Exam 3 Supply Chain

Chapter 7-9

The Essence of Demand Management

• To estimate and manage customer demand and use this
  information to make operating decisions.

• To further the ability of firms throughout the supply chain to
  collaborate on activities related to the flow of products, services,
  information, and capital

Desired end result:

• Greater value for the end user or consumer

Common Problems in Demand Management

• Lack of coordination between departments

• Too much emphasis placed on forecasts of
  demand, with less attention on the
  collaborative efforts and plans needed to be
  developed from the forecasts

• Non-strategic uses of demand information

Effective Demand Management

• unifies channel members with the
  common goals of satisfying customers and solving customer problems.

  1. Gather & analyze knowledge about consumers, their
     problems, and their unmet needs.

  2. Identify partners to perform functions needed in
     demand chain.

  3. Move functions to the channel member that can perform
     them most effectively and efficiently.

  4. Share with other supply chain members knowledge
     about customers, technology, and logistics challenges
     and opportunities.

  5. Developing products and services that solve customers’
     problems.

  6. Develop & execute best methods to deliver products &
     services to consumers in the desired format.

Demand Forecasting

• Foundation of many SC manager decisions

• How to balance supply and demand

• All forecasts will be wrong

• Select the forecasting technique with the lowest forecast error

Two Types of Demand Forecasting

• Forecasts serve as a plan for both marketing and operations to set goals
  and develop execution strategies

• Independent Demand

  • demand for the primary item, known as base
    demand

• Dependent Demand

  • demand directly influenced by demand for an
    independent item

All Demand is Subject to Fluctuations

• Random fluctuation – cannot be
  anticipated & is usually the cause to hold
  safety stocks to avoid stockouts

• Trend fluctuation – gradual increase or
  decrease in demand over time for an
  organization

• Seasonal fluctuation – patterns will
  normally repeat themselves during a year
  for most organizations

common forecasting techniques

• simple moving average

• weighted moving average

• exponential smoothing

weighted moving average

• assigns a weight to each previous period with higher weights usually given to the more recent demand

• pros: allows emphasis on more recent demand as a predictor of future demand

• cons: not easily accommodate seasonal demand patterns

Other Quantitative Methods

• Regression – based on the assumption that underlying factors influence
  what is being forecasted

• Simulation – can be very sophisticated, often used to compare different
  forecasting methods

Common Qualitative Methods

• Executive Judgment – expert opinions from different
  departments is averaged

• Sales Force Composite – forecast based on the
  opinions of salespeople

• Market Research/Survey – directly collecting
  information from consumers about purchases

• Delphi Method – panels of experts individually
  questioned (not as a group); effective for long range
  forecasting

Demand Management Impacts Order Management

• Demand Management: How organizations create forecasts that are
  used to create marketing, production,
  finance, and logistics plans & Align organization resources to strategic
  goals

• Order Management & Customer Service: The execution of the plans from demand management & Tactical, day-to-day activities

Order Management

• Defines and sets in motion the logistics
  infrastructure of the organization

• Two Phases:

• Phase 1: Influence and Order

  • Organization attempts to change the manner by which
    customer place orders

• Phase 2: Execute the Order

  • Order receipt: electronic vs. manual

  • Order fulfillment: inventory policy, number and location
    of warehouses

  • Order shipments: transportation mode choice

Customer Service

• Anything that touches the customer, including all activities that impact
  information flow, product flow, and cash flow between the organization and its
  customers

• Customer service as a philosophy

  • Elevated to an organization-wide commitment

• Customer service as a performance measure

  • Assess performance through measures like on-time delivery and percentage of
    orders filled complete

• Customer service as an activity

  • A task that an organization must perform to satisfy customers

Order Management: Influencing the Order

• Customer Relationship Management (CRM)

  • Align the supplier’s resources with its customers in a manner that
    increases both customer satisfaction and supplier profits

  • How? How much? What? When?
    • Maximize efficiencies of the shipping organizations logistics
    network

• 4 Basics Steps in the Implementation of the CRM Process

  • 1. Segment the Customer Base by Profitability

  • 2. Identify the Product/Service Package for Each Customer
    Segment

  • 3. Develop and Execute the Best Processes

  • Measure Performance and Continuously Improve

• CRM: product/service package example Option #1, Most Commonly Used

  • Offer the same product/service to each customer segment, while varying the product quality or
    service levels.

  • Pro: easy for the supplier to manage

  • Con: Assumes that all customer segments value the same types of supplier offerings.

CRM Product/Service Package Example, Option#2

• Vary the service offerings for each customer segment

• Pro: meet the needs of each segment

• Con: difficult for the supplier to manage

What is Activity Based Costing?

• “A methodology that measures the cost and performance of activities, resources, and cost
  objects. Resources are assigned to activities, then activities are assigned to cost objects based
  on their use. ABC recognizes the causal relationships of cost drivers to activities”

Customer Segmentation

• Danger zone segment strategies are: (1) Change the manner in which the customer interacts with the shipper to
  move the customer to another segment; (2) Charge the customer the actual cost of doing; or (3) Switch the customer to an alternative distribution channel.

• Build segment strategies aim to maintain the cost to serve but build net sales value to help drive the customer into the “Protect” segment.

• Cost engineer segment strategies aim to find more efficient ways for the customer to interact with the shipper.

• Protect segment: most profitable, provide shipper with the most cost efficiencies

OTC: refer to outbound-to-customer shipments. The order to cash (or order cycle) is all of the activities that occur when an order is received by a seller until the product is received by the buyer, plus the flow of funds back to the seller based on the invoice.

Replenishment Cycle: The term replenishment cycle is used more frequently when referring to the acquisition of additional inventory as in materials management.

Customer Service

• Output of logistics activities

  • Right product, right place, right time…lead to good
    customer service

• Today’s consumers:

  • Time conscious

  • Demand flexibility

  • High standards for quality

  • Not always brand loyal

  • Desire products at the best price, best service, with times that are convenient for their schedules

• Companies build today’s customer service strategies on speed, flexibility, customization, and reliability

Customer Service: The Logistics/Marketing Interface

• Marketing Objective: Allocate resources to the marketing mix to maximize long-term profitability of the firm

• Logistics Objective: Minimize total costs, given customer service
  objective, where: Total cost = Transportation costs + Warehousing costs + Order processing & Information costs + Lot quantity costs + Inventory carrying costs

4 Elements of Customer Service

• Time – absolute length of lead time

  • Sellers – order to cash

  • Buyers – order cycle time, lead time, replenishment
    time

• Dependability – consistent lead time, safe delivery,
  correct orders

• Communications – pre-transaction, transaction, post
  transaction

• Convenience – flexible logistics service level

stockout- occurs when desired quantities of finished goods are not available when or where a customer needs them.

Item- a case, an inner-pack, or an “each” on an order

Line- a single product on a multiple product order

Item fill rate- the percentage of items in stock available to fill an order

Line fill rate- the percentage of total lines filled complete on an order

Order fill rate- the percentage of orders filled complete

Perfect order rate- the percentage of orders filled completely, received on time, billed accurately, etc

Metrics

• Internal

  • Item fill rate

  • Line fill rate

• External Metrics

  • Order fill rate

  • Perfect order

Financial Impact of Order Fill Rate: Improvement in order fill results in improvement in cash flow but might require some type of investment in inventories and/or technology

Service Recovery

• Requires an organization to realize that mistakes will occur and to have plans in place to fix them.

  • Key Aspects

    • Measuring the costs of poor service

    • Anticipating the needs for recovery

    • Developing employee training and empowerment

Basic Facts About Inventory

• Asset on the balance sheet

• Variable expense on the income statement, direct impact on COGS

• Direct impact on service levels

• Part of corporate strategy

• Constant balancing of too much vs. too little

• Major logistics cost tradeoff is between transportation and inventory
  

Basics of Inventory Management

• A set of techniques used to manage the inventory levels within different companies in a
  supply chain

• Goal is to reduce cost (efficiency) while maintaining service levels customers require
  (effectiveness)

• Forecast + product price = inputs that IM needs to balance

3 Types of Inventory

• Cycle Stock – needed to meet demand between normally scheduled orders

• Safety Stock – necessary to compensate for demand uncertainty & order lead times

• Seasonal – produced and stockpiled in anticipation of future demand

Conflicting Goals of Functional Areas

• Marketing- In favor of holding sufficient, or extra, inventory to ensure
  product availability to meet customer needs and new
  product offerings for continued market growth.

• Manufacturing- In favor of long production runs of a single product with
  minimal changeovers to lower labor and machine costs
  per unit, resulting in high inventory levels of the product.

• Finance- In favor of low inventories to increase inventory turns,
  reduce liabilities and assets, and increase cash flow to
  the organization

Major Types of Inventory Costs

• Inventory Carrying Cost

  • Incurred by inventory at rest and waiting to be used. Four major components: Capital cost, Storage space cost, inventory service cost, & Inventory risk cost.

• Ordering and Setup Cost

  • Refers to the expense of placing an order, excluding the cost of the product itself. Setup cost refers to the expense of changing/modifying a production/assembly process to facilitate line changeovers.

• Expected Stockout Cost

  • Cost associated with not having a product/materials available to meet customer/production demand. Most organizations hold safety stock or buffer stock, to minimize the possibility of a stockout and costs of lost sales.

• In-transit Inventory Carrying Cost

  • Generally, carrying inventory in transit costs less than in warehouses. However, in-transit inventory carrying cost becomes especially important on global moves since both distance & time increase.

4 Fundamental Questions of Inventory Management

• How much should inventory be ordered?

• When should inventory be ordered?

• Where should inventory be held?

• What specific line items should be available at specific
  locations?

3 Key Factors of Inventory Management Strategies

1. Dependent vs. Independent demand- Independent demand is unrelated to
the demand for other items, while dependent demand is directly related to,
or derives from, the demand for another inventory item or product.

2. Pull vs. Push- The “pull” approach relies on customer orders to move
product through a logistics system, while the “push” approach uses
inventory replenishment techniques in anticipation of demand to move
products.

3. System-wide vs. Single-facility solutions- A system-wide approach plans
and executes inventory decisions across multiple nodes in the logistics
system. A single-facility approach does so for shipments and receipts
between a single shipping and receiving point.

Inventory Management Approaches

• Economic Order Quantity (EOQ)

• Just-in-time (JIT)

• Materials Requirement Planning (MRP)

• Manufacturing Resource Planning (MRP II)

• Distribution Requirements Planning (DRP)

• Vendor Managed Inventory (VMI)

Economic Order Quantity (EOQ)

• Most cost-effective amount to purchase at a time

• Order a fixed amount each time reordering takes place

• Limitation – assumes consumer demand is constant

fixed order quantity EOQ model: inventory is reordered when the amount on hand reaches the reorder point. The reorder point quantity depends on the time it takes to get the new order and on the demand for the item during this lead time.

Just in Time (JIT) Approach

• JIT is an operating concept based on delivering materials in exact amounts and at the precise times that organizations need them—thus minimizing inventory costs.

• Designed to manage lead times and eliminate waste

• Ideally, product should arrive exactly when an organization needs it, with no tolerance for late or early deliveries

• High priority on short, consistent lead times but reliability is also important

4 Major Elements of JIT Concept

• Zero inventories

• Short, consistent lead times

• Small, frequent replenishment quantities

• High quality (zero defects)
  

Materials Requirements Planning (MRP)

• Begins by determining how much end products (independent demand
  items) customers desire and when they are needed

• Timing and component needs based on end-product demand are disaggregated

• Objectives similar to JIT

• An MRP system is designed to translate a master production schedule into time-phased net inventory requirements and the planned coverage of such requirements for each component item needed to implement this schedule.

• Advantages:

  • Attempt to maintain reasonable safety stock levels and to minimize or eliminate inventories whenever
    possible.

  • Can identify process problems and potential supply chain disruptions long before they occur and take the
    necessary corrective actions.

  • Production schedules are based on actual demand as well as on forecasts of independent demand items.

  • They coordinate materials ordering across multiple points in an organization’s logistics network.

• Disadvantages:

  • Application is computer intensive, and making changes is sometimes difficult once the system is in operation.

  • Both ordering and transportation costs might rise as an organization reduces inventory levels and possibly moves toward a more coordinated system of ordering product in smaller amounts to arrive when the organization needs it.

  • Not usually as sensitive to short-term fluctuations in demand as are order point approaches (although they are not as inventory intensive, either).

  • Frequently become quite complex and sometimes do not work exactly as intended.
    

Manufacturing Resource Planning (MRP2)

• More comprehensive set of tools than MRP alone

• Allows the integration of financial planning and operations/logistics

• Helps an organization conduct “what if” analyses to determine appropriate product movement and storage strategies

Distribution Requirements Planning (DRP)

• DRP systems accomplish for outbound shipments what MRP
  accomplishes for inbound shipments.

• Determines replenishment schedules between a firm’s manufacturing
  facilities and its distribution centers.

• Usually coupled with MRP systems to manage the flow and timing of both inbound materials and outbound finished goods.

• Underlying rationale is to more accurately forecast demand and the
  share that information for use in developing production schedules

Vendor Managed Inventory (VMI)

• Vendor-managed inventory manages inventories OUTSIDE a
  firm’s logistics network, specifically inventories held in its
  customer’s distribution centers.

  • How it works:

  • 1. The supplier and its customer agree on which products are to be managed using VMI in the customer’s distribution centers.

  • 2. An agreement is made on reorder points and economic order quantities for each of these products.

  • 3. As these products are shipped from the customer’s distribution center, the
    customer notifies the supplier, by SKU, of the volumes shipped on a real- time basis.

  • 4. The supplier monitors on-hand inventories in the customer’s distribution center, and when the on-hand inventory reaches the agreed-upon reorder point, the supplier creates an order for replenishment, notifies the customer’s distribution center of the quantity and time of arrival, and ships the order to replenish the distribution center

• Principal advantages of VMI systems

  • The knowledge gained by the supplier of real-time inventory levels of its products at its customer locations allows the shipper more time to react to sudden swings in demand to assure that stockouts do not occur.

• Principal shortcomings of VMI systems

  • Suppliers’ uses of VMI to push excess inventory to a customer distribution center at the end of the month in order to meet monthly sales quotas, resulting in the customer holding extra inventory, adding costs to its operations

Inventory Classification Techniques

• Multiple product lines and inventory control require organizations to focus on more important inventory items and use more sophisticated and effective approaches to inventory management.

• ABC Analysis

  • ABC classification technique assigns inventory items to one of three groups according to the relative impact or value of the items that make up the group. A items are considered to be the most important, B items lesser importance, and C items least important.

• Pareto’s Law (The “80–20” Rule)

  • Pareto’s Law “80–20” rule suggests that a relatively small percentage of inventory might account for a large percentage of the overall impact or value.

• Quadrant Model

  • Quadrant model classifies finished goods inventories using value and risk to the firm as the criteria. Value is measured as the value contribution to profit; risk is the negative impact of not having the product available when it is needed.

ABC Classification

• In many ABC analyses, a common mistake is to think of the B and C items as being far less important than the A items. However, all items in the A, B, and C categories are important to some extent and each category deserves its own strategy to assure availability at an appropriate level of cost (stockout cost vs. inventory carrying cost).

Quadrant Model

• Items with high value and high risk (critical items) need to be managed carefully to ensure adequate supply. Items with low risk and low value (generic or routine items) can be managed much less carefully.

Full Exam review

• demand management

  • essence of demand management “slide”

  • demand forecasting “slide”

  • all demand is subject to fluctuation “slide” know the differences in fluctuations

  • common forecasting techniques- simple moving average & weighted moving average- know the difference between the two types; when it comes to “weighting”

  • common qualitative methods “slides” know what each is and difference between them

  • sales and operations

  • CPFR

    • difference between them

    • know the acronyms

• Order management & customer service

  • order management “slide”

  • influencing order how and why companies do that

    • section about how companies “tender” orders

  • customer service “slide”

    • understand the difference between what customer service is

  • order management influencing the order “slide”

    • customer relationship management

      • 4 steps of the relationship process

  • what is activity based costing- principle behind why companies use this

  • customer segmentation

    • profitable customers, change customers, danger zone customers; know the customer in each

    • order to cash cycle

    • customer service in logistics “slide”; what marketing org does v logistics org does

    • dreaded stockout

    • know what a stockout is and potential outcomes

    • terminology

    • financial impact on product availability “slide”; understand the breakeven point

• Inventory management

  • basic facts about inventory

  • COGS

  • basics of inventory management “slide”

  • 3 types of inventories; know which one which is

  • rational behind different types of inventories

    • seasonality, procurement, emergency or unusual need

  • inventory carrying cost “slide”; know the cost categories

    • what is not a part of inventory carrying cost?

  • inventory carrying cost vs. ordering cost

  • economic order quality “slide”

    • know reorder point vs safety stock

  • all things “just in time” JIT

  • requirement planning, basics on “planning”

    • all the acronyms with planning

  • vendor management

    • advantages and disadvantages

  • inventory classification techniques

    • ABC Vs. Quadrant models