Unit 2 SCM Strategy

SCM Strategy in SCMSCM Strategy in SCM
Prof.Ramachandran, CIMAT

SCM StrategySCM Strategy
Supply chain
strategy framework
Demand flow
Strategy
Technology
integration strategy
Collaboration
Strategy
Customer
Service
Strategy

Collaboration StrategyCollaboration Strategy
Manufacturer/Supplier Collaboration
Manufacturer/Customer Collaboration
Collaboration with Third Party and
Fourth Party logistics providers

Demand Flow StrategyDemand Flow Strategy
Demand Forecasting
(Demand Planning)
Managing flow of goods from suppliers
through the manufacturing and
distribution chain to the customer.

Customer Service StrategyCustomer Service Strategy
Customer Segmentation
Cost to Serve
Revenue management

Technology Integration StrategyTechnology Integration Strategy
Intelligent Decision Support
Execution management
Integration of Elements of Customer
Service Focussed organisation

Customer Focus in SCMCustomer Focus in SCM
Customer analysis
Demand and lead time management
Purchasing/Supplier partnering
Cost benefit and analysis
Manufacturing/Remanufacturing
Materials Management
Inventory management and control
Transportation

ForecastingForecasting
In the supply chain context is the art and
science of predicting a future demand.
A planning tool that helps management in
its attempts to cope with the uncertainty
of the future, relying mainly on data from
the past and present and analysis of
trends.
Forecasting starts with certain
assumptions based on the management's
experience, knowledge, and judgment.

Role of Forecasting in a Supply ChainRole of Forecasting in a Supply Chain
andand Demand PlanningDemand Planning
The basis for all strategic and planning
decisions in a supply chain
Used for both push and pull processes
Examples:
◦ Production: scheduling, inventory, aggregate
planning
◦ Marketing: sales force allocation, promotions,
new production introduction
◦ Finance: plant/equipment investment,
budgetary planning
◦ Personnel: workforce planning, hiring, layoffsProf.Ramachandran, CIMAT

Characteristics of ForecastsCharacteristics of Forecasts
Forecasts are always wrong. Should
include expected value and measure of
error.
Long-term forecasts are less accurate than
short-term forecasts (forecast horizon is
important)
Aggregate forecasts are more accurate
than disaggregate forecasts
It’s an Integral Part of Decision Making.

Forecasting MethodsForecasting Methods
Qualitative: primarily subjective; rely on
judgment and opinion
Time Series: use historical demand only
◦ Static
◦ Adaptive
Causal: use the relationship between
demand and some other factor to develop
forecast
Simulation-Imitate consumer choices that
give rise to demand Can combine time
series and causal methods

Qualitative MethodsQualitative Methods
Grass Roots
Market Research
Panel Consensus
Executive Judgment
Historical analogy
Delphi Method
Qualitative
Methods

SCM PLANNINGSCM PLANNING
Demand Planning
Aggregate Planning
Replenishment Planning
Purchase Planning

 Demand forecasting: The creation of a projection for
unconstrained demand for a product or service over time
 Demand planning: The development of a forecast that
reflects known constraints and any possible associated
impacts that may occur as a result of external events,
capacity (either production or logistics) or changing
priorities
 Demand management: Influencing demand via the
addition (or cancellation) of activity, the increasing or
reduction of price, or the rationing or allocation of stock.

Basic Approach to DemandBasic Approach to Demand
ForecastingForecasting
Understand the objectives of forecasting
Integrate demand planning and forecasting
Identify major factors that influence the
demand forecast
Understand and identify customer
segments
Determine the appropriate forecasting
technique
Establish performance and error measures
for the forecast

Demand PatternsDemand Patterns
Lumpy Slow Erratic
Fast
Positive Trend Negative Trend
ObsoleteNew Dying

Demand PlanningDemand Planning
Demand planning is a multi-step
operational supply chain management
(SCM) process used to create reliable
forecasts. Effective demand planning can
guide users to improve the accuracy of
revenue forecasts, align inventory levels
with peaks and troughs in demand, and
enhance profitability for a given channel
or product.

Steps in Demand PlanningSteps in Demand Planning
Importing historical sales data
Creating statistical forecasts
Collaborating with customers
Managing forecasts
Building consensus forecasts
Supply and demand collaboration
Confirmation with customers
Re-examining data and adjusting planning
accordingly.

Purchasing:Purchasing:
Function of buying Goods & Services
from External Source to an Organisation
Main Activity in Area of Material
management.
first element which affects the product
cost

Objectives Of PurchasingObjectives Of Purchasing
ManagementManagement
 To purchase the required material at minimum possible
price by following the company policies. to keep
department expenses low.
 Development of good & new vendors(suppliers).
 Development of good relation with the existing
suppliers. training & development of personal
employees in department.
 To maintain proper & up to date records of all
transactions.
 Participating in development of new material and
products. to contribute in product improvement. to
take Economic "MAKE OR BUY" decisions.

Principles Of PurchasingPrinciples Of Purchasing
ManagementManagement
Buying Material at right QUALITY.
In the right QUANTITY.
From the right SOURCE.
At the right PRICE.
Delivered at the right PLACE.
At the right TIME.
With right mode of TRANSPORT.

Purchasing ProcessPurchasing Process
Approving
Studying Market
Making Purchase Decision
Placing Orders
Receipting Goods and Services Received
Accounting Goods and Services
Receiving Invoices and Making Payment
Credit note in case of material defect

Purchasing ManagementPurchasing Management
ProcessProcess
Purchasing Planning,
Purchasing Tracking,
Purchasing Reporting,
Negotiate

Purchasing PlanningPurchasing Planning
creating purchasing projects and tasks
providing related information (files, links, notes
etc.)
assigning purchasing tasks to the concern
person
setting task priorities, start/finish dates etc.
assigning supervisors
setting reminders
control and evaluation

Stages in PurchasingStages in Purchasing
Transactional Stage
Price negotiation
Coordination
Cross functional
External Integration

Make or Buy DecisionMake or Buy Decision
Outsourcing is closely related to make or
buy decision. The corporations made
decisions on what to make internally and
what to buy from outside in order to
maximize the profit margins.
KAIZEN Principle
HAWEI

4 Values of M or B4 Values of M or B
The volume
The fixed cost of making
Per-unit direct cost when making
Per-unit cost when buying

FormulaFormula
Cost to Buy (CTB) = Volume x Per-unit
cost when buying
Cost to Make (CTM) = Fixed costs +
(Per-unit direct cost x volume)

Reasons for MakingReasons for Making
Cost concerns
Desire to expand the manufacturing focus
Need of direct control over the product
Intellectual property concerns
Quality control concerns
Supplier unreliability
To maintain a backup source
Political and environment reasons
Organizational pride
Reduction of logistic costs (shipping etc.)

Reasons for BuyingReasons for Buying
Lack of technical experience
Supplier's expertise on the technical
areas and the domain
Cost considerations
Need of small volume
Insufficient capacity to produce in-house
Brand preferences
Strategic partnerships

The ProcessThe Process

Cost ManagementCost Management
Cost management is the process of
planning and controlling the budget of a
business.
Cost management is a form of
management accounting that allows a
business to predict impending
expenditures to help reduce the chance
of going over budget.

Life Cycling Cost in SCMLife Cycling Cost in SCM
Initial Cost Target
Final Cost Target
Contract Baseline
Cost/Price Continuous Investment

Cost Analysis(Elements)Cost Analysis(Elements)
Profit margin
Selling and Administration cost
Production Overhead
Direct Labour Cost
Direct Managerial Cost

Cost Based Pricing ModelsCost Based Pricing Models
Margin Based Model
cost+(marginal rate)(unit selling price)
unit selling price=cost+(1-marginal rate)

Inventory Management in SCMInventory Management in SCM
•What is Inventory
•Roles and Types
•Costing
•Techniques

MeaningMeaning
Inventory management is the process of
efficiently overseeing the constant flow of
units in and out of an existing inventory

Supplie
r
Manufacturin
g
Distribut
er
Retailer
Custome
r•Inventories
•Raw Materials
•Work in Progress
•Finished Goods
•Goods in
Transit
•Finished Goods
SCM/Inventories
Traditional Supply Chain Management
(SCM)
G.Trites, J.Boritz, “e-business strategies, a Canadian perspective for a networked world” ,Pearson-Prentice Hall,Prof.Ramachandran, CIMAT

What is Inventory?What is Inventory?

Reasons for InventoriesReasons for Inventories
o Improve Customer Service
o Economies of purchasing
o Economies of Production
o Transportation Savings
o Hedge against future
o Unplanned shocks(labor strikes, natural
disasters, surges in demand, etc)
o To maintain independence in supply chain

INVENTORY TYPESINVENTORY TYPES
*RAW MATERIALS
*WORK-IN-PROGRESS
*FINISHED GOODS
*TRANSIT INVENTORY
*BUFFER INVENTORY
*DECOUPLING INVENTORY

Development of EOQ ModelDevelopment of EOQ Model
(a.) Develop a COST EQUATION (MODEL)
QUANTITIVELY and QUANTITIVELY
TC = Holding cost + Setup Cost + DC
(b.) Minimize the total cost equation (model)
(c.) Find REORDER QUANTITY
D = annualD = annual
demand indemand in
unitsunits
C = cost of anC = cost of an
individualindividual
itemitem

AnnualCost
Total Cost of Holding and Setup (order)
Holding Cost
Setup (order) Cost
Order QuantityOptimal Order
Quantity (Q*)
Minimum
totalcost Minimizing Cost

Role of Inventory in Supply ChainRole of Inventory in Supply Chain

Continued..Continued..
Decoupling
Balancing supply and demand
Uncertainities

Measures of Product availabityMeasures of Product availabity
Product fill rate(fr)
Order fill rate
Cycle service level (CSL)

Two Types of CostTwo Types of Cost
– Costs of storage space (E.g. warehouse depreciation)
– Security
– Insurance
– Forgone interest on working capital tied up in inventory
– Deterioration, theft, spoilage, or obsolescence
– Clerical costs of preparing purchase orders
– Some spent finding suppliers and expediting orders
– Transportation costs
– Receiving costs (E.g. unloading and inspection)
Holding
Cost:
Ordering
Cost:

Unit 2 SCM Strategy

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