Healthcare Supply Chain - Chapters 1-4

What is suppy chain management

SCM encompasses the planning and

management of all activities involved in

sourcing and procurement, conversion, and all

logistics management activities

What Does Supply Chain Management Include?

Intra- and inter-organizational integration

and coordination

• Consists of the flow of products and

services from:

• Raw materials manufacturers

• Component and intermediate

manufacturers

• Final product manufacturers

• Wholesalers, distributors and retailers

Origins of Supply Chain Management

2000s and Beyond

Evolution along 2 parallel paths:

1. Supply management emphasis from

industrial buyer

2. Logistics and customer service

emphasis from wholesalers and

retailers

• Third-party service providers (3PLs)

• Integrating logistics

• Client/server SCM software -

Enterprise Resource Planning

Origins of Supply Chain Management Today

Emphasis is being placed on the environmental and social impacts of supply chains

• Sustainability - ability to meet the needs of current supply chain members without hindering the ability to meet the needs of future generations

• Triple bottom line – taking care of people, planet and profits

Gross Domestic Product (GDP)

• Generally, logistics costs as a % of GDP have declined since the early-1980s

• Logistics has an impact on interest rates, inflation, productivity, energy costs and availability, employment, and other aspects of the economy

Infrastructure

Infrastructure often does not keep up with increases in freight traffic

• In many countries, spending on infrastructure as a percentage of GDP has declined

• The Panama Canal expansion completed in 2016 doubled throughput as larger ships were able to pass through it

Regulatory Issues

Many aspects of supply chain management

are subject to some type of regulation (local,

state, federal, and/or international)

• In the United States, the Sarbanes-Oxley Act

has impacted both legal and ethical issues

relating to supply chain management

• Environmental and sustainability regulations

are increasing

Security and Risk

5 general categories of risk

facing supply chain executives: economic;

environmental; geopolitical; societal; and

technological

• Risk mitigation strategies are important in

supply chains

• Cyber security has become a very important

risk issue in domestic and global commerce

Supply Chain Disruptions

As firms become leaner and more

technology dependent, disruptions can

cause more serious problems than ever

before

Disaster Preparedness and Relief

Examples include natural

disasters, pandemics, financial

market collapses, power

outages and blackouts, and

transportation accidents

• Organizations such as the

American Logistics Aid Network

(ALAN) have formed to post-

disaster humanitarian relief

Business-Related Issues Impacting Supply Chains

1. CUSTOMER

SERVICE AND

SATISFACTION

2. HUMAN

RESOURCES

2. ORGANIZATIONAL

ISSUES

4. TECHNOLOGY FINANCIAL

5. ASPECTS AND

METRICS

CUSTOMER SERVICE

Activities between the buyer and seller that enhance or facilitate the sale or use of the seller’s products or services

Customer service and marketing exchanges

• Pre-transaction elements: all service aspects that

must be completed prior to any transaction taking place

• Transaction elements: service aspects that occur

during the transaction

• Post-transaction elements: all service aspects that

must occur after a transaction or sales has occurred

Three components of customer satisfaction

• Activity or process: activities and processes that must be

managed such as product delivery, reverse logistics, order

processing, sourcing and procurement

• Performance measures: metrics that measure specific aspects of customer satisfaction (e.g., market share percentage, on-time

delivery, net profit margins)

• Corporate philosophy: incorporates the first two perspectives and is a philosophy that treats customer satisfaction as an integral part of a firm’s total supply chain activities

Customer satisfaction and the scor model

Balance human and physical resources of the organization and

supply chain with customer service requirements and

establish/communicate customer satisfaction plans and strategies

for the whole supply chain.

Measures and metrics

The management adage is correct: You can’t manage what

you don’t measure.

• Companies must have defined metrics in order to

determine if service and satisfaction goals and objectives

are being met.

• The most important metrics are referred to as key

performance indicators (KPIs). There are usually less than

20 KPIs that are important.

The perfect order

The optimization of customer satisfaction through supply

chain management

• At the right time (100% on-time delivery)

• In the right quantity (100% fill rate)

• In the right condition and packaging (100% quality related to

fulfillment)

• With the right documentation (increasingly electronic)

Strategic profit model

Return on net worth (RONW) is the most important

financial factor and is a measure of the return on

shareholders’ investment plus retained earnings

• RONW is impacted by three major factors:

• Net profit

• Asset turnover

• Financial leverage

Balanced scorecard

• Financial performance: traditional financial measures such as ROI, ROA, cost reduction, asset utilization, and productivity levels

• Internal business process: focuses on company metrics such as waste reduction, product quality, and order cycle time variability

• Customer service: measures that focus on customer requirements and satisfaction such as order response time, customer retention, customer profitability, and customer satisfaction ratings

• Education and learning: measures concerned with employees, systems and procedures

Why do companies lose customers?

The Disconnect:

• Customers say it is primarily due to poor customer

service

• Companies say it is primarily due to price and not being

the lowest-cost provider

Data versus information

Non-metric:

• nominal

• ordinal

metric data

• internval

• ratio

Product stock-outs

Most of the time when a customer experiences a

product stock-out, it is due to a customer service

failure

Cost-service trade-offs

Activity-based costing can be useful in in capturing the

actual costs related to serving customers: within cost

centers; and between cost centers

Gap analysis in customer satisfaction

Exceeding the service requirements of customers can result in

mis-allocating resources on the wrong things and lower the ROI

associated with various satisfaction strategies

Customer relationship management (CRM)

CRM is an approach to managing customer relationships

and serving customers using various types of information

systems technology

The Uses of Information in Supply Chains

Information is the lifeline of a supply chain and as such has several uses:

• To maintain asset visibility

• Manage daily operations

• Make planning and

strategic decisions

Asset visibility

A supply chain manager controls assets belonging to firms in the supply chain

• This includes items such as trucks, inventory, pallets, containers, and lift trucks

Managing Daily Operations

Managing daily operations requires timely

information

• Information sharing is critical both within individual

firms and among firms in the supply chain

• Internally, information is needed to coordinate

activities within and among functions

Supply Chain Planning

refers to decision making

related to future operations in the supply chain

• The objective is to meet service and quality

requirements with the lowest possible use of

resources

• Some of the key supply chain planning areas are:

• Demand Planning

• Transportation

• Production

• Warehousing

• Inventory

• Collaborative Planning

Applying Information Technology to Supply Chain Management: Data Capture

Data capture is the process by which data

enters an information system.

• This may be accomplished by manual or

automated processes

• Automation is the only way to quickly

capture large volumes of data.

• The book describes two main forms of

automated data capture:

• Bar codes

• Radio frequency identification (RFID)

Data transmission: EDI

Electronic Data Interchange (EDI) was created in 1948

• It is a one way communication standard designed to

exchange structured computer-to-computer messages

Benefits of EDI

Less costly because minimal human interaction

is required

• Fewer human errors

• Speeds up supply chain processes

Data Transmission: Extensible Markup Language (XML)

is an alternate technology to exchange data among firms in the

supply chain

Data Transmission: The Need

Firms with the capability of transmitting EDI or XML

messages benefit most by exchanging messages with

multiple partners

Value Added Networks (VANS)

means that firms must have the

capability of exchanging messages in multiple

standards, which is costly

API

Application Programming Interface (APIs) are a clearly defined

means of communicating between various software programs

ERP

Enterprise Resource Planning (ERP) refers to the systems and software packages used by organizations to manage day- to-day business activities, such as accounting, procurement, project management and manufacturing

SC Collaboration Support

Information technology tools are also needed to

support supply chain collaboration

upply chain collaboration whereby a supplier

manages its customer’s inventory using data

supplied by the customer

• Collaborative Planning, Forecasting and

Replenishment (CPFR) works across

organizational boundaries to develop a single

forecast

Order Management: Beyond Understanding

The role of a supply chain manager goes beyond

understanding the steps in the order management

process

• The process needs to be actively managed to

reduce cost and support customer service

• An order is a key contact point between customer

and supplier

Process Map

is a visual representation of a process

• It represents the path of the information

throughout the supply chain, decisions and

activities that occur at each point in the

process, as well as the related timeline

What is Sales Forecasting?

is the process of gathering and analyzing

information to estimate future sales

Reasons to Forecast Sales

determine the level of production needed to support sales

• Too much production leads to excess

inventory

• Too little production leads to stockouts

and lost sales

• Both outcomes lead to higher costs

Two Basic Forecasting Methods

qualitative - based on judgement of one or more knowledgable forecasters

quantitive - based on projections of historical sales data

Consensus Panel

formed by a group of experts who jointly decide on a sales

forecast

• Experts communicate with each other in the search for a consensus

Delphi Method

a variation of the consensus panel where experts work

independently an anonymously to arrive at a consensus

Sales Force Estimate

draw forecasts from the expert judgment of salespersons

• The sales force is closest to customers and thus is in the best position to anticipate customer needs and detect changes in market trends

Moving Average

a simple and easy to use forecasting method

• It uses the average sales of a pre-

specified number of past periods as a

forecast of the next period in the future

Moving Average Example

For example, if a firm wants to predict October sales using a MA of the past three

months, then it needs actual sales data for July, August and September

• Assuming that sales for those three months were respectively 130, 170 and 120,

the forecast for October will be average of the three numbers, or 140

• The equation to compute the MA is:

SMA = p1 + p2 + … + pn / n

• p: The data point or price for a given period

• n: The total number of periods or window size

Exponential Smoothing

• It is easy to use and requires little data

• Through the use of a smoothing parameter the ES method

enables the forecaster to consider a longer sales history than

the Moving Average Method, which is limited to the number of

periods included in the computation of the moving average

Exponential Smoothing

Exponential Smoothing WITH TREND

CORRECTION

S&OP

Sales & Operations Planning is an integrative process that encourages firm to integrate multiple functions in the organization to share information in order to develop more accurate forecasts in order to align resources to a single demand plan.

• S&OP focuses on three primary components:

• People

• Process

• Technology

CPFR

Collaborative planning, forecasting and replenishment

(CPFR) is a cohesive bundle of business processes

whereby supply chain trading partners share

information, synchronized forecast, risks, costs and

benefits with the intent of improving supply chain

performance through joint planning and decision

making

• Strategy and planning

• Demand and supply management,

• Execution

• Analysis

Measuring Forecasting Error

Every forecast contains a level of error

There are three main purposes for measuring

forecast error

• To assess the level of confidence managers

should have in a particular forecast.

• The smaller the error, the greater the

confidence in the forecast.

• Second, measuring forecast error is key to

improve forecasts.

• Third, when forecasting sales for a large

number of items, the forecast error works as a

flag directing management to focus on the

items with the largest forecast error

Measuring Forecasting Error

• Time horizon

• The farther in the future is the period being forecasted,

the larger the error that should be expected

• Level of aggregation

• Forecast error is relatively larger when forecasting at

greater level of detail.

Mean Absolute Deviation (MAD)

is simply a measure of the absolute average error for all time periods considered

Mean Absolute Percent Error (MAPE)

Mean Square Error (MSE)

Why is Inventory Management important

supply chain manager must

decide on the level of inventory to be

maintained for each individual item

stocked by the company, as well as

the size and frequency of inventory

replenishments

• The goal is to achieve minimum cost

at a predetermined level of service

Reasons to hold inventory

Transportation economies of scale

• Production economies of scale

• Economies of scale in purchasing

• Prepare for seasonal demand

• New product introduction

How much inventory?

In order to support a predetermined customer service policy,

supply chain managers need to determine:

• How much inventory to keep

• How often to reorder its inventory

• This involves a series of trade-offs

• How much does it cost to order the inventory

• Administrative costs to issue the order

• Related transportation and warehousing

When to order inventory: The Economic

order quantity (EOQ)

Total costs are minimized

when ordering costs and

inventory carrying costs

intersect

EOQ Assumptions

• No uncertainty

• Demand is known and constant

• Lead times are constant

• Shipments are never late

• Transportation costs per unit are fixed

lead time demand quantity

Why use the ltd?

minimizes the risk of related to holding inventory

is the declining cost of placing an order

Sizing inventory and the impact of uncertainty

EOQ and LTD assume no uncertainty, which

is not realistic

• Trucks will be late

• Demand is not constant

• Prices vary based on quantity

INV (avg. total inventory) = base stock + safety stock

Base stock

The inventory needed to support daily operations is known as base stock or cycle stock

BS = OQ (order quantity) / 2

Safety stock

Safety stock, or buffer stock, is an inventory quantity maintained

in addition to the base stock in order to protect the firm from the

uncertainties of demand and replenishment lead time

SS = k (safety factor) x Sc (combined SD of demand and replenishment lead time)

Safety factor: demand and supplier lead

time uncertainties

Safety factor: measures of customer

service

f(k) = (1-fr(fillrate)) x sc/ OQ

the portfolio effect

There is a relationship between the level of inventory needed to support

a target level of inventory availability and the number of locations

where the inventory is stored

• More locations, more inventory

• Fewer locations, less inventory

quantifies the percent decrease in safety stock

that is achieved with inventory centralization

form postponement

This principle states that demand uncertainty can be managed by delaying a product’s final form until the exact nature of the demand is known

Safety stock management extensions: form postponement

• Labeling postponement

• Packaging postponement

• Assembly postponement

• Manufacturing postponement