SCM 301 Exam 1

Arguments for single-sourcing

(single sourcing can be risky but most current trends favor it) -establish good relationship -less quality variability -lower cost -transportation economies -proprietary product or process -volume too small to split

Logistics Elements

*Transportation management*- trade off decisions between cost and timing of deliveries Ex: Canal created in Nicaragua, expansion to fit bigger ships *Warehouse management*- storage, accumulating, allocating, assorting and sorting *Global logistics*- managing vagaries of each country

International Purchasing terminology

*import broker/sales agent*- performs service for a fee *Import merchant*- buys and takes title to the goods *Trading company*- imports & carries wide variety of goods *Tariff and non-tariff* barriers- international trade organizations strive to reduce barrier *Countertrade*- raw materials are traded for goods and services

Challenges of supplier partnerships

-maintaining confidentiality (data research) -R & D and proprietary info -satisfying customer expectations -differences in power in chain members (between buyer/supplier) -mass customization -investment in assets

Arguments for multiple-sourcing

-need capacity -spread risk of supply interruption -create competition -Information -dealing w/ special kinds of business

Importance of SCM

-used as a competitive weapon (advantage) among firms 1. Start w/ key suppliers 2. Move on to other suppliers, customers & shippers 3. Integrate 2nd tier suppliers and customers -the cost of a product is largely tied to buying from other suppliers (60-70% of the materials used in new products comes from buying from other suppliers (ex: Chrysler car) --> creates close, contractual relationships with key suppliers -cost savings -better coordination of resources- -reduced bullwhip effect through CPFR activities (Ex: consider Kellog's Poptarts: if Hyvee (wholesaler) sells more in one week than expected, a panic happens and orders are cranked up, this tends to lead to overcompensating

Reasons of Outsourcing (BUY)

-usually a cost advantage for standard supplies, lower labor/material costs (fixed/total costs) -insufficient capacity (@ ur own facility) → subcontracting -lack of expertise (if environmental standards have to be met, or buying food service from someone else who knows what the requirements are) -Quality (BOSE) In addition: use "best-in-class" suppliers, greater flexibility, design cycle time reduction, less capital required so *risk is transferred* (risk of losing money/your investment)

3PLs (Third Party Logistics services)

3PL provider is an external supplier who performs all/part of a company's logistics (may include transportation, warehousing, distribution, related financial services). 4PL's oversee 3PL's

forecast error (e)

= A(t) - F(t) = demand for period "t" - forecast for period "t" Tells us how far above or below the actual demand was from the forecast. Defines the error in real terms

Tracking Signal (TS)

= RSFE/MAD -Determines if a forecast is within acceptable control limits -Could be a bias problem if TS falls outside pre-set limits (-4 < x < 4) -Measures whether the forecast error is keeping pace like quality control (chart)- shows if model is generating too much error Typical graph looks like a diagonal-straight line, this isn't what we want (means something is systematically wrong in your errors) → Pattern If you see a pattern you can change your technique (ex: consistent under forecasting) Ideal graph is inconsistent looking, because errors are independent from each other → NO pattern How sensitive a firm is to the TS depends on the following factors: risk, time (how quickly your product can go bad), economic/industry factors

What is TCO?

A factor that is often overlooked in evaluating criteria for supplier selection, says the cost of a product is MORE than just per unit costs

Make or Buy decision & current trends

A strategic decision that can have a lasting effect on cost efficiency and organization's competitive position. NOT an exclusive "either-or" decision, can implement both strategies. More to consider than just cost! -Current trends toward: Outsourcing (buy), but its controversial, pay someone to do something for us (usually cheaper for fixed costs) Ex: LetroLux moves production to Mexico for lower labor costs. -Movement away from backward (acquiring upstream suppliers)/forward (downstream suppliers) integration.

Which of the following is not a common cause for the bullwhip effect?

A: shortened lead times (time between when an order is placed and when it's delivered) Which are? trade deals, price fluctuations, periodic order policies

How does the forecast method chosen affect the forecast created?

Can affect responsiveness (how quickly our forecast is able to adjust to the actual data) → *Look at your data* Ex: if we have two different forecast graphs, one is wavy/spiky and the other is a straighter-diagonal line. Which is better? If our original data (demand) is wavy/spiky, we'd prefer the forecast graph that reflects this (means it's more responsive to the data)

TCO Analysis

Every company calculates it differently. A lot of different measures go into calculating it (*tooling, freight rate, engine cost, ordering cost, carrying cost, quality cost* (if replacements needed for defective products))

Origins of SCM: 1960's & 70's

New technology lead to MRP & MRPII to coordinate inventory management and improve internal communication MRP: Materials Requirements Planning MRPII: Manufacturing Resource Planning (These systems tell you when need tires, supplies, materials) Firms still don't care much about quality @ this time Ex: Ford Pinto, recall costs were huge and led to legal costs

What is a supply chain?

a flow of products (stuff), services, money and information from: raw material manufacturers, component & intermediate manufacturers, final product manufacturers and wholesalers, distributors and retailers: *connected by transportation & integrated though information, planning and other coordination* activities.

What is a forecast?

an *estimate of future demand*, used as an underlying basis for all business decisions (related to production, inventory, personnel, facilities), goal is to minimize forecast error -the forecast is always wrong. Math is only a tool used in business, so what happens in math/calculations doesn't mean it will happen in business practice -Forecasting is part of "demand mgmt." in Operations Management

Which is true regarding centralized purchasing versus decentralized purchasing?

centralized can lead to greater quantity discounts (also uses a common supply base and avoids duplication) Decentralized: local sourcing

Purchasing Process

starts with materials requisition → issue purchase order → delivery order → invoice is issued (A/P). Consider it like a 3-way match (purchase order, supplier's bill, and a document stating "here's what we received") --serve as a checks and balances system, if these 3 match then we can pay the supplier

Materials Requisition/Purchase Requisition ("req")

states product, quantity, and delivery date, often a planned order release from MRP system, traveling reqs used for recurring orders

Roles of the supply base

supply base: list of suppliers a firm uses -Preferred suppliers provide: early supply involvement, info on the market, capacity for meeting demand, cost efficiency due to economies of scale

Purchase Order (PO)

the buyer's offer, becomes a *binding contract* when accepted by supplier (price is usually worked out ahead from prior communication). A "sales order" is initiated by a supplier

(Simple) Moving Average forecast method

uses historical data to generate a forecast (works well when demand is fairly stable over time). *Assumes an average is a good estimator of future behavior* F (t+1) = sum of (Ai/n) -Actual demand in a period/number of periods used to calculate moving avg -The more periods we have data for, the better average we can calculate Ex: Use 4-period moving avg to forecast Period 5 (F5) = (sum of demands in periods 1,2,3,4)/4 Pros: simple to use and understand Cons: unable to respond to trend changes quickly

Components of demand (why sales were not what we expected?)

*Average*- average demand for a period of time *Trend variation*- increase or decrease in demand due to population growths, cultural changes/shifts, changes in income *Cyclical variation*- wavelike movements that last over a year and are influenced by macroeconomic and political factors. 2-10 years in duration usually. Business cycle: recessions/expansions that tend to occur every 8-10 years *Seasonal variation*- peaks and valleys experienced in company's sales. Examples: Target experiences peak sales in mirrors at the beginning of the school year Dog treat sales peak the week before Thanksgiving bc of traveling with pets *Random variation*- due to unexpected/unpredictable events. Short duration and non repeating. Many products state "Act of God"-lightning, hurricane, etc. Impacts of a hurricane, union strike or war

Vendor managed inventories (VMI)- Perspectives

*Buyer (focal firm)*: supplier tracks inventories, determines deliveries & order quantities, buyer takes ownership @ stock location *Supplier*: avoids ill-advised customer orders, supplier decides inventory setups/shipments, supplier may educate customer about other products -Takeaway: you're not really buying the nuts/bolts from the supplier but the SERVICE that you never run out of them-

Pros of Centralized Purchasing

*Centralized*: purchasing dep't at the firm's office makes all the purchasing decisions Pros: concentrated volume, leveraging purchase volume, avoid duplication, specialization, lower transportation costs, no competition within units, common supply base

What is CPFR

*Collaborative Planning, Forecasting and Replenishment* A tool used to coordinate activities between supply chain trading partners (such as demand forecasting, production and purchase planning, inventory replenishment) Aka JOINT planning (like marriage rules)

Pros of Decentralized Purchasing

*Decentralized*: individual, local dep'ts (plant level) make their own purchasing decisions Pros: *closer knowledge* of requirements, *local sourcing*, *less bureaucracy*

Operations Management Elements

*Demand management*- match demand to available capacity *MRP & ERP*- system to link buyers & suppliers *Lean systems*- improve flow of materials to reduce inventory level *Six Sigma*- improve quality compliance among suppliers

Current trends in SCM

*Expanding*- firms expanding partnerships and building facilities in foreign markets. Involves: Breadth- foreign mfg, office & retail sites, foreign suppliers & customers Depth- 2nd and 3rd tier suppliers & customers *Increasing responsiveness*- need for more flexibility and responsiveness to customer need, need to benchmark industry performance, improve on continuous basis, effective and faster product/service delivery systems *Greening of SCs* Supply chain activities can be harmful to the environment, chains must work harder to reduce environmental degradation, 75% of U.S. consumers are influenced by a firm's environmental- friendliness reputation, recycling and conservation are alternatives in response to costly natural resources *Reducing SC costs*- Achieved by: reduced purchasing costs, reduce waste, excess inventory, and non-value added activities Continuously improved by: Benchmarking- improve over competitors' performance, Trial & error, Increased knowledge of supply chain processes

Qualitative forecast methods

*Jury of executive opinion*: senior management uses market knowledge, common technique for commercial banks for medium-term forecasts *Sales Force Composite*: uses knowledge of the market & estimates customer demand, can be negatively impacted if individual bias is present *Customer surveys*: provide insight on purchasing needs, new product ideas, opinions on existing products *Delphi method*: an iterative process continued until a group consensus is reached among expert participants, used for high-risk technology forecasting or extensive (large) projects

MAD: forecast accuracy measurement

*Mean Absolute Deviation* = sum of all forecast errors (in absolute value terms)/ # of periods, aka the average forecast error in absolute terms The higher MAD the less desirable, lower the MAD the better Can calculate at any period, don't have to wait until last period

MAPE: forecast accuracy measurement

*Mean Absolute Percentage of Error*= [sum of all errors (e)/ actual demand] * 100 Perspective of the true average *magnitude of the forecast error* Lower the MAPE the better

MSE: forecast accuracy measurement

*Mean Squared Error* = sum of squared errors (e^t)/ # of periods Analogous to variance → large forecast errors are heavily penalized

Purchasing terminologies

*Purchasing*: key business function for acquiring materials, services, & equipment *Contracting*: term often used for the acquisition of services *Supply Management*: a newer term that encompasses all acquisition activities

Qualitative vs. Quantitative forecasting techniques

*Qualitative*: opinion and intuition based Used when data is limited/unavailable *Quantitative*: uses mathematical models and historical data The longer the time horizon, the less accurate the forecast becomes

RSFE: forecast accuracy measurement

*Running Sum of Forecast Errors* = sum of all forecast errors on a running basis (down the column of periods) *NOT in absolute value terms, so if one period's forecast error is negative, remember that when summing the errors A measure that *indicates bias* in the forecast: [tendency for the forecast to be consistently higher or lower than actual demand] over time Positive RSFE → forecast < demand, could lead to stockouts Negative RSFE → forecast > demand, potential excess inventory costs

Supply Management/Purchasing Elements

*Supplier management* -Evaluation- determining supplier capabilities Ex: Ordering pizza based on price, delivery time, quality -Certification *Strategic partnerships*- successful & trusting relationships w/ top-performing suppliers (marriage in a sense) Ex: a customer who orders Dominos often is recognized by voice when placing an order on the phone

Foundations of SCM

*Supply Management (Purchasing)*: Supplier management, supplier evaluation, supplier certification, strategic partnerships, green sourcing, vendor managed inventory (VMI) *Operations*: Demand management, CPFR, MRP, ERP, inventory management, JIT/Lean production, quick response, TQM, Six Sigma *Logistics*: Transportation management, customer relationship management (CRM), distribution networks, perfect order fulfillment, global supply chains, logistics management, service response logistics, green logistics --Integration methods: process integration, performance measurement, risk management

Why is purchasing important? (1st stage in SCM)

-60-70% of producing a product (car) is the cost of buying supplies/materials from other suppliers -We can increase profits (pie) by increasing revenues or decreasing expenses (but this DEPENDS on what happens to the other variable. Ex: Just because revenues go up doesn't mean profits go up (as expenses may also increase) -So, the goal in purchasing is to lower expenses without it resulting in a negative effect on product quality/service.

Make or Buy Analysis Assumptions

-All costs classify as fixed or variable -Fixed costs remain the same (questionable) -A linear variable cost relationship exists -Fixed cost is higher (for make) bc of initial capital investment -Variable cost of buying is higher bc of supplier profits

Recent trends in Supply Management/Purchasing

-Outsourcing of non-core activities to suppliers -Focusing of operations -Supply base reduction (fewer # of suppliers, multiple → single-sourcing) -LT buyer-supplier relationships -Partnerships (vs. adversarial training)

Keys to strong supplier partnerships

-Performance metrics/measures -Continuous improvement -Trust -Shared visions/objectives -Personal relationships -Mutual needs, top mgmt support, info sharing & lines of communication

What flows are in a supply chain?

-Product, services and credit (A/P) flow forward ---> -Orders, cash, recycling and returns flow backward <--- -Information, planning and activity integration flows back and forth among supply chain partners <----> *Upstream* flow refers to suppliers --> focal firm *Downstream* flow refers to focal firm --> final customer

Reasons for MAKE

-Protect proprietary technology (you want control over your process, keep secrets hidden. Ex: can't buy Apple laptops from other suppliers, but can buy Microsoft laptops from other suppliers) -No competent supplier -Better quality control -Use existing idle capacity (keep equipment/facilities engaged) -Control of lead-time, transportation & warehousing costs -Usually *lower cost per unit* (not total/fixed costs)

Make or Buy Analysis Example

-Require 150,000 units -Buy from supplier for $17/unit (variable) and $5000 to prepare contract with supplier (fixed) -Make cost is $15/unit and requires a $125,000 cost in investment 1) Set two equations = → 125000 + 15q = 5000 + 17q, q is the break-even # units q= 60,000 units (lower than the required amount) 2) Since break-even Q is lower than required units, plug in required units to both make and buy formulas, "Make" option is cheaper, meaning: if cost is all we're concerned with, "Make" option is usually better (if we're dealing with large production requirements) Ideally, you would use "buy" option up until the break-even Q of units, then use "make" option for units required further

Benefits of CPFR

-Strengthens partner relationships -Provides analysis of forecasts -Uses point-of-sale, seasonal activity, promotions, new product introductions, and store openings or closing to improve forecast accuracy -Integrates planning, forecasting and logistics activities -Provides efficient management and understanding of customer purchasing patterns

Supplier selection- How many suppliers to use?

-Unit price should NOT be used as sole criterion for selecting suppliers bc other factors must be considered (quality, delivery, reliability, location/distance, transportation, capacity, inventory costs, communication, order time/cycle time, product and process technologies, willingness to share info, TCO* --process of selecting suppliers is COMPLEX and must be based on MULTIPLE criteria (which, depend on the firm's goals/interest)

Request for Quotation/Proposal (RFQ/RFP)

-buyer identifies suppliers & issues a request for quotation (RFQ) for routine items (specific items) -Request for Proposal (RFP) for more demanding products (seeking possible answers/help, supplier does more of the work). (Doesn't specify exactly what you need; size/design)

Delphi method process (steps)

1. Choose expert participants with varying knowledges 2. Obtain forecasts using questionnaires 3. Summarize results, impose new Q's to old/new participants 4. Repeat steps 2-3, refine the forecast, develop new Q's 5. Repeat step 4 if needed, distribute results

Supplier evaluation method: Weighted Criteria Evaluation

1. Select key dimensions of performance 2. Assign weights to each 3. Collect performance data 4. Evaluate the measures 5. Multiply rating * weight → sum overall score, score usually means nothing to us 6. Classify suppliers based on scores; unacceptable, certified, preferred 7. Perform ongoing certification review

What happens in a supply chain?

Example SC for Coke: Begins with *raw materials manufacturing* (aluminum or plastic, smeltering to make the can) → *component/intermediate manufacturing* (put labels on the can) → *final product manufacturing* (pop is filled) → end product is *delivered* to focal firm ← *wholesalers/retailers* buy Coke products to sell at their stores ← *final customers* buy Coke products from wholesaler/retailer (Walmart) --All supply chains start with pulling stuff from the Earth (raw materials

How does CPFR work? (Model)

Exchanges of selected *internal information* to provide a reliable LT view of demand (a cyclical and iterative approach) CPFR Model: Enter into a collaborative agreement (contract) → both firms create a joint business plan → then together, forecast sales, generate orders & fulfill them, exception management: figure out where we went wrong by comparing/analyzing → Assess performance based on this insight (this whole process is repeated several times)

Distinguish key suppliers, 2nd tier suppliers

For Dell: key suppliers- Asus, Seagate (semiconductors), company who makes the keyboards 2nd tier suppliers- suppliers of platters for Seagate (those who supply the key suppliers)

Origins of SCM: 1980's & 90's

Global competition led to US manufacturers to adopt new strategies (as European firms (Japanese) become powerful)). Practices adopted: SCM- increases in popularity, viewed as a competitive advantage JIT (Just-in-time) TGM (Total Quality Mgmt) BPR (Business Process Reengineering) practices

Origins of SCM: 2000's and beyond

Industrial buyers rely on 3PLs to improve purchasing/supply management Wholesalers/retailers focus on transportation/logistics more (quick response, service response logistics, integrated logistics)

How is TCO different than Unit Cost?

It also includes *ordering, logistics, inventory, and maintenance* costs Includes *quality* costs (Ugly Twins- is the cost of switching/transitioning from one supplier to another, also considered the cost of messing up. Ex: Canvas v Blackboard)

Why is CPFR used?

It combines the intelligences of multiple trading partners, links the SC planning process to increase availability while reducing inventory, transportation and logistics costs used to integrate the multi-tier supply chain (manufacturers, distributors, retailers)

Purchasing players: Merchant v Industrial

Merchant buyer- *wholesaler/retailers* who purchase for resale Industrial buyer- *raw materials* for conversion, services, capital equipment; Ex: who Danfoss would buy from for joystick

Roles of Purchasing

Primary goals are to... -Ensure *uninterrupted flows* (easy access to obtain supplies/materials) at the *lowest total cost* -Improve *quality* of the finished products -Optimize *customer service* Purchasing achieves these by recruiting, managing, developing

Analyze potential SC problems that could arise for Superdogs

Purchasing- buying small quantity because of limited capacity/space Operations- staffing can be difficult to meet the demand working late hours, Ames is a small town Logistics- routing- who can reach you/who can you reach? Integration- local restaurant communicates with Sysco (big company)

International Purchasing (Global sourcing)

Reasons for: to improve quality, cost and delivery performance Potential challenges - additional skills and knowledge required to deal w/ international suppliers, logistics, communication, political environment and other issues

Integration Elements

SC *Process Integration*- work for common goals, requires intra-firm functional integration (within the firm), then inter-firm (outside, between other firms) SC *Performance Measurement* high-level SC performance will occur when strategies at each firm fit well with overall supply chain strategies

Origins of SCM: 1950 & 60's

US manufacturing focused on mass production (not competition/quality), for cost reduction and productivity improvement purposes. Demand was greater than supply during this time after Great Depression

Causal (Cause & Effect) forecasting models

assume that 1 or more independent variables are related to demand, and therefore can be used to predict future demand. Simple linear regression- Forecast (Y-hat) = Bo + B1 * X Ex: demand is dependent upon the size of the advertising budget Multiple regression- requires much more data and costs to improve forecast accuracy assume that 1 or more independent variables are related to demand, and therefore can be used to predict future demand.

With which functions within a firm do supply chain processes interact?

finance, R & D, Operations, HR departments. HR within the firm affects relationships with distributors, suppliers, customers

Quantitative Forecasting: Time Series Analysis

includes Moving Average, Exponential Smoothing, Trend Projection. Try to *predict the future based on past data*. Choose specific model based on: time horizon to forecast, data availability, accuracy required, size of forecasting budget, availability of qualified personnel

Demand Management diagram (independent vs. dependent)

independent demand for chairs (as the finished good), depends on the demand of other materials/parts such as; wheels, rubber, legs, etc. -To manage independent demand firms can play an... *Active role* to influence demand Advertise more (to increase demand) Lower the price of the product (to lower demand) or, *Passive role*- simply respond to demand Adjust capacity intentionally (inventory shortages can drive up demand, ex: Game Stop only holds a limited number of PlayStations)

Characteristics of strong supplier partnerships

like a marriage (you're tying your fortunes to that business for a long period) -Win-win competitive performance (primary goal is for both sides to gain from the deal) -Strategic perspective (not tactical) -Mutual commitment over an extended time, sharing info and the risk & rewards of the relationship -Lead to supplier development

Weighted Moving Average forecast method

places weights on each of the "n" period observations (on each value), permits an unequal weighting on prior time periods F (t + 1) = sum of (Wi * Ai) Wi- weight assigned to a period (ex: t-1) Ai- actual demand for that period *highest weight (emphasis) is placed on the most recent values/periods* Pros: more responsive to underlying changes in demand Cons: lags demand b/c of the averaging effect, not good at tracking trend changes in data

You have a document that contains an offer to purchase supplies, it is legally binding if accepted by the supplier. What type of document is it?

purchase order

Naïve forecast method

says the estimate(forecast) of the next period is equal to the demand in past period F (t + 1) = A (t) Cons: no consideration of causal relationships, may not generate accurate forecast so we need a different method

Exponential Smoothing forecast method

sophisticated weighted-moving average technique, where the forecast for next period's demand is the current period's forecast (adjusted by a fraction of the difference between current period's demand (actual) and forecast) F (t + 1) = F (t) + (alpha * (A (t) - F (t)) *Assume the first period's forecast = first period's demand* When alpha value is greater → places more weight on MOST RECENT data, so more responsive to changes in data When alpha value is smaller → responds slower to changes in data Pros: simplicity in that less data is required, one of the most widely used techniques, suitable for data that shows little trend/seasonal patterns Cons: generally lag any trend in the actual data