Introduction to Global Supply Chain Management Module Two: Sales & Operations Planning In The Age of Globalization

Class Agenda Sales & Operations Planning (S&OP) defined June 18 Class Agenda Sales & Operations Planning (S&OP) defined Components & activities Buy-Side & Sell-Side elements of international trade Material Requirements Planning Distribution Requirements Planning Introduction to Inventory Management

The Essence of Supply Chain Management: Buy-Side & Sell-Side Activities In An Outsourced World MANUFACTURER DISTRIBUTION SYSTEM C T O M MATERIALS MANAGEMENT Buy-Side Sell-Side

Sales & Operations Planning “Sales & Operations Planning is a multi-functional business discipline that helps companies to synchronize product supply with customer demand. Designed as an ongoing process, S&OP uses updated forecasts to translate high-level supply chain strategies into operational activities that include production planning, material requirements planning, purchasing, distribution requirements planning, inventory management, sales, order management, logistics, finance and accounting. At its core, S&OP forces executives to constantly compare period-specific product forecasts with actual sales activities, and then make operational adjustments that reflect any variation between the two. Whereas the frequency and planning horizon for S&OP will vary by industry and company, S&OP is essential to making sure that an organization can achieve a balance between demand, inventories and profitability.” -Dan Gardner, April 2015

The S&OP Challenge: Integrating & Synchronizing Functional Activities Sales forecasting Materials Requirements Planning Supplier Relationship Management Distribution Requirements Planning Customer Relationship Management Inventory Management Demand Management Available to Promise Order Management

Sales & Operations Planning: Objectives & Outcomes Link high-level strategy with tactical execution Marketing Production Finance Greater alignment between the Buy-Side & Sell-Side of the supply chain Supplier Relationship Management Customer Relationship Management

Sales & Operations Planning: Objectives & Outcomes Improved sales Existing products New product launches More accurate forecasts End-to-end supply chain visibility Control over landed costs & profit margins Reliable lead times Enhanced inventory management No lost sales Minimal obsolete inventory

The “Cascade Effect” of Forecasting on Sales & Operations Planning

Characteristics of The Forecasting Discipline Virtually all supply chain (S&OP) activities begin with a forecast Because forecasting involves predicting the future, they are almost always wrong Predicting future sales Budgeting for future costs Planning for capital expenditure Differences between forecasts and actual results should be calculated as soon as posible and made a part of future planning

Sales & Operations Planning: The Integration & Synchronization of Buy-Side Activities MANUFACTURER DISTRIBUTION SYSTEM C T O M MATERIALS MANAGEMENT Buy Side Sell Side

Buy-Side Activities: Material Requirements Planning (MRP) MRP is a time-phased approach to planning for the procurement of raw materials that will go into a production process MRP activities are based on the Master Production Schedule What products will be manufacturered Quantities to be produced During a specific “time bucket”

Materials Requirements Planning Forecasts for finished goods (independent demand) are what drive the MPS and MRP Independent demand for finished goods drives dependent demand for raw materials The “Cascade Effect” MRP for specific products is driven by the “Bill of Material” A “recipe” for the raw materials that go into making a product MRP software provides product-specific information on what to order, in what quantity and when to place a purchase order

Materials Requirements Planning As part of the S&OP process, MPS & MRP quantities will change based on updated forecasts Adjustments made to the MPS & MRP driven by actual demand Two essential activities related to MRP are: Gross to Net Exploding Lead-time Offsetting MRP has a direct impact on sales, landed costs, lead times and inventory levels

The Heart of the Tactical Matter: Material Requirements Planning (Buy Side) Material Requirements Planning (MRP)-A set of techniques that use Bill of Material data, inventory data and the master production schedule to calculate requirements for materials. It makes recommendations to release replenishment orders for material. Further, because it is time-phased, it make recommendations to reschedule open orders when due dates and need dates are not in phase. Time-phased MRP begins with the items listed on the MPS and determines (1) the quantity of all components and materials required to fabricate those items and (2) the date that the components and material are required. Time-phased MRP is accomplished by exploding the bill of material, adjusting for inventory quantities on hand or on order, and offsetting the net requirements by the appropriate lead times. Source: APICS Dictionary

Integrating S&OP: MPS, MRP, Inventory Management & Logistics Gross–to-Net Exploding An exercise whereby the original (gross) requirement for a product is reduced by: Inventory on hand Confirmed order receipts Confirmed order releases Planned order releases Gross-to-Net Exploding must be integrated with the raw materials inventory management function Integration is achieved through process design and supply chain software applications

Integrating S&OP: MPS, MRP, Inventory Management & Logistics Lead time off-setting Orders are placed for products on a date that “off-sets” cumulative lead times with the desired date of receipt P.O. preparation/acceptance Production time Transportation lead time Customs clearance Domestics distribution Lead time off-setting must be integrated with the logistics function Integration is achieved through process design and supply chain software applications

Sales & Operations Planning: The Integration & Synchronization of Sell-Side Activities U P L I E R MANUFACTURER DISTRIBUTION SYSTEM C T O M MATERIALS MANAGEMENT Buy-Side Sell-Side

The Heart of the Tactical Matter: Distribution Requirements Planning (Sell-Side) Distribution Requirements Planning (DRP)-Intended for use with finished goods, DRP encompasses the activities associated with identifying the replenishment requirements of (warehouse) locations throughout a company’s logistics network. DRP uses the same logic as MRP in that it is a time-phased approach to determining inventory needs for each of an an organization’s stocking locations (satellite warehouse, regional distribution center, et al). Distribution Requirements Planning relies upon the principles of Gross-to-Net Exploding and Lead Time Off-Setting to synchronize product quantities and delivery times with actual demand. Because DRP is often used by companies with multi-level distribution networks (multiple warehouses), the discipline uses a “Bill of Distribution” to implode time-phased requirements from satellite warehouses up through the distribution channel to main distribution centers. Ideally, companies and their supply chain partners employ cloud-based visibility tools to truly integrate and synchronize all of their Sales & Operations Planning activities. Dan Gardner, April 2015

Distribution Requirements Planning Used for independent demand products (finished goods) within a company’s distribution network Calculates time-phased requirements in specific quantities Very similar to the logic behind MRP Gross to Net Exploding Lead-time Offsetting Uses Bill of Distribution to implode needs up the distribution channel

Distribution Requirements Planning Heavily influenced by customer orders Backorders & current orders Consumption of the forecast integral to the process S&OP adjustments must be made based on variances between forecast & actual demand Variances are cascaded back up the supply chain to Buy-Side activities

Introduction to Global Inventory Management

Inventory Management Defined: Inventory Management: All activities associated with the valuation, acquisition, shipment, location, storage, sale, distribution, disposition, recovery and disposal of merchandise related to the operation of a firm’s business Goal is to meet the customer service requirements of the company Product availability

Global Inventory Management: Integrating & Synchronizing the Supply Chain Raw materials, components, sub-assemblies, work-in-process, finished goods, accessories, service parts, MRO S U P L I E R MANUFACTURER DISTRIBUTION SYSTEM C T O M MATERIALS MANAGEMENT Buy Side Sell Side

Different Industries & Business Models Determine How Supply Chains Are Designed Retailer (brick & mortar) E-Commerce Wholesaler/Distributor Manufacturer (OEM) Tier I, II or III supplier Agricultural importer/exporter Marketer/Merchandiser

Different Types of Inventory & Operating Models Also Influence How Supply Chains Are Designed Raw materials Components/sub-assemblies Work In Process Finished goods Distribution inventory Accessories Spare parts MRO Build to stock Build to order Assemble to Order Engineer to Order Just In Time Vendor Managed Inventories

Global Inventory Management: Strategic & Tactical Considerations Total dollar investment in global inventories Number and type of Stock Keeping Units (SKU’s) or Part Numbers to carry Locations of distribution centers, warehouses and/or satellite operations By region and/or country Risk Management policies & procedures

Global Inventory Management: Strategic & Tactical Considerations In-house inventory management or with a Third Party Logistics (3PL) company Systems integration Inventory management system Warehouse management system Transportation management system

Global Inventory Management: Strategic & Tactical Considerations Inventory accuracy Best Practices ABC Analysis Cycle Counting Safety stock levels Order points Min/Max levels Title transfer (Buy-Side & Sell-Side)

Regardless of the Model or Type of Inventory: I. M Regardless of the Model or Type of Inventory: I.M.-Related Costs to Consider Ordering costs Clerical & Admin support Carrying costs Cost of capital Opportunity cost Lease Payroll Systems Materials handling equipment Maintenance Supplies

Regardless of the Model or Type of Inventory: I. M Regardless of the Model or Type of Inventory: I.M.-Related Costs to Consider Transportation costs Ocean, air, surface Returns & reverse logistics Risk management Theft, pilferage & damage Insurance Security Stock-out costs Expedited transport Back-order processing Lost sales Depletion of customer goodwill

End of Module Two Congratulations!!!