Supply chain management

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Supply chain management

  1. 1. Supply Chain Management By: Mahesh Alimchandani GM – SCM, Cummins India Ltd. Gmail: maheshalim@gmail.com 1 Cell: +91-9623275447
  2. 2. Supply Chain Management 1. Introduction 2
  3. 3. 1. Introduction 1.1. Key Concepts 1.1.1. Supply Chain The Supply Chain is: • the sequence of suppliers that contribute to the creation and delivery of a good or service to end customers. • APICS (1): The processes from the initial raw material to the ultimate consumption of finished product, linking across supplier-user companies. • APICS (2): The functions within and outside a company that enable the value chain to make products and provide services to the customers. 3
  4. 4. 1. Introduction 1.1. Key Concepts 1.1.2. Logistics Logistics is: • the management of the storage and flow of goods, services and information throughout your organisation. 4
  5. 5. 1. Introduction 1.1. Key Concepts 1.1.3. Supply Chain Management Supply Chain Management is: • organizing the cost effective flow and storage of materials, in-process inventory, finished goods and related information from point of origin to point of consumption to satisfy customer requirements. 5
  6. 6. 1. Introduction 1.1. Key Concepts 1.1.4. Objectives • Greater efficiency; lower costs • Enhance flexibility; agility • Improve customer service • Optimize the value chain 6
  7. 7. 1. Introduction 1.2 Principal Issues 1.2.1. Supply Chain (1) Supply Chain The supply chain of a company consists of different departments, ranging from procurement of materials to customer service. The supply chain includes activities associated with inventory (materials) acquisition, storing, use in production, transit, and delivery to customers. The activities are planned, executed, and monitored under the guidelines set by the company’s chosen customer service levels and in line with the company’s other operating goals. 7
  8. 8. 1. Introduction 1.2 Principal Issues 1.2.1. Supply Chain (2) •Supplier’ s Partner •Customer s •Store s •Employee s •Store s •Employee s •Supplier •Employee s •Distributors & Resellers •Store s •Inbound Logistics •Store s •Logistic s •Factory •Line Inventory •Warehous e •Value Flow • Information Flow •Value Flow Enablers 8
  9. 9. 1. Introduction 1.2. Principal Issues 1.2.2. Elements of Logistics Elements of Logistics: • materials management: • sourcing and receiving of raw materials or unfinished products for subsequent use • material flow system: • the ability to locate and schedule material through to end production and disposition • physical distribution: • the delivery of finished goods to customers 9
  10. 10. 1.2. Principal Issues 1.2.3. Logistic Goal 1. Introduction Logistic goal and objectives The right products The right quantity Flexibility 10 The right moment Delivery reliability At minimal cost Delivery time/ lead time Inventory level
  11. 11. 1. Introduction 1.2. Principal Issues 1.2.4. Logistic Steps Logistic steps: • accepting a customer order • receive and enter • credit clearance / authorize • delivery commitment • • • • • 11 supplier ordering forecasting demand scheduling manufacturing inventory management delivery to customer.
  12. 12. 1. Introduction Supply Chain Evolution 1.2. Principal Issues 1.2.5. Evolution Quality products Lowest possible cost Order fulfillment Integration of supply chains Customer service Preferred partners Communication Supply chain communities Common goals, objectives 12
  13. 13. 1. Introduction 1.2. Principal Issues 1.2.6. The Goal Supply Chain Management Goal To evolve a company’s supply chain into an optimally efficient, customer-satisfying process, where the effectiveness of the whole supply chain is more important than the effectiveness of each individual department. 13
  14. 14. 1. Introduction 1.2. Principal Issues 1.2.7. Focus Supply Chain Management focuses on business processes: • • • • product design planning order management stock management instead of functions: • sales • purchasing • production 14
  15. 15. 1. Introduction 1.2. Principal Issues 1.2.8. Drivers of Change (1) Drivers of change: • outsourcing trend • actual customer demand: speed, flexibility and competitive pricing • new software: ERP, sophisticated application software 15
  16. 16. 1. Introduction 1.2. Principal Issues 1.2.8. Drivers of Change (2) • new technologies • • • • • 16 Electronic Data Interchange (EDI) internet, intranet, extranet wireless communications teleconferencing and telecommuting bar coding.
  17. 17. 1. Introduction 1.2. Principal Issues 1.2.9. Activities Supply chain management activities: • • • • • • • 17 Forecasting demand Selecting suppliers Ordering material Managing inventory Scheduling production Shipping and delivery Organizing information exchange
  18. 18. 1. Introduction 1.3. Analysis 1.3.1. Diagram Understand the customer Understand the information flow 18 Understand the product Understand the process
  19. 19. 1. Introduction 1.3. Analysis 1.3.2. Understand the Customer (1) Know and understand the customers: • Your existing customers, i.e., • demographics • existing and potential number • income levels? • Who are your potential customers? • How might these customers be grouped? • For which percentage of sales is each group responsible? 19
  20. 20. 1. Introduction 1.3. Analysis 1.3.2. Understand the Customer (2) • What is the effect of various methods of communications (i.e., telephone, fax, e-mail, internet telephoney systems) in your relation with your customers? • What do your customers want from you? • How well do your competitors meet customers needs? 20
  21. 21. 1. Introduction 1.3. Analysis 1.3.3. Understand the Products Understand the products: • • • • • 21 How many? Where are they? Which percentage of sales? What is the product life cycle? What is the product mix?
  22. 22. 1. Introduction 1.3. Analysis 1.3.4. Understand the Process Understand the production process: • process flow • • • • • linear flow job shop - batch flow assembly line continuous flow project flow • order fulfillment strategy • make-to-order • make-to-stock. 22
  23. 23. 1. Introduction 1.3. Analysis 1.3.5. Understand the Information Flow Understand the information flow: • What information is required for effective decision-making at each stage in the supply chain? • What data has to flow between each part of the supply chain? 23
  24. 24. 1. Introduction 1.4. Performance Indicators (1) A total view must be taken in assessing performance. Performance measurements need to be focused on what factors add to total performance, total value or total cost. The principle performance indicator is customer service. Optimum service levels are necessary from each supplier to each customer throughout the supply chain. 24
  25. 25. 1. Introduction 1.4. Performance Indicators (2) Customer Service + Quality Efficiency Suppliers Inputs Effectiveness Adding value Productivity Profitability 25 Outputs Customers Customer Service Results
  26. 26. 1. Introduction 1.4. Performance Indicators (3) Effectiveness: • accomplishment of the right things, on time, within the requirements specified. Efficiency: • resources expected to be consumed divided by resources actually consumed. 26
  27. 27. 1. Introduction 1.4. Performance Indicators (4) Productivity: • measures of output divided by measures of input for a given period of time. Profitability: • relationship between revenues and costs. 27
  28. 28. Supply Chain Management 2. Purchasing and Procurement 28
  29. 29. 2. Procurement 2.1. Key Concepts Purchasing: implies the monetary transaction. Procurement: the responsibility for acquiring the goods and services the organization needs: • goods: • raw materials • production parts • maintenance, repair and operating supplies (MRO) • services: • consulting services • utilities • workers health care benefits. 29
  30. 30. 2. Procurement 2.2. Principal Issues 2.2.1. Evolution in Purchasing Evolution in Strategies for Purchasing Focus on price Focus on quality, reliability, responsiveness, and total cost Strategic focus - supplier relationships - forecasting - cycle time 30
  31. 31. 2. Procurement 2.2. Principal Issues 2.2.2. The Procurement Process (1) The Procurement Process: • preparation: • identify needs, such as dependability, long term availability • evaluate user requirements to ensure suitability of purchase • forecast when and how purchase will be needed • identify and select suppliers • develop an efficient ordering system for control • negotiation: • bidding processes • contracts 31
  32. 32. 2. Procurement 2.2. Principal Issues 2.2.2. The Procurement Process (2) • order placing via appropriate channels (i.e. authorized purchase order) • receiving including adjustments for damages, short or over-shipping and incorrect costs • monitoring supplier performance. 32
  33. 33. 2. Procurement 2.2. Principal Issues 2.2.3. Supply Uncertainty Elements of supply uncertainty: • • • • 33 lead time to supply quantity supplied quality of supply data accuracy on products supplied and prices.
  34. 34. 2. Procurement 2.2. Principal Issues 2.2.4. Selecting a Supplier In selecting a supplier, a number of factors must be analyzed: • • • • • price quality reliability credit terms shipping costs. Look at the whole transaction cost of dealing with a supplier (not just the cheapest price). 34
  35. 35. 2. Procurement 2.1. Principal Issues 2.2.5. Positive Trends (1) Positive trends in purchasing and procurement include: • reduced number of suppliers • long-term relationships with suppliers • suppliers located close to customers for improved access • integrated information infrastructure: EDI, electronic catalogs 35
  36. 36. 2. Procurement 2.1. Principal Issues 2.2.5. Positive Trends (2) • suppliers considered to be an essential part of the business • suppliers involved in future product development programs. 36
  37. 37. 2. Procurement 2.3. Analysis Key considerations in analyzing the purchasing process: • • • • • • • 37 annual sales annual purchases number of suppliers number of supplier alliances total number of purchased products or parts short and long-term cost effective purchasing efficient business management of the purchasing process.
  38. 38. 2. Procurement 2.4. Suggestions Analyze what the suppliers requirements are for: • goods and services: lot sizes, packaging, delivery frequency, and responsiveness • information: how much and when • financing arrangements and costs. Compare your needs and abilities against these requirements. 38
  39. 39. 2. Procurement 2.5. Performance Indicators 2.5.1. Delivery to Schedule The following formula is used to assess suppliers delivery to schedule performance. D%=100-(L*100)/S D = monthly delivery performance (%) L = number of line items delivered later than scheduled S = number of line items scheduled for delivery during month Different tolerances for A, B, C-articles (see chapter 6) 39
  40. 40. 2. Procurement 2.4. Performance Indicators 2.5.2. Quality to Specification The following formula is used to assess quality performance. Q%=100-(R*100)/N • Q = monthly quality performance (%) • R = number of units rejected during month • N = number of units delivered during month 40
  41. 41. The Supply Chain Management Guide 3. Sales Forecasting 41
  42. 42. 3. Sales Forecasting 3.1. Key Concepts Sales forecasting is the process of organizing and analyzing information in a way that makes it possible to estimate future sales. 42
  43. 43. 3. Sales Forecasting 3.2. Principal Issues 3.2.1. Demand Uncertainty Elements of demand uncertainty: • timing of order • size and composition of order • data accuracy on: • products required • delivery points • timing. 43
  44. 44. 3. Sales Forecasting 3.2. Principal Issues 3.2.2. Components of Demand Components of demand: • Trend: • growth or decline over an extended period of time • Cyclical: • wavelike fluctuation around the trend • Seasonal: • pattern of change that repeats itself year after year • Random: • not accounted for by the other components (trend, cyclical, or seasonal). 44
  45. 45. 3. Sales Forecasting 3.2. Principal Issues 3.2.3. Sales Forecasting Methods (1) Qualitative sales forecasting methods rely more on judgment and intuition than on historical data: • surveys of buyer intentions, such as questionnaires, telephone polls, and consumer interviews • Delphi technique: • a body of experts, consulted separately, is asked to arrive at a consensus opinion • sales force composite: • based on the combined estimates of experienced sales personnel. 45
  46. 46. 3. Sales Forecasting 3.2. Principal Issues 3.2.3. Sales Forecasting Methods (2) Quantitative sales forecasting methods make use of past data to predict future sales: • market tests to gauge consumer response (usually to a new or modified product) under actual conditions • trend projections/analysis (also called Time Series) involves forecasting sales based on the historical relationship between sales and time, which is expressed as a growth rate (percentage) and each measure is plotted on a growth curve: 46
  47. 47. 3. Sales Forecasting 3.2. Principal Issues 3.2.3. Sales Forecasting Methods (3) • moving average: all observations are given equal weight and only a few of the previous observations are considered • exponential smoothing: gives greater weight to more recent observations and considers all past observations • regression analysis can be used to forecast a dependent variable (i.e., sales) as a result of changes in one or more independent variables (i.e., advertising) 47
  48. 48. 3. Sales Forecasting 3.2. Principal Issues 3.2.3. Sales Forecasting Methods (4) • input-output models forecast the impact of the change in the outputs (sales) of one industry on the out-outs of the purchasing industry (i.e., a reduction in the supply of tin cans produced by the metal industry would effect the supply of canned tuna that would be produced by the fish canneries). 48
  49. 49. 3. Sales Forecasting 3.2. Principal Issues 3.2.3. Sales Forecasting Methods (5) Computerized forecasting models include: • spreadsheets, such as Microsoft Excel (with the Data Analysis Toolpack), that can perform calculations automatically with changes in entered data • forecasting application software: • statistical packages, such as Minitab • forecasting packages specifically designed for forecasting applications 49
  50. 50. 3. Sales Forecasting 3.2. Principal Issues 3.2.4. Major Uses of Sales Forecasts (1) Sales forecasts are used for: • production: • production scheduling • inventory control • purchasing: • determination of procurement requirements • scheduling of purchases to get favorable prices • finance: • establishing of operating budgets • cash flow planning • capital budget / expenditure decisions 50
  51. 51. 3. Sales Forecasting 3.2. Principal Issues 3.2.4. Major Uses of Sales Forecasts (2) • marketing: • formulation of marketing strategies for products • setting of sales quotas • scheduling of advertising expenditures and sales promotions • personnel: • planning of manpower requirements • top management: • overall planning and control of operations of the company. 51
  52. 52. 3. Sales Forecasting 3.2. Principal Issues 3.2.5. Advantages Forecasting (1) Accurate sales forecasting offers several advantages: • reduced excess inventory • fewer stock shortages which result when demand exceeds supply • fewer unnecessary production line changes to fulfill unanticipated demand • less overtime hours through improved predictions in personnel requirements • improved customer service levels as supply and demand balance • more economic purchasing power. 52
  53. 53. 3. Sales Forecasting 3.2. Principal Issues 3.2.6. Forecast Accuracy Factors that influence forecast accuracy: • availability of product demand history • capability of computer system • other available history (i.e., new products, design changes, changes in customer base, promotional actions, economic indicators) • responsibility for forecasting: a team effort is required (Sales, Distribution and Manufacturing). 53
  54. 54. 3. Sales Forecasting 3.3. Checklist Sales forecasting considerations: • What are the items to be forecast? • How far into the future should the forecast extend? • What is the length of the time period for stating the forecast quantity? • How frequently should the forecast be made, reviewed and revised? • What would constitute an acceptable tolerance of forecast error? 54
  55. 55. 3. Sales Forecasting 3.4. Suggestions (1) Prior to forecasting sales, scrub the data by removing the effects of unusual events that are not likely to happen again. Otherwise, the forecasting model will show a distorted view of the past. 55
  56. 56. 3. Sales Forecasting 3.4. Suggestions (2) Examples of problems that may require data adjustments: • • • • 56 unusual weather addition or loss of major customers special promotions changes in price or package size.
  57. 57. 3. Sales Forecasting 3.4. Suggestions (3) Determine the most accurate forecasting method: • regularly use a number of different methods to generate forecasts • maintain historical accuracy information on each method • use the most accurate method to generate “official” forecasts. 57
  58. 58. 3. Sales Forecasting 3.4. Suggestions (4) Make an ABC-analysis of the items to forecast: • A-items are reviewed each month by management • only those B- and C-items with a significant deviation between forecast and actual demand need to be reviewed by management. 58
  59. 59. The Supply Chain Management Guide 4. Production planning and control 59
  60. 60. 4. Production Control 4.1. Key Concepts 4.1.1. Production Planning and Control The responsibility for: • number of units of a specific product to be produced • time intervals over which production will occur • availability of equipment, materials and work force • cost effective inventory and resource management. 60
  61. 61. 4. Production Control 4.2. Principal Issues 4.2.1. Production as a Goal or Means (1) Production as a goal: • resources are planned and used in the production process regardless of actual demand • often based on economies of scale, where lower cost per item is presumed to generate end product demand. 61
  62. 62. 4. Production Control 4.2. Principal Issues 4.2.1. Production as a Goal or Means (2) Production as a means: • resources are planned and used in the production process only as a result of product demand • often based on economies of scope, where end product demand has greater influence over production units and costs. 62
  63. 63. 4. Production Control 4.2. Principal Issues 4.2.2. Economies of Scope vs Scale (1) Economies of scope production assumptions: • • • • • • • • 63 responsive to demand flexible production plans variable cost per item smaller production runs increased total set up and change over costs lower product/inventory obsolescence minimized inventory carrying costs material is pulled through the production process as needed.
  64. 64. 4. Production Control 4.2. Principal Issues 4.2.2. Economies of Scope vs Scale (2) Economies of scale production assumptions: • • • • • • • • 64 responsive to profit margin gains fixed production plans lower cost per item larger production runs less production set up and change over cost greater risk of product/inventory obsolescence higher inventory carrying costs material is pushed through the production process.
  65. 65. 4. Production Control 4.2. Principal Issues 4.2.3. Order Decoupling Point How far does a customer order penetrate in the production process? Purchasing Production Warehouse Distribution Position of the order decoupling point Manufacture to order 65 Manufacture to stock
  66. 66. 4. Production Control 4.2. Principal Issues 4.2.4. Planning Hierarchy Aggregate plan: works with aggregate (grouped) units Master Production Schedule: indicates the quantity and timing of the production of specific end items. (actual orders are incorporated) Materials planning: what material is needed when? Capacity requirements planning: which equipment, work force and facilities are required? Loading: which job on which work center? Sequencing: in which order have the jobs to be processed? 66
  67. 67. 4. Production Control 4.2. Principal Issues 4.2.5. Production Control Systems Formal production control systems for inventory include: • Economic Order Quantity (EOQ) • Materials Requirements Planning (MRP) • Just-in-Time concept (See Chapter 6, Inventory Management) 67
  68. 68. 4. Production Control 4.3. Suggestions Suggestions: • pull rather than push material through the production process • produce nothing until it is needed • reduce set up times • reduce lot sizes • try to move the order decoupling point to an early stage in the supply chain • try to remove transaction (steps which ad no value) from the process. 68
  69. 69. The Supply Chain Management Guide 5. Material Handling 69
  70. 70. 5. Material Handling 5.1. Key Concepts 5.1.1. Material Handling (1) Material Handling: • moving of goods between incoming transport, storage, processes and outgoing transport • the set of activities that move production inputs and other goods within plants, warehouses and transportation terminals. 70
  71. 71. 5. Material Handling 5.1. Key Concepts 5.1.1. Material Handling (2) Providing the right amount of material: • • • • • • • 71 in the right condition at the right place at the right time in the right position in the right sequence for the right cost by using the right methods.
  72. 72. 5. Material Handling 5.2. Principal Issues 5.2.1. Materials Handling Manager (1) The task for the materials handling manager is to find the methods, the routes, the layouts and the right components to minimize handling. 72
  73. 73. 5. Material Handling 5.2. Principal Issues 5.2.1. Materials Handling Manager (2) Six main responsibilities of the materials handling manager: • • • • • • 73 packaging - unitizing internal transport storage retrieval identification communication.
  74. 74. 5. Material Handling 5.2. Principal Issues 5.2.2. Material Handling System Design The design of a material handling system depends upon the the type and the characteristics of the materials to be handled. 74
  75. 75. 5. Material Handling 5.2. Principal Issues 5.2.3. Material Handling System Components (1) Material handling equipment: • • • • 75 unitizing equipment material transport equipment storage and retrieval equipment automatic identification and communication equipment.
  76. 76. 5. Material Handling 5.2. Principal Issues 5.2.3. Material Handling System Components (2) Unitizing equipment: • containers, such as cartons, boxes, and bags • carriers or support, such as pallets, skids, and plywood • stretch wrap • shrink wrap. 76
  77. 77. 5. Material Handling 5.2. Principal Issues 5.2.3. Material Handling System Components (3) Material transport equipment: • conveyors (belts and rollers) • industrial vehicles, such as pallet trucks, lift trucks, and automated guided vehicles (AGV) • monorails • hoists • cranes. 77
  78. 78. 5. Material Handling 5.2. Principal Issues 5.2.3. Material Handling System Components (4) Storage and retrieval equipment: • unit load storage equipment • unit load retrieval equipment • small load storage and retrieval equipment. 78
  79. 79. 5. Material Handling 5.2. Principal Issues 5.2.3. Material Handling System Components (5) Automatic identification and communication equipment: • • • • • • 79 bar coding radio frequency tag magnetic stripe smart cards voice headsets machine vision.
  80. 80. 5. Material Handling 5.2. Principal Issues 5.2.4. Cost-effective Means of Transport (1) Key factors to consider in selecting means of transport: • • • • 80 physical characteristics of loads the number of loads to be moved the distance to be moved the required speed of movement.
  81. 81. 5.2. Principal Issues 5.2.4. Cost-effective Means of Transport (2) 5. Material Handling Units moved/ hour Conveyors Motorized trolleys Forklift trucks Manual trolley Manual Movement distance (m) 81
  82. 82. 5. Material Handling 5.2. Principal Issues 5.2.4. Cost-effective Means of Transport (3) Other factors which influence the means of transport: • • • • cost of building/dismantling loads packaging costs space requirements interface with other storage, transport and handling systems • housekeeping issues. 82
  83. 83. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (1) The warehouse must be: • located in the right place • the right size • organized to allow: • • • • • 83 efficient delivery and placing cost-effective use of its space adequate access to stored materials security from theft and weather flexibility to deal with the various items.
  84. 84. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (2) The mission (or goal) of a warehouse is set by demand. The warehouse location is a means to achieving the mission. Mission Balance and buffer Accumulate and consolidate Rapid response 84 Location Demand Near the manufacturer Monthly/quarterly replenishments of stocks Central to production locations Weekly/monthly orders Close to customer Daily
  85. 85. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (3) Within the warehouse, stock must be: • put into known places and • in known order so that it can be: • retrieved quickly and in the right quantity • rotated properly (ex. first-in, first-out). 85
  86. 86. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (4) Warehousing activities: • • • • • • • • 86 receiving goods identifying goods sorting goods dispatching goods to storage holding goods picking goods preparing shipments dispatching shipments.
  87. 87. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (4)  Material receipt • • • • • Scan the incoming part number Determine the storage location Location input to operator for storage Confirmation from operator on storage Inventory update  Material tracking • Monitor material movement in storage • Maintain FIFO / LIFO etc. as required • Maintain history for every part number from receipt to dispatch 87
  88. 88. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (4)  Material issue • • • • Receive dispatch order from ERP Determine the material to be issued based on FIFO / LIFO etc. Location input to operator for picking Confirmation from operator on delivery  Inventory update • Inventory count • Maintain inventory count for every part number stored 88
  89. 89. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (4)  ERP Integration • Inventory updates • Delivery schedules  Reports • • • • • 89 Inventory on hand Orders dispatched Orders on backlog Orders under process Shipments completed in a given period of time
  90. 90. 5. Material Handling 5.2. Principal Issues 5.2.5. Warehousing (4) WMS Benefits •Faster inventory turns. •More efficient use of available warehouse space. •Reduction in inventory paperwork. •Improved cycle counting. •Reduced dependency on warehouse personnel. •Enhanced customer service. •Improved stacking productivity. 90
  91. 91. 5. Material Handling 5.3. Suggestions Suggestions for materials handling: • use identification systems, such as bar coding to handle the right material: • give a part identification number • give a location identification number • handle similar materials, packaging and size of loads at the same time • implement improvements in material handling systems which will increase the efficiency of the overall system. 91
  92. 92. The Supply Chain Management Guide 6. Inventory Management 92
  93. 93. 6. Inventory Management 6.1. Key Concepts Inventory: • those stocks or items used to support production and customer service. Service level: • probability (%) that stock will be available to meet demand. 93
  94. 94. 6. Inventory Management 6.2. Principal Issues 6.2.1. Types of Inventory (1) Types of Inventory: • raw materials: • purchased parts used in manufacturing other items • work-in-process: • parts that are in the manufacturing process • sub-assemblies: • manufactured parts that are partially completed and stocked in inventory 94
  95. 95. 6. Inventory Management 6.2. Principal Issues 6.2.1. Types of Inventory (2) • finished goods: • Items ready for sale to a customer • MRO: • maintenance, repair and operation supplies. 95
  96. 96. 6. Inventory Management 6.2. Principal Issues 6.2.2. Functions of Inventory (1) Functions of inventory: • safety stocks: • protect against uncertainties of materials supply and consumer demand • cycle stocks: • result from ordering or producing in lots • transit stocks: • materials must be moved from one location to another 96
  97. 97. 6. Inventory Management 6.2. Principal Issues 6.2.2. Functions of Inventory (2) • speculative stocks: • expected price increase • promotional stocks: • additional inventory accumulated for a promotional event. 97
  98. 98. 6. Inventory Management 6.2. Principal Issues 6.2.3. Elements of Inventory (1) Elements of inventory Inventory Level Excess stock Replenishments Safety stock Time 98
  99. 99. 6. Inventory Management 6.2. Principal Issues 6.2.3. Elements of Inventory (2) Elements of inventory Over time, demand and the ability to service demand (replenish inventory) can vary. Forecasts may not be precise due to uncertainties, so, a reserve of stock (safety stock) may be necessary to reduce inventory shortages (stock-outs). Inventory levels above the safety stock and normal demand are considered excess inventory. 99
  100. 100. 6. Inventory Management 6.2. Principal Issues 6.2.4. Inventory Holding Reasons for holding inventory: • purchased parts: • • • • variations in supplier lead time quantity discounts price changes scarcities of materials • manufactured parts: • • • • 100 cover period between production runs allow flexibility in production scheduling variations in product demand (safety stock) economies of scale.
  101. 101. 6. Inventory Management 6.2. Principal Issues 6.2.5. Inventory Costs (1) Cost of inventory production and holding: • order/set-up costs: • cost of replenishing inventory through changes in the production run for a different item • includes labour and other associated costs • carrying costs: • • • • 101 cost of capital insurance costs costs of space, staff inventory handling, deterioration, damage, obsolescence, insurance
  102. 102. 6. Inventory Management 6.2. Principal Issues 6.2.5. Inventory Costs (2) • opportunity costs: • restriction of other investments that could have been made with the same money • stock-out costs: • lost sale • halted production. 102
  103. 103. 6. Inventory Management 6.2. Principal Issues 6.2.6. Inventory Management (1) Objectives of inventory management: • minimize costs: • working capital • carrying costs • scrap and rework • highest level of customer service. 103
  104. 104. 6. Inventory Management 6.2. Principal Issues 6.2.6. Inventory Management (2) Inventory management tasks: • make decisions about: • safety stock • replenishment production runs • excess stock. 104
  105. 105. 6. Inventory Management 6.2. Principal Issues 6.2.6. Inventory Management (3) Inventory must be managed differently for: • independent demand: influenced by market conditions • dependent demand: derived from the production of parent items. (see following slide) 105
  106. 106. 6. Inventory Management 6.2. Principal Issues 6.2.6. Inventory Management (4) A B C D 106 Independent demand Dependent demand E
  107. 107. 6. Inventory Management 6.2. Principal Issues 6.2.7. ABC-Analysis (1) ABC analysis of inventory: • select a criterion (sales / usage) based on importance • rank the inventory items on criterion • calculate the cumulative sales and/or usage for all items • assign items into A, B, C groups • assign inventory levels and warehouse locations for each item. 107
  108. 108. 6. Inventory Management 6.2. Principal Issues 6.2.7. ABC-Analysis (2) ABC classification, where items are not of equal importance: • A-items • few items (ex. 15 %) which have a high rate of usage and/or high unit cost and account for 80 % of the total value of usage in the inventory • B-items • number of items (ex. 25 %) which in total account for 15 % of the total value of usage 108
  109. 109. 6. Inventory Management 6.2. Principal Issues 6.2.7. ABC-Analysis (3) • C-items • great many items (ex. 60 %) with low individual usage and/or low unit value which in total account for only 5 % of the total value of usage 109
  110. 110. 6. Inventory Management 6.2. Principal Issues 6.2.7. ABC-Analysis (4) ABC analysis chart demonstrates relative importance of inventory items. Class of Item Class A 15% 80% Class B 25% 15% Class C 110 % of Items % of Value 60% 5%
  111. 111. 6. Inventory Management 6.2. Principal Issues 6.2.7. ABC-Analysis (5) ABC - Analysis Chart Number of items 600 500 400 C 300 B 200 A 100 0 111 Product 1 Product 2 Product 3 Product 4
  112. 112. 6. Inventory Management 6.2. Principal Issues 6.2.7. ABC Analysis (6) ABC and inventory control efforts: • A-items • very careful management • careful estimates of future usage. • B-items • routine management • routine effort in forecasting demand. • C-items • little effort in forecasting demand • however be careful for strategic items (safety stock). 112
  113. 113. 6. Inventory Management 6.2. Principal Issues 6.2.8. Inventory Management Systems (1) Inventory management systems include: • two-bin replenishment system: • used for low value , non-critical items (i.e.. class C items) • relies on visual inspection of declining inventory • one bin contains enough material to meet needs between the time one order is received and another is placed • second bin (also called the “reserve bin”) contains enough material to meet needs between placing an order and receiving the materials • if production taps into the reserve bin, additional materials must be ordered immediately 113
  114. 114. 6. Inventory Management 6.2. Principal Issues 6.2.8. Inventory Management Systems (2) • reorder point system: • amount ordered when inventory declines to a predetermined level • considers: • when to order (re-order point) • how much to order (order quantity) • periodic review systems: • after predetermined fixed passages of time, orders are placed for variable amounts • consider: • how much to order (order quantity) • how long between orders (reorder time interval) 114
  115. 115. 6. Inventory Management 6.2. Principal Issues 6.2.8. Inventory Management Systems (3) • Materials Requirements Planning (MRP): • assumes variable demand throughout production • calculates component requirements based on the Master Production Schedule (MPS), Bill of Material and inventory data • materials are purchased only when the MPS has them scheduled for use • materials are pushed through a plant 115
  116. 116. 6. Inventory Management 6.2. Principal Issues 6.2.8. Inventory Management Systems (4) • MRP II systems share information with other functional departments, outside the operations area (i.e., purchasing, sales, cost accounting). These systems plan the use of company resources, including scheduling raw materials, vendors, production, equipment and processes • JIT: different approach to reordering: • activities that add no value are waste • material only is supplied when it is requested from the next step in the production process (pull system) • these requests are called kanbans. 116
  117. 117. 6. Inventory Management 6.2. Principal Issues 6.2.9. How Much to Order: EOQ (1) Economic Order Quantity (EOQ): • the lot size that minimizes total annual inventory holding and ordering costs • assumptions: • • • • 117 annual demand is constant. forecast is perfect (no random error) all costs are constant and linear lead time is known and constant.
  118. 118. 6. Inventory Management 6.2. Principal Issues 6.2.12. Excess Inventory Reasons for excess inventory include: • • • • • 124 engineering changes spoilage defects technical obsolescence lack of market demand.
  119. 119. 6. Inventory Management 6.2. Principal Issues 6.2.13. Inventory Counting Methods (1) Inventory Counting Methods: • Cycle counting: • a few experienced people count continuously throughout the year • timely detection of errors • fewer mistakes in item identification • minimal loss of production time • systematic improvement of record accuracy. 125
  120. 120. 6. Inventory Management 6.2. Principal Issues 6.2.13. Inventory Counting Methods (2) • End of year: • many inexperienced people count inventory in a short hectic period once per year • no correction or cause of errors • many mistakes in item identification • plant and warehouse shutdown for inventory • no improvement of inventory accuracy. 126
  121. 121. 6. Inventory Management 6.3. Suggestions 6.3.1. 6 Step Action Plan • Find out why you have inventories • Analyze the present situation: • inventory matrix • ABC-analysis • • • • 127 Define the inventory levels Define the inventory system Define performance indicators Performance follow-up
  122. 122. 6. Inventory Management 6.3. Suggestions 6.3.2. Inventory Matrix Fill in the different amounts of inventory Raw material Safety Cycle Transit Speculative Promotional ------------- 128 WIP Sub-assemblies MRO Finished Goods
  123. 123. 6. Inventory Management 6.3. Suggestions 6.3.3. Rationalize Products • Print and analyze lists of slow-moving and Class C items • Monthly evaluation • Action plans • Follow-up 129
  124. 124. 6. Inventory Management 6.3. Suggestions 6.3.4. Reduce Excess Reduce excess: • try to move the order decoupling point to an early stage in the supply chain to reduce inventory holding (carrying) cost: Sourcing Production Warehouse • ABC - item management • shorten replenishment cycles. 130 Distribution
  125. 125. 6. Inventory Management 6.4. Performance indicators (1) Inventory turnover: Annual cost of sales Inventory value at cost Stock coverage: • stockholding x 52 weeks / annual usage Customer satisfaction: • comparison of % of demand actually satisfied with the defined service level • number of backorders 131
  126. 126. 6. Inventory Management 6.4. Performance indicators (2) Excess inventory reduction: R%=((PE - CE)/PE)*100 R=inventory reduction during month (%) PE=prior month excess inventory (value) CE=current month excess inventory (value) 132
  127. 127. The Supply Chain Management Guide 7. Distribution 133
  128. 128. 7. Distribution 7.1. Key Concepts (1) Physical distribution: • the activity that is concerned with: • receiving parts or finished goods • storing them until they are required • and then delivering them to the customer. 134
  129. 129. 7. Distribution 7.1. Key Concepts (2) Transport operator: • who does the moving. Intermodal: • interchange point from one transportation mode provider to another. 135
  130. 130. 7. Distribution 7.1. Key Concepts (3) Consolidation: • the process of receiving multiple lots in small quantities, which are accumulated and then repackaged into one larger lot. Cross docking: • unloading the cargo from several trucks and then immediately reload it into one container for delivery to a final destination. 136
  131. 131. 7. Distribution 7.1. Key Concepts (4) Distribution warehouse: • a facility designed to assemble and then redistribute goods in a way that facilitates rapid movement to customers. Unitization: • a technique for grouping boxes on a pallet or skid for later movement by pallet jack, forklift, conveyor and/or truck. 137
  132. 132. 7. Distribution 7.1. Key Concepts (5) Containerization: • the process of combining several unitized loads into a single well-protected load. 138
  133. 133. 7. Distribution 7.2. Principal Issues 7.2.1. Functions of Physical Distribution Functions of physical distribution: • inventory management • order processing • warehousing: • the set of activities involved in receiving and storing goods and preparing them for reshipment • materials handling • transportation. 139
  134. 134. 7. Distribution 7.2. Principal Issues 7.2.2. Distribution Decisions Important distribution decisions: • Which transport mode? • Number and location of distribution warehouses? • Own or contract-out warehousing and transport? 140
  135. 135. 7. Distribution 7.2. Principal Issues 7.2.3. Transport Modes (1) Basis of transport mode selection: • nature, volume, value and criticality of goods • flexibility of transport mode: coping with demand change. 141
  136. 136. 7. Distribution 7.2. Principal Issues 7.2.3. Transport Modes (2) Methods of transport: • • • • • trucks railroads water airways Pipelines • Package carrier 142 Rail Air Piggyback Birdyback Truck Fishyback Water Pipeline
  137. 137. 7. Distribution 7.2. Principal Issues 7.2.3. Transport Modes (3) Trucks: • flexible, on-time, low loss and damage, tracing, accuracy and wide geographical coverage • weather and traffic conditions can delay shipments • still heavy price competition. • Low fixed cost 143
  138. 138. 7. Distribution 7.2. Principal Issues 7.2.3. Transport Modes (4) Railroads: • inexpensive for carload lots • requires more packing material or must allow for rough handling • somewhat slow • freightforwarders, piggyback truck, and doublestack containers offer cost savings for users. • Idle time is very high • It is ideal forheavy or high density products • High fixed cost-raillines 144
  139. 139. 7. Distribution 7.2. Principal Issues 7.2.3. Transport Modes (5) Water transportation: • ideal for heavy, low-value non-perishables, but has high fixed costs • weather can be a problem • containerization and improved ports allow for expansion in new products and markets. • Slowest mode 145
  140. 140. 7. Distribution 7.2. Principal Issues 7.2.3. Transport Modes (6) Airways: • high costs, so only suitable for high value or urgent or perishable items • weight and locations limited • saves inventory holding costs • important in international trade. • Wieght limitation 146
  141. 141. 7. Distribution 7.2. Principal Issues 7.2.3. Transport Modes (7) Pipelines: • slow but dependable, continuous flow of liquids or slurries • harder to establish today due to government regulations. • Need to build proper infrastucture.. Big task 147
  142. 142. •Package carriers: •Preferred mode for e-businesses •Tracking •Expensive •Rapid and reliable •Time constrained/high value products •Eg flipkart •INTERMODAL TRANSPORT: •Truck + airplane: birdybag •Truck + ship: fishybag •Truck + train: piggybag 148
  143. 143. 7. Distribution 7.2. Principal Issues 7.2.4. Outsourcing Decisions for owning or contracting-out transport consider: • • • • • • • 149 total cost control customer service flexibility management skills operators return on investment.
  144. 144. 7. Distribution 7.2. Principal Issues 7.2.5. Distribution Warehouses Number and location of distribution warehouses are based on: • customer service needs • available transportation services • cost trade-off. 150
  145. 145. 7. Distribution 7.3. Performance indicators Performance can be assessed on the basis of: • distribution system flexibility: • response time to special requests • distribution system information: • speed, accuracy and message detail of response • distribution system malfunction recovery: • efficiency to recover from malfunction (errors in billing, damage, claims). 151
  146. 146. The Supply Chain Management Guide 8. Customer Service 152
  147. 147. 8. Customer Service 8.1. Key Concepts Customer Service Standard A statement of goals and acceptable performance for the quality of service that a company expects to deliver to its customers. 153
  148. 148. 8. Customer Service 8.2. Principal Issues 8.2.1. What Customers Look for (1) What customers look for: • Pre-transaction: • accessibility of data (catalogue, price lists, literature) • completeness of data (products, prices, instructions) • availability of samples 154
  149. 149. 8. Customer Service 8.2. Principal Issues 8.2.1. What Customers Look for (2) • accessibility of the organization: • experts • assurance of product suitability, quality, reliability (employees should be knowledgeable about products) • customers want to be noticed, appreciated and recognized as important individuals • efficiency of the information flow 155
  150. 150. 8. Customer Service 8.2. Principal Issues 8.2.1. What Customers Look for (3) • Transaction: • reliability: delivery on time, in the right quantities, and error-free • quality of products, packaging, palletisation • information about order processing, dispatch, transport • flexibility: time, product variants, volumes • assurance of satisfaction after purchase. 156
  151. 151. 8. Customer Service 8.2. Principal Issues 8.2.1. What Customers Look for (4) • Post-transaction: • • • • • technical support, training, helpdesk availability of spare parts and repair instructions product traceability handling of complaints: speed, monitoring, evaluation administration: invoices, accounts receivable, and payments • performance measurements and evaluation. 157
  152. 152. 8. Customer Service 8.2. Principal Issues 8.2.2. What Customers Experience (1) The customer experience is: • any episode in which the customer comes in contact with the organization: • • • • • personal contact telephone mail advertising internet (i.e., e-mail, forms) • any event that forms a perception of the organization in the mind of the customer. 158
  153. 153. 8. Customer Service 8.2. Principal Issues 8.2.2. What Customers Experience (2) The customer experience is a chain of contacts the customer undergoes in obtaining a product. Each link represents a contact. The total experience depends on the weakest link. Customer (start) Shipping Sales Service 159 Customer (end)
  154. 154. 8. Customer Service 8.2. Principal Issues 8.2.4. Customer Service Issues Customer service issues include: • accurate understanding of customer’s needs and wants • the ability to deliver necessary customer service levels • variations between plans and their actual implementation • effective communications with the customer’s • difference between supplier’s and customer’s perception of service level. 160
  155. 155. 8. Customer Service 8.2. Principal Issues 8.2.5. Service Levels Which service level approach to you use: • cut costs and reduce or eliminate service • maximum service at any cost • the cost of stock-out is no greater than the cost of carrying additional inventory (break-even point) • competitive advantage, where service is sufficiently higher than competitors’ service. 161
  156. 156. 8. Customer Service 8.3. Analysis 8.3.1. Customer Analysis (1) Customer Analysis: example table: The following table helps to identify the customer groups, their primary expectations, and their contribution to total sales. Customer 1 Customer 2 Customer 3 Customer 4 ------------------------Total Sales 162 Sales (value) % Total Sales % Cumul Products 92000 18,4 18,4 A 83500 16,7 35,1 A (75%), B(25%) 73200 14,6 49,7 B 31500 6,3 56,0 C 500000 What the customer wants 3 days ex stock 2 weeks 5 days ex stock 6 weeks order to delivery
  157. 157. 8. Customer Service 8.3. Analysis 8.3.1. Customer Analysis (2) Pareto Analysis: • in many cases, approximately 80% of the turnover (i.e., stock) can be ascribed to approximately 20 % of the customers, articles or orders • Rank the customers, products, etc. in order of magnitude • Calculate % that each item contributes to total value • derive a cumulative % list • evaluate the cumulative list and identify appropriate breakpoints (A, B and C). 163
  158. 158. 8. Customer Service 164 8.3. Analysis 8.3.1. Customer Analysis (3)
  159. 159. 8. Customer Service 8.3. Analysis 8.3.2. Know the Customer Know the customer: • Who is our customer? • What are the important things we know about our customers? • What do our customers expect? • What do our customers want? 165
  160. 160. 8. Customer Service 8.3. Analysis 8.3.3. Customer Service Levels Customer service levels: • Do we consistently meet and exceed expectations? • How well do we solve the problems that our customers experience? • What service levels will give us a relative edge over our competitors? • How, and how quickly, are we using customer information? 166
  161. 161. 8. Customer Service 8.3. Analysis 8.3.4. Customer Response Customer response • What did you like most/least about doing business with us? • What will you tell others about us? • How can we serve you better? 167
  162. 162. 8. Customer Service 8.4. Suggestions Group (segment ) customers based on service needs: • Companies traditionally group customers by industry or product, and then provide the same level of service to everyone within the group. • To improve customer satisfaction, customers should be grouped by distinct service needs and services should be tailored to each group. 168
  163. 163. 8. Customer Service 8.5. Performance Indicators 8.5.1. Customer Service Level Customer service level • The desired probability versus the actual percentage that product demand can be met from stock • expressed in a number of ways: • • • • 169 % of orders completely satisfied from stock % of units demanded which are met from stock % of units demanded which are delivered on time % of time there is stock available
  164. 164. 8. Customer Service 8.5. Performance Indicators 8.5.2. Availability Performance indicators of availability: • stock-out frequency: • how many times does demand for a specific product exceed its availability • fill rate: • how much of a specific product is available to satisfy customer demand • orders shipped complete: • how often is customer demand fully met. 170
  165. 165. 8. Customer Service 8.5. Performance Indicators 8.5.3. Operational Performance Operational performance indicators: • speed: • order cycle time • flexibility: • ability to handle extraordinary customer requests • malfunction recovery: • contingency plans for recovering from service failures. 171
  166. 166. 8. Customer Service 8.5. Performance Indicators 8.5.4. Reliability Reliability performance indicators: • ability to comply to: • planned inventory availability • operational performance • capability and willingness to: • provide accurate and timely customer logistical information • commitment to: • continuous service quality improvement. 172
  167. 167. 8. Customer Service 8.5. Performance Indicators 8.5.5. Quality Quality performance indicators: • Ability to deliver: • items without errors • shipped goods without damage. 173
  168. 168. The End Supply Chain Management Please share your feedback on maheshalim@gmail.com 174

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