BREIFING OF CONTENTS
1) Introduction to supply chain management
a) Definition & scope
2) Inventory management
a) Understanding of inventories
c) Inventory related cost concepts
d) Selective inventory controls
I. A.B.C analysis
II. Criticality analysis
III. Usage frequency analysis
e) Sku & Articles
f) Inco terms 2016 (updated)
3) Lean manufacturing concepts
c) Pull strategy
d) Push strategy
e) Dependent demand
f) Independent demand
4) Planning : Replenish Order Point
a) R factor
b) 3 bin approach
c) Formulation of R.O.P
5) Planning :Economic Order Quantity
a) Simple EOQ model
c) Adjustment EOQ model(Case study)
6) Forecasting Methods
a) Qualitative methods
I. Executive judgment
II. Sales force composite
III. Market research / survey
IV. Delphi method
b) Quantitative methods
I. Time series model
II. Regression model
c) Common measure of errors (Mean Absolute Deviation)
I. Introduction & phases
CHAPTER # 1
INTRODUCTION TO SUPPLY CHAIN MANGEMENT
Supply chain management refers to “the means by which firms engaged in creating,
distributing & selling products can join forces to establish a supply network with an
increased competitive advantage”.
ELEMENTS OF SUPPLY CHAIN MANAGEMENT
A simple supply chain is made up of several elements that are linked by the movement of
products along it.
The supply chain starts and ends with the customer.
Customer: The customer starts the chain of events when they decide to purchase a
product that has been offered for sale by a company. The customer contacts the sales
department of the company, which enters the sales order for a specific quantity to be
delivered on a specific date.
Planning: The requirement triggered by the customer’s sales order will be combined
with other orders. The planning department will create a production plan to produce the
products to fulfill the customer’s orders. To manufacture the products the company will
then have to purchase the raw materials needed.
Purchasing: The purchasing department receives a list of raw materials and services
required by the production department to complete the customer’s orders. The
purchasing department sends purchase orders to selected suppliers to deliver the
necessary raw materials to the manufacturing site on the required date.
Inventory: The raw materials are received from the suppliers, checked for quality and
accuracy and moved into the warehouse. The supplier will then send an invoice to the
company for the items they delivered.
Production: Based on a production plan, the raw materials are moved inventory to the
production area. The finished products ordered by the customer are manufactured using
the raw materials purchased from suppliers. After the items have been completed and
tested, they are stored back in the warehouse prior to delivery to the customer.
Transportation: When the finished product arrives in the warehouse, the shipping
department determines the most efficient method to ship the products so that they are
delivered on or before the date specified by the customer. When the goods are received
by the customer, the company will send an invoice for the delivered products.
CHAPTER # 2
Inventory management is a science primarily about specifying the shape and placement of
“Properly maintaining adequate supplies to ensure uninterrupted service”.
The objective of inventory management is to strike a balance between inventory investment
and customer service.
Effective Inventory Management
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
A classification system
“Inventory is the raw materials, component parts, work-in-process, or finished products that
are held at a location in the supply chain.”
Sales growth: right inventory at the right place at the right time.
Cost reduction: less money tied up in inventory, inventory management, obsolescence.
One of the most expensive assets of many companies representing as much as 50% of
total invested capital.
Operations managers must balance inventory investment and customer service.
Functions of inventory (why we manage inventory or supply chain?)
1. To decouple or separate various parts of the production process.
2. To decouple the firm from fluctuations in demand and provide a stock of goods that will
provide a selection for customers.
3. To take advantage of quantity discounts.
4. To hedge against inflation.
5. To meet anticipated demand.
6. To smooth production requirements.
7. To decouple operations.
8. To protect against stock-outs.
9. To take advantage of order cycles.
10. To help hedge against price increases.
11. To permit operations.
Types of inventory
o Purchased but not processed.
o Undergone some change but not completed.
o A function of cycle time for a product.
o Completed product awaiting shipment.
Other stocks (Maintenance/repair/operating (MRO) Necessary to keep machinery and
Categories of stocks (topologies)or reasons for holding stocks
1. Pipeline stock (Goods still in transit or in the process of distribution - have left the
factory but not arrived at the customer yet).
(Average Daily/Weekly usage quantity X Lead time in days + Safety stock)
2. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer
3. Anticipation /seasonal stock (Building up extra stock for periods of increased demand
e.g. ice cream for summer, time varying requirements of an item).
4. Buffer/safety stock (safety for unplanned stock out or uncertainties).
5. De-coupling (Buffer stock held between the machines in a single process which serves as
a buffer for the next one allowing smooth flow of work instead of waiting the previous or
next machine in the same process).
A lead time is the latency between the initiation and execution of a process. For example,
the lead time between the placement of an order and delivery of a new car from a
manufacturer may be anywhere from 2 weeks to 6 months. In industry, lead
time reduction is an important part of lean manufacturing. The longer the lead time, the
larger the quantity of goods the firm must carry in inventory. A just-in-time (JIT)
manufacturing firm, such as some automobile manufacturing firms, can maintain
extremely low levels of inventory. Some of these companies take delivery of some goods
as many as 18 times per day.
INVENTORY PLANNING MODULES
1. Multi-period OR Fixed order quantity module.
• Repeat business, multiple orders; want to maintain an item “in stock”.
2. Single period models.
• Single selling season, single order.
3. Fixed time period model(E.O.Q).
HOW TO TRACK INVENTORY
We track inventory through their SKU# & UPc or Article# because we have to be
efficient in time and wants to prevents ambiguity in stocks, we also keep stock physical
audited in order to reconcile paper & physical stocks.
STOCK KEEPING UNITS (SKU & UPC)
A stock keeping unit (SKU) is a product and service identification code for a store or
product, often portrayed as a machine-readable bar code that helps track the item
for inventory. It is always unique for each category of product.
In contrast; universal product codes (UPCs) are identical regardless of which business
sells the items. UPCs track only basic information about a product. Retailers must add
UPCs to their databases of inventory and assign SKUs to the products.
RIFD is an advance tracking system, it works like a sim card.
INVENTORY COUNTING SYSTEM
1) Periodic (Physical count of items made at periodic intervals).
2) Perpetual Inventory System.
(System that keeps track of removals from inventory continuously, thus monitoring
current levels of each item).
INVENTORY RELATED COSTS
1) Procurement cost
Cost of goods
The costs of placing an order and receiving goods generally fixed not dependent
on order quantity, it includes.
1. Administrative components.
4. Inspection on arrivals.
2) Existence of inventory/holding /carrying cost
The costs of holding or “carrying” inventory over time or when supply exceeds demand,
I. Storage & handling.
II. Interest on tired up capital.
III. Property tax.
3) Setup costs Cost to prepare a machine or process for manufacturing an order.
4) Shortage cost Cost when demand exceeds supply OR stock out.
SELECTIVE INVENTORY CONTROLS
1) 80/20 RULE (Pareto’s law)
2) ABC ANALYSIS (SIGINIFICANT FEW & INSIGNIFICANT MANY)
3) CRITICALITY ANALYSIS(V.E.D)
4) USAGE FREQUENCY ANALYSIS (F.S.N)
1- 80/ 20 RULE
It is based on pareto’s concept, that is 20% of overall stocks provide 80% contributions
2- ABC Analysis (Always Better Control)
On the basis of pareto’s principle we rated to stocks as per their importance or
contributions and, Classifying inventory according to some measure of importance and
A – Very Important (> = 6 times annual usage)
B - Moderate Important (between A & C class)
C - Least Important (< = 0.5 times annual usage)
3- CRITICALITY ANALYSIS (V E D ANALYSIS)
IT is based on maintaining stocks as per importance of goods according to their need or
intrinsic value; we have to carry some stocks because they are,
VITAL (to the process of production OR without it we can’t perform function).
ESSENTIAL (to the process of production OR without it we can perform function
but quality must be affected).
DESIRABLE (to the process of production OR without it we can perform
4- USAGE FREQUENCY ANALYSIS
We have to carry some stocks on the basis of turnover frequency,
(Annual demand/ Average inventory),& categorized them as,
INVENTORY COSTING/VALUATION SYSTEMS
1. FIFO (utilize on basis of first in-first out).
2. LIFO (utilize on basis of last in-first out).
3. MOVING/WEIGHTED AVERAGE METHOD (total cogafs/total qty of goods).
4. SPECIFIC COST METHOD (A.B.C analysis base costing).
5. STANDARD COST METHOD (estimated process cost + fluctuation in prices).
AS AN ASSET (BALANCE SHEET APPROACH)
After costing of consumption remaining in hand stocks are reported in balance sheet as an asset.
AS AN EXPENSE (INCOME STATEMENT APPROACH)
The cost of goods sold in the item of the income statement that reflects the cost of inventory
flowing out of a business.
HOW TO MAKE CHIOCE? IN MANAGING STOCKS:
A. Cut (cut sku/article because less is more)
B. Categorized (segregate them according to sku#/article# order)
C. Concretize (use image building techniques, statements must be realistic/visualize your
customer (e.g., a hill station document v/s its image and people’s decision about to going
D. Compact complexities (highlight specification first by providing limited number of
choices to customer because less is more)
INTERNATIONAL RULES FOR TRADE (DUTIES OF SELLER & BUYER)
OF TRUCK IN
EXW BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER
FCA SELLER SELLER SELLER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER
FAS SELLER SELLER SELLER SELLER BUYER BUYER BUYER BUYER BUYER BUYER BUYER BUYER
FOB SELLER SELLER SELLER SELLER SELLER BUYER BUYER BUYER BUYER BUYER BUYER BUYER
CFR SELLER SELLER SELLER SELLER SELLER SELLER BUYER BUYER BUYER BUYER BUYER BUYER
DDP SELLER SELLER SELLER SELLER SELLER SELLER SELLER SELLER SELLER SELLER SELLER SELLER
CHAPTER # 3
We use lean management technique in mass production, as re-organized process in order to,
Ensures continuous flow of process
Meet technological advancement
Make effective process flow
Create more efficiency for organization
World is changing also customer requirements as well so in order to meet customer’s
fluctuating demands we redesign process flow according to their demand, cost minimization
objective is secondary in this case we have to fulfill demand without looking at the cost. We
redesign process as;
Just in time (J.I.T) inventory approach
Special terms of price & credit
Taylor made process
We know our requirements of productions based on historical demand.
Forecast base manufacturing, as we create needs as demand if orders are not sufficient we plan
The demand for item is independent of the demand for any other item in inventory (EG.CHAIRS,
FINISHED GOODS, it calls for replenish approach).
Need to determine when and how much to order,
Basic economic order quantity
Production order quantity
Quantity discount model
The demand for item is dependent upon the demand for some other item in the inventory, we
make EOQ model (it calls for requirement approach).
REPLANISH ORDER POINT
In order to maintain balance between R FACTOR & K FACTOR we compute ROP
FORMULA= (USAGE @ LEAD TIME) +SAFETY STOCK
K FACTOR = inventory carrying cost,
Multiple smaller quantity purchases of the same item certainly hold down carrying cost, but it
hurts your cost of replenishment, expense associated with buying things.
R FACTOR = inventory ordering cost,
If the per line P/O cost is 5$ then your cost to but all one million widgets at one time would be
If you were to buy the same million widgets 250,000 at a time, then R factor would be (5$ x 4=
Order size versus frequency of purchasing shifts the cost burden from the K factor to R factor or
vice versa in other words,
If you buy smaller quantities more often, the purchasing cost R-factor goes up.
If you buy larger quantities less often, you have a higher level of inventory for a long
period of time, results in carrying cost goes up.
Calculating the R-factor
Total annual cost / total times stock items were ordered,
Total cost = (annual cost of purchasing dept labour+overheads) 424000 (Assumed)
Average number of different stocks items per order = 8 items
Number of p/o created per year = 10000
R-factor = 424000/(8x10000) = 5.30$
ORDER POINT FORMULA (R.O.P)
We used R.O.P to determine how much of a given item needs to be ordered where there is
independent demand .R.O.P is set for each item, the R.O.P is the lowest amount of an item
you will have on hand and on order before you reorder.
A SIMPLE MIN – MAX APPROACH (3 bin approach)
A true order point system is a 3 bin system
BIN 1 = CONTAINING WORKING STOCKS OR USAGE
BIN 2 = CONTAINING WORKING RESRVES OR BUFFER STOCKS
BIN 3 = CONTAINING SAFETY STOCKS (50% OF BUFFER STOCK)
FORMULA = (USAGE X LEAD TIME) +SAFETY STOCKS = R.O.P
In above formula lead time is shown as a percentage of a month, as follows,
1 week = 0.25 = 25%
2 week = 0.50 = 50%
3 week = 0.75 = 75%
Usage rate of 1200 items per month
Lead time of 3 weeks
Step n step calculation:
Calculate weekly usage. Assume a 4-week month(1200 items/4 weeks = 300
items per week, therefore BIN-1 or working stocks should contain at least 300
Calculate working reserves (Buffer stock) given 3 weeks of lead time, working
reserves should be 1200 items x 0.75 = 900 items.
Calculate safety stock, use 50% of working reserves as a guideline (900 items
x 50% = 450 items).
Calculate R.O.P: (1200 items x 0.75) +450 items = R.O.P 1350 items.
In order to compute the maximum, we must first determine how often we will place orders;
this time period is called the “review cycle”.
The review cycle is the length of time between reviews of when we wish to order product.
Formula = total purchases from vendor for a year / discount quantity
Discount quantity = the minimum amount we have to order of that unit of measure in order
to be granted discount.
5,000 units minimum order quantity in order to get discount
Review cycle = 200,000 / 5000 = 40 reviews per year
And, by dividing 40 reviews by 52 weeks equals to a review of every 1.3 weeks.
So review cycle = 1200 items/ 4 weeks = 300 items used per week
= 300 items x 1.3 = 390 items used during review cycle
Formula = MIN R.O.P + REVIEW CYCLE = MAX R.O.P
= 1350 ITEMS + 390 ITEMS = 1740 ITEMS MAX.
By setting a MIN-MAX for each item in inventory, we can create a simple method of ordering
products having independent demand.
CHAPTER # 5
ECONOMIC ORDER QUANTITY (EOQ)(Best Ordering policy)
Idle level of inventory be ordered and optimal utility of resources can be derived by balancing
the K factor and R factor is called EOQ.
Demand is uniform & known e.g 50 units per week, no fluctuations
Delivery is predictable with no lapses
Holding cost & ordering cost are constant
Min stock is zero
Demand or D = 4000
Ch = 5
Co = 100
idle case is QTY # 4 because holding & carrying both costs are aqual at this point
particulars QTY 1 QTY 2 QTY 3 QTY 4 QTY 5 QTY 6 QTY 7
Q 50 100 200 400 500 1000 2000
avg inv 25 50 100 200 250 500 1000
Ch (K factor) 125 250 500 1000 1250 2500 5000
total # of orders (=D/Q) 80 40 20 10 8 4 2
Co (R factor) 8000 4000 2000 1000 800 400 200
total cost 8125 4250 2500 2000 2050 2900 5200
We can also drive it through formula:
EOQ = √2. 𝐶𝑜. 𝐷/𝐶ℎ
= 400 ITEMS
EXAMPLE # 2
A company makes bicycles 450 per month, buys tyre from vendor at cost 20rs per tyre
Holding cost = 15% of purchase value
Ordering cost = 50 rs per order
Required: compute EOQ, # of orders, avg annual holding cost, avg annual ordering cost & total
A-Compute demand in first step then EOQ
D= 2 tyres per cycle x 450 x 12 = 10800 tyres annual demand
Holding cost = 20 x 15% = 3 per tyre
EOQ = √2. 𝐶𝑜. 𝐷/𝐶ℎ
= 2x50x10800 / 3
= 600 tyres
B- Total # of orders
= D/ EOQ
= 10800 / 600
= 18 orders
C- Average annual ordering cost
= 18 Orders x 50 (ordering cost)
= 900 per year
D- Average annual holding cost
= AVG INV X Ch
= 600+0/2 = 300
= 300 X 3
= 900 + 900
=1800 PER YEAR
ADJUSTED EOQ MODEL (DISCOUNTING)
This approach based on assumptions of “discounting”, when demand is constant but
supplies changes due to change in price of materials, resulting more material available for
consumption and we create new demand for it in order to meet both demand and supply
400 units available @.90
500 units available @.80
First we apply EOQ technique
Second compute variance in cost
Third we made an adjusted EOQ model
A company sells a product A through internet (online/e-commerce), company has been offered a
quantity discount by a supplier, company largest product is Louisiana and its main ingredient is
Company wants to determine optimal order size of brown sugar,
Annual demand = 10400
Holding cost = 20%
Ordering cost = 200 $
In order to analyze offer & determine the best strategy of brown sugar we compare lower
purchasing cost by increasing inventory cost,
For 0 – to 1499 units = 10 $
For 1500 – to 4499 units = 9.9 $
For 4500 – & above units = 9.8 $
IF TOTAL COST =Q (9.9) = 105832, WE ORDERED 2468 UNITS
IF TOTAL COST =Q (9.8) = 106792, WE ORDERED 3493 UNITS
SO, Q (9.9) will be the best opportunity of discount.
2ND Scenario: (if demand changes as, 10400 to 11200 & 12600)
1- EOQ 10 @ 10400 D = √2.
EOQ 10 @ 10400 D = 1442.22
2- EOQ 10 @ 11200 D = √2.
EOQ 10 @ 11200 D = 1496.66
3- EOQ 10 @ 12600 D = √2.
EOQ 10 @ 12600 D = 1587.45
A demand forecast is a central piece of the operations of a modern firm. It is a decision making
tool which considers different factors and justifies decisions. The main idea is to make the
prediction and estimations of the future demand and consequently determinate the potential
markets for the product or services for the following period. A demand forecast states the needed
inventory that helps to overcome the fluctuations in demand. According to the information, a
firm can start to plan its upcoming activities in a way that they can most efficiently transform
their inputs into outputs. Additionally, a demand forecast enables a corporation to provide its
customer higher value. It distributes the operations the information including the needed
products and stock keeping units (SKU), their quantities and the facilities required to fulfil the
future needs. This way, the firm can gain better profit as forecast offers them a chance to lower
their costs.-(Keath & Young, 1996, 217-219)
CATEGORY GRID OF METHODS
Briefly, the qualitative methods are:
Executive Judgment: Opinion of a group of high level experts or managers is pooled
Sales Force Composite: Each regional salesperson provides his/her sales estimates. Those
Forecasts are then reviewed to make sure they are realistic. All regional forecasts are then
pooled at the district and national levels to obtain an overall forecast.
Market Research/Survey: Solicits input from customers pertaining to their future purchasing
plans. It involves the use of questionnaires, consumer panels and tests of new products and
Delphi Method: As opposed to regular panels where the individuals involved are in direct
communication, this method eliminates the effects of group potential dominance of the most
vocal members. The group involves individuals from inside as well as outside the organization.
Typically, the procedure consists of the following steps:
Each expert in the group makes his/her own forecasts in form of statements
The coordinator collects all group statements and summarizes them
The coordinator provides this summary and gives another set of questions
Group member including feedback as to the input of other experts.
The above steps are repeated until a consensus is reached.
Time Series Models
Try to predict the future based on past data
Assume that factors influencing the past will continue to influence the future
1- NAÏVE APPROACH
“Demand in next period is the same as the demand in most recent period”.
MAY-16 SALE = 48 UNITS JUNE-16 FORECAST = 48 UNITS
2- MOVING AVERAGE (SIMPLE)
Assumes an average is a good estimator of future behavior
Used if little or no trend
Used for smoothing
Ft+1 = Forecast for the upcoming period, t+1
n = Number of periods to be averaged
A t = Actual occurrence in period t
You’re manager in Amazon’s electronics department. You want to forecast iPod sales for months
4-6 using a 3-period moving average
N = 3
MONTH ACTUAL SALE MOVING AVERAGE SALE
1 4 N/A
2 6 N/A
3 5 N/A
4 3 5.00
5 7 4.67
6 6 5.00
3-WEIGHTED AVERAGE METHOD
“Give additional weight to a specific month or number or volume as standard”
Leverage for extra weight,
“When demand assumed to be more than actual on basis of predictions we use weighted average
method to forecasting demand” it reflects seasonality effects on demand.
You’re manager in Amazon’s electronics department. You want to forecast iPod sales for months
4-6 using a 3-period weighted rate as,
For first month = 1/6
For second month = 2/6
For third month = 3/6
MONTH ACTUAL SALE
<SEASONALITY EFFECT> WEIGHTAGA AVERAGE SALE
1 4 0.17 N/A
2 6 0.33 N/A
3 5 0.50 N/A
4 3 5.17
5 7 4.17
6 6 5.33
MONTH ACTUAL SALE
<SEASONALITY EFFECT> WEIGHTAGA AVERAGE SALE
1 4 =1/6 N/A
2 6 =2/6 N/A
3 5 =3/6 N/A
4 3 =(C31*$D$31+C32*$D$32+C33*$D$33)
5 7 =C32*$D$31+C33*$D$32+C34*$D$33
6 6 =C33*$D$31+C34*$D$32+C35*$D$33
4-EXPONENTIAL SMOOTHING METHOD
Exponential smoothing is a rule of thumb technique for smoothing time series data, It is an
easily learned and easily applied procedure for approximately calculating or recalling some
value, or for making some determination based on prior assumptions, such as seasonality, the
simplest way to smooth a time series is to calculate a simple, or unweighted, moving average,
We use α in order to normalize extra weigthage,
“α can’t be > 1 OR < 0 “
Given the weekly demand data what are the exponential smoothing forecasts for periods 2-10
using α = 0.10 & 0.6?
Ft +1 = Forecast value for time t+1
At = Actual value at time t
a = Smoothing constant
EXPONENTIAL SMOOTING MODULE
α 0.1 α 0.6
Week Demand 0.1 0.6
1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
5-CORRELATION & REGRESSION
Correlation examines if there is an association between 2 variables if so to what extent.
Regression establishes an appropriate relationship between the variables or degree of
COMMON MEASURES OF ERRORS
MAD = MeanAbsolute Deviation = Є (ACTUAL-FORECAST)/N
It is also called MAD for short, and it is the average of the absolute value, or the difference
between actual values and their average value, and is used for the calculation of demand
FORMULA = (ACTUAL-FORECAST)* α(0.10 OR 0.50)+FORECAST)
QTY ACTUAL DEMAND FORE CASTED WITH α = 0.10 FORE CASTED WITH α = 0.50
1 180 175.00 175.00
2 168 175.50 177.50
3 159 174.75 172.75
4 175 173.18 165.88
5 190 173.36 170.44
6 205 175.02 180.22
1077 1,046.80 1,041.78
Є(ACTUAL - FORECAST) 5.03 5.87
MEAN ABSOLUTE DEVIATION
Establish needs for purchase
Formulation of team
Identify potential suppliers
Determine selection criteria
Screen & select
Contact potential suppliers
Evaluate & choose
Documentation of contracts
Give high attention & feedback
Maintain current level & expand relationship
Reduce discrepancies or decision for alternate
CHAPTER # 7
“The act of obtaining or buying goods and services, the process includes preparation and
processing of a demand as well as the end receipt and approval of payment”.
FIVE PHASES OF SELECTION & DEVOLOPMENT (MANAGEMENT)
*____________________________ T H E E N D _____________________________*