Supply Chain Management Exam #2

Supply Management (Procurement or Purchasing)

Identifying, acquiring, and managing the inputs a company needs, along with its supplier relationships

Effective Supply Management Helps a Company: (6)

• Reduce costs

• Maintain quality

• Ensure materials arrive on time

• Manage risk

• Access innovation

• Meet sustainability goals

Supply Risk

The probability of an unexpected negative event that disrupts supply

Ex: Supplier bankruptcy, natural disasters, labor disputes, quality problems, and changing regulations

Supply Chain Resilience

The ability to resist and recover from disruptions

4 Ways Companies Can Improve Supply Chain Resilience

• Using multiple suppliers

• Holding additional inventory

• Diversifying supplier locations

• Increasing supply chain visibility

Total Cost of Ownership (TCO)

Measures the complete cost of acquiring and using something, not just purchase price

Costs Included Before Purchase (3)

• Finding suppliers

• Evaluating suppliers

• Certifying suppliers

Costs Included During Purchase (5)

• Purchase price

• Transportation

• Ordering

• Inspection

• Receiving

Costs Included After Purchase (7)

• Inventory

• Repairs

• Defects

• Recalls

• Downtime

• Last Sales

• Reputation Damage

Insourcing

• Producing internally

• Greater control

• Protects core competencies

• Requires internal resources

Outsourcing

• Purchasing from external suppliers

• Potential cost savings

• Access to supplier expertise

• Risk of supplier dependence

Core Competencies

Unique skills, capabilities, or resources that a company does especially well that give them competitive advantage over other firms

Eight-Step Make-or-Buy Decision

1. Strategic fit (with core competencies)

2. Outsourcing suitability

3. Benefits (ie. lower costs, flexibility, and access to expertise)

4. Costs

5. Qualitative risks (ie. quality, supplier risk, loss of control, and intellectual property protection)

6. Supplier capabilities (technical, financial, manufacturing, and quality capabilities)

7. Decision

8. Monitoring

Sourcing Strategies (4)

• Strategic

• Leverage

• Bottleneck

• Noncritical

Strategic Sourcing

• High importance

• High supply risk

• Build close, collaborative supplier relationships

• Often single or dual sourcing

• Need exec. champions - (high level leaders or execs who actively promote and support the company’s sourcing strategy)

• Collaboration/innovation

Leverage Sourcing

• High importance

• Low supply risk

• More supplier options

• Standardize purchases

• use competition

• Consolidate

Bottleneck Sourcing

• Low importance

• High supply risk

• Focus on ensuring reliable availability and reducing supply risk

• Use multiple sources

• Find substitutes

• Develop new suppliers

• Lack of availability

Noncritical Sourcing

• Low importance

• Low supply risk

• Simplify purchasing

• Minimize administrative effort

• Increase efficiencies

• Electronic catalogs

• VMI (Vendor Managed Inventory)

• Purchasing cards

Supply Base Optimization

Finding the appropriate number of suppliers

Single Sourcing

Using one supplier for an item

Multiple Sourcing

Using several suppliers to reduce dependence

Purchase Requisition

Internal document by an employee or department formally requesting the purchase of goods or services from the purchasing department

(First step in purchase process)

Includes:

• Item

• Quantity

• Specifications

• Delivery date

• Estimated cost

Purchase Specification

Technical requirements of what is being purchased

Weighted Point Model

Evaluating and comparing suppliers using weighted performance criteria based on importance

1. Choose Criteria: Such as price, quality, delivery reliability, or service

2. Assign Weights: Give more important criteria higher %, weights must total 100%

3. Score Suppliers: Rate each supplier on each criterion

4. Calculate Weighted Scores: Multiply each score by its weight % and add the results

5. Compare: The supplier with the highest total score is generally preferred

Supplier Scorecard

Tracking supplier performance using KPIs

Supplier Certification

Formal evaluation of supplier capabilities

SRM

Technology-supported supplier relationship management

EDI

Electronic Data Interchange

Structured, secure electronic exchange of business data

Too Few Suppliers →

Increase dependency and shortage risk

Too Many Suppliers →

Increase complexity and administrative costs

ESG

Environmental, Social, and Governance

• Sustainability’s potential to improve financial performance, product quality, customer loyalty, reputation, and long-term costs

• Sustainable sourcing can create business value, not just additional expense

Demand Planning

Forecasting and managing demand to achieve operational and financial goals

Demand Forecasting

Predicting future customer demand

Demand Management

Influencing the timing, pattern, or amount of customer demand

Overforecasting Can Cause (3)

• Excess inventory

• Wasted capacity

• Unnecessary labor costs

Underforecasting Can Cause (3)

• Stockouts

• Lost sales

• Overworked Employees

Stockouts

When a company runs out of inventory and can’t meet customer demand for a product

Stable Demand

Relatively constant demand over time

Seasonal Demand

Repeating increases and decreases

Trend

Long-term upward or downward movement

Step Change

A sudden shift to a different demand level

Autocorrelation

The relationship between past and current demand

Forecast Error

The unexplained or random portion of demand

Grassroots (Forecasting)

Uses input from employees close to customers

Executive Judgement (Forecasting)

Uses experienced managers’ opinions

Historical Analogy (Forecasting)

Uses previous demand (experiences) as a predictor

Marketing Research (Forecasting)

Studies customer behavior and patterns

Delphi Method (Forecasting)

Uses a panel of experts

Time Series (Forecasting)

Uses historical demand observations (data and mathematical methods)

Casual Forecasting

Uses relationships between demand and other variables

Simulation (Forecasting)

Evaluates different possible business scenarios

Moving Average

Averages demand from a specified number of previous periods

Moving Average Formula

F= Average demand

n= Number of periods

Dt= Period’s demand

Moving Average - More vs. Less Periods

More periods → Smoother forecast

Less periods → Foreast more responsive to recent changes

Weighted Moving Average

Assigns different weights to past periods based on importance

Weighted Moving Average Formula

F= Forecasted demand for next period

Wi= Weight (must add up to 100%)

Di= Demand of period

Exponential Smoothing

Gives greater weight to recent demand

Exponential Smoothing Formula

Ft= Current period forecast

a(alpha)= Smoothing constant 0<a<1

Dt= Current actual demand

Exponential Smoothing - Higher a (alpha) →

Forecast responds more quickly to recent changes

Forecast Error Formula

et= Forecast error for period t

At= Actual demand during period t

Ft= Forecasted demand for period t

n= Number of periods evaluated

Forecast Accuracy Metrics

• MFE

• MAD

• MAPE

MFE

Mean Forecast Error - Measures forecast bias

MFE Formula

A= Actual demand

F= Forecasted demand

n= Number of periods evaluated

MAD

Mean Absolute Deviation - Measures average error size

MAD Formula

A= Actual demand

F= Forecasted demand

n= Number of periods evaluated

MAPE

Mean Absolute Percentage Error - Average percentage error

Expresses error relative to actual demand

MAPE Formula

A= Actual demand

F= Forecasted demand

n= Number of periods evaluated

Positive MFE Interpretation

Actual demand exceeds forecasted demand

Forecast was too pessimistic

Negative MFE Interpretation

Actual demand falls below forecasted demand

Forecast was too optimistic

Near Zero MFE Interpretation

Little average bias but individual errors could still be large

Lower Values for MAD and MAPE

Indicate better forecasting accuracy

Seasonal Index

A factor used to adjust a forecast for predictable seasonal fluctuations

Seasonal Index Formula + Index </> 1

• An index > 1 indicates above-average demand

• An index < 1 indicates below-average demand

Linear Regression

Models the relationship between variables

Reducing lead time to improve forecast accuracy (improving demand planning)

So companies don’t have to predict demand so far into the future, shorter-term forecasts are generally more accurate

• Less uncertainty

• More current information

• Greater flexibility

• Less safety stock needed

Postponable products (+4 ways of improving demand planning)

Products designed specifically final production, assembly, or customization can be delayed until actual customer demand is known

• Reduce forecasting errors

• Reduce excess inventory

• Increase flexibility

• Reduce stockout

Big Data

• Extremely large and complex amounts of data that companies analyze to identify patterns, trends, and insights to improve decision making

• Ex: Amazon analyzes millions of customer purchases to predict future demand

IoT

• Internet of Things

• A network of physical devices equipped with sensors, software, and internet connectivity that collect and exchange data

• Ex: Smart warehouse sensors track inventory levels in real time and alert companies when stock is running low

CPFR

• Collaborative planning, forecasting, and replenishment

• Supplychain partners collaborate/coordinate to plan demand, forecasts, replenishment, and inventory decisions

Inventory

Items held to meet demand

Raw Materials

Inputs used to manufacture products

Components

Parts used in finished products

Work In Process (WIP)

Partially completed products

Finished Goods

Completed products ready for sale

MRO

Maintenance, Repair, and Operating supplies

Types of Stock

• Cycle Stock

• Seasonal Stock

• Safety (Buffer) Stock

• Speculative Stock

• Transit Stock

Cycle Stock

Inventory regularly ordered and consumed

Seasonal Stock

Extra inventory for predictable seasonal changes

Safety (Buffer) Stock

Extra inventory to protect against uncertainty

Speculative Stock

Inventory purchased in anticipation of price increases or shortages

Transit Stock

Inventory being transported

Inventory Turnover

How many times inventory is sold or used during a period

Inventory Turnover Formula

High Inventory Turnover

• Higher inventory turnover generally means less inventory tied up

• Excessively high turnover may increase stockout risk

Days of Supply

How long current inventory will last

Days of Supply Formula

or days/turnover

Independent Demand

Demand determined by customers or outside market forces

Dependent Demand

Demand driven by another product

Continuous Review

Inventory is monitored constantly and an order is placed when inventory reaches the reorder point

• More accurate but more expensive to manage