Supply Chain Midterm

Strategic stock

Additional inventory beyond cycle and safety stock generally used for very specific purpose or future event and for defined period. Hedge current fluctuations Take advantage of price discount Protect against short term disruptive supply event Take advantage of opportunity Life cycle changes- seasonal, new product launch, etc.

Chase Production Strategy

Adjust capacity to match demand. Firm hires and lays off workers to match finished output to demand. Finished goods inventory remains constant. Good for market-to-order companies. ex.) construction company- union employees sent back and recalled accordingly

Customer Survey

Advantage- direct method of assessing info from primary source, simple to administer and comprehend, no bias Disadvantage- poorly formed questions lead to unreliable data, customer may not answer, costly and time consuming

Planning Processes

Aggregate production planning (APP) Master Production Scheduling (MPS) Material Requirement Planning (MRP) Distribution Requirement Planning (DRP) Capacity Planning

Strategic Sourcing

Approach to supply chain management that formalizes way info gathered and used such that organization can leverage its consolidated purchase power to find best possible values in market-place. Disciplined, systematic process to reduce total cost of externally purchased materials, equipment and service while maintaining/improving levels of quality, service, and tech.

Co-Managed Inventory (CMI)

Arrangement where specific quantity of item stored at buyer's location. Once used item replaced by supplier with full knowledge and approval of buyer. Buyer provides ordering system access to supplier and supplier has responsibility for mangement and replenishment process.

Multiple Linear Regression

Attempts to model relationship between 2 or more independent variables and dependent variable (demand) by fitting linear equation to observed data

Simple linear regression

Attempts to model relationship between single independent variable and dependent variable (demand) by fitting linear equation to observed data. Describes relationship between independent and dependent variable as straight line.

Inventory Carrying Costs (ICC)

Average Inventory Value ($) x Carrying Cost (%) Ex.) Order delivery = 10,000 tons/month SS = 2,000 tons Purchase price = $50/ton Inventory expense = 20% Cycle stock + SS = Total Avg Inventory 5,000 + 2,000 = 7,000 Avg Inventory Cost = 7,000 x $50 =$350,000 ICC = $350,000 x 20% = 70,000

Cycle stock (CS)

Average inventory for periodic fixed order quantity or order quantity CS = Q / 2 Ex.) Q = 10,000 tons per year CS = 10,000 / 2 = 5,000 tons

Finding Economic Order Quantity?

Balance cost of ordering inventory with cost of carrying inventory. Annual carry cost = Annual ordering cost (Q / 2)(KC) = (R / Q)(S) where, Q = order quantity K = annual carrying cost percent C = purchase cost ( $ per unit) R = annual requirement S = ordering cost ($ per order)

Information flow

Between suppliers and customers. Integrated through information and planning.

Keys to Successful Strategic Partnerships

Build trust Shared vision and objective Personal relationship mutual benefits/needs Commitment and top management support change management info sharing and lines of communication right tech/capabilities to meet requirements

Supplier selection

Conducted by cross-functional team that selects supplier based on multiple criteria like: product/process tech reliability quality order system/cycle time cost willingness to share info capacity services location

What is supply chain?

Consists of flow of products from raw materials suppliers to intermediate suppliers to finished product manufacterers to wholesalers/distributors to retailers/customers.

Request for Quote (RFP)

Document initiated by procurement organization used to solicit bids (pricing) from qualified suppliers for supplying well-defined, routing good or service.

Purchase requisition

Document that describes need for good/service. Internal document. Does not constitute a contractual relationship with any external party.

Bill of Material (BOM)

Document that shows inclusive listing of all component parts and assemblies making up final product.

When is inventory good for company?

During period of high demand.

When is inventory bad for company?

During period of low demand.

EOQ Graph

EOQ lowest point on total cost curve when total carrying cost equals total ordering cost

Barcode reader

Electronic device can read barcodes and transmit data to computer

Supply chain plannine

Element of supply chain management responsible for determining how best to satisfy the requirements created by the forecasted demand plan. Objective is to balance supply and demand in way that realizes financial and performance objectives of that company.

Enterprise resource planning system (ERP)

Extension of MRP-II and includes Distribution Requirement Plan which determines need to replenish final product inventory at branch warehouse when multiple warehouses in network. Implemented through software platform of integrated functional modules that share info across multiple business functions. Connects all functional areas and operations of an organization and in some cases suppliers and customers via communication software infrastructure and database.

Safety stock (SS)

Extra inventory or buffer company carries to protect against uncertainty in supply chain.

Warehousing and distribution

Facilitates that allow company to store material and finished product in short term and long term to receive, break down, repackage, and ship material out to a manufacturing location or a customer.

Make-to-order

Finished goods not produced until customer order received and raw material may not even be ordered from suppliers in advance. Little to no finished goods in inventory.

Make-to-stock

Finished product produced prior to receipt of customer order. Forecast and demand plan created and final goods produced/held until customer order received. Significant amount of finished goods inventory maintained.

Fixed Time Period System

Inventory checked in fixed time intervals against a target inventory level. If inventory < target a quantity necessary to bring inventory back up to target level is ordered. Amount of inventory ordered will vary period to period based on remaining inventory at each time interval checked.

Pipeline inventory

Inventory in transportation network and distribution system or inventory already out in market being held by wholesalers, distributors, retailers, and consumers. Ownership transferred to trading partners.

Continuous review system

Inventory levels continuously reviewed. As soon as inventory falls below pre-determined level, replenishment order triggered. More costly to conduct but requires less safety stock and replenishment action taken more quickly. Advantage- allows for real time updates, facilitates accurate account of CGS Disadvantage- cost, requires automated system, hardware/software expensive

Peer Review system

Inventory levels reviewed at set frequency. At that time is stock below predetermined level order for replenishment placed otherwise no action taken until next cycle. Advantage- reduce time spent analyzing inventory and less expensive Disadvantage- greater need for safety stock, may not provide accurate measure of inventory counts

Cycle stock

Inventory that builds to satisfy its' immediate demand. Depletes gradually as customer orders received and is replenished cyclically when supply orders are received. Amount held depends on actual demand in immediate time period, supply replenishment lead time, and order quantity

Long range supply chain planning

Involves planning for actions such as construction of facilities and major equipment purchases (Aggregate Production Plan). Strategic level- top management; 3-5 years ex.) Ford grows market share by 3% each year over next 3 years.

Finished goods

Items for which all manufacturing operations, including final testing, completed and product is awaiting sale or shipment to cutomers.

Reasons for Global Sourcing

Opportunity to improve quality, cost, delivery, etc. Exploit global efficiencies Access low cost labor and material Tax breaks and low trade barriers Insufficient domestic capacity Access to better process/product tech Reciprocal trade/countertrade arrangements

Fixed time period assumption

Order quantity different between on-hand stock on review day and pre-determine target inventory level. Q = R - IP where, Q = order quantity R = target invenotry level IP = inventory position Inventory levels checked/reviewed in fixed time period (T) If (IP) < (R) then (Q) ordered and (R) restored when each new order received

SCOR Model: Deliver

Oversees plan and execution of forward flow of goods. Coordinate receipt of orders from customers, develop network of warehouses, pick carriers to transport product to customer, and set up invoicing system to recieve payment.

Calculate Reorder Point (P)

P = D + SS = dL + SS where, P = reorder point D = expected demand during lead time d = periodic demand SS = safety stock Ex.) Q = 10,000 units Demand per week (d) = 2500 units L = 2 weeks SS = 1000 units P = 2500(2) + 1000 = 6000 units

Logistics

Part of supply chain management that plans, implements, and controls flow and storage of goods from point of origin to point of consumption.

Jury of Executive Opinion

People who know most about product and market likely to form a jury (management panel) to discuss and determine forecasts. Conducts series of forecast meetings until consensus reached. advantage- decisions enriched by experience of panel and less time/resources spent disadvantage- experts introduce bias

Inventory Mangement

Planning and controlling of inventory to help company be more profitable by lowering CGS and/or increasing sales

Risks of outsourcing

Potential loss of control over production process, intellectual property, etc. Increased reliance of suppliers. Increased need for supplier oversight and management.

Benefits of Strategic Partnerships for Buyer

Preferred access to supplier's best people Increase operating efficiency Lower costs Improved quality Enhanced service Influence over supplier investing/tech preferred access to supplier ideas increased innovation from suppliers sustainable competitive advantage

Multiple Sourcing

Purchase of a product or service from more than one supplier. Company may use to create competition between suppliers to achieve higher quality and lower price. Supply interruptions can be minimized.

Expenses associated with development capabilities to make or buy product

Quantitative factors- involves incremental costs of making/buying item such as availability of manufacturing factors, needed resources, and capacity. Qualitative factors- subjective and includes things like control over quality, reliability of suppliers, impact on customers and suppliers.

Econ Order Quantity (EOQ) Model

Quantity decision model based on trade-off between annual inventory carrying costs and annual ordering costs. Seeks to determine optimal ordering quantity where sum of annual ordering costs and annual inventory carrying costs is minimized.

Inventory

Quantity of goods/materials held in stock. Includes all raw materials and work in progress items used to support production of final products ready to be sold to customer Holding some necessary to maintain operations and ensure products available when demanded. Too much is a liability and adds storage, insurance, and tax costs. Can become liability if becomes unusable from expiration, obsolenscence, damage, or spoilage.

Annual Purchase Cost

R x C

Objectives of Strategic Sourcing

Reduce total costs while maintaining or improving quality of goods/services. Improve value-to-price relationship Identify improvement opportunities Examine supplier relationships across entire firm Develop multi-year contracts with standard terms and conditions Leverage entire organization's spending Share best practices across organization

Forward vertical integration

Refers to company acquiring one or more customers. ex.) A manufacturer buying a wholesaler/distributor to take ownership of their aspect of their supply chain.

Level Production Strategy

Relies on constant output rate while varying inventory and backlog accounts to fluctuating demand. Firm relies on fluctuating finished goods and backlogs to meet demand works well for make-to-stock companies. Would be inefficient to stop/start. ex.) steel, lightbulbs, razors, etc.

Supplier partnerships

Requires strategic perspective rather than tactical position to form mutual commitment between buyer and supplier to work together towards mutual benefits and sharing in risks and rewards of relationship.

Corporate Social Responsibility

Requires suppliers to agree to abide by supplier code of conduct in order to be approved

SCOR Model: Return

Reverse logistics is planning and controlling processes of moving goods from point of consumption back to origin for repair, reclamation, remanufacture, recylcing, or disposal.

Supply chain risk management

Risk management process of measuring or assessing risk and then develop strategy to manage risk. Startegies can involve transference of risk to another party, risk avoidance or mitigation, and distribution channel risk sharing.

Distributive negotiation

leads to self-interested, one-sided outcome

Operational Procurement Qualities

lower dollar value/unit costs leveraged/non-critical items purchase/blanket orders arms length relationship standard terms and conditions

Supply management elements

manage all supplies and suppliers purchasing supplier management supplier evaluation supplier certification strategic partnerships ethics and sustainability

Reasons for multiple suppliers

need more capacity spread risk create competition more sources of info dealing with special kinds of business

Annual Carrying Cost

(Q/2)(KC)

Calculate EOQ

(Q/2)(KC) = (R/Q)(S) Q = EOQ = sq.root ( 2RS / KC)

Annual Ordering Cost

(R/Q)(S)

Uncertainty in demand

Sales or usage above expected

Linear (1D) Barcodes

Series of alternating bars and spaces printed or stamped on parts of containers, labels, or other media representing encoded info that can be read by electronic reader. Can only read horizontally and hold max of 85 characters.

Cost improvements

Series of small improvements over time to eliminate waste. Plan- identify opportunities and plan for change, establish baseline, identify priorities, set goals Do- implement change on small scale Check- use data to analyze results of change and determine difference, monitor/measure, find and fix, document results Act- if change successful, implement on larger scale and if not begin cycle again

End-to-end supply chain

Supply chains span from end-to-end from suppliers through internal operations to customers. Enabled through processes and technologies. Planning includes determination of marketing and distribution channels, promotions, quantities, timing, inventory, replenishment and production policy.

Supplier Relationship Management Systems

Systems provide a more comprehensive and objective view of a supplier's performance. Systems help identify and address supplier performance issues and can help make sourcing decisions.

Ethical sourcing

Takes into account public consequences of organizational buying or bringing positive social change through buying behavior.

Simplified Supply chain flow tiers

Tier 1- direct supplier or direct customer Tier 2- indirect supplier or indirect customer Tier 3- indirect supplier or indirect customer Tier n- indirect supplier or indirect customer

3 Attributes of Supplier recognition programs

1.) recognize and celebrate achievements of best suppliers 2.) exemplify true partnerships, continuous improvement, organizational commitment, and excellence 3.) award-winning suppliers serve as role models

Benefits of supplier certification program

1.) reduce time and resources needed for buyer to conduct incoming inspections of products and materials from certified supplier 2.) build long term relationship 3.) decrease supplier base 4.) recognize excellence

Weighted criteria Evaluation System

1.) select key dimensions of performance mutually acceptable for both parties 2.) monitor and collect data 3.) assign weights to each dimension 4.) evaluate performance measures between 0-100 5.) multiple dimension rating by weight and sum of overall score 6.) classify vendors based on overall score (certified, preferred, acceptable. conditional, developmental, unacceptable, etc.) 7.) audit and ongoing certification review

Sources of uncertainty in supply chain

1.) suppliers 2.) company 3.) customers

Variations in quantitative forecast

1.)trend variations- movement of variable over time 2.)random variations- instability from random occurences 3.) seasonal variations 4.) cyclical variation

Sustainability

Ability to meet current needs of supply chain without hindering ability to meet future needs in terms of econ, social, and environmental challenges.

Operational Procurement

Acquisition of material/service required to meet day-to-day needs. Cost management: Rev - CGS - Overhead Exp = Profit Quality/Quantity management Delivery Service Risk Management

Purchasing

Act of obtaining merchandise, capital equipment, raw materials, service, or maintenance, repair, operating (MRO) supplies in exchange. Process of how goods/services ordered. Transactional function of procurement. Can be separate department or part of the supply chain.

Value engineering

Actions that help buyer's company to reduce cost, improve quality, and reduce new product development time.

Supplier-Evaluation Performance

Actively monitor supplier's performance and provide visibility and feedback. Relevant metrics: supply price and cost performance product quality delivery performance financial stability contractual compliance participation in product development ethical practices

Strategic Procurement Qualities

higher dollar value/unit costs critical/bottleneck items contracts/agreements alliances/partnering complex terms and conditions

Integration

Manage all enabling systems necessary to facilitate complete integration of operations, supply, logistics functions. Supply chain risk assessment and mitigation. Supply chain performance measurement.

Logistics management elements

Manage all movement and storage of products and materials within supply chain. Transportation management- tradeoff decision between cost and timing of delivery and customer service. Complaints and improve communications Network design- create distribution networks based on tradeoffs between cost and sophistication of distribution system.

Operations Management elements

Manage internal resources forecast and demand planning- match demand to capacity planning system- link supply to demand via MRP & ERP systems process management- use LEAN manufacturing to improve flow of material to reduec inventory levels and 6 sigma to improve quality compliance

When should we order more inventory?

Management will review demand cycle (D) and re-order (P) with sufficient lead time (L) to avoid penetrating safety stock (SS)

Benchmarking

Measuring what other businesses do best and matching their performance. Data obtained both formal and informal ways

Exponential smoothing

More sophisticated weighted moving average. Requires last period's forecast, last period's actual demand, and a smoothing factor (0<x<1) Advantage- more responsive to trends Disadvantage- lags with upward trends and smoothing constant determined by judgment Forecast = (D x S) + (F x (1 - S)) where, D = last period's actual demand S = smoothing factor in decimal form F = last period's forecast

Bullwhip effect

Moving backward across supply chain, each participant is further removed from end demand and may have less info about what is happening with demand creating greater need to maintain high levels of safety stock. Individual participants second guess what is happening with ordering patterns and potentially overreact causing bull whip effects. Period of increasing demand- downstream participants increase orders Period of decreasing demand- downstream participants decrease or stop orders and inventory increases.

Single sourcing

Multiple potential suppliers available for a product or service but company decides to purchase only from one

Internal certification

Mutually agreed-upon set of clearly specified quality performance measures. Fully documented process and quality systems with cost controls and continuous improvement capabilities. Supplier's processes stable and in control.

Reasons to Buy

Non-strategic if non-strategic item Cost advantage Insufficient capacity Temporary capacity constraints Lack of expertise Quality Multi-sourcing strategy Inventory considerations- stockless buying Brand strategy

Bid

Offer, proposal, or price quote submitted in response to a solicitation from procurement authority

Competitive bidding

Offers submitted by multiple firms competing for a contract, priviledge, or right to supply good or service.

Sole sourcing

Only one supplier for an item Not a strategy or choice Little opportunity to negotiate price/service

RFID

Successor to barcode for tracking individual goods. Doesn't require direct line of sight to read tag and info on tag updatable. Automates supply chain: Material management Manufacturing Distribution Center Retail store

Total Cost of Ownership (TCO)

Sum of all costs associated with every action in life cycle of product or service. TCO = Quality + Service + Delivery + Price

Preferred supplier

Supplier of choice achieved through exceptional performance over time measured by criteria set by buyer and supplier. Trusted partners who know organization, processes, and requirements. Provides higher value characterized by reliability. responsiveness, flexibility, and cost effectiveness. Provide expertise, product development analysis, info on trends, capacity for unexpected demand, and economies of scale

Vendor management inventory (VMI)

Suppliers directly manage buyer's inventories to reduce buyer's inventory carrying costs and avoid stockouts for buyer. Independently created by supplier who is responsible for delivering item and billing buyer for material delivered. Supplier tracks inventory, determines inventory schedule and order quantities, and buyer takes ownership at stocking location or avoids ownership until material actually utilized. Avoids ill-advised customer orders, supplier decides inventory set-up and shipments, opportunities for supplier to educate buyer on other products

2 considerations for forecasts

1.) forecast is inaccurate but still useful 2.) forecast basis for most downstream supply chain planning decisions so a good forecast can facilitate more effective planning

Fundamentals of forecast

1.) forecast likely wrong 2.) simple forecast methodologies better than complex ones 3.) correct forecast does not prove method is correct 4.) trust data less if it is not used regularly 5.) hard to eliminate bias 6.) all trends eventually end 7.) tech not solution to better forecasting

5 Models of qualitative forecasting

1.) personal insight 2.) jury of executive opinion 3.) delphi method 4.) sales force estimate 5.) customer survey

2 important functions of supplier development programs

1.) providing info about product, expected sales growth, etc. 2.) training suppliers in application of 6 sigma and quality tools

5 Keys points to consider in development/implementation of SRM systems

1.) automation- meant to handle routine transactions 2.) integration- spans multiple departments, processes, and software applications 3.) visibility- informative, clear, and concise process flows 4.) collaboration- info sharing 5.) optimization- process and decision making

Request for Proposal (RFP)

Document initiated by procurement organization to solicit bids plus determine supplier's capability in supplying customized good or service

Steps of APP

1.) determine demand for each period and available capacity 2.) identify constraints 3.) determine direct/indirect manufacturing costs 4.) identify or develop strategy to manage ups/downs in market 5.) agree on plan

Goals of Purchasing

1.) ensure uninterrupted flows of materials and services at lowest total cost. 2.) improve quality of finished good products 3.) optimize customer satisfaction

Traditional Operational Procurement Process

1.) Purchase requisition- internal client's request for good/service 2.) For material, check available existing inventory first 3.) Start competitive bidding process- RFQ and RFP 4.) Evaluate bids- pricing, technical, commercial terms 5.) Consider negotiations for improvements to bids 6.) Create PO's 7.) Copies PO's to internal user, accounting department, and successful supplier (3 way match)

4 Categories of Inventory

1.) Raw materials 2.) Work in process 3.) Finished goods 4.) MRO

4 categories of inventory

1.) Raw materials 2.) Work in process (WIP) 3.) finished goods 4.) maintenance, repair, and operating (MRO) supplies

3 Ways Procurement Management Creates Enterprise Value

1.) Revenue growth- new product or service, 1st to market/volume, flexibility and responsiveness to market trends, improved product/service quality 2.) Financial performance (EPS and Asset Management)- capital utilization, cash velocity, inventory management, cycle time reduction, continuous improvement 3.) Cost Management- lower purchase price, lower transaction costs, lower overhead, raise productivity, logistics efficiency

3 Levels of Enterprise planning process

1.) Strategic - Executive/CEO/VP (3-5 years) 2.) Tactical - Manager/Director (12-18 months) 3.) Operational- Supervisory (1-2 weeks)

2 ethical approached

1.) Utilitarianism- ethical action that has greatest good for greatest number of people 2.) rights and duties- some actions just right in and of themselves regardless of consequences

Implementing ERP System

1.) Best of Breed - pick best application for each individual function 2.) Single integration solution- pick all applications from single vendor Advantages- added visibility, standardizes manufacturing process, integrates information, and measures performance. Disadvantages- substaintal time and capital investment, complexity, existing processes must be changes

Trends in Supplier relationship management

1.) Close alignment of sourcing with supplier relationship management 2.) focus on cross-functional engagement 3.) focus on innovation 4.) invest in people and soft skills

Steps of Strategic sourcing

1.) Demand analysis (internal) 2.) Supply analysis (external) 3.) Sourcing strategy development 4.) Negotiating (RFP & RFQ bidding) & supplier selection 5.) Implement

Function of Inventory

1.) Meet customer demand (cycle stock) 2.) buffer against uncertainty in demand and or supply (safety stock). 3.) Decouple supply from demand- supply pattern different from demand pattern (econ of scale achieved through purchasing, speculative buying in anticipation of price shock, economical order size, seasonal demand, etc.) 4.) Decouple dependencies in supply chain- seperating operations in a process and smoothing production and reduce peak period capacity needs

Benefits of Supplier recognition programs

1.) Motivate suppliers to perform better 2.) Improve supplier loyalty and commitment 3.) Encourage suppliers to adapt to company's culture 4.) creates entry barriers for competitors 5.) encourages supplier's participation in product innovation

Purchasing Process Steps

1.) Need identified and purchase requisition issued by internal client. Required good/service submitted to procurement organization. Initiated by user of the company. 2.) Obtain authorization as necessary 3.) Identify and evaluate potential suppliers by procurement organization. Use list of approved suppliers or Request for Info (RFI) to collect info from potential suppliers. 4.) Procurement organization makes supplier selection. If buyer knows supplier move to next step. If buyer does not know supplier, competitive bidding process initiated. RFP and RFQ issued to suppliers. Supplier provides price quote and delivery arrangements. Supplier selected from RFP or RFQ received from suppliers based on certain criteria. 5.) PO created and given to supplier. Identifies item to be procured, quantity, delivery date, and price to be paid. 6.) Supplier confirms PO 7.) Fulfillment- supplier delivers item to internal client per PO 8.) Receipt of goods 9.) Involve 10.) Reconciliation- invoice reconciled to PO and receipt before payment made for a 3-way match 11.) Payment 12.) Reclamation of taxes 13.) Close out order- PO should be closed out in a purchasing system (manual or automated) 14.) Analysis- measures efficiency and accuracy of procurement process

e-Procurement

Business-to-business (B2B) purchase and sale of goods/services over Internet. Automates all or part of bid solicitation (RFI, RFQ, RFP), bid analysis and execution of PO, reserse auction capabilities. Advantages- time savings, cost savings, accuracy, real-time, mobility, trackability, improved resource management Disadvantages- does not work well for every type of purchase, where procurement of mission-critical items only available from a few suppliers, where item needs complex negotiation

Purchase Order (PO)

Buyer's offer to supplier to acquire goods/service. Becomes legally binding contract when accepted by supplier.

Inventory turnover

CGS / Average Inventory

CMI vs. VMI

CMI supplier just recommends order which is not confirmed until and unless buyer approves it.

EOQ Model Assumptions

Calculate for one period at a time Demand must be known and constant during year Delivery replenishment lead time known and does not fluctuate Replenishment instantaneous Purchase cost (unit cost) is constant, no discount or price breaks factored into model Carrying cost and ordering cost known and constant stockouts not allowed

Resources for implementing sourcing practices

Center for advanced purchase studies Council of supply chain management pros Institution of supply management

Aggregate planning strategy supply options

Change inventory levels- increase to build stock in advance of demand or decrease inventory during peak demand period to meet customer requirements. Change Capacity- vary production output through overtime or idle time, vary work force size through hiring/firing, part-time work, subcontracting

Innovative production

Characterized by short product life cycles, volatile demand, high profit margin, and less levels of competition. ex.) high-tech products, software, etc. Potential strategy- innovative, cutting-edge, market-leading supplier, long-term partnership, single-sourced

How to alleviate bullwhip effect

Collaboration- share information through use of electronic data interchange (EDI), point of sale (POS) data, and web-based systems Synchronized supply change Reduce inventories- JIT, Vendor management inventory (VMI), and quick response (QR)

CPFR

Collaborative, Planning, Forecasting, and Replenishment. CDFR is a business practice that combines intelligence of multiple trading partners who share plans, forecasts, and delivery schedules with one another.

Functional production

Commodity items and low profit margin items with stable demand and high levels of competition ex.) office suppliers, mechanical parts, etc. Potential strategy- low cost, reliable supplier, multi-sourced

Non-critical items

Commodity items with low level of supply risk and low dollar value to company. Simplify and streamline purchasing process Reduce number of suppliers and simplify ordering ex.) office supplies

Specialized knowledge

Companies interested in pursuing internal purchasing arrangements must acquire some specialized knowledge particular to buying product/service internationally. Tariffs, duties, or customs of host country Non-tariff barriers- quotas, licensing agreements, embargos, laws and regulation imposed on IM/EX Countertrade- exchange goods for goods

Backward vertical integration

Company acquires 1 or more of their suppliers ex.) A manufacturer buying key supplier of a critical material to take ownership of this aspect of their supply chain.

SCOR Model: Enable

Company's ability to manage supply chain. Elements include supply chain systems and network operations. Systems configuration control. Gateways. Database Administration.

Material Requirement Planning System (MRP)

Computer-based material management system that calculates exact quantity, need dates, and planned order releases for subassemblies, component parts, and material requirements to manufacture final product. Requires independent demand info (final product forecast), parent-component relationship from BOM, inventory status of final product and each of component and materials, planned order releases (output of MRP) Advantage- provides material planning info Disadvantage- loss of visibility and ignores shop floor conditions

Benefits of outsourcing

Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce internal management problems Improve manufacturing flexibility

Fixed-order quantity system

Continuous inventory review system in which same order quantity used from order to order. When inventory falls position falls to predetermined point a predetermined fized order quantity is placed. Time between orders (order period) varies order to order. If review determines order should be placed then order for pre-defined quantity for that item is placed. Calculate Reorder pt (ROP) & Order quantity (Q). Assumptions: Constant demand (d) rate (not erratic, seasonal, etc.) Inventory position (IP) is reduced (consumed/used) by rate of (d) Replenishment order placed when ROP reached When inventory received (IP) increases quantity (Q) Lead time (L)- time between placing order and receiveing delivery is known and constant Inventory position (IP) reviewed on continual basis

Carrying costs

Costs incurred for holding inventory in storage cost of capital- specific by senior management tax on warehouse inventory insurance- estimate risk overtime and facility characteristics obsolescence- deterioration of product during storage rather than shelf life storage- facility expenses related to product holding rather than product handling

Factors that minimize processing costs for small value purchases

Credit card Blanket or open-ended PO Blank check PO Petty cash Stockless buying or systems contracting Standardization or simplifaction of materials Fixed order interval

Measures of success

Customer service (99% line item fill rate) Demand plan conformance (80% forecast accuracy) Supply plan conformance (95% on-time delivery) Inventory plan conformance (4.0 month on hand total inventory) CGS (15% CGS)

Total Average Inventory

Cycle Stock (CS) + Safety Stock (SS)

Make or buy decision

Decide whether to produce item internally or buy from outside supplier.

Profit-leverage effect

Decrease in purchase expenditures to increase EBT.

Enterprise Strategy Business Planning

Defines company's objective for next 3-5 years (LR) Manager gathers input from organization's functions (finance, suppliers, operations, etc.) Updated and evaluated annually Starting point for developing organization's Aggregate Production Plan.

Enterprise Strategy Planning

Defining enterprise requirements through a systematic planning process of: corporate goals and objectives -> corporate strategy development -> business unit strategy development -> department (division) strategy development that drives the development of supply chain management production strategy: department/division product strategies -> product design strategy -> procurement and supply management product strategy -> supplier integration production strategy -> competitive advantage

Master Production Schedule (MPS)

Detailed disaggregation of APP, listing exact end items to be produced in next 6-18 months. More detailed than APP and easier to plan under stable demand. Planning horizontally shorter than APP but longer than lend time to produce the item.

Short-range supply chain planning

Detailed planning process for components and parts to support master production schedule (Material Requirement Planning) Operational level- managers, supervisors, analysts, up to 3 months ex.) Ford wants to make 1000 engines, seats, and windows each week next 4 weeks

Supplier Relationship Management definition

Discipline of strategically planning for and managing all interactions with the third party organization that supplies goods/services to organization in order to maximize value of those interactions. Seeks to improve and reduce costs using tools like: sourcing analysis procurement execution payment and settlement supplier score card performance monitoring

Single-level BOM

Display of components that are used directly in parent item, together with quantity requirement of each component. Shows only one level down.

Multi-level BOM

Display of components that are used directly or indirectly used in parent together with quantity requirements of each component.

Forecasting and demand planning

First step is developing a forecast with data and judgement. Second step is demand planning where management and experts review forecast to ensure it is aligned with company's strategy, policies, and knowledge.

Payment flow

Flow of cash from customers to suppliers.

Return flow

Flow of returns from customers to suppliers.

Personal Insight

Forecast based on insight of most experienced, most knowledgeable, or most senior person. advantage- fastest and cheapest; can provide good forecast disadvantage- relies on one person's judgement/prejudices, unreliable

Product and service flow

From suppliers to customers. Connected by transportation and storage.

Work-in-process

Goods in various stages of completion spans from raw material released for initial processing up to fully processed material awaiting final insepection

2D Barcodes

Graphical image stores info both horizontally and vertically and stores more than 7000 characters

Benefits of Strategic Partnerships for Supplier

Greater visibility into buyer's purchasing plans Increased operating efficiency Long term buyer commitment Increased scope of business and revenue Lower cost of sales Increased margins Opportunities to develop and show innovation Sustainable competitive advantage

Supply base

Group of suppliers from which the company acquires goods/services. Firms emphasize long term strategy supply alliances consolidated volume into one or fewer suppliers, resulting in a small supply base.

Aggregate Production Plan

Hierarchical planning process that translates annual business marketing plans and demand forecasts into production plan for a product family. Planning horizon at least 1-2 years. Includes costs relevant to APP decisions - inventory, training, etc. Purpose to establish production rates that achieve management's objective to satisfy customer demand by maintaining, raising, or lowering inventory with stable workforce.

ROA effect

High value indicates managerial prowess in generating profit with lower spending.

Inventory turnover effect

Higher value means optimal utilization of space and inventory levels to increase sales and avoid obsolesce.

Linear trend forecast

Imposes best-fit line across demand data of entire time series. Extends past existing data into future by maintaining slope. Advantage- accurate even if random variation Disadvantage- seasonal and cyclical variations softened

Importance of Supply Chain Management

Increase customer service while simultaneously reducing both inventory investment and operating expenses. Achieve cost savings. Better coordination of resources.

Decentralized purchasing

Individual, local purchasing department, such as at the business unit or plant level, making their own purchasing decisions. Advantage- greater knowledge of business unit's requirement, make use of local suppliers, less bureaucracy

Industrial Buyers

Individuals within organization that purchase raw materials for conversion into product and/or purchasing service, capital equipment, and MRO supplies.

Aggregate planning strategy demand options

Influence demand to align with production capacity (advertising, promotions, pricing) backordering during high demand periods counter-seasonal product mix- develop product mix with seasonal trends that level cummulative required production capacity (ex. lawn mower vs. snow blowers)

External certification

International organization for standardization (ISO) in the world's largest developer of voluntary international standards. Represents achieving and maintaining standard of excellence verifies by third party.

Safety stock

Inventory above and beyond what actually needed to meet anticipated demand. Quantity in stock protects against fluctuations in demand and supply.

Maintenance, Repair, and Operations (MRO)

Items used in support of general operations and maintenance such as maintenance support, spare parts, and consumables used in manufacturing process and supporting operations. Materials needed for manufacturing process not part of final product. Some consumed in process of making final product (i.e. oil) while others used to facilitate manufacturing operations (i.e. spare parts) and others used to facilitate administrative action (i.e. office supplies)

Strategy Items

Items with high level of supply risk and high dollar value to company. Vital to success. Ensure availability of suppliers Focus on relationship building Encourage process integration and innovation Frequent communication Establish mutually agreeable supply perfection criteria ex.) uranium rods

Bottleneck items

Items with high level of supply risk and low dollar value to company. Procurement challenges, high supply risk, low availability, small number of alternative suppliers. Search for alternatives Strengthen relationships Maintain safety stock Develop contingency plans ex.) chemicals

Leverage

Items with low level of supply risk and high dollar value to company. Many alternatives of suppliers exist and signifigant potential procurement savings Consolidate volume as negotiating tool Use competition to reduce costs Automate supply interfaces to minimize process related costs ex.) utility poles

Potential challenges of international purchasing

Knowledge or international trade policy Awareness/cost of tariffs Communication difficulties Evaluating global market Payment management Longer time for negotiations Cultural, political, labor problems Longer transportation lead times Documentation Legal

Hybrid purchasing organization: Decentralized-Centralized

Large multi-unit organization. Decentralized purchasing at corporate level and centralized purchasing at business unit level

Hybrid purchasing organization: Centralized-Decentralized

Large organization with centralized control. Organization with large, important contracts centralized control at corporate level and small specific items decentralized at business unit level.

Nodes

Links in supply chain connected by transportation and warehousing and integrated through information and planning.

Reorder Point (ROP)

Lowest inventory level at which order placed to avoid stockout. Set at level that provides inventory so demand covered during lead time. ROP - demand during lead time (dL) Given: Dem (d)=600/month=(600/30 day) = 20/day Lead Time (L) = 6 days ROP = dL = 20 x 6 = 120

Mixed production strategy

Maintains stable core workforce while using other short term means such as overtime, subcontracting, and part-time helpers to manage short term demands ex.) retail stores during holiday

SCOR Model: Make

Process from material to finished product. Most metric portion of supply chain (quality levels, production output, worker productivity, etc.)

Demand planning

Process of combining strategy and forecasting techniques and judgement to construct demand estimate for product or service.

SCOR Model: Source

Process of identifying suppliers that provide service and material needed for supply chain to deliver product. Build relationship with suppliers. Develop pricing, shipping, delivery, and payment process with suppliers, and create metrics for performance.

Procurement

Process of selecting, vetting suppliers, negotiate contracts, establish payment terms, actual purchase of good/service. Concerned with acquiring all of goods, service, and work that is vital to an organization. Overarching or umbrella term within which the act of purchasing can be fund. Purchasing Mangement, Strategic Sourcing, Supplier Relationship Mangement. Plan, Source, Make, Deliver/Return, Enable

Sales and Operations Planning

Process that brings all demand and supply plans for business (sales, product development, operations, etc.) together to provide management with ability to strategically direct business to achieve competitive advantage. Definitive statement of plans for near-intermediate term covering time to plan for resources and support annual business planning process. Links enterprise strategy plan with its execution Perform in about a month If capacity and demand = emphasis on meeting demand efficiently If capacity > demand choose promotion to increase demand If capacity < demand choose subcontracting

Evolving Responsibility of Supply Chain Professionals

Procurement Manufacturing Logistics (1950-70) Process and Resources (1970-80) Risk and Security (1980-90) Ethics and Sustainability (2000-present)

Performance metrics for Suppliers

Procurement cost savings Quality, defects, returns On-time delivery Responsiveness/flexibility Process improvement/cost reduction Innovation/product development Corporate social responsibility Adherence to legal ethical standards

Trade off when determining amount of safety stock to hold

Product availability vs. cost of inventory

Fixed Order Quantity (Q)

Product received in bulk used up at constant demand and replenished instantly in bulk

Supplier recognition program

Program to recognize suppliers who achieve the highest performance standards necessary to meet customer expectations.

Reasons to Make

Protect proprietary property No supplier available Lower cost Better quality control Use existing idle capacity Control of production lead-items Control of transportation and warehousing costs

Total Inventory Cost

Purchase Cost + Carrying Cost + Ordering Cost (R x C) + (Q/2)(KC) + (R/Q)(S)

Centralized purchasing

Purchase department located at firm's corporate office makes all purchasing decisions. Advantage- concentrated volume, avoid duplication, specialization, lower transportation costs, no competition between business units, common supply base.

Raw material

Purchase items or extracted materials converted via manufacturing process into components part or starting material.

Strategic sourcing

Using facts about required goods/services, supplier base, and supply market in order to determine best acquisition strategies and best suppliers available to achieve required improvements

Intermediate range supply chain planning

Shows quantity and timing of end items (Master Production Schedule) Tactical level- middle management; 6-18 months ex.) Ford wants to make 1000 trucks each week for next 6 months

Delphi method

Similar to jury of executive opinion but input of each participant collected seperately such that people not influenced by others. advantage- enriched by experience of panel, not likely to have group think, good for new products disadvantage- experts introduce bias, time spent collecting data

Sales force estimate

Similar to jury of executive opinion except performed with group of sales people. Sales closest contact to customer. Advantage- no added cost to collect data, more reliable forecast Disadvantage- not ideal in LT, bias, sales may not be aware of econ environment

Weighted moving average

Similar to simple moving average except not all periods valued equally. Advantage- more accurate if demand increases/decreases Disadvantage- still lags and challenging to choose weight Formula: (W1 x A) + (W2 x B) + (W3 x C) ...

Strategic alliances

Sourcing agreement between buyer and supplier to pursue agreed upon objective while remaining independent of organization. Agree to share resources for mutual benefits. Preferred supplier ideal candidate. Benefits include potential increased profits for both parties, mitigation of risk, and future strategic opportunities

Obsolete inventory

Stock that has expired, damaged, or no longer needed. Will never be used or sold at full value. Takes up space and costs money to maintain and may prefer to absorb loss as soon as item becomes obsolete rather than delay and continue to lose money. Disposal costs. Can donate inventory to non-profit to avoid disposal costs and may result in tax benefit.

Supplier development

Technical and financial assistance given to existing and potential suppliers to improve quality and or delivery performance. Buyer's actions to improve supplier's capabilities. Designed to achieve lower supply chain total costs, increased profitability for participants, increased product quality, and near-perfect on-time delivery at each point of the supply chain. Aimed at improving supplier's performance not bullying them into charging less or auditing and rewarding them. Is about providing suppliers what they need to be successful in the supply chain.

Supply management

Term that encompasses all acquisition actions beyond simple purchase transactions.

Supply Chain Management

The coordination of a network of independent organizations (trading partners) all involved in creating a desired product or service and moving it from suppliers out to customers when and where they want it. Delivers value by managing the processes of all of those otherwise independent trading partners so that they can collaborate with one another in an efficient, effective, and cost conscious way.

Inventory Stock levels

Three levels of inventory held to meet customer demand, buffer against uncertain demand/supply, decouple supply from demand, and decouple dependencies in supply chain. 1.) Strategic stock 2.) Safety stock 3.) Cycle stock

Absolute inventory value

Value of inventory at either cost or market value

Hidden costs of inventory

Too much inventory- financial resources tied up in inventory, underlying problem being hidden rather than exposed and solved, no incentive to improve process Too little inventory- production disruption, longer delivery replenishment lead times, reduced responsiveness to customer demand

Value chain

Transformation process that collects actions within firm to design produce, market, deliver, and support its product and services.

Customer uncertainty

Uncertainty with customer demand regarding past performance, forecast techniques, and promotions and incentives.

Company uncertainty

Uncertainty with manufacturing regarding process design, product design, capacity, and quality

Supplier uncertainty

Uncertainty with supplier performance regarding responsiveness, transportation, location, quality, and info

Measuring Inventory Performance

Units- number units available Money - amount of money tied up in inventory Weeks in supply= avg inventory/avg week usage Inventory turns=CGS/avg inventory

Simple moving average forecast

Use calculated average of historical demand during most recent period to generate forecast. Advantage- consistent demand over long period and smooths out random variations Disadvantage- fails to identify trends, lags Formula: (A + B + C + D) / 4

Quantitative forecast

Use math models and historical data to forecast

Supplier Certification Program

Used to differentiate strategic supplier alliance candidates from others. Buyers can monitor quality assurance method and specify type of acceptance sampling and strategy process control method used. Company may develop internal certification program and use external certification (150 9000/150 14000)

Evaluating and Selecting Key suppliers

When evaluating key suppliers for collaborative relationship, purchase cost becomes less important. Squeezing suppliers to generate lower annual purchasing costs hurts strategic relationship.

Merchants

Wholesalers and retailers who purchase for resale

Uncertainty in supply

shortage, delay, or disruption

cause and effect forecast

assume 1 or more factor (independent variables) predict future demand (ex. seasonality in retail)

time series forecast

based on assumption that future is an extension of past

Qualitative forecasting

based on opinion and intuition generally used when data limited (ex. new product or new market) forecast depends on skill of forecasters and available information

Collaborative negotiation

both sides create outcome with win-win results requires open discussion and free flow of info

Forecast

business function that establishes future demand for a product such that it can be purchased or manufactured in the appropriate quantity in advance of need.

Ordering costs

costs incurred each time order placed order preparation costs transportation receipt processing material handling

Supplier Relationship Management

create value build the relationship maintaining a relationship dissolving relationship

Enterprise planning process

create vision perform SWOT develop strategic goals and objectives develop business unit goals and objectives develop department/division goals and objectives create a line of sight for metrics communicate, monitor, and adjust as necessary

Poor supplier quality

defective finished goods, scrap rework, recycling or recovery of material, etc.

Independent demand

demand for an item that's unrelated to demand for other item such as finished product, spare part, or service part demand forecasted

Dependent demand

demand for item that is directly related to other items or finished product such as a component or material used to make finished product demand is calculated

Quality discount

encourages buyer to purchase larger amount

Cash discount

encourages prompt payment of discount

Reasons for single supplier

establish good relationship less quality variability lower cost transportation economies proprietary product or process volume too small to split

Insourcing

produce goods/service from company's own internal resources

Outsourcing

purchase good/service externally

Strategic sourcing outcomes

rationalized supply base identification of potential alliances cost reduction/improved profitability continuous improvement can be disruptive switching suppliers requires specialized sourcing skill sets extended time and resource commitments

Supply base rationalization

reduce supply base to lowest number of possible suppliers without increasing risk

Administrative expenses

screening suppliers, negotiations, order preparation, etc.

Naive forecast

sets demand for next period to be exactly the same as demand last year advantage- good for mature product and easy to determine disadvantage- only good for mature product and any variations cause inventory issues

Reverse auction

sourcing technique where pre-qualified supplier enters a website and at pre-designated time and date tries to underbid competitors to win bid buyer makes suppliers aware of intention to purchase goods/services during course, sellers bid against one another to secure bid driving down price

Value-added service

special delivery, packaging, etc.

Early supplier involvement

strategic suppliers become more involved in the internal operations of buyer's company particularly with respect to new product or process design, concurrent engineering, and design for manufacturability

Contracting

term for acquisition of service