homogeneous demand, technological flexibility facilitates
consolidation of production to a few manufacturing facilities.
• The more cumbersome the transfer of raw material, the closer the facility
must be to the source site (e.g., factories processing minerals)
TARIFFS AND TAX INCENTIVES
• Tariffs: Any duties that must be paid when products and/or equipment are
moved across international, state or city boundaries.
• High tariffs necessitate localized production.
• Presently, there is a systematic effort to open the markets to global
competition through the World Trade Organization Policies (WTO) and regional
agreements (NAFTA, MERCOSUR for S. America, ASEAN for Pacific rim,
etc.)
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• Tax incentives: a reduction in tariffs or taxes that countries, states and cities
often provide to encourage firms to locate their facilities in specific areas.
• Free trade zones: Areas where duties and tariffs are relaxed as long as
production is used primarily for export (e.g., Taiwan and China’s GuangZhou
area) Allows companies to take better advantage of low labor costs.
• Tax incentives can be focusing on certain
– Industries
– Technologies
– Regions
• Quotas: Limits on import volumes placed by different countries in an effort to
protect their local industry. Sometimes there is also some requirement on
minimum local content.
INFRASTRUCTURE FACTORS
• Availability of skilled labor
• Availability of transportation facilities
– Ports
– Airports
– Rail
– Highways
• Availability of necessary utilities
– Power
– Water
– Sewage
– Telecommunications / IT
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POLITICAL, EXCHANGE RATE AND DEMAND RISK
• POLITICAL RISKS -- NEED FOR:
– Well-defined rules of commerce
– Independent and clear legal systems
– Political stability
• Exchange rate risks: This risk arises from the fact that companies might incur
their costs in one currency and collect their revenues in other currencies.
(e.g., Japanese production under an expensive Yen in the late 80’s / early
90’s; the role of an expensive EURO these days for the American economy)
• Potential protection to exchange rate risk: Build some flexible over-capacity to
the regional facilities so that production is shifted to the lower-cost regions.
• Demand risk: Comes from extensive demand fluctuation due to regional
economic crises (e.g., Asia markets between 1996-1998) Plant flexibility is
also a potential protection to this type of risk.
COMPETITIVE FACTORS
Positive Externalities: Instances where collocation of multiple firms benefits all
of them, since
• They share the cost of the necessary infrastructure
• And the collocation can stimulate demand for all of them
• Examples: a mall, silicon valley, industrial parks
• Locating to “split the market”: For companies that
• Do not have price control, and
• try to maximize their market share by minimizing their distance from
the customer,
PHASES III & IV: SELECTING SPECIFIC LOCATIONS
Important factors
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• Infrastructure
• Costs
– Labor
– Materials
– Facilities
– Transport
– Inventory
– Taxes and Tariffs
FACTORS INFLUENCING NETWORK DESIGN DECISIONS
Strategic – Cost vs. Responsiveness
o ex) Apparel producers, Convenience stores, Discount stores
Technological
o Economies of scale few high-capacity locations
o ex) Manufacturer of computer chips
o Lower fixed costs many local facilities
o ex) Bottling plants for Coca-Cola
Macroeconomic
o Tariffs, Tax incentives, Exchange rate and Demand risk
Political
Infrastructure
o availability of sites & labor
o proximity to transportation terminals, rail service, airports and seaports
o highway access, congestion, local utilities
Competitive – Close vs. Far
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o ex) Retail stores in a mall, Supermarkets
Logistics and facility costs
5) DISTRIBUTION NETWORKS
DISTRIBUTION REFERS to the steps taken to move and store a product from the
supplier stage to a customer stage in the supply chain. Distribution is a key driver of
the overall profitability of a firm because it directly impacts both the supply chain
cost and the customer experience. Good distribution can be used to achieve a variety
of supply chain objectives ranging from low cost to high responsiveness. As a result,
companies in the same industry often select very different distribution networks.
THE ROLE OF DISTRIBUTION IN THE SUPPLY CHAIN
DISTRIBUTION: the steps taken to move and store a product from the supplier
stage to the customer stage in a supply chain
Distribution directly affects cost and the customer experience and therefore
drives profitability
Choice of distribution network can achieve supply chain objectives from low
cost to high responsiveness
Examples: Wal-Mart, Dell, Proctor & Gamble, Grainger
Supply chain costs affected by network structure:
o Inventories
o Transportation
o Facilities and handling
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-Transit Merge
Distributor Storage with Carrier Delivery
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Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer Pickup
Retail Storage with Consumer Pickup
Selecting a Distribution Network Design
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DISTRIBUTION NETWORKS IN PRACTICE
The ownership structure of the distribution network can have as big as an
impact as the type of distribution network
The choice of a distribution network has very long-term consequences
Consider whether an exclusive distribution strategy is advantageous
Product, price, commoditization, and criticality have an impact on the type of
distribution system preferred by customers
THE VALUE OF DISTRIBUTORS IN THE SUPPLY CHAIN
Distributing Consumer Goods in India
Distributing MRO Products
Distributing Electronic Components
CHANGING THE DISTRIBUTION NETWORK DESIGN AFFECTS THE FOLLOWING SUPPLY CHAIN
COSTS:
• Inventories
• Transportation
• Facilities and handling
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• Information
FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN
• Performance of a distribution network should be evaluated along two dimensions
CUSTOMER NEEDS THAT ARE MET (CUSTOMER SERVICE)
• Response time (Time it takes for a customer to receive an order)
• Product variety (Number of different products that are offered)
• Product availability (Probability of having a product in stock)
• Customer experience (Ease of placing and receiving orders)
• Order visibility (Ability of customers to track their orders)
• Return ability (Ease of returning unsatisfactory merchandise)
COST OF MEETING CUSTOMER NEEDS (SUPPLY CHAIN COST)
• Inventory (All raw materials, WIP, and finished goods)
• Transportation (Moving inventory from point to point)
• Facility & handling (Locations where product is stored, assembled,
or fabricated)
• Information (Data and analysis of all drivers in a supply chain)
Module III…!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
MANAGING INFORMATION FLOW:
1) DEMAND FORECASTING,
DEMAND FORECASTING is the activity of estimating the quantity of a product or
service that consumers will purchase. Demand forecasting involves techniques including
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both informal methods, such as educated guesses, and quantitative methods, such as
the use of historical sales data or current data from test markets. Demand
forecasting may be used in making pricing decisions, in assessing future capacity
requirements, or in making decisions on whether to enter a new market.
METHODS
METHODS THAT RELY ON QUALITATIVE ASSESSMENT
Forecasting demand based on expert opinion. Some of the types in this method
are,
Unaided judgment
Prediction market
Delphi technique
Game theory
Judgmental bootstrapping
Simulated interaction
Intentions and expectations surveys
Conjoint analysis
jury of executive method
METHODS THAT RELY ON QUANTITATIVE DATA
Discrete Event Simulation
Extrapolation
Reference class forecasting
Quantitative analogies
Rule-based forecasting
Neural networks
Data mining
Causal models
Segmentation
SOME OF THE OTHER METHODS
A) TIME SERIES PROJECTION METHODS THIS INCLUDES:
moving average method
exponential smoothing method
trend projection methods
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B) CASUAL METHODS THIS INCLUDES:
chain-ratio method
consumption level method
end use method
FORECASTING is the process to predict how the future needs, which include the
requirement in the size of the quantity, quality, time and location that is required in
order to meet the demand for goods or services.
DEMAND FORECASTING is the demand for products that are expected to be realized
for a certain period in the future. In forecasting we must pay attention to
forecasting procedures should be implemented, namely:
1. Determining the purpose of forecasting.
2. Choose the item “independent demand” to be predicted. Plot data into scatter
diagram.
3. Selecting “forecasting method” in accordance with the pattern of data for its
intended purpose.
4. Counting errors are to be performance of each method used, can be known.
5. The selection of the best method, which has the smallest error rate.
6. Make predictions of future demand, then perform the test verifies that the
forecasting results carried out a representative to the past data
IMPORTANCE OF FORECASTS
Forecasts of future demand are essential for supply chain management decisions.
Demand forecasts are used in supply chain design, planning as well as in operations.
Demand forecasts are used in various subcomponents of supply chain.
Production: for aggregate planning, inventory control and scheduling,
Marketing: for new product introductions, promotions, and sales-force allocation
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Finance: Plant and equipment investment decisions, operating budgeting
Personnel: Workforce planning and resulting hiring and layoff.
CHARACTERISTICS OF FORECASTS
1. Forecasts may always go wrong. Therefore a rigorous presentation of forecast
should include both the expected value and a measure of forecast error.
2. Long-term forecasts are usually less accurate in comparison to short-term
forecasts.
3. Aggregate forecasts are usually more accurate in comparison to disaggregate
forecasts. For example, forecast of the food consumed by a group of students in a
college canteen can be forecasted more accurately than the food consumed by each
and every student.
FORECASTING METHODS
Forecasting methods fall into four categories
1. Qualitative: The forecasts are based on the human judgement and opinion. Market
research falls in this category.
2. Time Series: These methods use historical demand data of an item.
3. Causal: Causal forecasting uses data of multiple variables to forecast demand of
an item.
4. Simulation: Simulation methods use what if questions and come out with forecasts.
The underlying models for what if analysis are time series or causal models. Even a
hybrid model can be used for simulation.
When quantitative methods are used for forecast, the effort is to isolate systematic
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component and random component using the available data. The systematic component
gives the expected value and the variation around the expected value happens in the
future periods due to the random component.
STATIC AND ADAPTIVE METHODS OF FORECASTING
In a static method, a single forecasting model is applied to the currently available
data to derive forecasts for all the future periods for which forecasts are to be
generated. In adaptive methods, as new data arrives, the new data is incorporated
into the forecasting model to derive forecasts for future periods from then on.
BASIC APPROACH TO DEMAND FORECASTING
1. Understand the objective of forecasting: Determine the decisions which are taken
based on the forecast.
2. Integrate planning and forecasting in the entire supply chain: Different units in
the supply chain should not forecast separately. All the required forecasts have to be
generated from uniform premises and tools.
3. Identify major factors that influence the demand: This identification helps in
choosing the forecasting technique.
4. Understand and identify customer segments for which you want forecast of
demand.
5. Determine the appropriate forecasting technique
6. Establish performance and error measures for forecast.
TIME SERIES METHODS
In static methods, estimates of level, trend, and seasonal factor are derived using
the past data. These three factors give the forecast of the systematic component
for future periods.
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ADAPTIVE METHODS:
Moving average is an adaptive method. Exponential smoothing is also an adaptive
method. Holt model is trend-corrected exponential smoothing model. Winter's model
is a trend- and seasonality corrected exponential smoothing model.
MEASURES OF FORECAST ERRORS
An estimate of the forecast error is to be given along with the forecast of an
expected value. As actual values are realized, a forecast error can be calculated and
managers perform error analysis to satisfy themselves that the current forecasting
method is accurately predicting the systematic component of demand. Contingency
plans have to be put in place to account for the predicted forecast error.
SOME POPULAR MEASURES FOR FORECAST ERROR ARE:
Mean square error
Mean absolute deviation
Mean absolute percentage error
tracking signal
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FACTORS INVOLVED IN DEMAND FORECASTING
1. How far ahead?
a. Long term – e.g., petroleum, paper, shipping. Tactical decisions. Within the limits
of resources already available.
b. Short-term – e.g., clothes. Strategic decisions. Extending or reducing the limits
of resources.
2. UNDERTAKEN AT THREE LEVELS:
Macro-level
Industry level e.g., trade associations
Firm level
3. Should the forecast be general or specific (product-wise)?
4. Problems or methods of forecasting for “new” vis-à-vis “well established”
products.
5. Classification of products – producer goods, consumer durables, consumer goods,
services.
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6. Special factors peculiar to the product and the market – risk and uncertainty.
(e.g., ladies’ dresses)
SHORT TERM FORECAST
Scheduling of production to avoid problems of over production and under-
production.
Proper management of inventories
Evolving suitable price strategy to maintain consistent sales
Formulating a suitable sales strategy in accordance with the changing pattern
of demand and extent of competition among the firms.
Forecasting financial requirements for the short period.
LONG TERM FORECAST
Planning for a new project, expansion and modernization of an existing unit,
diversification and technological up gradation.
Assessing long term financial needs. It takes time to raise financial resources.
Arranging suitable manpower. It can help a firm to arrange for specialized
labour force and personnel.
Evolving a suitable strategy for changing pattern of consumption.
2) SUPPLY CHAIN DATA MANAGEMENT,
SPECIFIC RESPONSIBILITIES INCLUDE IN SUPPLY CHAIN DATA MANAGEMENT:
Develop, review, and strengthen support systems and procedures for logistics
management information systems at different levels of the supply pipeline.
Develop strategies to address critical challenges affecting quality and timely
availability of essential logistics data and improving the management,
processing, and use of key logistics data.
Mentoring key counterparts in data management.
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Developing interventions to improve logistics reporting rates and data accuracy.
Support the use of Supply Chain Manager software and National Stock Status
Database (NSSD).
Improving systems and procedures to effectively and routinely update, analyze,
and share stock status data and logistics data.
Improve availability and use of NSSD data and develop and maintain
collaborative relationships with MOH partners and stakeholders.
Support routine data sharing.
Participate in relevant meetings and technical working groups.
Development and/or completion of regular assessment, status, and
consumption/logistics reports.
MAIN ACTIVITIES
Establish Supply Chain data governance, including:
o Extract the Supply Chain data requirements from the defined Supply Chain
performance indicators
o Structure and manage the (master) data definitions for ease of use in
reporting
o Create standards and best practices for data recording in the Supply Chain,
including data classification and format taking into consideration legislation,
industry requirements etc
o Ensures that data transfer procedures / mechanisms in the new Supply Chain
processes enable data characteristics to be kept intact along the data use
o Ensure that all appropriate data back-ups creation are integrated in the
Supply Chain processes
o Liaise with relevant Supply Chain business stakeholders
• Ensure consistent data quality in the Supply Chain ERP system (SAP etc)
CHALLENGES
Typical product data management challenges are complex, diverse and pervasive,
creating a variety of supply chain headaches, including missed orders, long lead times,
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inefficient logistics and excessive inventory, which ultimately contribute to reduced
profitability. COMMON CHALLENGES INCLUDE:
NO SINGLE SOURCE OF TRUTH: The proverbial organizational silos best describes the
state of supply chain operations at many manufacturing firms. Product design,
inventory management, supply planning and enterprise resource planning each have
their own systems and processes, and there is no consistent process for managing
product and materials data across the enterprise - resulting in inconsistent bill of
materials data, product nomenclatures, attribute names, types and domain values.
Working around all of these system and data problems requires a huge amount of
manual effort.
LACK OF PRODUCT MODEL FLEXIBILITY AND TRACEABILITY: Part numbers are “intelligent”
and over engineered; in other words, every digit in the part number has a coded
meaning. For example, if any attribute for a particular part changes, but it does not
affect form, fit or function of the part, the part number may still need to be
changed if the attribute is included in the part number nomenclature. Therefore,
instead of revising the existing part, a new part is created. This cripples the ability
to track the revision history and turns data managers away from using revisions
effectively to manage parts.
MISMATCHED SUPPLY AND DEMAND: Account managers create individual forecasts in
Excel and the forecasts are manually consolidated. Unfortunately, the product
structures used for forecasting often don’t match supply execution data, which makes
it nearly impossible to align supply with demand. This results in batch data
processing, workload spikes and fire drills.
PARTNER COLLABORATION DEMANDS: Whether it is product design and engineering,
manufacturing or logistics, partners expect a tight collaboration process and timely
data exchange in agreed-upon format and protocols. Certain industries such as
consumer products and retail have stringent requirements to comply with industry
standard data exchange protocols such as 1SYNC, UCCnet and Transora. In addition,
partnerships with large enterprise customers, contract manufacturers and vendors
also put pressure on the operations manager for tailored data preparations and
transfers from static apps.
3) INFORMATION TECHNOLOGY IN SUPPLY CHAIN MANAGEMENT
INFORMATION IS crucial to the performance of supply chain because it provides the
basis on which supply chain managers make decisions.
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INFORMATION TECHNOLOGY consists of the tools used to gain awareness of
information, analyze the information and execute on it to increase the performance
of the supply chain
ROLE OF IT IN A SUPPLY CHAIN
Information is a key supply chain driver because it serves as the glue that
allows other drivers to work together with the goal of creating an integrated,
coordinated supply chain.
Information makes the supply chain visible to a manager. With the visibility, a
manager can make decisions to improve the supply chains performance.
Managers must understand how information is gathered and analyzed. This is
where IT comes into play as IT consists of the hardware, software and people
throughout a SC that gather, analyze and execute upon information.
Thus, the organization needs to be connected and become able to share
information in real time and instantaneously. This is not achievable without IT
and the tools it offers for organization wide collaboration.
The most typical role of IT in SCM is reducing the function in transactions
between supply chain partners through cost-effective information flow.
IT is viewed to have a role in supporting the collaboration & coordination of
supply chains through information sharing.
It can be used for Decision Support. In this instance the analytical power of
computers is used to provide assistance to managerial decisions.
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OBJECTIVES OF IT IN SCM
1) Providing information, Availability & Visibility.
2) Enabling single point of contact of data.
3) Allowing decisions based on total supply chain information.
4) Enabling collaboration with supply chain partners.
INFORMATION TECHNOLOGY FOR SUPPLY CHAIN MANAGEMENT
• SOFTWARE SYSTEMS
• Enterprise Resource Planning (ERP)
• Electronic Data Interchange ( EDI )
• Supply Chain Management Systems (SCM)
• Customer Relationship Management (CRM)
• NETWORK INFRASTRUCTURE
• Internet
ORIGINS OF ERP SYSTEMS
ERP systems grew out of a function called materials requirements planning
(MRP) which was used to allocate resources for a manufacturing operation
MRP systems software ultimately became very complex allowing for efficiencies
of scale not previously possible
Even more sophisticated MRP II systems began to replace MRP systems in the
1980s
By the early 1990s, other enterprise activities were being incorporated into
ERP systems
ENTERPRISE RESOURCE PLANNING SYSTEMS
Enterprise resource planning (ERP) is a term used to refer to a system that links
individual applications (for example, accounting and manufacturing applications) into a
single application that integrates the data and business processes of the entire
business.
ERP is a s/w that aims to serve as a backbone for the whole business.
It integrates key business & management processes to provide an integrated
view of the entire organization & the activities that take place within it.
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ERP systems have emerged to automate business functions and offer an
integrated data solution across an org’s infrastructure.
It provides the capability to manage & integrate the information & services of
departments throughout an entire enterprise.
This allows org’s to better manage all their resources, thus achieving cost
reduction and efficiency through the integration of all information among
various business processes.
By combining all the operations within the firm, ERP allows co’s to view the
information, cash and material flow.
MAJOR ERP SYSTEMS
• SAP R/3
• Oracle
• PeopleSoft (have been merged by Oracle)
• Toyota uses PeopleSoft and SAP
• Microsoft Dynamics (formerly Microsoft Business Solutions )
ELECTRONIC DATA INTERCHANGE (EDI)
EDI is the computer-to-computer exchange of business data in standard
formats.
In EDI, information is organized according to a specified format set by both
parties, allowing a “hands-off” computer transaction that requires no human
intervention at either end.
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EDI standards are developed & managed by the Accredited Standards
Committee (ASC) X12. The standards are designed to work across industry &
co. boundaries.
It permits hundreds of unrelated co’s to communicate & process business
transactions electronically.
EDI works because it relies on a standard system that everyone can use,
developed under the guidelines of the American National Standard Institute
(ANSI), USA.
The ANSI committee ensures that everyone using a process such as EDI
follow the same rule & methods, making the Programme Universally accessible.
BENEFITS OF EDI
• Better inventory management.
• Increased productivity.
• Reduced costs.
• Improved business relationships.
• Improved accuracy.
• Enhanced customer service.
• Increased sales.
SUPPLY CHAIN MANAGEMENT SYSTEMS
• SCM is the process of effectively managing the components of an extended
value chain—from suppliers, through manufacturing and distribution chain, and
to the consumers.
• SCM information systems use technology to more effectively manage supply
chains
• A TYPICAL SCM SYSTEM MIGHT ADDRESS THE FOLLOWING ISSUES:
• Planning
• Vendor selection
• Manufacturing
• Logistics
• Customer relationship
• THE TWO BASIC TYPES OF SCM SYSTEM SOFTWARE ARE:
• Supply Chain Planning software (SCP): Uses mathematical models to predict
inventory levels based on the efficient flow of resources into the supply chain
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• Supply Chain Execution software (SCE): is used to automate different steps in
the supply chain such as automatically sending purchase orders to vendors when
inventories reach specified levels
CUSTOMER RELATIONSHIP MANAGEMENT SYSTEMS
Customer relationship management (CRM) systems, sometimes called e-CRM
systems, use technology to help an e-business manage its customer BASE.
CRM allows an e-business to match customer needs with product plans and
offerings, remind customers of service requirements, and determine what
products a customer has purchased.
THE USE & BENEFITS OF IT
1) Successful companies have developed focused E-business solutions for improving
customer service elements that are most important in their business.
2) Improved efficiency allows company personnel's to focus more on the critical
business activities.
3) E-business solutions support planning collaboration & improved agility of the
supply network.
4) The use of E-business solutions improves the information quality.
5) To gain strategic benefits, the use of IT has to be coupled with process re-
design.
INTERNET
Internet has a profound impact on SCM. The backbone of SCM is
communication & real-time information exchange between various parties
involved in the production & distribution of materials.
Following are the various SCM activities that have created new Internet
opportunities:-
• Online Vendor Catalogue (without human contact).
• The ability to schedule outbound logistics.
• Provide worldwide customer service (24X7).
• Receive orders from all over the world all the time.
• Place bids on projects.
• Pay invoices electronically.
• The ability to directly communicate.
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• The ability to be more responsive to customer service problems.
• To reduce service costs & response time.
OR
ROLE OF INFORMATION TECHNOLOGY IN A SUPPLY CHAIN
INFORMATION TECHNOLOGY (IT)
– Hardware and software used throughout the supply chain to gather and
analyze information
– Captures and delivers information needed to make good decisions
Effective use of IT in the supply chain can have a significant impact on supply
chain performance
Information is the driver that serves as the “glue” to create a coordinated
supply chain
Information must have the following characteristics to be useful:
o Accurate
o Accessible in a timely manner
o Information must be of the right kind
Information provides the basis for supply chain management decisions
o Inventory
o Transportation
o Facility
CHARACTERISTICS OF USEFUL SUPPLY CHAIN INFORMATION
o Accurate
o Accessible in a timely manner
o The right kind
o Provides supply chain visibility
USE OF INFORMATION IN A SUPPLY CHAIN
Information used at all phases of decision making: strategic, planning,
operational
Examples:
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o Strategic: location decisions
o Operational: what products will be produced during today’s production
run
Inventory: demand patterns, carrying costs, stockout costs, ordering costs
Transportation: costs, customer locations, shipment sizes
Facility: location, capacity, schedules of a facility; need information about
trade-offs between flexibility and efficiency, demand, exchange rates, taxes,
etc.
THE SUPPLY CHAIN IT FRAMEWORK
The Supply Chain Macro Processes
o Customer Relationship Management (CRM)
o Internal Supply Chain Management (ISCM)
o Supplier Relationship Management (SRM)
o Plus: Transaction Management Foundation
o Below Figure
Why Focus on the Macro Processes?
Macro Processes Applied to the Evolution of Software
CUSTOMER RELATIONSHIP MANAGEMENT
The processes that take place between an enterprise and its customers
downstream in the supply chain
Key processes:
o Marketing
o Selling
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o Order management
o Call/Service center
INTERNAL SUPPLY CHAIN MANAGEMENT
Includes all processes involved in planning for and fulfilling a customer order
ISCM processes:
o Strategic Planning
o Demand Planning
o Supply Planning
o Fulfillment
o Field Service
There must be strong integration between the ISCM and CRM macro processes
SUPPLIER RELATIONSHIP MANAGEMENT
Those processes focused on the interaction between the enterprise and
suppliers that are upstream in the supply chain
Key processes:
o Design Collaboration
o Source
o Negotiate
o Buy
o Supply Collaboration
There is a natural fit between ISCM and SRM processes
THE TRANSACTION MANAGEMENT FOUNDATION
Enterprise software systems (ERP)
Earlier systems focused on automation of simple transactions and the creation
of an integrated method of storing and viewing data across the enterprise
Real value of the TMF exists only if decision making is improved
The extent to which the TMF enables integration across the three macro
processes determines its value
THE FUTURE OF IT IN THE SUPPLY CHAIN
At the highest level, the three SCM macro processes will continue to drive the
evolution of enterprise software
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Software focused on the macro processes will become a larger share of the
total enterprise software market and the firms producing this software will
become more successful
Functionality, the ability to integrate across macro processes, and the strength
of their ecosystems, will be keys to success
SUPPLY CHAIN INFORMATION TECHNOLOGY IN PRACTICE
Select an IT system that addresses the company’s key success factors
Take incremental steps and measure value
Align the level of sophistication with the need for sophistication
Use IT systems to support decision making, not to make decisions
Think about the future
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INFORMATION TECHNOLOGY FOR SUPPLY CHAIN MANAGEMENT
SOFTWARE SYSTEMS
Electronic Data Interchange (EDI)
Material Requirements Planning (MRP)
Manufacturing Resource Planning (MRP II)
Enterprise Resource Planning (ERP)
Supply Chain Management Systems (SCM)
Customer Relationship Management (CRM)
Internet-based Software
NETWORK INFRASTRUCTURE
Wide Area Network
Internet (for E-commerce: B2B, B2C)
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Module IV…!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
SUPPLY CHAIN INNOVATIONS:
1) SUPPLY CHAIN INTEGRATION,
SUPPLY CHAIN INTEGRATION
“Supply chain integration is process integration upstream and downstream in the supply
chain”.
AN INTEGRATED SUPPLY CHAIN (ISC) IS one that has full responsibility across
the corporation (including different divisions, business units and geographies)
for the planning and management of all activities involved in end-to-end supply
chain processes, including direct sourcing and procurement,
conversion/manufacturing, and all logistics management activities.
SUPPLY CHAIN INTEGRATION IS DIFFICULT FOR TWO MAIN REASONS (SIMCHI-LEVI ET
AL. 2003): First, different companies in the supply chain may have different,
conflicting objectives (e.g. suppliers’ desire for long production run in stable volumes
against manufacturer’s desire for flexibility). Second, the supply chain is a dynamic
system that evolves over time. Customer demand, supplier capabilities, and
relationships in the supply chain evolve over time (e.g. customer’s increasing power
pressure to produce an enormous variety of high-quality products, ultimately, to
produce customized products).
REASONS FOR SUPPLY CHAIN INTEGRATION
MANUFACTURER’S GOALS
Reduce costs
Reduce duplication of effort
Improve quality
Reduce lead time
Implement cost reduction program
Involve suppliers early
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Reduce time to market
SUPPLIER’S GOALS
Increase sales volume
Increase customer loyalty
Reduce cost
Improve demand data
Improve profitability
ISSUES IN AN INTEGRATED SUPPLY CHAIN
Local optimization - focusing on local profit or cost minimization based on
limited knowledge
Incentives (sales incentives, quantity discounts, quotas, and promotions) - push
merchandise prior to sale
Large lots - low unit cost but do not reflect sales
Bullwhip effect - stable demand becomes lumpy orders through the supply chain
OPPORTUNITIES IN AN INTEGRATED SUPPLY CHAIN
Accurate “pull” data
Lot size reduction
Single stage control of replenishment
Vendor managed inventory
Postponement
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Channel assembly
Drop shipping and special packaging
Blanket orders
Standardization
Electronic ordering and funds transfer
MEASURES OF INTEGRATION
– Access to planning system
– Sharing production plans
– Joint EDI access / networks
– Knowledge of inventory levels
– Packaging customization
– Delivery frequencies
– Common logistical equipment / containers
– Common use of third-party logistics
FACTORS IN FORMING SUPPLY CHAIN RELATIONSHIPS
– The order winner
– The method making sourcing decisions
– The nature of electronic collaboration
– The attitude to capacity planning
– Price negotiations
– Managing product quality
– Managing research and development
– The level of pressure
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ACCORDING TO LEE & WHAN (2001), SUPPLY CHAIN INTEGRATION HAS FOUR DIFFERENT
PERSPECTIVES:
1. INFORMATION INTEGRATION refers to sharing information about important supply
chain parameters among the supply chain members. This comprises any type of data
(e.g. demand data, inventory data, capacity plans, production and schedules,
promotion plans, and shipment schedules) that could influence the actions and
performance of the supply chain members;
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2. PLANNING SYNCHRONIZATION relates to the joint design and execution of plans for
product introduction, forecasting and replenishment. In essence, it defines what is to
be done with the information that is shared: it is a mutual agreement along the
members of the supply chain as to specific actions based on that information. Ideally,
all order fulfillment plans are coordinated so that all replenishments are made to
meet the ultimate customer demand;
3. WORKFLOW COORDINATION refers to streamlined and automated workflow activities
between supply chain members. In contrast to planning synchronization, it defines not
just what the firms should do with the shared information, but what should be done
with the information that is shared (e.g. procurement activities from a manufacturer
to a supplier can be tightly coupled so that efficiencies in terms of accuracy, time,
and cost, can be achieved. Product development activities involving multiple companies
can also be integrated to achieve similar efficiencies. In the best-case situation,
supply chain partners would rely on technology solutions to actually automate many or
all of the internal and cross-company workflow steps);
4. NEW BUSINESS MODELS.
Adoption of e-business models to supply chain integration includes more than
just efficiency progress.
Firms are realizing whole new ways of doing business and new business
opportunities, which were not previously possible.
Logistic flows may change and/or roles and responsibilities of supply chain
partners may shift in order to improve overall supply chain efficiency.
INFORMATION SHARING AMONG SUPPLY CHAIN MEMBERS
Reduced bullwhip effect
Early problem detection
Faster response
Builds trust and confidence
COLLABORATIVE PLANNING, FORECASTING, REPLENISHMENT, AND DESIGN
Reduced bullwhip effect
Lower Costs (material, logistics, operating, etc.)
Higher capacity utilization
Improved customer service levels
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COORDINATED WORKFLOW, PRODUCTION AND OPERATIONS, PROCUREMENT
Production efficiencies
Fast response
Improved service
Quicker to market
ADOPT NEW BUSINESS MODELS AND TECHNOLOGIES
Penetration of new markets
Creation of new products
Improved efficiency
Mass customization
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SUPPLY CHAIN INTEGRATION
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2) SUPPLY CHAIN RESTRUCTURING,
THE GOAL SHOULD BE to simplify the supply chain by first minimising part numbers and
financial transactions between the various business entities that make up the supply
chain. Next the Supply Chain should be aligned and tiered. Alignment will ensure
responsibility for a product or service is focussed and provided by a limited number
of 1st tier suppliers. These suppliers should be encouraged to develop themselves so
that the tiers below them are under their full control. Simplification makes the supply
chain visible and transparent to all links within it and minimize reliance on complex
information systems
OBJECTIVES
• What is the magnitude of any potential cost savings?
• What is the likely impact on customer service?
• What are the requirements for executing the new strategy?
• What are the associated business risks?
STEP 1: Identify and select project team participants.
STEP 2: Document service requirements.
STEP 3: Identify internal sources of data and information.
- Inbound Transportation Costs:
- Outbound Transportation Costs:
- Distribution Center (DC) Operating Costs:
- Inventory Carrying Costs:
- Supply Chain Administration Costs:
STEP 4: Collect data and information.
STEP 5: Identify potential improvement opportunities.
• TRANSPORTATION
o Expand/eliminate the private fleet
o Leverage more volume through fewer carriers; negotiate deeper discounts nationally
o Reduce empty miles through the use of better planning tools
o Centralize route planning nationally; execute locally
o Bid out selective major traffic lanes
• NETWORK
o Consolidate multi-division facilities into one
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o Close “x” number of DC’s
o Exit owning/operating DC’s; use 3PL
o Strip “each pick” out of DC’s; use wholesalers for that volume
o Create cross docking facilities
• INVENTORY
o Move slow moving SKU’s to single central location
o Reduce/eliminate slow/no moving SKU’s
o Reduce supplier lead times
• ADMINISTRATION
o Consolidate all/part of multi division organization structure
STEP 6: Conduct detailed analysis.
STEP 7: Summarize preliminary results.
STEP 8: Develop business risk framework.
STEP 9: Formalize results.
STEP 10: Conduct management briefing.
A FRAMEWORK FOR SUPPLY CHAIN RESTRUCTURING
There has been much discussion recently by business leaders for the need to
restructure corporate supply chains so that they are responsive to the needs of
corporations in a dynamic business environment. THE MATERIAL PRESENTED BELOW
PROVIDES A FRAMEWORK FOR THE PROCESS OF SUPPLY CHAIN RESTRUCTURING. Supply
chain restructuring encompasses significantly more than changes in the supply
chain function, like moving to vendor managed inventories or employing electronic
reverse auctions. Supply chain restructuring as used here is a fundamental
alteration in a supply chain for the firm, affecting all functions and activities.
The word 'restructuring' connotes many things to different people. Frequently it
is used to suggest streamlining of operations, reducing redundancies, changing
relationships with trading partners, etc. THE FRAMEWORK SUGGESTED HERE
INCLUDES THIS FOCUS, BUT ALSO ENCOMPASSES A PROACTIVE APPROACH TO
RESTRUCTURING THE SUPPLY CHAIN where the appropriate response to the major
forces for change is to achieve long-run capability to meet the needs of the
firm.
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UNDERSTANDING THE RESTRUCTURING PROCESS
Restructuring of the supply chain needs to be viewed as a process of fundamental
rejuvenation throughout the company. The fundamental proposition is that doing
things better is necessary, but not sufficient. IT IS ESSENTIAL TO DO BETTER
THINGS! Successful restructuring requires a critical understanding of
1. THE FORCES AND CONSTRAINTS FOR CHANGE - THE WHY?
2. THE PARADIGM SHIFT REQUIRED - THE WHAT?
3. THE IMPLEMENTATION PROCESS - THE HOW?
4. THE PROBLEMS AWAITING SOLUTION - WHAT IS NEXT?
FORCES AND CONSTRAINTS FOR CHANGE (WHY?)
Forces, both internal to the organization and external, mandate fundamental changes
in business operations. Constraints, on the other hand, act to either prohibit or limit
the restructuring that is undertaken. Together, the forces and constraints constitute
the WHY for supply chain restructuring. From all fronts, the forces for change are
expected to increase, not decrease, in intensity in the future. Companies need to
understand the dynamic forces precipitating change, as well as how constraints are
transformed over time, -for forces and constraints both external and internal to the
organization.
1. EXTERNAL FORCES AND CONSTRAINTS stem from the environment specific to
an entire industry, or to a particular firm within an industry. They include
economic, social, and political forces and constraints as well as
technological thrusts which impact on all players in an industry. Also
included are these same forces as they uniquely impact on a particular firm
with its individual set of strengths and weaknesses, both human and
physical. For example, economic forces and constraints include actions by
competitors, market place dictates for shorter product life cycles, world-
wide competition, requirements for improved product features and prices,
the demand for smaller lot sizes, the dictates imposed by the trade in
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consumer products and the competitive might of other firms who have
undergone successful restructuring.
2. INTERNAL FORCES for change include any mismatch between the strengths
required to compete successfully and the existing inventory of company
strengths, a restatement of the overall mission and concomitant strategy
for a business unit, or an initiative stimulated by some perceived need for
performance improvement. To illustrate, cost structure can be a primary
internal force for restructuring. Many firms have great dissatisfaction
with their cost structures.
3. INTERNAL CONSTRAINTS include all the forms of resistance to change that
include behavior, cultural, technical, financial, etc. Inertia is a major
internal constraint against restructuring. Overcoming inertia -that is,
surmounting the inherent mismatch between the present deployment of the
enterprise resources and the issues of most importance - is a significant
constraint in most companies.
THE PARADIGM SHIFT (WHAT?)
Successful restructuring requires a well thought out set of objectives. That is,
WHAT is the purpose of restructuring and how will the company be different as a
result? The paradigm shift can be conceptualized as encompassing three distinct
(but related) dimensions:
1. CULTURE includes the broadest, most enduring (and most difficult to
change) aspects of business. Existing culture directs and constrains
restructuring efforts. Changes in culture are major shifts in the driving
forces of a manufacturing company. Included are changes in strategy,
mission, fundamental objectives, values held, philosophy and basic policies.
Examples encompass shifting from a cost-driven company to one where high
quality, time-based competition, shorter product life cycles, partnerships,
etc.
2. CONFIGURATION relates to both organizational designs and relationships,
and to physical/geographical distributions of people, capital and equipment.
Configuration change also includes transforming the definition of the basic
tasks or charters of each of the supply chain activity. Inside the factory,
configuration changes include regrouping of machines into cells, significant
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new methods of manufacturing, and major redeployments of overhead
personnel. Restructuring typically results in new designs and arrangements
with partners.
3. COORDINATION refers to management and control within the business
system itself. Restructuring normally requires new flows of information and
materials -as well as new sets of managerial responsibilities (Oliff, Arpan
and DuBois, 1989).
The foundation for restructuring rests on three fundamental resources: people,
technology, and information. Restructuring the supply chain can then be defined
as:
The process of changing significantly anyone or more of the three
dimensions (culture, configuration, coordination), through the deployment
(or redeployment) of any of the three resources (people, technology,
information).
In most cases, restructuring involves all three. People perform different jobs,
utilizing new technology, coordinated with new information systems.
1. PEOPLE DEPLOYMENT is at the heart of most restructuring projects, with
the nature of jobs and responsibilities changing fundamentally. Examples
include the elimination of managerial layers, replacement of pyramid
organizations with flat or network organizations, mobilizing people to
undertake new initiatives, and the continuing absorption of what has
traditionally been 'staff' work into the basic supply chain infrastructure.
2. TECHNOLOGY DEPLOYMENT for restructuring often involves a major shift in
fundamental supply chain methods and equipment. Examples include flexible
machining systems (FMS), e-procurement options, and the transfer of
technology from one firm to another. Introduction and successful
implementation of these major advances in technology require significant
change in the culture of the company.
3. INFORMATION DEPLOYMENT includes both the development/introduction of
new management information systems (MIS) and the obsolescence of
existing systems. For example, enterprise resource planning (ERP) systems
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mandate increase integration among key corporate activities, including
order entry, manufacturing and distribution within the firm. External
linkages using electronic data interchange (EDI) systems and/or the
Internet have required firms to determine what business channels will need
to be supported.
4. THUS, there is a very close interlinking relationship between the six
elements and numerous forces, as depicted in EXHIBIT 1.
EXHIBIT 1: RESTRUCTURING ELEMENTS
THE IMPLEMENTATION PROCESS (HOW?)
Fundamental changes must be achieved in culture, configuration, and/or
coordination by the redeployment of the three resources: people, technology and
information. Defining the desired new configuration and the new coordination to
be achieved in restructuring is more straightforward than defining the new
culture that is to be achieved. But what is fundamentally more difficult is
determining the set of steps required to achieve the desired result, i.e. the
HOW of responding to the forces, recognizing the genuine constraints, and
achieving the desired paradigm shift.
1. TOP-DOWN IMPLEMENTATION efforts are typically directed by senior
management. Included are: the decision to restructure, usually based on a
careful analysis of the forces and constraints; the overall objectives and
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approach for the restructuring, perhaps based on scenarios of various
actions and competitive responses; an inclusive plan which is not simply an
overall goal statement or wish list without adequate attention given to the
detailed action steps required; and personal leadership to achieve the
desired results and timing.
2. BOTTOM-UP IMPLEMENTATION energies are typically required from a large
number of people, in most cases the more the better. Also required is a
set of key managers who will lead the implementation process. The changes
required in restructuring are usually fundamental. If cultural change is
necessary, the new culture can be adopted more quickly if everyone is a
part of the implementation process.
Approaches to restructuring vary widely. Some firms utilize consultants essentially to
serve as 'hatchet men'. Others do the entire job internally. More frequently, some
middle ground is found where advice is give by consultants based on seeing other
companies undertake similar responses to similar forces.
It is important not to frame the restructuring project minimally. To often this is the
case -the project is defined to have the smallest possible impact on the labor force,
culture, configuration and coordination. The frequent result is that it becomes
necessary to undertake still another major restructuring project, with a combined
impact that is far more serious for morale and culture. The approach needs to be
based on the long-term competitive posture required, and the changes required to
make it a reality.
Invariably, restructuring will require the learning of new values, skill and practices,
and the unlearning of old beliefs. For this reason, virtually every restructuring
project has to include education and training. In many successful restructuring
projects, education and training has, played a major role for the company in the
adoption of the new culture. The emphasis is often formally on the issues of
configuration and coordination, but the bottom line is culture.
Project teams play a key role in most restructuring undertakings when formal
organizational barriers are broken. Education on the fundamental forces and
constraints, as well as the paradigm shift (in clearly understandable terminology) is
required in order to create a bandwagon effect. It is critical that the organization
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both understands and believes in its definition of the forces and constraints and its
paradigm shift. Too often the paradigm shift is stated as some lofty goal associated
with 'getting closer to the customer', but the organization sees it as only cost-
reduction and head-count reduction.
EVALUATION of a restructuring program is a major challenge. The measures of
effectiveness for restructuring are often not focused on what is truly important:
the ability of the new business entity to compete. All too frequently, the goal is
to shed X people or Y dollars of cost by the end of some period Z, or to create
a better set of financial statements by next year. While recognizing the primacy
of financial measures under certain conditions, the short-run orientation of many
companies comes at their long-run expense.
It is difficult to tell whether the results achieved are truly successful, mediocre,
or poor, or if short-term results are being achieved at the expense of long- run
health. Moreover, it is necessary to take into account the continuing impact of
changing forces. Frequently, restructuring requires a new system for performance
measurement in the company (Dixon, Nanni and Vollmann, 1990).
A VIEW TO THE FUTURE (WHAT IS NEXT?)
Restructuring activities need to be clearly bounded to be tractable. What is to
be included or accomplished? It also needs to have a definition of what is and is
not to be included. But the WHAT IS NEXT question must also be asked. Too
often restructuring is viewed as a one-time adjustment rather than a continuing
process. As a particular restructuring effort is taking place, it is important
always to be evaluating the next steps. To the extent that this viewpoint can be
proactive, it may well help avoid the painful reactive mode of restructuring.
3) AGILE SUPPLY CHAINS,
SUPPLY CHAIN AGILITY is an operational strategy focused on inducing velocity
and flexibility in the supply chain. A supply chain is the process of moving
goods from the customer order through the raw materials stage, supply,
production, and distribution of products to the customer. All organizations have
supply chains of varying degrees, depending upon the size of the organization
and the type of product manufactured. These networks obtain supplies and
components, change these materials into finished products and then distribute
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them to the customer. Included in this supply chain process are customer
orders, order processing, inventory, scheduling, transportation, storage, and
customer service. A necessity in coordinating all these activities is the
information service network.
The difference between supply chain management and supply chain agility is the
extent of capability that the organization possesses. Key to the success of an
agile supply chain is the speed and flexibility with which these activities can be
accomplished and the realization that customer needs and customer satisfaction
are the very reasons for the network. Customer satisfaction is paramount.
Achieving this capability requires all physical and logical events within the
supply chain to be enacted swiftly, accurately, and effectively. The faster
parts, information, and decisions flow through an organization, the faster it
can respond to customer needs.
Agile organizations are market-driven, with more product research and short
development and introduction cycles. The focus is on quickly satisfying the
supply chain, the chain of events from a customer's order inquiry through
complete satisfaction of that customer. All physical events are enacted quickly
and accurately. The faster materials, information, and decisions flow through
an organization the faster it can respond to the demands of the market. The
keys are flow and time.
The concept of agile supply chains was introduced to transfer and apply the winning
strategy of agility to that of supply chains (Harrison et al., 1999). It is a newly
accepted unit of business. Agility in the context of supply chain management focuses
on “responsiveness” (Lee and Lau, 1999; Christopher and Towill, 2000). Existing
literature on agility presents it as a general concept, often linked to manufacturing
only. A supply chain provides more practical setting for assessing agile capabilities
(Van Hoek et al., 2001). It is unlikely that any single organisation will be able to
produce artifacts with correctly configured customization and added value to satisfy a
particular emergent market demand. Agility suggests cooperation to enhance
competitiveness within organisations. Several authors claim that it is difficult to
estimate agility directly in the supply chain (Christopher, 2000; Van Hoek et al.,
2001). In order to reduce this significant deficiency, the supply chain is frequently
introduced as an area where the agility concept can be applied in operations.
The key elements of an agile approach are very similar to the elements of the agile
supply chain. Agility is all about customer responsiveness, people and information,
cooperation within and between firms and fitting a company for change. To be truly
agile, a supply chain must possess a number of distinguishing characteristics which
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include: market sensitivity, virtuality, process integration, and networking (Kisperska-
Moron and Swiercze, 2008: 2). Parallel developments in the areas of agility and
supply chain management led to the introduction of an agile supply chain (Harrison et
al. 1999, Christopher 2000). While agility is accepted widely as a winning strategy
for growth, even a basis for survival in certain business environments, the idea of
creating agile supply chains has become a logical step for companies (Ismail and
Sharifi 2006:434).
Agility in a supply chain is the ability of the supply chain as a whole and its members
to rapidly align the network and its operations to dynamic and turbulent requirements
of the customers.
The main focus is on running businesses in network structures with an adequate level
of agility to respond to changes as well as proactively anticipate changes and seek
new emerging opportunities.
THE ISSUES
Supply Chain Agility is in direct opposition with traditional manufacturing approaches
characterized by use of economic order quantities, high capacity utilization, and high
inventory.
It requires radical change. Excess capacity is welcome instead of taboo. Make-to-
order capability replaces mass production, and lot sizes of one replace EOQ's.
A major issue with Supply Chain Agility is the high capitalization often required for
flexibility in the production and assembly areas. However payback periods of 2 years
or less are common.
AGILE SUPPLY CHAIN: An agile supply chain requires various distinguishing capabilities
in order to enrich and satisfy customers. These include: responsiveness, flexibility
and adaptability. To be truly agile, an organization must possess the following
elements: market sensitive, process integration, network based and virtual
(Christopher, 2000).
They should be able to be flexible, responsive and adapt to changing market
conditions. This can be achieved through collaborative relationship, process
integration, information integration, and customer/marketing sensitivity achieving
customer satisfied objectives.
These include cost, time, competency and speed in the supply chain contributing to
competitive advantage of the entire organization.
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-AGILITY is about the basis of competition, business practices, and corporate
structures in the 21st century;
– AGILITY is not about developing more technology, although technology will play an
important role;
– AGILITY is not another way of referring to leanness, flexibility, computer
integrated enterprises, or other current buzzwords;
– AGILITY is a strategic response, not tactical, and involves building defense against
primary competitive forces through cooperation;
– AGILITY is a holistic concept;
– AGILITY is primarily about adaptability which is achieved through reconfiguration
capability. Processes, structures, organization, people, implementation capabilities,
etc are the key issues;
– AGILITY is a paradigm shift;
– AGILITY is a step change innovation not an incremental innovation;
– AGILITY holds the promise of a world based on cooperation.
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TO SUSTAIN AND MAINTAIN SUPPLY CHAIN AGILITY, AN ORGANISATION SHOULD:
�� Commit to flexibility and adaptability in regards to your supply chain. Convince
those who will implement the necessary programs of its importance.
�� Identify the factors involved in past problems with your company's supply chain.
Review your business's past history for its biggest problems.
�� Implement simple solutions for these problems.
�� Design programs for solutions that are not solved simply. Prioritize problems on the
basis of which are most likely. Systematically move through these problems.
�� Address flexibility and adaptability while moving through the later stages of
disaster-proofing your production. Begin by asking for input from all levels of
production, even levels below that of managers.
�� Centralize responsibility for reviewing plans for change. Those with the
responsibility should have a broad base of experience. Involve consulting firms if
needed, but critically assess the skills of the consultants such that they fit into your
team.
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�� Integrate the newer theories of agile supply chains, specifically those that allow
for greater coordination between customers and suppliers, where appropriate.
DEVELOPING AN AGILE SUPPLY CHAIN
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4) PRICING AND REVENUE MANAGEMENT,
PRICING IS AN IMPORTANT LEVER to increase supply chain profits by better matching
supply and demand. Revenue management is the use of pricing to increase the profit
generated from a limited supply of supply chain assets. Ideas from revenue
management suggest that a firm should first use pricing to achieve some balance
between supply and demand and only then invest in or eliminate assets. Supply chain
assets exist in two forms, capacity and inventory. Capacity assets in the supply chain
exist for production, transportation, and storage while inventory assets exist
throughout the supply chain and are carried to improve product availability.
REVENUE MANAGEMENT ALSO COULD BE DEFINED AS the use of differential
pricing based on customer segment, time of use and product or capacity availability to
increase supply chain surplus. Another definition for revenue management is an order
acceptance or refusal process that employ differential pricing strategy and stop sales
tactic to reallocate capacity enhance delivery reliability and speed, and realize
revenue from change order responsiveness in order to maximize revenue from pre-
existing capacity
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REVENUE MANAGEMENT HAS A SIGNIFICANT IMPACT ON SUPPLY CHAIN
PROFITABILITY WHEN ONE OR MORE OF THE FOLLOWING CONDITIONS EXIST:
- The value of the product varies in different market segments
- The product is highly perishable or product wastage occurs
- Demand has seasonal and other peaks
- The product is sold both in bulk and the spot market
Revenue management technique has been successfully applied to airline, railway, hotel
and resort, cruise ship, health care, printing and publishing. Revenue management has
considerable potential for manufacturing operations as well.
REVENUE MANAGEMENT FOR MULTIPLE CUSTOMER SEGMENTS
Airline seats are good example of market with multiple customer segments.
Airline use advance purchase restriction to segment its customer into different fare
classes and dynamically adjust their seat capacity assigned to those fare classes as
advance sales orders arrive. For instance business travelers are willing to pay a
higher fare to travel a specific schedule for convenience and even order at the last
minute, while leisure travelers are willing to shift their schedule to take advantage of
lower fares.
There are two fundamental issues than must be handled to apply the
concept of revenue management. First, how to differentiate between two segments
and structure its pricing to make one segment pay more than the other. Second, how
to control demand such that the lower price segment doesn’t utilize the entire
available asset.
To differentiate between various segments, the firm must create by
identifying product or services attributes that segments value differently. For
example, business travelers on an airline want to book at the last minute and only
stay just as long as they must. In other hand leisure travelers are willing to book far
in advance and adjust the duration of stay. Thus the flexibility on booking and
schedule differentiate the business travelers from leisure travelers. For
transportation provider the segment can be differentiated based on how far in
advance a customer is willing to commit and pay for transportation capacity. Similar
separation can also occur for production and storage-related assets in supply chain.
To take advantage of revenue management, the supplier must limit the
amount of capacity committed to lower price segment even if sufficient demand exist
from the lower price segment to use the entire capacity. The basic trade-off here is
between committing to an order from a lower price or waiting for a high price to
arrive later on. The risks in such situation are spoilage and spill. Spoilage occurs when
capacity is wasted because demand from high price doesn’t materialize. Spill occurs if
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higher price segments have to be refused because capacity has already been
committed to lower price segment. A current order from a lower price should be
compared to expected revenue from waiting for a higher price buyer and order from
lower price buyer should be accepted if the expected revenue from higher price is
lower than the current revenue from the lower price buyer.
To minimize the cost of spoilage and spill, supplier which working with two
customer segments can use the following formula. Assume that the anticipated
demand for the higher price segment is normally distributed with mean of DH and
standard deviation of σH:
CH = F-1(1-pL/pH,DH,σH) = NORMINV(1-pL/pH,DH,σH).
CH = reserve capacity for higher price segment
pL = the price for lower segment
pH = the price for higher segment
The important point here is that the use differential pricing increases the level of
asset availability for the high price segment.
Another approach to differential pricing is to create different versions of
product targeted at different segments. An automobile manufacturer create a high-
end, a mid-level and low-end versions of the most popular models based on the
options provided. This policy allows them to charge differential price from different
segment for the same core product.
To successfully use revenue management when serving multiple customer
segments, a firm must use the following tactics effectively:
Price based on the value assigned by each segment
Use different price for each segment
Forecast at the segment level
REVENUE MANAGEMENT FOR PERISHABLE ASSETS
Any asset that loses value over time is perishable. Fruits, vegetables and
pharmaceuticals are perishable. Perishable assets also include products such
computer, cell phone, fashion apparel that lose value as new model introduce. There
are two revenue management tactics used for perishable assets:
- Vary price over time to maximize expected revenue
- Overbook sales of the assets to account for cancellations
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The first tactic is suitable for assets such as fashion apparel that have clear date
beyond which they lose a lot of their value, apparel designed for certain season
doesn’t have much value in the end of the season. The retailer must use effective
pricing strategy and forecast impact of price on customer demand to increase total
profit. The trade-off here is charge a high price initially and leaving more products
to be sold later at lower price or charge a lower price initially, selling more products
early in the season and leaving fewer products to be sold at a discount.
The second tactic is suitable if customers are able to cancel orders and the value of
asset drops significantly after deadline. Airline seats, product designed specially for
Christmas, and production capacity at a supplier are examples of this asset.
The trade-off is between having wasted capacity because excessive cancellation or
having a shortage of capacity because of few cancellations, in that case an expensive
backup needs to be arranged. The goal of overbooking is to maximize supply chain
profit by minimizing the cost of wasted capacity and the cost of capacity shortage.
The following formula is used to set overbooking level for an asset:
CW = p – c
CS = b – c
s* = Probability (cancellation < O*) =
CW = cost for wasted capacity
Cs = cost for capacity shortage
p = product price
c = product cost
if cancellations is normally distributed with a mean μc and standard deviation σc, the
optimal booking level is given as follows:
O* = F-1 (s*, μc, σc) = NORMINV(s*, μc, σc)
If cancellation distribution only known as a function of the booking level (capacity L +
overbooking O) to have a mean of μ(L+O) and standard deviation σ(L+O), the optimal
overbooking level is shown as follows:
O* = F-1 (s*, μ(L+O), σ(L+O)) = NORMINV(s*, μ(L+O), σ(L+O))
The optimal overbooking level should increase as the margin per unit increases and the
level of overbooking should decrease ad the cost of replacement capacity goes up.
The use of overbooking will increase asset utilization by the customers.
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REVENUE MANAGEMENT FOR SEASONAL DEMAND
One of purposes the use revenue management for seasonal demand is to shift demand
from the peak to the off-peak period, thus can get better balance between supply
and demand, and also generate higher overall profit.
The common and effective revenue management tactic to deal with seasonal demand is
to charge higher price during peak period and a lower price during off-peak periods,
this tactic result in shifting demand from peak to off-peak period. Some company
offer discount and other benefits to encourage customers to shift their demand to
off-peak period, one example is Amazon.com that has peak period in December,
bringing in short-term capacity is expensive and decrease profit margin. Amazon.com
offer discount and free shipping for order that are placed in November, this strategy
reduce demand in the peak season and generate a higher profit for Amazon.com.
REVENUE MANAGEMENT FOR BULK AND SPOT CUSTOMERS
The fundamental trade-off here is similar to the case revenue management
for multiple customer segments. The firm needs to decide on the amount of the asset
to reserve for spot market (higher price). The reserved quantity will be affected by
difference in margin between the spot market and the bulk sale and also the
distribution of demand from the spot market.
A similar decision needs to be made by purchaser of production,
warehousing and transportation assets. The trade-off is between sign on long-term
bulk contract with a fixed, lower price but can be wasted if not utilized or buy in the
spot market with higher price but never being wasted. The basic decision is the size
of the bulk contract.
Following is a formula can be used to obtain optimal amount of the asset to be
purchased in bulk:
Q* = F-1 (p*, μ, σ) = NORMINV (p*, μ, σ)
Where:
cB = the bulk rate
cS = spot market price
p* = probability demand for the asset doesn’t exceed Q*
Q* = the optimal amount of the asset to be purchased in bulk
The amount of bulk purchase increases if either the spot market price increases or
the bulk price decreases.
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OR
THE ROLE OF RM (REVENUE MANAGEMENT) IN THE SCS
Revenue management is the use of pricing to increase the profit generated
from a limited supply of supply chain assets
o SCs are about matching demand and capacity
o Prices affect demands
Yield management similar to RM but deals more with quantities rather than
prices
SUPPLY ASSETS EXIST IN TWO FORMS
– Capacity: expiring
– Inventory: often preserved
Revenue management may also be defined as offering different prices based on
customer segment, time of use and product or capacity availability to increase
supply chain profits
Most commonly known example is probably in airline ticket pricing
o Pricing according to customer segmentation at any time
o Pricing according to reading days for any customer segment
Reading days: Number of days until departure
CONDITIONS FOR RM TO WORK
The value of the product varies in different market segments
o Airline seats: Leisure vs. Business travel
o Films: Movie theater goers, DVD buyers, Cheap movie theater goers, TV
watchers.
The product is highly perishable or product waste occurs
o Fashion and seasonal apparel
o High tech products
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Demand has seasonal and other peaks
o Products ordered at Amazon.com, peaking in December
o Supply Chain textbook orders peaking in August and January.
The product is sold both in bulk and on the spot market
o Owner of warehouse who can decide whether to lease the entire
warehouse through long-term contracts or save a portion of the
warehouse for use in the spot market
o Truck capacities for a transportation company
RM FOR MULTIPLE CUSTOMER SEGMENTS
If a supplier serves multiple customer segments with a fixed asset, the
supplier can improve revenues by setting different prices for each segment
o Must figure out customer segments
Prices must be set with barriers such that the segment willing to pay more is
not able to pay the lower price
o Barriers: Time, location, prestige, inconvenience, extra service
In the case of time barrier,
o The amount of the asset reserved for the higher price segment is such
that quantities below are equal
the expected marginal revenue from the higher priced segment
the price of the lower price segment
USING RM IN PRACTICE
Evaluate your market carefully
– Understand customer requirements for services and products
– Price, flexibility (time, specs), value-added services, etc.
– Based on requirements identify customer segments (groups)
– Differentiate products/services and their pricing according to customer segments
» Dell:
» Same product is sold at a different price to different consumers
(Private/small or large business/government/academia/health care)
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» Price of the same product for the same industry varies
QUANTIFY THE BENEFITS OF REVENUE MANAGEMENT
_ Implement a forecasting process
_ Apply optimization to obtain the revenue management decision
_ Involve both sales and operations
_ Understand and inform the customer
_ Integrate supply planning with revenue management
5) GLOBAL SUPPLY CHAIN
GLOBAL SUPPLY CHAIN An integrated process where several business entities
such as suppliers, manufacturers, distributors, and retailers work together to
plan, coordinate and control materials, parts, and finished goods from suppliers
to customers. One or more of these business entities operate in different
countries.
To compete globally requires an effective supply chain
Information technology is an “enabler” of global trade
Nations form trading groups
No tariffs or duties
ADVANTAGES OF GLOBAL SUPPLY CHAINS
Reduced total costs
Inventory reduction
Improved fulfillment cycle time
Reduce cycle time
Increased forecast accuracy
Productivity increase
Improved capacity
Expand international connections
Increase intellectual assets
Delivery improvement
POTENTIAL GLOBAL SUPPLY CHAIN OBSTACLES
Inefficient transportation and distribution systems
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Market instability
Language Barriers
Customs
Political turmoil
Trade imbalances
Export surges and recessions
COMBATING OBSTACLES
Join nation groups
Be innovative
Be flexible
Research
New technology
Vertically integrate
Form consortiums
DIFFERENT TYPES OF GLOBAL SUPPLY CHAIN MODELS
1. OWN AND MANAGE YOUR OWN INFRASTRUCTURE
Pro= Maximum control
Con= Heavy costs
2. USE STRATEGIC ALLIANCES
Pro= Convenience Large areas covered
Con= Unreliable alliance-prone
3. PARTNER WITH AN ASSET-BASED THIRD-PARTY
Pro= Operational standards Uniform identity and marketing strength Dedicated mgmt
structure
Con= Ignorance of complex customs regulations Lack of connections Local economic
downturns
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4. PARTNERSHIP WITH A GLOBAL INTEGRATOR OF LOGISTICS SERVICES
Pro= Customer friendly In-country knowledge True information systems integration
Uniform standards Con= Limited use Less control
GLOBAL SUPPLY CHAINS POSE CHALLENGES REGARDING BOTH QUANTITY AND VALUE:
Supply and value chain trends
Globalization
Increased cross border sourcing
Collaboration for parts of value chain with low-cost providers
Shared service centers for logistical and administrative functions
Increasingly global operations, which require increasingly global coordination and
planning to achieve global optimums
Complex problems involve also midsized companies to an increasing degree,
These trends have many benefits for manufacturers because they make possible
larger lot sizes, lower taxes, and better environments (culture, infrastructure, special
tax zones, sophisticated OEM) for their products. Meanwhile, on top of the problems
recognized in supply chain management, there will be many more challenges when the
scope of supply chains is global. This is because with a supply chain of a larger scope,
the lead time is much longer. Furthermore, there are more issues involved such as
multi-currencies, different policies and different laws. The consequent problems
include:
1. Different currencies and valuations in different countries;
2. Different tax laws (Tax Efficient Supply Chain Management);
3. Different trading protocols;
4. Lack of transparency of cost and profit.
OBSTACLES TO GLOBAL CHAIN TRANSACTIONS
Increased documentation for invoices, cargo insurance, letters of credit, ocean
bills of lading or air waybills, and inspections
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Ever changing regulations that vary from country to country that govern the
import and export of goods
Trade groups, tariffs, duties, and landing costs
Limited shipping modes
Differences in communication technology and availability
Different business practices as well as language barriers
Government codes and reporting requirements that vary from country to
country
Numerous players, including forwarding agents, custom house brokers, financial
institutions, insurance providers, multiple transportation carriers, and
government agencies
Since 9/11, numerous security regulations and requirements
GLOBAL SCM FACTORS
Managing extensive global supply chains introduces many complications
Geographically dispersed members - increase replenishment transit times
and inventory investment
Forecasting accuracy complicated by longer lead times and different
operating practices
Exchange rates fluctuate, inflation can be high
Infrastructure issues like transportation, communication, lack of skilled
labor, & scarce local material supplies
Product proliferation created by the need to customize products for
each market
GLOBAL CONSIDERATIONS IN USING SCM
Time differences
Language issues
Currency exchange rates
Tax
Different accounting systems
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Internet and security restrictions
Culture and religion holidays
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Keyur D vasava……….
