Chapter 2 Supply Chain Operations: Planning and Sourcing CHAPTER PREVIEW CHAPTER 2 To achieve a high-level of understanding, SCOR developed a simplified model for supply chain operations. There are 4 categories: PLAN SOURCE MAKE DELIVER CHAPTER 2 Visual view of the 4 categories CHAPTER 2 Demand Forecasting and Planning (Plan) Supply chain management decisions are based on forecasts that define which products will be required, how much of the product, and when will they be needed All forecasts deal with four major variables, which are combined to determine what market conditions will be favorable: SUPPLY DEMAND PRODUCT CHARACTERISTICS COMPETITIVE ENVIRONMENT CHAPTER 2 SUPPLY is determined by the number of producers of a product and by the lead times that are tied-in with a product The more producers of a product, the shorter the lead times, the more predictable the variable is Supply chain forecasts must cover a time period that encompasses the combined lead times of all components that are used in the development of the final product CHAPTER 2 DEMAND refers to the overall market demand for the group of related products or services Many products have a seasonal demand pattern (ex. Flip flops are in more demand in the summer) Markets with little historical data and lots of variability are most difficult for demand forecasting CHAPTER 2 PRODUCT CHARACTERISTICS include features of a product that influences a customer Forecasts for mature products (ex. I-Phone) can cover longer timeframes than forecasts for products that are developed quickly It is important to determine of a product will steal demand away from another product-Can you name a product? Can a product be substituted? Can we use a product drive to complement the use of a related product? CHAPTER 2 COMPETITIVE ENVIRONMENT refers to the actions of a company and its competitors Questions to consider: What is the market share of a company? What is the trend in an individual company’s market share? Is the market share growing or shrinking? What is the market share trend of the competitors? CHAPTER 2 There are 4 basic forecasting methods defined by Chopra and Meindl: Qualitative Causal Time Series Simulation CHAPTER 2 QUALITATIVE METHODS rely on the person’s intuition or subjective opinions about a market People can forecast using production adoption curves that they feel reflects what will happen in the market CASUAL METHODS of forecasting assume demand is strongly related to particular environmental or market factors A strong casual relationship can exist between price and demand CHAPTER 2 TIME SERIES methods are the most common used in forecasting They are based on the assumption that historical of demand are a good indicator of future demand Forecasting software can be used for the techniques of time series SIMMULATION methods uses combinations of casual and time series methods to start the behavior of consumers unde.

1. Chapter 2
Supply Chain Operations: Planning and Sourcing
CHAPTER PREVIEW
CHAPTER 2
To achieve a high-level of understanding, SCOR developed a
simplified model for supply chain operations. There are 4
categories:
PLAN
SOURCE
MAKE
DELIVER
CHAPTER 2
Visual view of the 4 categories

2. CHAPTER 2
Demand Forecasting and Planning (Plan)
Supply chain management decisions are based on forecasts that
define which products will be required, how much of the
product, and when will they be needed
All forecasts deal with four major variables, which are
combined to determine what market conditions will be
favorable:
SUPPLY
DEMAND
PRODUCT CHARACTERISTICS
COMPETITIVE ENVIRONMENT
CHAPTER 2
SUPPLY is determined by the number of producers of a product
and by the lead times that are tied-in with a product
The more producers of a product, the shorter the lead times, the
more predictable the variable is
Supply chain forecasts must cover a time period that
encompasses the combined lead times of all components that are
used in the development of the final product

3. CHAPTER 2
DEMAND refers to the overall market demand for the group of
related products or services
Many products have a seasonal demand pattern (ex. Flip flops
are in more demand in the summer)
Markets with little historical data and lots of variability are
most difficult for demand forecasting
CHAPTER 2
PRODUCT CHARACTERISTICS include features of a product
that influences a customer
Forecasts for mature products (ex. I-Phone) can cover longer
timeframes than forecasts for products that are developed
quickly
It is important to determine of a product will steal demand away
from another product-Can you name a product?
Can a product be substituted? Can we use a product drive to
complement the use of a related product?
CHAPTER 2
COMPETITIVE ENVIRONMENT refers to the actions of a

4. company and its competitors
Questions to consider:
What is the market share of a company?
What is the trend in an individual company’s market share?
Is the market share growing or shrinking?
What is the market share trend of the competitors?
CHAPTER 2
There are 4 basic forecasting methods defined by Chopra and
Meindl:
Qualitative
Causal
Time Series
Simulation
CHAPTER 2
QUALITATIVE METHODS rely on the person’s intuition or
subjective opinions about a market
People can forecast using production adoption curves that they
feel reflects what will happen in the market
CASUAL METHODS of forecasting assume demand is strongly
related to particular environmental or market factors
A strong casual relationship can exist between price and
demand

5. CHAPTER 2
TIME SERIES methods are the most common used in
forecasting
They are based on the assumption that historical of demand are
a good indicator of future demand
Forecasting software can be used for the techniques of time
series
SIMMULATION methods uses combinations of casual and time
series methods to start the behavior of consumers under
different circumstances
This method can be used to answer questions based on what will
happen to revenue prices on a line of products ar lowered or a
competitor/competing product opens up a store nearby
CHAPTER 2
Aggregate planning is used when demand forecasts are already
created, then create a plan for the company to meet expected
demand
CHAPTER 2

6. There are 3 basic approaches to take in developing an aggregate
plan:
Amount of production capacity
Level of utilization of the production capacity
Amount of inventory to carry
There are 3 other approaches combined with the one above:
Use of production capacity to match demand
Utilizing varying levels of total capacity to match demand
Use inventory and blocklogs to match demand
CHAPTER 2
Relationship of cost structure to pricing
Question to consider:
Is it better to do price promotion during peak periods to
increase revenue or during low periods to cover costs?
This question cannot be answered which is contingent on the
company’s cost structure
Some companies run promotions to further stimulate demand
CHAPTER 2
Inventory management (plan) is a set of techniques that are used
to manage inventory levels within different companies in a
supply chain
The aim is to reduce costs of inventory as much as possible
while maintaining the service levels that customers require

7. Inventory management operation in a company or an entire
supply chain comprise of a blend of activities related to three
types of inventory (cycle, seasonal, & safety)
CHAPTER 2
CYCLE inventory is the buildup of inventory in the supply
chain due to production and stocking of inventory is done in lot
sizes larger than continuous demand for the product
CHAPTER 2
Economic order quantity(EOQ) refers to a given the cost
structure of a company, there is an order quantity that is most
cost-effective amount to purchase at a time
See EOQ problem
CHAPTER 2
SEASONAL INVENTORY occurs when a company or a supply
chain with a fixed amount of production capacity decides to
produce more to anticipate future demand

8. CHAPTER 2
SAFETY inventory is necessary to compensate for uncertainty
in the market/supply chain
A rule of thumb, the higher the uncertainty, the higher the level
of safety stock that is required
Safety inventory for an item can be defined as the amount of
inventory on hand for an item when the next replenishment EOQ
lot arrives
CHAPTER 2
CHAPTER 2
Procurement (source)
The purchasing manager job is to beat potential suppliers on
price and then buy the products from the lowest-cost supplier
that could be found
There are 5 main activities that are incorporated in a
procurement function:
-Purchasing

9. -Consumption Management
-Vendor Selection
-Contract Negotiation
-Contract Manager
CHAPTER 2
PURCHASING requires routine activities related to issuing
purchase orders for needed products
There are two types of products that company buys:
Direct or storage materials, needed to produce products that
company sells to its consumers
Indirect or maintenance, repair, and operations (MRO) products
that a company consumes as a part of a daily operations
One of the greatest challenges of the purchasing activity is to
see to it that this is data communication happens in a timely
manner without error
CHAPTER 2
CONSUMPTION MANAGEMENT refers to the understanding
of how much of what categories of products are being brought
across the entire company as well as by each operating unit
Expected levels of consumption for different products at a

10. various locations of a company should be set and then compared
to the actual consumption on a daily basis
Consumption below expectations may signify an opportunity
that should be exploited or may also reflect inaccurate
expectations
CHAPTER 2
VENDOR SELECTION is an ongoing process to define the
procurement capabilities needed to support the company’s
business plan and its operating model
The value of product quality, service levels, just-in-time
delivery, and technical support is predicated by the business
plan and the company’s operating model
The general rule is if a company seeks to narrow down a number
of suppliers it does business with
CHAPTER 2
CONTRACT NEGOTIATION involves the negotiation of
contracts with individual vendors on the preferred vendor list
The most complex negotiations involve direct purchase of
materials that meet specified quality requirements
Performance targets must be specified and penalties and other
fees defined when performance benchmarks are not met

11. CHAPTER 2
Credit and collects is the sourcing process that a company uses
to retrieve its money
The collections operation is what actually bring in the money
that the company has earned
Good credit management attempts to fulfill customer demand
for products and also minimize the amount of money tied up in
receivables
Supply chains that a company participates in are often selected
based on the credit decisions/record
Credit and collections can be broken down into 3 categories
Set Credit Policy
Implement Credit and Collections Practices
Manage Credit Risk
CHAPTER 2
CREDIT POLICY is established by senior managers (Controller,
CFO, CEO, treasurer)
The company’s receivables must be reviewed first
Criteria is needed to define the different kinds of customers and
payment terms that will be offered
IMPLEMENT CREDIT AND COLLECTION PRACTICES are
need to enforce the credit policies of the company
Credit analysis is beneficial and proactive for customers to pay
off their loan at the specified time

12. CHAPTER 2
Collections is ongoing maintenance of each customer’s account
payable status
If customers have past-due accounts, they are contacted. Also
new payment terms and schedules can be negotiated
Payments can come in the form of money orders, check, and
electronic funds
Cash is not a viable method to send in for payment
For VIP customers with large individual sales, people in the
credit area work with others in the company to structure special
deals for a single customer
The above bullet, in short, increases the value of the company
to such a customer and can be a signficant part of securing new
business