Supply Chain Chapters 1-3

Supply Chain

an organization that offers a product or service has a supply chain
created from materials, time, money, labor, resources
requires suppliers, manufacturers, and customers
exist in large/small, private/public, profit/non-profit

Suppliers

raw materials (tier 3)
intermediate suppliers (tier 2)
finished materials (tier 1)

Customers

wholesalers + distributers (tier 3)
retail consumers (tier 2)
consumers (tier 1)

Facilitated through the use of logistics

execution of moving and storing inventory

The Main flows of Supply Chain

product and service flow (downstream so toward customer)
information flow (both downstream and upstream)
payment flow (upstream so toward supplier)
(returns flow is extra)

Supply Chain Management

coordination of the network of independent trading partners who create a desired product or service then move it through a supply chain to give it to customers

goal is to increase customer service while reducing inventory and costs

Supply Chain in the Service Industry

all service businesses have a supply chain

people are paying for their labor and intangible products

consumers are directly involved

tangible item is provided by customer

Facilitated Goods

tangible elements/goods needed to provide the service to customer
ex) restaurant has food, utensils, table, chairs, etc

SCOR Model

supply chain operations and research model

plan, source, make, deliver, return, enable

PLAN

establish parameters within which the supply chain will operate

companies need strategy to manage resources

determine marketing and distribution channels, promotions, quantity timing, inventory and replenishment policies, production policies

SOURCE

identifying the suppliers

building a solid relationship with those suppliers

develop pricing, shipping, delivery, payment processes

create metrics for monitoring and improving performance

MAKE

convert materials into finished products

have product tested, packaged, scheduled for delivery

most metric intensive

quality management is essential

DELIVER

logisitcs phase

oversees the execution of the forward flow of goods

takes care of the in between points of the supply chain to meet customer requirements

RETURN

reverse logistics

deals with planning and controlling process of moving goods from point of consumption to point of origin

goes against the normal outbound flow of production

managers need to create a flexible a responsive and flexible network for dealing with excess products

ENABLE

enabling processes facilitate a company’s ability to manage the supply chain and is spread out through every stage

ex) interfaces, database administration, business rules

End-to-End Supply Chain

supply chains span from end-to-end, they cover EVERYTHING

Logistics vs Supply Chain

logistics focuses on moving products or materials efficiently; it is a subgroup of supply chain

supply chain includes the external trading partners on both supply and demand side; facilitates the coordination of their actions

Operations management

managing internal resources related to planning and production

forecast and demand planning

production planning

inventory management

process management

Supply Management

manages the supplies and suppliers that are needed to run a business

purchasing management

strategic sourcing

supplier relationship management

Logistics Management

manages the storage and movement of supplies and products if its forward or reverse moving

warehousing

transportation

distribution

international trade management

customer relationship management

service response logistics

Integration

uses enabling systems to facilitate the integration of operations, supply, and logistics management together

enabling systems

supply chain risk and security management

project management

performance measurement

Efficient Model

maximize output with a minimum input level at the lowest possible cost

suppliers are likely to maintain long term relationship

Responsive Model

fast and flexible, respond to dynamic market trends and new product launches

more flexible than efficient model

Push Model (Make-to-Stock)

95% businesses use it

produce finishing products based on anticipated demand

product is immediately available to ship

manufacturers can better plan utilization of resources

take advantage of economies of scale and reduce costs

high inventory (more money tied up)

dependent on accurate forecasting

forecasting errors create inefficiencies

Pull business model (Make-to-Order)

producing finishing product in response to actual demand

used by 5% of businesses

high level of customer service and personalization

low inventory

reduce dependency on forecasting

cannot use economies of scale

every order is a rush order

manufacturing problems lead to decline in customer satisfaction

Supply chain risk management vs supply chain resilience

risk management focuses on threat mitigation, it wants to identify and avoid disruptions, while supply chain resilience is focused on reacting, adapting, and recovering quickly when a disruption occurs

Forecasting

developed through data analysis and judgement

organizations need to have a formal forecasting processes to develop an agreed upon set numbers that become the driver for demand planning

Demand Planning

uses statistical forecasting techniques and judgement to consruct demand estimates for products or services

Demand

the need for a particular product or service

Independent Demand

demand for an item is unrelated to the demand for other items

ex) bicycle

demand is forecasted

Dependent Demand

demand for an item depends on the demand for a related item or finished product

demand is calculated

ex) seat, handle, wheel, tires

Forecast

an estimate of future demand

created using mathematics or historical data

Role of Forecasting

accounting and finance: helps with budgeting and cost cutting

marketing: helps with product planning and personnel compensation

production: helps with supply, capacity requirements, purchasing, staffing, inventory

Short-term forecasting

0-3 months

focuses on tactical decisions (day-to-day)

Medium-Term Forecasting

3 months - 2 years

develops a strategy over the next 6-18 months

Long-term forecasting

2+ years

used to detect general trends and identify major turning points

Important Considerations for Forecasting

1. statistically will always be inaccurate but it is still useful

2. basis for most downstream supply chain planning

3. good forecasting can benefit a company

4. bad forecasting creates opposite affect

Goal of forecasting

minimize forecasting error

forecasting error increases as time horizon increases

Forecasting process

identify the purpose

identify the item

determine the time horizon

choose a forecasting model

collect data needed

generate the forecast

(if not accurate then change forecasting model and repeat)

generate forecast for the time horizon planned

adjust forecasting with new data received

monitor results

Qualitative Forecasting Techniques

is opinions and intuition based

used if there is not enough data, or data is limited and irrelevant

forecast depends on skill of forecaster

personal insight, jury of executive opinion, delphi method, historical analogy, customer surveys

Personal Insight

forecast based on one person (who has the most authority)

fastest and cheapest technique

provides a good forecast

relies on one person judgement

can be unreliable

Jury of Executive Opinion

group of people who have the most knowledge on the product and market form a jury to determine forecast

usually management groups together

panel has a series of forecasting meetings until consensus is reached

experience of competent experts enrich decisions

companies don’t spend time and resources to collect data

data may be bias

Delphi Method

same as jury of executive decisions but input is collected separately so that people are not influenced by one another

done in several rounds so consensus is achieved

decisions are not likely product of groupthink

very useful for new products

may introduce some bias

companies have to spend time and resources to collect data

can be time consuming

if outside experts are used confidential data can be losy

Historical Analogy

forecasting technique based on identify a sales history comparable to a present situation

past sales of similar products are used to predict the likely sales of a new product

has potential to give a lot of information that can be used to create forecast for new product

inexpensive

there may not be historical comparison

no two historical decisions are the same

Customer Survey

customers are directly approached and asked their opinion

it is a direct method

simple to administer and comprehend

does not introduce bias or value judgement

poorly formed questions lead to unreliable information

customers don’t want to answer questionnaire

time-consuming and costly

Quantitative forecasting

uses mathematical models and historical data to make forecasts

Trend Variations

movement of a variable over time

easily observed by plotting actual demand on a graph

linear trend

s-curve trend

exponential trend

asymptotic trend

Random variation

instability caused in data by random occurrences

ex) weather emergencies, war, labor strikes

considered abnormal demand

can be removed from data set sometimes

Seasonal variations

pattern of variation within one single year

can be repeated yearly

ex) swimsuit sales in the summer, snow shovels in winter

Cyclical variations

are wavelike patterns that long longer than one year

not easily predicted

ex) business cycle, bull markets, bear markets, china’s growth GDP

Time Series Forecasting

forecasts for future demand based on understanding past demands

Naive Forecasting (time-series)

the demand for the next period is the same as the demand in the last period

simple and flexible; easy to determine

works for mature products

any variation in demand leads to inventory issues

Simple moving average (time-series)

(M1+M2+M3+M4)/4

calculated average during a specific number of the most recent periods

best for short-term forecasting

smooths out random variations

fails to identify seasonal effects

create shortages when demand is high

excess inventory when demand is low

longer time period = smoother

shorter period = reacts to trends quicker

Weighted Moving Average Forecast (time-series)

not all periods are valued and weighted equally

(M1*W1) + (M2*W2) + (M3*W3) + (M4*W4)

all weights = 1.0 when added

more accurate than simple moving average

allows unequal weighting of prior periods

still somewhat lag behind actual demand

more inconvenient and costly than exponential smoothing

Exponential Smoothing (time-series)

needs actual demand, forecasted demand, smoothing factor (0<x<1)

(Actual demand * smoothing factor) + (forecasted demand * (1-smoothing factor))

creates forecast that is more responsive

will still lag behind actual demand

more variation (growing demand) = higher smoothing factor = between 15-30%

5-10% smoothing factor for stable demand

Linear trend forecasting (time-series)

imposing a best fit line across demand data

extends line past existing data and into future while maintaining slope of line

can provide accurate forecast for future

seasonal and cyclical variations are softened, making it better for annual demands and not monthly

Simple Linear Regression (cause-effect model)

models relationship between a single independent variable and dependent variable (demand) using straight-line equation

ex) demand is dependent on how much money spent; more money—>higher demand

y=mx+b

Multiple Linear Regression (cause-effect model)

models relationship between 2+ independent variables and a dependent variable (demand)

ex) demand might be depended on how much money is spend AND the selling price charged for the product

y = mx1+mx2+mx3+b

Fundamental of Forecasting

1. forecast is most likely wrong

2. the more granular the forecast the less accurate

3. easier to forecast next month than next year

4. simple forecast technique is better than complex

5. accurate forecast doesn’t mean forecast is correct, you could’ve gotten lucky

6. if you don’t use data regularly, trust it less when forecasting

7. all trends eventually end

8. hard to eliminate bias, so most forecasts are biased

9. tech is not the solution to better forecasting

10. forecasting combines qualitative and quantitative methods; blend of art and science

Social Media and Forecasting

companies are using social media insights for forecasting improvements

helps evaluate health of a brand (how market feels about it)

improve demand prediction (use voice of customer to drive improvements in forecasting and inventory positioning)

address a crisis

research competition

Forecasting Error

companies need to track forecast against actual demand and measure size and type of forecast error

measured in units or percentages

error measurement is important in tracking forecast accuracy

interpreting statistics is tricky when working with low-volume data or assessing accuracy across multiple items

Calculating Forecast Error

difference between actual demand and forecast demand

error can be quantified as an absolute value or percentage

Forecast Error Value: Actual demand - forecasted demand

Forecast Error %: ((Actual-forecast) / actual ) *100

Mean Absolute Deviation (MAD)

measures size of forecast error in units

| actual - forecasted demand | ~ add these up for every period, then divide by number of periods, n

Mean Absolute Percentage Error (MAPE)

| actual - forecasted demand | / actual ~ add these up for every period, then divide by number of periods, n

Forecast Bias

bias exists when the demand is consistently over or under a forecast

sum of forecast error = sum of actual demand - sum of forecast demand

negative result shows actual demand was consistently less

positive results shows actual demand was greater than forecast demand

best practice is to measure forecast routinely and make corrections accordingly

Bullwhip Effect

customer demand is not stable, which is why businesses must adequately forecast demand to position inventory and other resources

companies often carry an inventory buffer called safety stock

easy supply chain participant is farther removed from end demand and has less information creating a greater need to maintain higher levels of safety stock

since there is a lack of information, supply chain individuals second guess what is happening, potentially over-react (over supply) creating bullwhip effect

Alleviating Bullwhip Effect

collaboration ~ sharing information through electronic data interchange

synchronizing the supply chain ~ participants coordinate planning and inventory management

reducing inventory ~ use of just in time, vendor managed inventory, and quick response

Collaborative Planning, Forecasting, & Replenishment (CPFR)

business practice that combines the intelligence of multiple trading partners who share their plans, forecasts, and delivery schedules to ensure smooth flow of goods and services across supply chain

reduce bullwhip effect

reduced cycle times

reduce inventory costs

better customer service

better/improved quality

better production methods

real value comes from the sharing of forecasts among firms rather than relying on forecasting models and algorithms to estimate demand

Supply Chain Agility

organization’s ability to quickly and efficiently respond to changes in demand and supply without sacrificing quality or cost

high supply chain agility = adaptability to changing market conditions and can take advantage of new business opportunities

Supply Chain Planning

element of supply chain management responsible for determining how best to satisfy the requirements created by the demand plan

objective is to balance supply and demand

Supply Chain Planning Process

central principal is to use a standardized and stepwise approach

usually hierarchical and divided into three categories

Long Range Supply Chain Planning ~ Tier 1

Top management / executive level

over 1 year

involves planning for actions such as the construction of facilities and major equipment purchases

1-10 year process

business planning, strategic/financial plans, aggregate production planning (APP), resource requirement planning (RPP)

R&D, new product plans, capital expenses, facility expansion

Intermediate Range (tier 2)

“tactical”

covers 3-18 months

managed by mid-level/middle management

master production scheduling (MPS), rough-cut capacity planning (RCCP)

shows the quantity and timing of end items

Short Range (tier 3)

operational

managed by operations supervisors and planners

material requirements planning (MRP), capacity requirements planning (CRP), distribution requirements planning (DRP), advanced scheduled planning (APS), suppliers (internal & external)

detailed planning process for components and parts to support the master production schedule

1st line supervisor

up to 3 months

job assignments, scheduling, dispatching, ordering

Business Planning (top part of supply planning diagram)

strategic plans —> business planning ←— financial plans

provides the company’s direction and objectives for next 2-10 years

management gathers input from finance, marketing, operations, engineering sections

states company’s plan for profitability, growth rate, return on investment

reevaluated annually

used as the starting point

Aggregate Production Plan (APP)

is part of long range supply planning section

translates annual business, marketing, and demand forecasts into production plan for a product family in a plant or facility

planning horizon is at least 1 year and rolled forward by 3 months every quarter

goal is to balance supply and demand by creating a production plan for all items that are similar (same product family, ex) all models of a microwave)

want to achieve customer demand by maintaining, raising, or lowering inventory while keeping workforce stable

APP Goals

meet demand

use capacity efficiently

meet inventory policy

minimize costs: labor, inventory, plant/equiptment, subcontractor

APP Strategies ~ Demand Adjustments

influence demand to align it with available production through advertising, pricing, promotional plans

backordering during high demand periods

counter-seasonal product mixing: company develops 2+ products with opposite seasonal demand cycles in order to balance total overall demand so production capacity stays steady

APP Supply Adjustments

change inventory levels by increasing or decreasing inventory

change capacity by varying production, workforce size by hiring/layoffs, using part-time workers, subcontracting

Sales & Operations Planning (S&OP)

allows management to strategically direct the business to achieve competitive advantage

aligns marketing, sales, financial, and operating plans into one unified master plan for the company

done monthly and reviewed at an aggregate level (product family)

statement of company’s plans for the near to intermediate term

reviews performance measurements for continuous improvement

S&OP related to supply and demand

traditionally, financial, sales, and operations plans are not integrated together

helps establish a plan for responding to customer requirements

capacity = demand: emphasis placed on meeting demand efficiently

capacity>demand: firm might choose promotion and advertising to increase demand

capacity<demand: firm might subcontract portion of workload to 3rd party

Monthly S&OP Cycle

Week 1: review sales and demand; propose demand plans

Week 2: review/adjust supply plan; proposed supply plans

Week 3: financial review; balance supply and demand plans

Week 4: review aggregate plans, direction provided to sales and op teams

Master Production Scheduling (MPS)

intermediate/medium range (tier 2)

represents what the company plans to produce expressed in specific quantities and dates

is the plan that drives the business because it is at the product level

detailed disaggregation of APP

set of planning numbers that provide major input for material requirement planing

can be represented by the appointment book

individual products can be finished ahead of time and be held in inventory since its a plan of what business wants to achieve, not necessarily what the customer wants

planning horizon is 3-18 months

planning horizon must exceed the lead time to produce the item

Rough - Cut Capacity Planning (RCCP)

intermediate term capacity (medium, tier 2)

used to verify whether a proposed MPS is achievable using the company’s available production capacity

converts planed production units into total required resource hours

Time Fencing

small changes in the MPS causes significant changes in the detailed production schedule

to minimize changes, companies have adopted a firmed time period and planned time period

Firmed Time Period

from the current date out several weeks into the future

establishes the outer limit of from the start of the week to signal the point where no changes can be made

changes within the firmed time period must be reviewed and approved by the Master Production Scheduler or an authorized person

Planned Time Period

from the end of the firmed time period to the end of the planning horizon

planning system is free to create or make changes to planned order during this time

Level Production Strategy

maintains a constant production rate and allows inventory and backlog to vary according to fluctuating demand

no increase/decrease in labor, materials, resources

used when skill level, training required, or cost of hiring and firing people is high

works well for Make-to-Stock (push) items

Chase Production

production set to match demand exactly

company increases/decreases labor, materials, resources as needed

finished goods inventory remains constant with no backlogs; production costs fluctuate

used when skill level, training required, cost of hiring and firing people is low

works well for make-to-order (pull) items

Hybrid Production Strategy

baseline production rate based on stable core workforce and then uses short term means to manage short term fluctuations in demand

production is set to match demand as closely as possible

short term means = building and temporarily holding inventory, working overtime, part-time labor, subcontracting

minimize costs while meeting demand

no backlogs but finished goods and inventory costs fluctuate up and down

Material Requirement Planning (MRP)

computer based materials tool that calculates the exact quantities, need dates, and planned order releases for all parts and materials required to manufacture a product

MRP Advantages

on-time availability of the right material required for production

facilitates lower inventory levels

helps optimize the use of production resources and lower costs

MRP Disadvantages

Ignores capacity

loss of visibility for products with multi level BOM (bill of materials)

works well for make-to-stock but not for make-to-order or engineer-to-order

MRP Requirements

finished product production schedule from MPS

Bill of Materials data (BOM)

item master data (unit of measurement, lot size, safety stock)

inventory status of each item in the BOM

purchasing data, any planned or scheduled receipts

Bill of Materials (BOM)

document tat shows an inclusive listing of all raw materials, component parts, and assemblies making up the final product

Single Level BOM

shows immediate parent component relationships (1 level down)

ex) table needs a tool kit, 4 legs, 2 ends, 2 sides

independent demand: total forecasted demand for the finished product

dependent demand: required quantity of all the component parts/raw materials listed in the single level BOM; demand is calculated based on the independent demand which is forecasted

Multilevel BOM

all the component that are directly or indirectly used to put together the finished product

ex) for a table you need the 4 legs, 2 sides, 2 ends, a tool kit but in the tool kit comes the screw driver, washers, screws (these are the multilevel BOMs)

Gross Requirement ~ terms used in MRP

time phased requirement before netting out on-hand inventory and lead-time

• total number of parts you need before checking what you already have in stock

Net Requirement ~ terms used in MRP

unsatisfied quantity needed for a given period

gross requirement - current on hand inventory

• the actual number of parts you need to buy or make after subtracting the inventory you already have in the warehouse

Planned Order Release: specific order for a particular item and quantity to be released to the shop or the supplier

Firmed Planned Order:

Projected Available Inventory ~ terms used in MRP

projected closing inventory at the end of a period

beginning inventory - gross requirement + scheduled receipts + planned receipts from planned order releases