SCM 300 Exam 1 Module 2

Demand Forecasting

"A predictive analysis and/or estimation of consumer demand in a future period"

Centralized

"A purchasing system where all corporate employees send material requisitions to a single purchasing department. The centralized purchasing department is then responsible for all purchasing decisions, including, supplier choice, order size, and payment terms. Advantages of Centralized Purchasing

Decentralized purchasing

"A purchasing system where material requisitions are sent to a departmental purchasing department. Thus a company with a decentralized purchasing system might have a purchasing department in each department, or perhaps each office might have the ability to make purchases on their own. Advantages of Decentralized Purchasing Closer Knowledge of Requirements - In certain cases the employee requesting the material has a better understanding of the items required and the suppliers. Decentralized purchasing may allow users to buy the best item for the intended purpose. Closer Knowledge of the Suppliers - Especially when departments are spread across the country or around the world, there are certain items and services where local buyers would be able to make better purchasing decisions than a faraway central purchasing department. Speed of purchase- In a decentralized system when a need arises a product can be bought immediately. In a centralized system multiple documents and approvals, as well as a drawn out purchasing process may slow the purchasing of a product or service."

Supplier scorecards

"A report card that can be used to communicate desires before a sales presentation or shipment. It can then also communicate performance outcomes after the sales presentation or shipment. The results can then be used to discuss changes that might be required in future interactions."

SKU

"A specific product or service's identification code used to track inventory or catalog sales."

Lot Size

"An accepted order size. (Sometimes also refers to a possible order size increment. Example: Lot size of 100 units. Ordering 100, 200, 300, etc. would be possible order sizes.)"

E-procurement system

"An electronic procurement system that can aid in submitting requests for materials, making material orders, negotiating with suppliers, tracking shipments, and receiving shipments. The data collected in these systems can also help in analyzing procurement actions which can lead to better procurement decisions in the future."

Supplier base

"An established group of suppliers from which a company makes most of its purchases."

TCO

"As the name would imply, total cost of ownership is the cost of owning an item over the entire lifetime of the item."

Inventory Calculations

"Average amount of inventory = Q/2" "Number of orders per year = D/Q" "Time between orders (in weeks) = (Q/D)*52"

Forward Integration

"Making over supply chain responsibilities formerly performed by downstream supply chain partners. (Example: A bakery decides to open up a sandwich shop. Rather than just selling bread to sandwich shops, they now forward integrate and use their own bread for their sandwich shop)"

High vs. Low Inventory

"Pros of High Inventory Levels Higher levels of customer service - Having inventory will help a company address their immediate demand for product Quantity discounts may be possible - Lower per unit costs Fewer orders will need to be placed - Possibly lower ordering costs and transportation costs Greater security against unexpected demand variability Pros of Low Inventory Levels Less storage space required - Costs of holding inventory may be lower Lower chance of inventory obsolescence and shrinkage Less inventory typically means less materials handling requirements Less money invested in inventory means more money available for other investment opportunities "

MR

"The document used to initiate the purchasing process. It is filled out by the intended user and then sent to their procurement office to communicate that need. It will not only signal that a product or service is needed; it may also list quantity needed, product/service description and/or specifications."

Inventory

"The items that are owned by a company for the purpose of present or future sale or for use in day-to-day operations."

Lead time

"The period of time between when an order is placed and when the order is received.

Explain the benefits of Honda's Best Practices program to both Honda Suppliers and Honda.

Has increased suppliers' productivity by about 50%, improved quality by 30%, and reduced costs by 7%. Suppliers have to share 50% of cost savings with Honda. Reduced costs became baseline for new contracts that suppliers sign with Honda. Suppliers benefità apply what they have learned to their other product lines for Honda and its competitors and keep all those cost savings.

How did the relationship between Honda and Atlantic Tool and Die develop?

Honda sent out one of its engineers to spend a year with the company. The engineer studied the way the organization worked, collected data and facts, and informally shared their findings. Atlantic signed on because they believed Honda was acting fairly by allowing them to make a profit.

Inventory Classifications

Long-term - These items can be sold today, next month, next year, perhaps even 5 years from now. Quick sale is preferred but not required. Examples: Nails, Paper, Cleaning supplies Seasonal - These items must sell quickly. The period of high demand for this item is limited. Next year may be an option. Examples: Christmas trees, Valentine's candy Perishable - The demand period for these items is finite. Selling them after today may not be possible. Spoilage - Fruits, Vegetables, Meat, Flowers Obsolescence - Clothing, Computers Time Perishable - Airline seats, rental cars, hotel rooms, newspapers...

Established supply base

A centralized purchasing "system allows a purchasing department to have a core group of suppliers that it knows and trusts. It also allows for deep supplier relationships to form.

How long does it take American and Japanese automakers to design a new car? Why are the Japanese faster?

American: 2-3 years, Japanese: 12-18 months. Japanese are so much faster because they are better in fostering innovation with vendors.

Supplier certifications

Assessments that help ensure that a buyer's suppliers all meet the minimum supplier standards. Some buyers may not even consider purchasing from a supplier unless that supplier first gets certified. Supplier certifications can be developed by the buyer themselves or they may be developed by an outside agency."

Weighted Moving Average

Average demand over a certain number of prior periods.

Simple Moving Average

Average demand over a certain number of prior periods. Works well in industries where demand is fairly stable.

Volume Discounts

By pooling together common orders from different departments, large orders can be used to take advantage of quantity discounts.

Costs of Inventory

COST OF THE ITEM / PURCHASE COST HOLDING or CARRYING COST Warehouse Rent, Security Systems, Depreciation Obsolescence/Shrinkage, Materials Handling Insurance, Opportunity Costs ORDERING COSTS Order Clerk Salary, E-Procurement System, Delivery Fees STOCKOUT COST (or Customer Service Cost) Stock-outs, Backorders, Lost Profits, Late Fees "ill-will" (Difficult to Calculate) These will not be considered in SCM 300 calculations

Avoid duplication

Centralized purchasing departments know the company's total inventory. If a request is made the purchasing department would be aware if someone else in the company already has the needed item and is not using it.

CONS for High Inventory (Pros for Low)

Cost to hold inventory Materials handling - Cost to handle inventory Shrinkage/Obsolescence Liquidity - Capital investment options

PROS for High Inventory (Cons for Low)

Customer service levels Costs to order inventory (purchasing costs) Cost to purchase - quantity discounts Transportation: Ease? Cost?

Despite the low cost wage opportunities presented by Chinese and Indian suppliers Toyota and Honda have not switched suppliers. Why?

Neither companies sources very much from those countries primarily because suppliers there offer them only wage savings and that isn't enough for Toyota and Honda. They believe suppliers' innovation capabilities are more important than their wage costs.

Japanese cars are seen as durable, reliable and high in quality. Do they struggle in decreasing manufacturing costs?

No, they have brought them down 25% since the 1990s.

Consolidated shipping

Perhaps different departments in one company need pens, paper, and tape. These are all items that might come from a single supplier. Multiple orders from a single supplier all being shipped in a single shipment.

Shrinkage

Pilferage, Security, Lost Items, Damaged, Obsolescence

Demand Forecasting Methods

Qualitative Query executives, experts, salespeople, consumers Irrelevant current data, lack of current data, incomplete data New products, new markets When is the group "smarter" than the expert? Quantitative Value of numbers? Limitation of numbers? How much do companies value statistics? Casual Methods - Linear Regressions Time Series - Averages, Trends, Seasonal...

Types of Inventory:

Raw Materials/Components, Work-in-Process, Finished Goods Spare and/or replacement parts Capital Equipment & MRO (Maintenance, repair & operations)

How has Johnson Controls benefited from its' relationship with Toyota?

Restructured shop floor, slashed inventories, and was able to make seats for Toyota in the existing space- reducing costs and improving quality. Created joint venture with TrimMasters and benefits from 56% market share

What did American companies do to copy the Japanese partnering model?

Slashed the number of suppliers they did business with, awarded survivors long-term contracts, and encouraged top-tier vendors to manage lower ties.

Why does Toyota divide components into two categories?

So they don't inundate suppliers with information and diminish focus.

SKU, according to lecture

Stock Keeping Unit. Unique identifying number used to track each unique product customers can purchase.

Inventory, according to lecture

Stock of any ITEM or RESOURCE used in an organization. Not just what you sell. Also includes what you need to run the business on a day-to-day business. Inventory is your insurance against risk at every stage of the supply chain. Inventory is "IT"- Buy IT, Make IT, Move IT, Sell IT, Service IT Relate inventory types to supply chain stages.

Inventory Considerations

Storage - Space, Heat/Cool Environment, Energy Requirements, Labor, Handling, Buy/Lease, Cost Transport - Vehicle, Cool/Heat, Fuel, Labor, Packaging, Cost Shrinkage - Pilferage, Security, Lost Items, Damaged, Obsolescence Other Inventory Needs - What else do we hold in inventory? Do we have enough room for everything we typically carry? Money - Cash, Financing Terms, Taxes, Insurance Legal Considerations - Licenses, Certifications, Other Laws

Lead Time

Time elapsed between customer placing order and order being received by customer

How does Honda use report cards

To monitor its core suppliers- sends reports to its suppliers' top management every month. Uses the comments section to communicate how the supplier is doing and highlight problems.

Lot Size, according to lecture

Typically refers to the order size

What are the general steps outlined in the supplier-partnering hierarchy?

Understand how your suppliers work, turn supplier rivalry into opportunity, supervise your suppliers, develop supplier's technical capabilities, share information intensively but selectively, and conduct joint improvement activities.

Vertical Integration

"The act of a company taking on additional supply chain responsibilities that were formerly done by outside parties. "

Making vs Buying

"Before a company buys anything they might consider if it is possible and worthwhile for the company to produce the product or perform the service on their own. Let's briefly look at a short list of reasons a company may choose to "make" the product or service versus choosing to "buy" the product or service from a supplier. Reasons for making Proprietary technology - Not only can others not make it, but our company does not want to tell anyone else how to make it. No competent supplier - Others can make it, but not as good as we can. Better quality control - We like it made a certain way and are concerned others will not be as detail oriented. Idle Capacity - We have the machines and people to make it. Why not take advantage of the idle capacity? Control - We want it faster, cheaper, better...than others are willing to make it. Perhaps the demands of our supply chain do not allow us to have suppliers that can dictate so much control over our supply chain flexibility. Reasons for outsourcing Insufficient Capacity - We could make it (we have the know-how), but we just don't have the time and resources "Lack of expertise - We don't know how to make it. No competent supplier - We know how to make it, but not up to the standards we'd like. Our suppliers could definitely make it better. Better use of resources - We know how to make it, but outside suppliers can produce it to acceptable standards faster and/or at a lower cost. "

Inventory Risks

"Carrying inventory can come at a hefty price, thus there is risk. Not carrying inventory also comes at a risk: the risk of not having inventory, the risk of not being able to satisfy the needs of the customer." "Company risks: Theft or damage to inventory, late shipments from supplier, employee sickness, employee strike, machine malfunctions, harsh weather Supplier risks: Employee sickness or strikes, sudden increases in demand for your company's supplies, the risks posed by their suppliers Customer risks: Sudden increase in demand, damage to customer's inventory"

Multiple suppliers

"Competition can breed innovation - Multiple tire suppliers fighting for a larger percentage of our tire purchases will work harder to set themselves apart in both product and service dimensions. Risk is spread out among multiple suppliers - If one tire supplier encounters difficulties, the other tire suppliers are ready to step in and carry the additional load. Capacity Flexibility - If more tires are needed immediately a buyer can call upon their large tire supplier base to increase supply quickly. Location advantages - For car companies that have multiple plants around the country or even around the world, having multiple suppliers may help ensure that a tire supplier is always relatively close by. This can reduce transportation costs and also reduce lead times. This can help reduce inventory requirements."

Choosing a supplier

"Consumer needs- Do they have a part that will make your product more desirable to your customer? Cost, Quality, Speed, and Flexibility - What do you and your customer want? Are your goals similar to their goals? Technological capability - Do they offer a product or service no one else can offer? Location - Will the distance between their facility and your facility significantly increase lead time or increase supply chain risk? Will transportation and tariffs pose cost challenges? Information Technology system - Will their system and your system be able to share data selectively and securely? Ability to innovate - Do they have money to invest in R&D? Are they interested in innovating? Your product can't improve if their parts do not improve. Capacity Potential - Is their present capacity or their potential for growing capacity sufficient to help you meet your growing demand? 2nd and 3rd tier suppliers - If we look farther downstream in the supply chain are we comfortable with the risks or opportunities their suppliers may pose? Are they willing to let us develop a relationship with their suppliers? Reliability - How often do they actually deliver on their promises? When they can't meet our deadlines what is the typical outcome? Service- "In addition to great products, what else do they offer? If we are buying a commodity where the market drives the price, what does this supplier offer to differentiate themselves from their competion?

All 4 Costs of Inventory

"Cost to Purchase - The cost to purchase the inventory. Holding Cost - The cost of holding the inventory. Some of the costs this may include are: Rent for the storage facility, energy and equipment required to keep inventory in an acceptable environment, insurance, security personnel, employees that handle inventory, etc. Ordering Cost - The costs associated with placing an order for inventory. This might include the cost to research suppliers, negotiate purchase, the cost to have items shipped, and the upkeep of any electronic ordering system. Stockout Cost - The costs associated with not having enough inventory on hand to meet customer demand. This might include loss of the unmet sale in the present, the loss of any future sales from this customers, cost of expedited shipment, and the cost of altering operational plans to expedite production"

EOQ

"EOQ is the lot size (Q) that will minimize total annual inventory cost (TC); it is therefore seen as the optimal lot size. The formula for Economic Order Quantity: EOQ = Sqrt[ (2DS) / H ]" "AHC is greater than AOC - Holding costs are too high - You are to the right of EOQ on the chart below. Decrease lot size to reduce TC. AOC is greater than AHC - Holding costs are too low - You are to the left of EOQ on the chart below. Increase lot size to reduce TC."

PO

"If a supplier is chosen and a quote is deemed acceptable, then an order can be formally requested through the use of a PO. A PO is a contract that states the terms and conditions of the order. Once the PO is accepted by the supplier, a signed copy returned to the buyer represents a binding contract."

RFQ

"If the product or service requested is not in stock then an RFQ can be issued to one or more potential suppliers. This document simply asks the potential supplier to provide a detailed quote that might include more than just a per unit price, it may also include delivery date, and payment terms. Be aware the quote provided may only be the first step in a negotiation with a supplier."

Independent vs Dependent Demand

"Independent demand item: An item for which demand levels are not directly impacted by the demand of another related item. Dependent demand item: An item for which demand levels are directly impacted by the demand of another related item."

Single

"Quantity discount opportunities - When buying in large quantities a buyer may have negotiating leverage and economies of scale may be easier to achieve. This goes for both the purchase price of the tires and the transportation costs. Lowest total cost - Perhaps this supplier's product and service package cannot be matched by any other supplier. Good product, reliable supplier, fast delivery. Intellectual property advantages - Perhaps no other company can make a tire like the one offered by this company. Quality control - With a single tire supplier a buyer can be fairly certain that all the tires are very similar in design and quality, and that all business interactions will be similar. Relationship management is easier - Sharing and communicating with a single supplier can be easier than trying to maintain multiple relationships simultaneously. Collaboration easier - Sharing information about future needs and working to help develop tires for "the future is much easier with one dedicated supplier."

All 8 Inventory Classifications

"Raw Materials - Typically refers to material, parts, or components that will be used to create an end item or service. These materials have not yet begun their manufacturing/transformation into a finished good or service. (Examples: unassembled handles, shafts, and shovel blades) Work-in-Process (WIP) - Items that have begun the manufacturing process but are not yet completed. (Example: Partially assembled shovels) Finished Goods (FG) - Items that are completed and ready for shipment at a manufacturing facility or assembly plant. (Example: Fully assembled shovels) Maintenance, Repair, and Operations (MRO) - Items that are not intended as part of the finished goods but are important to the daily operations of the company. (Examples: Desks, computers, cleaning supplies, oil/lubricants, factory equipment) Market Inventory - Inventory that is readily available on the shelf. (Example: Shovels on the shelf of Home Depot) Safety Stock (buffer stock) - Inventory kept to account for variation/uncertainty of demand. (Example: 100 shovels are sold per week Sunday to Saturday. Shipments arrive Sunday morning. Stores always wants to start Sunday with 125 units of inventory. The additional 25 units are safety stock) Anticipation Inventory - Inventory that is created and stored for future use. Typically used to absorb uneven rates "of demand that may be related to seasonal demand or planned price reductions. (Example: Shovels assembled in summer and stored through fall in anticipation of large winter demand would be classified as anticipation inventory.) Pipeline Inventory - Inventory in transit between two points. Those two points establish the pipeline. So the inventory does not necessarily need to be on a truck or train."

Steps in purchasing process

"Requisition - Someone discovers they need something (Item A). A materials requisition (MR) is issued by the person in need of Item A to inform procurement to get Item A. Supplier Selection - Procurement searches their supplier base to see if one of their present suppliers sells Item A. If no one does, they must find a supplier. If more than one company sells the item they will need to choose a supplier. In either case, procurement may send out a Request for Quotation (RFQ) to get a price for Item A. A negotiation may ensue. Place order - Once a supplier is chosen and a price for Item A is agreed upon, a Purchase Order (PO) may be issued by procurement to formally order the item. Track Order - In an effort to inform the eventual user of Item A as to when Item A will be available, procurement will likely track the order to see if it is due to arrive when promised. Receive Order - Once Item A arrives it will likely be inspected, scanned into inventory, and moved either to where it will be used or onto a shelf for storage."

TC Formula

"TC = DC + (Q/2)*H + (D/Q)*S TC = DC + AHC + AOC In an effort to decode the formulas, see below: Annual cost to purchase inventory = DC Annual holding cost (AHC) = (Q/2)*H Annual holding cost (AHC) = (D/Q)*S"

Backward Integration

"Taking over supply chain responsibilities formerly performed by upstream supply chain partners. (Example: A bakery decides to purchase a flour company. Rather than purchase flour from a flour supplier they now use their new flour branch to both sell flour to other companies (including competitors) and they also use the flour in their own bakery."

Despite the efforts of American car manufacturers, why did cost resurface as the key criterion?

1) Companies were easily able to source globally, notably from China. They jumped to the conclusion that the immediate benefits of low wage costs outweighed the long-term benefits of investing in relationships. 2) The development and spread of internet-based technologies allowed companies to get suppliers to compete on cost more efficiently—and more brutally—than they used to.

How should companies go about fulfilling each step?

1-understand your suppliers: learn about their business, go see how they work, respect their capabilities, and commit to coprosperity. 2- turn supplier rivalry into opportunity: source each component from 2 or 3 vendors, create compatible production philosophies and systems, set up joint ventures with existing suppliers to transfer knowledge and maintain control. 3- supervise your suppliers: send monthly report cards to core suppliers, provide immediate and constant feedback, get senior manages involved in solving problems. 4- develop supplier's technical capabilities- build supplier's problem solving skills, develop common lexicon, hone core innovate capabilities. 5- share info intensively but selectively- set specific times, places, and agendas for meetings, use rigid formats for sharing info, inisit on accurate data collection, share info in structured fashion. 7- conduct joint improvement activities- exchange best practices, initiate kaizen projects at facilities, and set up study groups.

Costs associated with inventory

INSURANCE - Manage Risk/Uncertainty Common risks - Breakdowns, accidents, weather, defects, strikes, illness, forecasting errors, theft BUY IT - Suppliers have the same risks. Protect yourself against their problems. MAKE IT - Labor, machine breakdowns, high demand... MOVE IT - Theft, late shipments, logistics problems associated with distance... SELL IT - Theft, high demand, damaged items ... SERVICE IT - Defects, repair, warranties, maintenance Insurance against your firm's risk, risk posed by suppliers and customers CUSTOMER EXPACTATIONS - Support strategic plan In some industries, companies make it their business to have large amounts of inventory on hand for your convenience - Wal-Mart, Home Depot, Circle K. Low Cost may require Longer Lead Times Your supplier's lead times may be too long to compete without inventory. Also consider perishable items, seasonal items... MANAGING COST- Economies of scale Quantity Discounts - Lower purchase costs could offset other inventory related costs. Manufacturing - Some items are made in batches, making them as needed wouldn't be economical. Maximize capabilities, minimize cost

Supply specialization

In a centralized purchasing system certain purchasing employees can develop expertise in buying certain categories of products or services."

CYCLE STOCK

Inventory used to accommodate normal demand or inventory that varies directly with lot size