SCM 300: Exam 2 Study Guide

Goals of waiting line management

Balance the cost paid by the customers (time) with the cost paid by the company (money paid to maintain the system).

Example:

• Add more workers and the company pays more money but the customer’s time in the line will decrease.

OR

• Limit the technology available to the employees and the company’s costs decrease, however customer’s time in line will increase.

3 Parts of a waiting line system

1) Input Source

2) Waiting Line

3) Service Facility

Input Source

This is the population of people that might want service.

Waiting Line

The area in which customers wait for service.

Service Facility

The area in which customers actually receive service.

4 Managerial Considerations in Queues

1) Customers: How many are there? How quickly are they waiting?

2) The Waiting Lines: What types of lines? How many lines?

3) Employees: Who’s working in the system? How many? Skill level and speed?

4) Service Facilities: How effective and efficient is the process? Tools?

Queue

Line

Example: Today I had to wait 10 minutes in the Starbucks queue.

Channels vs. Phases

Channel: Line; here it often refers to the number of lines available at each step

Example: This carwash has four channels. Each channel has an employee ready to vacuum the inside of your vehicle.

Phase: A single step in a process.

Example: The car wash had three phases: vacuum the inside of the vehicle, wash the exterior, hand polish and dry the vehicle and the tires.

Finite vs Infinite Populations

Finite Population of Customers: The number of customers is limited

Example: If you have a bus company that has 10 busses, then your company’s repair shop has a finite population of 10 busses. If one bus is in the shop, only 9 more can enter. → odds of second bus entering the system declines.

Infinite Population of Customers: The number of possible customers that many come into the store is very high (or unlimited). When a customer enters the system, the odds of another one entering is not impacted in any significant matter.

Balking

When a potential customer sees the line but never joins the line because they think it looks too long and/or too slow.

Example: Arun looked through the window of the coffee shop and saw that the line was too long. He never got in the line as it scared him away.

Reneging

When a customer joins the line, gets frustrated and leaves the line.

Example: Sade entered the coffee shop and got in the line. The line would not move and this caused her to become frustrated so she reneged (left before she even placed her order).

Jockeying (Line jumping)

When customers join one line, but then decide to switch to another line. → Something that would only occur in multiple line systems.

Arrival Rate

The number of customers arriving per unit of time.

• Denoted by lambda λ

Example: λ = 15 customers arrive/ hour

Service Rate

The number of customers that will be served per unit of time.

• Service rate symbol: mu - µ

Example: µ = 24 customers are served/ hour

Service Utilization Factor

Percentage of time server is busy.

• Service utilization factor symbol: rho - p

Example:

λ = 15 customers arrive/ hour

µ = 24 customers are served / hour

p = λ / µ → 15/24 = 0.625 or 62.5% of the time

Vendor

A supplier. The company from which a buyer purchases goods and/or services.

Wholesaler

These organizations purchase goods from manufacturers, typically in large amounts and at discounted prices. Often, wholesalers purchase an assortment of goods from many manufacturers in a single industry.

• In the retail world, the wholesaler then makes this large assortment of goods available for sale to retail stores and retail chains.

Dropshipper

A company that takes customer orders, most often via a retail site. Once the customer order is placed, the dropshipper then relays the order to a 3rd party wholesaler (or manufacturer). Upon receiving the order, the wholesaler picks, packs, and ships the ordered items to the customer.

Franchise

A franchise owns the rights to a company and the name.

• Charges prospective franchises to open an outlet under that name. The franchisee then has access to the products, services, processes, and trademarks of the franchise.

• Must abide by the rules and processes of the franchise.

Example: McDonald’s

Last Mile

Refers to the portion of the supply chain between the final inventory holding facility and the end consumer.

Planogram

A map of where every product goes on a retail store shelf.

Retail Layouts

Customer flow- How do customers typically navigate their way through a retail store? → Consider entrance and exit points

Product Location

• Planograms: Profit motivated? Customer convenience?

Perimeter vs. Central

• Location of high profit items, low profit items

• Location of high theft items

Aisles

• Main avenues for major store traffic

• Product aisles

Vendor Managed Inventory (VMI)

Inventory planning and replenishment system where the vendor accepts certain negotiated responsibilities.

Common Responsibilities part of VMI agreement:

• Monitor in-store inventories

• Initiate orders/shipments to the store when inventories are low

• Bring items into the store and onto the shelf

• Planogram the shelf space

Scan-based Trading

A system where the inventory on the retail store shelf is owned by the supplier. The retail store pays the supplier only when the product on the shelf is sold. Once the product sells, once it is “scanned” out of the store’s inventory, the retailer should immediately pay the supplier.

Reverse Logistics

The process of managing goods returning from consumers back through the supply chain for returns, repairs, recycling, or disposal.

• Outlets → cheaper material, stitching different from actual premium store material

• Returned, Opened, Damaged, Unsold items → goes to Recycle, Garbage, Donate (Charities, chucrches, shelters, hospitals)

• Sell: Salvage or Auction → Dollar stores, Discount stores, International (not able to sell in US, may sell elsewhere, in a different country)

• Refurbish

Omni-channel retailing

When an organization is capable of seamlessly selling to customers online, via the company’s app, in a physical store and perhaps via a call center. The available information and the available inventory across those platforms should be consistent.

Chargebacks

These are effectively penalties charged by retail organizations to their suppliers/vendors for any number of minor and major supply chain offenses.

• Used by buyers to motivate vendors to be compliant in the areas of on-time shipments, shipment accuracy, product quality, packaging requirements, etc.

Supply Chain Integration

The bringing together of supply chain partners- suppliers, manufacturers, logistics companies, etc. Furthermore, it is the coordination of the business processes between these diverse supply chain partners.

• Without integration, supply chains cannot become effective nor efficient.

Obstacles to Integration

Integration is about bringing diverse groups together & having them coordinate their plans & work methods. It is no wonder then that supply chain integration is about communication, trust and sharing.

Primary obstacles to supply chain integration include:

• Poor communication

• Unwillingness to share with supply chain partners, plan together

• Lack of trust between supply chain partners

Push System

A system in which consumer demand is known & expected. As a result, a push supply chain will preemptively buy materials, manufacture finished goods and even deliver the finished goods to a store or a picking and packing facility where consumers can buy them at a later date. Inventory is “pushed” toward the consumer in anticipation of consumer demand.

Push System Characteristics

• Works well when there is a relatively high & consistent demand for finished goods

• Customers desire these goods to be immediately & readily available

• Present companies with opportunities to take advantage of quantity discounts

• Works well for standardized end items that require very little or no customization

• Vulnerable to the obsolescence of inventory

• If items don’t sell quickly, high holding costs are possible

• Poor demand forecasts may result in stockouts or massive overstocks

Pull System

A system that is activated by consumer demand. As a result, a pull supply chain will not make and store finished goods inventory. Instead, the pull supply chain will wait for the customer to place a specific order & only then will the pull supply chain react by perhaps buying raw materials and/or parts, and then assembling the desired goods, before quickly delivering them to the consumer.

Pull System Characteristics

• Pull systems typically need access to high raw materials inventory readily available to produce a specific consumer order

• Pull system must be ready & capable of producing customizable end-items with a range of customization options

• Vulnerable to sudden increases in demand

• Poor forecasts may result in poorly planned production systems/facilities

Postponement

A system that combines elements of both the push system & the pull system. First, the company will push product elements (work-in-process inventory) that are considered standard. The company now has a partially created product. The company then waits for customer orders. Next, the customer orders this partially made product along with their additional specifications. The customer pulls the product elements that can be customized.

Example: Chipotle Mexican Grill is a good example of a company that takes advantage of postponement. This organization makes salsas, rice, beans, cuts vegetables, and cooks meats long before customers arrive. In addition, multiple types of tortillas are available in inventory. These are the push elements of the process. When the customer arrives they can order tacos, a burrito, or a bowl. The customer is then allowed to choose a type of rice, beans, protein, salsa and additional toppings. This is the pull portion of the process.

Bullwhip Effect

A phenomenon where fairly stable demand results in the proliferation (rapid growth) of the amount of inventory that is carried as one travels upstream in the supply chain. Distribution carries more inventory than retail, manufacturing carrier more inventory than distribution, and suppliers carry more inventory than manufacturers.

Example: Manufacturing is very uncertain about consumer demand also about being able to get parts from their supplier so they manufacture 200 units. Notice what just happened, a retail need of 100 units has ballooned to 200 units of inventory at the manufacturing level because of risk & uncertainty in the supply chain.

4 Causes of Bullwhip Effect

1) Order Batching

2) Forward Buying

3) Rationing

4) Shortage Gaming

Order Batching

This is when a company places large & infrequent orders from their suppliers. Typically, this is done to take advantage of quantity discounts & economies of scale in purchasing and delivery. The problem is that the infrequent orders leave large communication gaps (uncertainty) for suppliers and it may also require the suppliers to carry large amounts of inventory so they can be prepared when those large orders are actually placed.

Forward Buying

This occurs when customers buy more product than is actually needed. Often this is the result of suppliers offering sales. Buyers are motivated to buy in large quantities to take advantage of low prices. Buyers are not buying based on demand, but rather on price. Therefore, true demand is unknown by sellers (uncertainty). Sellers experience the uncertainty of demand due to their own short-term drops in price for their customers.

Rationing

Sometimes, despite their best efforts, suppliers do not have enough inventory to satisfy the demand of all of their customers. If this is the case, suppliers may ration their inventory and send each of their customers only a fraction of the inventory that was ordered.

Example: If a customer ordered 200 units, the supplier would only send 160 units. These smaller than expected deliveries introduce doubt into the system and thus may trigger negative behaviors in the future.

Shortage Gaming

Rationing can often lead to shortage gaming. If customer feels that this rationing may occur again, the customer may try to “game” the system by placing an order larger than their expected demand.

Example: If customer’s true demand is 80 units, the customer may place an order of 100 units instead of the 80 units needed. The rationale is that when the supplier send them only 80% of their placed order, they will get exactly the demand needed.

Shortage Gaming Problems

• Customer now has more inventory than needed

• If supplier does need to ration deliveries, they will still feel as though the customer wanted more → causing suppliers to inflate inventory levels in subsequent periods in an effort to meet the large, but false, demand of their customers.

5 Methods for controlling the Bullwhip Effect

1) Everyday Low Pricing (EDLP)

2) Vendor Management Inventory Systems (VMI)

3) Information Sharing

4) Improve Buyer-Supplier Relationships

5) Practice Lean Manufacturing

Everyday Low Pricing (EDLP)

When suppliers resist the urge to have sales promotions & instead offer their lowest (and most competitive) prices each day, buyers do not see an advantage to buying in bulk. Instead buyers are more likely to purchase at levels that are closer to their actual demand levels. This is a positive two-way communication. Suppliers are saying “these are our best prices”. Customers are saying “at these stable prices we will buy only what is needed”. These are our actual demand levels.

Vendor Management Inventory Systems (VMI)

These are systems where buyers (retail stores) share inventory information with supplier (vendors). Suppliers in turn take on the responsibility of managing inventory levels for the buyer by placing, delivering and sometimes even stocking the buyer’s shelves. This system benefits: Shelves are full of so customers are satisfied, suppliers know the sales patterns of their product from each store, and the store is less likely to experience stock outs since suppliers can better plan demand and deliveries.

Information Sharing

Real-time information sharing between supply chain partners allows organizations to see transactions and inventory movements across the supply chain. This aids in making sound decisions based on up-to-date facts.

Improve Buyer-Supplier Relationships

Develop strong buyer-supplier relationships that result in the sharing of supply chain responsibilities. In addition, work together in the strategy and planning phases of building and improving supply chains.

Practice Lean Manufacturing

Defects, waste, and a general lack of supply chain stability results in higher levels of uncertainty. Sound supply chain practices result in good products produced with minimal resources. These positive results require less safety stock to meet a much lower level of uncertainty.

Lean Manufacturing (Lean)

A production philosophy that strives to meet consumer demand and desires but with minimal inventory levels and minimal supply chain waste. In the past some people referred to lean manufacturing as just-in-time (JIT) and/or Toyota production system (TPS).

Rocks & Water Analogy

Each rock represents a different supply chain: poor forecasting, high defect rates, unreliable suppliers, theft, unreliable shippers, etc. In each case more inventory might help hide these weaknesses. Imagine if instead a company decided to remove the rock instead of hiding it with more water. (In other words, the company fixes the problem instead of hiding it with inventory).

• Companies that embrace lean systems → rather than hide from their problems, they would prefer to expose the problems and thus eliminate the threat from becoming an even bigger and more costly problem in the future.

Quality at the Source

Empowering every employee to be a quality inspector and manager. By having knowledgeable employees that can identify errors and are then empowered to act, lean companies can find and fix errors as early as possible in the supply chain.

Poka-Yoke

Mistake-proofing. Lean companies will find ways to completely eliminate certain types of errors.

Example: Suppose two digital devices are to be connected. Connecting them requires 5 wires to be plugged from one decide to the other. Suppose that the 5 wires each has a different connector that will only fit into a single connection point on the second device. This is a poka-yoke since it would be impossible to fit each of the five wires into the wrong connection point since they would not fit.

Pull System: Cost of miscalculations

Forecasting miscalculations can be costly

Demand high → Does supply chain have available capacity? Will lead times increase?

Demand low → Did you build too much capacity? Sunk costs.

Elements of Supply Chain Planning

• Strategic supply chain mapping

• Financial planning

• Demand planning

• Supply & inventory planning, Sales & Operations planning

• Production Planning

• Supply chain execution

Profit Motivations (Revenue Opportunities)

• Reach new consumers

• Manage risk of low sales in one market by selling in multiple markets abroad

• Taking your supply chain to new locations may allow your company to learn about alternative sale & distribution options that might be useful in other markets

• Taking your supply chain to new locations may allow your company to learn about new product, service, or business trends that can be adopted in other markets

Profit Motivations (Cost Opportunities)

• Potentially lower cost materials, labor, storage, transportation, energy savings, etc.

• Taxes, tariffs, legal fees & business transaction fees

• Taking your supply chain to new locations may allow your company to learn about business practices and trends that improve savings in other markets

Each of these cost opportunities is also a potential cost risk → costs may be higher in other parts of the world

Global Brand Strategy- Issues to Consider

Differences in…

• Packaging laws & accepted packaging conventions

• Environmental requirements

• Different distribution & retail systems

• Different consumer tastes & needs

• Laws that impact truck size

• Label requirements

These issues/differences may impact how your product looks, where it is bought and how consumers judge your brand.

Utilizing outside operations/manufacturing partners (Benefits & Risks)

Benefits:

• Speed

• Expertise

• Resource utilization

• Focus on core competencies

Risks

• Quality control

• Intellectual Property

• Business Practices

• Loss of strategic flexibility

Insourcing

When a company utilizes its own resources to deliver services, manufacture products and/or assemble products.

Example: Ford Motors manufactures their own cars for the US market. These cars are manufactured in the US in Ford owned factories.

Outsourcing

When a company contracts an outside firm to perform services, manufacturing, assembly, operations or business processes that could be or were previously performed in-house.

Example: Apple using other companies for design, manufacturing and/or logistic services.

Any time a company hires another company to perform services or operations it is an outsourcing arrangement, no matter the location of the two countries. → can be both US companies.

Offshoring

A strategy where a company moves manufacturing out of its “home” country to another country. This company still owns the manufacturing facility but the facility is not in the “home” country.

Example: Ford Motors is an American company and has manufacturing plants in the US, however also operates manufacturing plants around the world such as China, Germany, Brazil, Russia, and South Africa. These Ford factories that are outside of the US are part of Ford’s offshoring strategy.

Offshoring & Outsourcing

A strategy where a company utilizes a contractor in another country to perform services and/or operations.

Example: Apple, an American company, utilizes the manufacturing services of Foxconn, a Taiwan-HQ electronics manufacturing firm with facilities in Taiwan. Therefore, Apple is utilizing a strategy that incorporates both offshoring and outsourcing- manufacturing outside of the US, manufacturing done by an outside party.

Near-sourcing

A type of offshoring or offshoring & outsourcing where the location of the manufacturing facility is relatively close to the location of the consumer. → refers to a shift in strategy.

Example: A company used to manufacture goods very far away (8000 miles away) from the home market, but then shifts to manufacturing in a country that is much closer (750 miles away) to the home market.

Contract Manufacturers

A company that produces goods on behalf of another organization.

Example: Apple designs numerous digital devices but they outsource manufacturing to companies like Foxconn & Pegatron. Foxconn & Pegatron would therefore be considered Apple’s contract manufacturers.

Electrical Manufacturing Services (EMS) Industry & Benefits

An industry of companies that can manufacture, assemble, test, service, package, and service electronic goods for another company. Some can even provide design services.

Benefits

• Can do all of the work for you

• Provide speed to market

• Access to suppliers & distribution networks

• Expertise in manufacturing electronic goods

Intellectual Property

Refers to copyrights, patents, trademarks and other designations that protect the creative ideas of a company, an artist, or other creator of goods, ideas and other output.

• Provides the owner of the idea a monopoly on that idea and all works that derive from it.

Infrastructure

The physical structures & equipment utilized to move goods. In addition, can also refer to the organizations that support the movement of goods.

Example:

• Roads, railways, ocean ports, airports, bridges, etc. → Structures

• Available trucks, trains, planes, forklifts, loading cranes & ships needed to complete infrastructure projects

• Energy & fuel systems, security, skilled labor, and other logistics related systems & organizations

Longshoreman

A person that works at an ocean port. Their primary job is to provide labor that will assist in loading & unloading cargo.

Ports & Ports Operations

Port Data

• Cargo ocean port data → provides real-time data on cargo movement, container tracking, terminal efficiency, ETAs to optimize logistics

• Cargo airport data → enables real-time data sharing across airlines about cargo movement to mitigate delays and improve communication between air, road, and rail partners

Port Operations

• Ocean Terminals → manages transfer of goods between ships & inland transport (trucks/rail), handles container loading, unloading, and storage

• Longshoreman → A person that assists in loading & unloading cargo at an ocean port

The Jones Act

A US Federal Law requiring goods shipped between US ports to be carried on ships that are built, owned, and operated by Americans.

• Aims to support the domestic maritime industry, ensures safety for seamen, and maintains national security

Customs & Regulations Considerations

Governments establish customs agencies to control the goods that enter and leave a country (i.e. imports & exports).

Assist in the following areas:

• Classifying goods & services according to the government’s classification system

• Assessing & collecting the appropriate tariffs & enforcing quotas

• Aiding in issues related to national security, illegal narcotics, weapons, etc.

• Aid in issues related to commerce control, intellectual property, etc.

• Collecting information about goods being imported & exported

Customs-Trade Partnership Against Terrorism (C-TPAT)

A voluntary program developed by US Customs & Border Protection for companies importing goods into the US.

• Requires member organizations to report a significant level of detail related to supply chain partners & actions for each imported shipment. → in exchange, allows member companies opportunities for speedier & more hassle-free customs clearance.

Third-Party Logistics Company (3PL)

A contractor that performs one or more logistics functions for their client in an effort to facilitate effective & efficient movement in the supply chain. Third-party contractor can neither be the buyer nor the seller of the items being moved.

• Arranges shipping itineraries, in some cases takes over all the client’s logistics responsibilities

• Aids in the import and/or export process

• Warehousing, distribution, picking and packing

• Containerization & transportation

• Packaging

• Shipping documentation services

• Product tracking, logistics data & information management

• Logistics-specific financial services

• Management of digital marketplaces for logistics services

Freight Forwarder

A contractor (company or person) that helps companies organize the efficient & effective shipment of goods from one point in the supply chain to another.

• Does not transport goods, instead negotiates & arranges for one or more logistics company to prepare, secure, store, track, and move cargo

Customs House Broker

A contractor (company or person) that helps a client’s goods clear customs in a foreign country.

Some things a customs house broker does:

• Before goods reach the border: Preparation of documents, issues relating to import fees & taxes

• During inspection: Answers customs agent questions in an effort to facilitate customs clearance

Free Trade Zone (FTZ)

A geographic area sanctioned by the government where items are not under the control of customs authorities.

• FTZs offer companies the ability to easily import raw materials & export finished goods with minimal hassle.

Duty Drawbacks

• Utilized when an item is imported and then re-exported

• Utilized for both finished goods and also for parts in finished goods

• Typically, 90%+ return of tariff

Example(s):

• A company imports fabric, cuts into garments, and exports finished garments

• An importer receives defective electronics and exports them back to the supplier

Bonded Warehouse

A building or secured area in which can hold goods that will require a tariff/duty be paid.

• Goods can be stored, assembled, manipulated, undergo other manufacturing operations.

• Goods may stay in the bonded warehouse for up to 5 years.

• Bonded warehouses may be government owned & operated or privately owned

Shipping Documents- 3 Purposes

1) Transportation: Proof that cargo was received, states where cargo originated and where it is going.

2) Financial: Provides proof to the bank that goods were received according to the terms of the sale & that monies can be released to the seller.

3) International Shipments: When goods cross borders, customs officials look to check for legal infractions and also to assess duties

Four Common Logistics Documents

1) Bill of Lading

2) Packaging List

3) Commercial Invoice

4) Certificate of Origin

Bill of Lading

The most important shipping document that serves 3 main purposes

1) Contract between shipper & carrier

2) Receipt of goods for the shipper

3) Acts as the certificate of ownership

Packaging List

Provides significant detail on what is being shipped

• Describes all items in a box, including dimensions & weight

• May even provide location of items in a box or container

• Prices not typically provided on packaging list

Commercial Invoice

A vital document that provides a reasonable summation of the items being shipped, the parties involved, cargo values, and other information important to supply chain members & customs officials.

Certificate of Origin

Certifies that the goods were in fact manufactured in the country specified.

• Can be important when shipping treaties are involved

• Especially important for clearing customs & assessing duties/tariffs