Supply Chain Management Unit 1
Bill of Materials (BOM)
Document that shows an inclusive listing of all component parts & assemblies making up the final product.
Random Variations
Due to unexpected or unpredictable events (hurricane = wood for roof repair, tree clean up, water damage).
Basic Supply Chain Capabilities Models
Efficient and Responsive
Super Bill of Materials
Enables the firm to forecast the total demand end products.
Integration
Enabling systems, risk and security management, performance measurement.
Globalization
Expanding the Supply Chain. International, mature and emerging markets have become a part of the overall business growth strategy for many companies.
Traditional Logistics
Focuses on activities such as: Procurement / Purchasing, Sourcing, Inventory Management, Warehousing, Distribution (order fulfillment, pick / pack & ship)
Strategic Stock
For major disruptive event in supply, major business opportunity for sales.
Second Tier
Indirect suppliers (i.e., supplier's suppliers) and indirect customers (i.e., customer's customers).
Cycle Stock
Inventory to satisfy demand in the immediate time period. Sales/Demand & replenishment driven. Based on EOQ/MOQ (balance of inventory and order/production costs).
Long-Range Operations Planning
Involves planning for actions such as the construction of facilities & major equipment purchase (ref., Aggregate Production Plan - APP).
How do companies benefit from Supply Chain Management?
Lower purchasing and inventory costs, improved quality, higher levels of customer service.
Mixed Production Strategy
Maintains stable core workforce while using other short-term means, such as overtime, subcontracting & part time helpers to manage short-term demand (ex. Construction co., retail stores at holiday season).
b) Computer-based "Push" Resource Systems
Closed-loop Materials Requirement Planning (MRP), Manufacturing Resource Planning (MRP II), Enterprise Requirements Planning (ERP), Distribution Requirements Planning (DRP)
Importance of Supply Chain Management
Cost savings and better coordination of resources are two main reasons to employ Supply Chain Management.
Network Design
Creating distribution networks based on trade off decisions between cost & sophistication of distribution system.
Sustainability and "Greening" the Supply Chain
Customers increasingly prefer products that are made and sourced in 'the right way'; minimizing business' social, economic and environmental impact on society and enhancing positive effects. Large majority (75%) of U.S. consumers influenced by a firm's environmental friendliness reputation.
Operations Trends
Demand Management, linking buyers and suppliers, Lean Systems.
Independent Demand
Demand for final products affected by trends, seasonal patterns, & general market conditions.
Types of Bill of Material
Dependent Demand, Independent Demand, Multilevel, Super.
Distribution Requirement Planning (DRP)
Describes the time-phased net requirements from warehouses & distribution centers customer demand minus any on hand in-transit inventories.
Short-Range Operations Planning
Detailed planning process for components & parts to support the master production schedule (ref., Materials Requirement Planning - MRP)
First Tier
Direct suppliers and direct customers.
Methods of Calculating Available-to-Promise Quantities
Discrete, Cumulative w/o Look Ahead, Cumulative w/ Look Ahead.
Anticipatory Business Model (Push Model)
Forecast --> Buy Components --> Manufacture --> Warehouse --> Sell --> Deliver
Operations Management
Forecasting, demand management, material and operations planning, lean systems, Six Sigma quality systems.
Supply Chain Breadth
Foreign manufacturing, office & retail sites, foreign suppliers & customers.
Firmed Segment (Demand Time Fence)
From current period to several weeks into future. Can only be altered by senior management.
Tentative Segment (Planning Time Fence)
From end of firmed segment to several weeks into the future.
Current Trends in SCM
Globalization, Flexibility and Responsiveness, Cost Reduction and Continuous Improvement, Sustainability and "Greening" the Supply Chain.
Time Series Forecasting Models
Naive, Simple Moving Average, Weighted Moving Average, Exponential Smoothing, Linear Trend.
Integration Trends
Supply Chain Process Integration, Supply Chain Performance Measurement.
Supply Elements
Supply Management (Supplier Evaluation, Supplier Certification), Strategic Partnerships, Ethics and Sustainability.
The Foundations of Supply Chain Management
Supply Management, Operations Management, Logistics & Transportation, Integration
1950's & 1960's
U.S. manufacturers focused on mass production techniques as their principal cost reduction and productivity improvement strategies.
Steps for building an Efficient Model
Understand the requirements of your customers. Define core competencies and the roles your company will play to serve your customers. Develop supply chain capabilities to support the roles your company has chosen.
Supply Management
(Purchasing/Sourcing) - Supply base rationalization, supplier relationship management, partnerships and alliances, ethics and sustainability.
Tracking Signal
= RSFE / MAD. Determines if the forecast is within acceptable control limits.
Mean Absolute Deviation (MAD)
A MAD of "0" indicates the forecast predicted demand exactly.
Scheduled Receipt
A committed order awaiting delivery for a specific period.
Material Requirements Planning (MRP)
A computer-based materials management system that calculates the exact quantities, need dates, & planned order releases for subassemblies.
Major ERP Applications
Accounting and Finance, Customer Relationship Management, Human Resource Management, Manufacturing, Supplier Relationship Management, Supply Chain Management.
Linear Trend
Can be estimated using simple linear regression to fit a line to a time series. This technique tries to match the slope of the line.
Basic Production Strategies
Chase, Level, Mixed
Supplier Evaluation
Determining supplier capabilities.
Flexibility & Responsiveness
Firms will increasingly need to be more flexible and responsive to customer needs adapting to unexpected changes and circumstances. Necessitating closer integration and collaboration.
Who benefits from Supply Chain Management?
Firms with: large inventories, large number of suppliers, complex products, customers with large purchasing budgets.
Bias Problem
If the tracking signal falls outside the pre-set control limits.
Lean Systems
Improve the flow of materials to reduce inventory levels.
Closed-loop Materials Requirements Planning (MRP)
Incorporates the aggregate production plan, the master production schedule, material requirements plan, & the capacity requirements plan.
Manufacturing Resource Planning (MRP II)
Incorporates the business & sales plans with the closed-loop MRP system.
Trend Variations
Increasing or decreasing (e.g., laptops, cell phones, fashion products, toys).
Running Sum of Forecast Errors (RSFE)
Indicates bias in the forecasts or the tendency of a forecast to be consistently higher or lower than actual demand.
Positive RSFE
Indicates that the forecasts generally were too low - they were underestimating the demand and stock-outs were likely to occur.
Negative RSFE
Indicates that the forecasts were too high - they were over estimating demand resulting in likely excess inventory carrying costs.
Pipeline Inventory
Inventory in transit, inventory held by wholesalers, distributors, and customers.
Demand Management
Match demand to available capacity.
Components
Parts demanded by a parent.
Seasonal Variations
Peaks & valleys that repeat over a consistent interval such as hours, days, weeks, months, seasons, or years (e.g., holiday shopping, restaurant customers, swim suits sales by region, building construction slowing in winter by region).
Single Integrator Solution
Pick all the desired applications from a single vendor.
Best-of-Breed
Pick the best application for each individual function. Disadvantage - software may not integrate well but this may not be a major issue in future
Basic Supply Chain Model
Plan --> Source --> Make --> Deliver <--> Return
Discrete Available-to-Promise
Planned - Ordered = ATP for each time period. (1) Add the Beginning Inventory to the MPS for Period 1, subtracting the Committed Customer Orders (CCO's) from Period 1 up to but not including the period of the next scheduled MPS. (2) For all subsequent periods, there are two possibilities - (a) If no MPS has been scheduled for the period, the ATP is zero. (b) If an MPS has been scheduled for the period, the ATP is the MPS minus the sum of all the CCOs from that period up to the period of the next scheduled MPS. (3) If an ATP for any period is negative, the deficit must be subtracted from the most recent positive ATP, and the ATP quantities must then be revised to reflect these changes.
Innovative Products
Rapidly changing, Very short life-cycle products, Great variety, Very unpredictable demand.
Ethics and Sustainability
Recognizing suppliers' impact on reputation and carbon footprint.
Cost Reduction and Continuous Improvement
Reducing purchasing costs, waste, excess inventory, non-value added activities. Improving demand planning. Increased outsourcing of non-core competencies.
Logistics
Refers to activities that occur within the purview of a single organization.
Pegging
Relates gross requirements for a component part to the planned order releases of the parent item.
Capacity Planning Tools
Resource Requirement Planning (RRP), Rough-Cut Capacity Plan (RCCP), Capacity Requirement Planning (CRP)
Major ERP Providers
SAP, Oracle, Microsoft
Responsive Business Model (Pull Model)
Sell --> Buy Components and Materials --> Manufacture --> Deliver
Multiple Regression
Several explanatory variables are used to make the forecast Examples; Grand opening of a new store, Sale, Rebate, Tax change.
Multilevel Bill of Materials
Shows the parent-component relationships & the specific units of components known as the planning factor. Often presented indented.
Intermediate Operations Planning
Shows the quantity & timing of end items (ref., Master Production Schedule - MPS)
Cause & Effect Forecasting Models
Simple Regression, Multiple Regression
Bullwhip Effect
Slight demand variability is magnified as information moves back upstream. It refers to a trend of larger and larger swings in inventory in response to changes in demand, as one looks at companies further back in the supply chain of a product.
System Nervousness
Small changes in the upper-level-production plan cause major changes in the lower-level production plan (bullwhip effect).
Planned Order Release
Specific order to be released to the shop or to the supplier.
Functional Products
Staples that people buy everywhere. Don't change much over time. Stable predictable demand.
Customer Relationship Management
Strategies to ensure deliveries, resolve complaints, improve communications, & determine service requirements.
Disadvantages of ERP Systems
Substantial time & capital investment, Complexity, Firms adapt processes to meet ERP system.
Strategic Partnerships
Successful and trusting relationships with top-performing suppliers.
Efficient Model
Supply Chain and processes are designed to minimize cost. Characteristics: For predictable supply and low cost, low cost production and highly utilized capacity, high inventory turns, ideal for functional products.
Responsive Model
Supply Chain designed to respond quickly to market demand. Characteristics: Fast response, minimal stock outs, need flexible capacity (volume), inventory of parts, minimize lead time, need to have a variety of products available for customers when they want to buy, ideal for innovative products.
Supply Chain Process Integration
When supply chain participants work for common goals. Requires intrafirm functional integration. Based on efforts to change attitudes & adversarial relationships.
Forecast Error
The difference between actual quantity & the forecast.
Naive
The estimate for the next period(s) is equal to the actual demand in the past period(s).
Net Requirement
The unsatisfied item requirement for a specific time period. Gross requirement for period minus current on-hand inventory.
Supplier Certification
Third party or internal certification to assure product quality and service requirements.
Time Bucket
Time period used on the MRP. Days, weeks or months.
Goal of Supply Chain Management
To increase Customer Service while simultaneously reducing both Inventory Investment and Operating Expenses.
Transportation Management
Trade off decisions between cost & timing of delivery / customer service via trucks, rail, water & air.
Logistics Trends
Transportation Management, Customer Relationship Management, Network Design.
Components of Time Series Forecasting
Trend Variations, Seasonal Variations, Cyclical Variations, Random Variations.
MRP requires
i) The independent demand information, i.e., finished product forecast. ii) Parent-component relationships from the BOM. iii) Inventory status of final product & each of the components and materials. iv) Planned order releases (the output of the MRP system).
Supply Chain Performance Measurement
Crucial for firms to know if procedures are working.
Explosion
Process of converting a parent item's planned order releases into component gross requirements.
2000's and Beyond
Companies will focus on relationships, sustainability, and social responsibility. Companies will focus on improving supply chain capabilities with initiatives such as: Third-party service providers (3PLs), Integrating logistics, Using transportation to facilitate rapid response.
Collaborative Planning, Forecasting, & Replenishment (CPFR)
A business practice that combines the intelligence of multiple trading partners in the planning & fulfillment of customer. Links sales & marketing best practices, such as category management, to supply chain planning processes to increase availability while reducing inventory, transportation & logistics costs.
Old paradigm
A company gained synergy as a vertically integrated firm encompassing the ownership and coordination of several supply chain activities. Organizational cultures emphasized short-term, company focused performance.
New paradigm
A company in a supply chain focuses activities in its area of specialization and enters into voluntary and trust-based relationships with supplier and customer firms. "Outsourcing non-core competencies"
Master Production Schedule (MPS)
A detailed disaggregation of the aggregate production plan, listing the exact end items to be produced by a specific period. More detailed than APP & easier to plan under stable demand. Planning horizon is shorter than APP, but longer than the lead time to produce the item.
Resource Requirement Planning (RRP)
A long-range capacity planning module, checks whether aggregate resources are capable of satisfying the Aggregate Production Plan. Resources considered include gross labor hours & machine hours.
Time Fence
A method of dealing with nervousness by separating a planning horizon into a firmed segment and a tentative segment.
Firmed Planned Order
A planned order that the MRP computer logic cannot automatically change when conditions change. Established by the Planner or Supply Chain Manager to prevent system nervousness.
Capacity Requirement Planning (CRP)
A short-range capacity planning technique that is used to check the feasibility of the Material Requirements Plan (MRP).
Distribution Requirements Planning (DRP)
A time-phased finished good inventory replenishment plan in a distribution network. A logical extension of the MRP system & ties physical distribution to manufacturing planning and control system.
Gross Requirement
A time-phased requirement prior to netting out on-hand inventory & lead-time.
Exponential Smoothing
A type of weighted moving average where only two data points are needed.
Advantages of ERP Systems
Added visibility leads to reduced supply chain inventories, Helps to standardize manufacturing processes, Measure performance & communicate via a standardized method.
Chase Production Strategy
Adjusts capacity to match demand. Firm hires & lays off workers to match finished output to demand. Finished goods inventory remains constant. Works well for make-to-order firms. (ex. Airplane companies do this since training takes time. Union employees are sent back to the union hall, waiting to be recalled. They collect unemployment. Another example are workers that harvest crops).
Forecast
An estimate of future demand & provides the basis for planning decisions.
Enterprise Requirements Planning (ERP)
An extension of MRP-II.
Mean Squared Error (MSE)
Analogous to variance, large forecast errors are more heavily penalized .
Cause & Effect Forecasting
Assumes that one or more factors (independent variables) predict future demand (e.g., seasonality in retail markets).
Supply Chain Management Challenge
Balancing demand (working capital/capital investment) and supply (cost of goods sold/operating expenses).
Weighted Moving Average
Based on an n-period weighted moving average You place more weight on a certain period of history. For Example: If you think recent actual demand history is abnormal, then you might want to place more weight on data which is further back in time.
Qualitative Forecasting
Based on opinion & intuition. Generally used when data is limited, unavailable, or not currently relevant. Forecast depends on skill & experience of forecaster(s) & available information.
Time Series Forecasting
Based on the assumption that the future is an extension of the past. Historical data is used to predict future demand. The most frequently used among all the forecasting models.
ERP System Implementation Styles
Best-of-Breed, Single Integrator Solution
Safety Stock
Buffer demand variability, buffer supply variability, ensures desired customer service level.
Aggregate Production Plan (APP)
Hierarchical planning process that translates annual business & marketing plans & demand forecasts into a production plan for a product family in a plant or facility. Planning horizon is at least one year & is usually rolled forward by three months every quarter. Includes those costs relevant to aggregate planning decisions (i.e., inventory, setup, machine operation, hiring, firing, training, & overtime costs).
Enterprise Resource Planning Systems (ERP)
Information system connecting all functional areas & operations of an organization and in some cases, suppliers and customers via common software infrastructure and database. Provides means for supply chain members to share information so that scarce resources can be fully utilized to meet demand, while minimizing supply chain inventories.
1980's & 1990's
Intense global competition led U.S. manufacturers to adopt: Supply Chain Management (SCM), Just-In-Time (JIT), Total Quality Management (TQM), Business Process Reengineering (BPR).
1960's & 1970's
Introduction of new computer technology lead to development of Materials Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII) to coordinate inventory management and improve internal communication.
Parent
Item generating demand for lower-level components.
Four Qualitative Models
Jury of executive opinion, Delphi method (done separately so people are not influenced by others), Sales force composite, Consumer survey
ERP System Implementation Problems
Lack of top management commitment, Lack of adequate resources, Lack of proper training, Lack of communication, Incompatible system environment.
Operations Planning Categories
Long-Range, Intermediate, Short-Range
Disadvantage of MRP
Loss of visibility (especially acute for products with a deep BOM), ignores capacity and ignores shop floor conditions.
Typical Supply Chain
Material Supplier (Tier 2) --> Intermediate Supplier (Tier 1) --> Manufacturer (Finished Product) --> Wholesaler & Distributor (Tier 1) --> Retail Customer (Tier 2) --> End Consumers
Measures of Forecasting Accuracy
Mean Absolute Deviation (MAD), Mean Absolute Percentage Error (MAPE), Mean Squared Error (MSE).
Rough-Cut Capacity Plan (RCCP)
Medium-range capacity planning, is used to check the feasibility of MPS. Converts MPS from the production needed to the capacity required, then compares it to capacity available.
Maintenance, Repair and operating (MRO) Inventory
Not directly related to product creation.
Simple Regression
Only one explanatory variable is used & is similar to the previous trend model. The difference is that the x variable is no longer time but an explanatory variable. Examples; Sales on clothing, Competitor goes out of business, Major recall by a competitor.
Lot Size
Order size for MRP logic.
Pull/Make-to-Order
Producing stock in response to actual demand. Used by 5% if businesses.
Push/Make-to-Stock
Producing stock on the basis of anticipated demand. Demand forecasting can be done via a variety of sophisticated techniques. Used by 95% of businesses.
Product Family
Products that share similar characteristics.
Projected On-Hand Inventory
Projected closing inventory at end of period. Beginning inventory minus gross requirements, plus scheduled receipts plus planned receipts from planned order releases.
Mean Absolute Percentage Error (MAPE)
Provides a perspective of the true magnitude of the forecast error.
Advantage of MRP
Provides planning information.
Supply Chain Management
Refers to networks of independent companies that work together and coordinate their actions to deliver a product(s) or service(s) to market for the benefit of all companies in the network (i.e., collaboration and coordination).
Level Production Strategy
Relies on a constant output rate while varying inventory & backlog according to fluctuating demand. Firm relies on fluctuating finished goods & backlogs to meet demand. Works well for make-to-stock firms (ex. Plywood, steel, light bulbs, razors are examples. Maybe the changeover is long, or its inefficient to stop/ start).
Available-to-Promise (ATP) Quantity
The difference between confirmed customer orders & the quantity that the firm planned to produce, i.e., what we planned to make verses what our customers have actually ordered. Represents the remaining open slots that customers can still order.
Dependent Demand
The internal demand for parts (i.e., the items that are assembled or combined to make up the final product) based on the demand of the final product in which the parts are used (e.g., raw materials, component parts, packaging materials, subassemblies, etc.),
Planning Factor
The number of each component or material needed to produce a unit of the parent item.
Simple Moving Average
Uses historical data to generate a forecast. Works well when demand is stable over time. You specify the time period and then calculate the average over that time frame. Generates a very consistent demand over a long time frame as this technique smooth's out the minor variations or changing demand blips
Quantitative Forecasting
Uses mathematical models & historical data to make forecasts.
Logistics & Transportation
Warehousing, transportation management, customer relationship management, network design, international trade, sustainability, service response logistics.
Cyclical Variations
Wavelike movements that are longer than a year (e.g., business cycle, China growth, GDP, bull or bear markets).
Collaborative Planning, Forecasting, and Replenishment (CPFR)
activities reduce the Bullwhip Effect and lead to better customer service, lower inventory costs, improved quality, reduced cycle time, better production methods, and other benefits.
Supply Chain Management delivers value by
managing the processes of all of those otherwise independent trading partners so that they collaborate with one another in an efficient, effective and cost conscious way.