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Chapter 21 Demand Management and Logistics 21-2

Key Concepts The Key to Supply Chain Management »The SCM Triangle –Supply Management –Demand Management –Logistics Management »Evolution to Strategic SCM 21-3

Key Concepts Strategic Demand Management »Demand Management Defined »The Bullwhip Effect »Evolution of Strategic Demand »Forecasting Demand »Planning with Time Fences »Implications for Supply Management 21-4

Key Concepts Strategic Logistics Management »Logistics Defined »Logistics Role in Supply Chain Management 21-5

The Key to Supply Chain Management Supply management is the key to Supply Chain Management. While many functional areas lay claim to the emerging field of SCM, supply management has the strongest claim Since supply professionals are responsible for developing and managing the interrelationships between supply chain members, supply management is the critical function responsible for managing the supply chain 21-6

Harnessing the Power of SCM The issue of how to harness the power of SCM is creating debate in upper management boardrooms and academic classrooms across the world Firms need to come to terms with how they are going to improve their competitiveness in the future through SCM Competition is not just firm versus firm, but chain versus chain (or network versus network.) Identification of who is in charge of SCM is the first step to moving it towards world class 21-7

Definitions of Supply Chain Management An integrating philosophy to manage the total flow of a distribution channel from supplier to the ultimate customer. Integrative management of the sequential flow of logistical, conversion and service activities from vendors to ultimate consumers necessary to produce a product of service efficiently and effectively. 21-8

Definitions of Supply Chain Management A strategic concept that involves the understanding and managing of the sequence of activities - from supplier to customer - that add value to the product supply chain. The supply chain encompasses all activities associated with the upstream and downstream flow and transformation of goods and information from the raw materials stage (extraction), through to the end user. Supply chain management is the collaborative effort of multiple channel members to design, implement, and manage seamless value-added processes to meet the real needs of the end customer. 21-9

The Strategic SCM Triangle Strategic Supply Management Strategic Logistics Management Strategic Demand Management 21-10

Three Stages of SCM 1.SCM is the management of the internal supply chain 2.SCM is supplier-focused 3.SCM is the management of a network of enterprises 21-11

Strategic Demand Management Demand Management seeks to estimate, control, smooth, coordinate, balance, and influence the demand and supply for a firm’s products and services. Demand Management strives to reduce total costs for the firm and its supply chain. Demand Management works with the supply side to adjust the inflow of materials and products. Demand Management must be a collaborative process

Need for World Class Demand Management A major driver of the recession of was the proliferation of error in forecasts Billions of dollars worth of inventories had accumulated in some supply chains The primary reason for the inaction was the lack of demand management A constant truth about forecasting is that the further into the future one attempts to forecast future conditions, the greater the error 21-13

Demand Management Characteristics Recognizes forecasts are developed at several points throughout an organization Accepts forecasts from other functions and updates them based on actual, real-time demand Works with the supply side to adjust the inflow of materials and products Controls through execution of effective production plans, calculation of inventory levels, setting of capacity levels and developing customer service strategies 21-14

Demand Management Characteristics Smoothes production after master production schedules have already been released to internal production and external suppliers Is a process (versus a bounded business function) that requires the utmost in coordination and communication between the responsible parties Has contingency plans developed with supply chain members to allow modification of short- term schedules when necessary Balances the total costs of not meeting demand against the total costs of adding additional resources required to meet demand 21-15

Future Customer Demand Research and Technology Daily Schedules Operations Schedules Demand Forecasting Strategic Capacity Planning Aggregate Plan for Production Master Production Schedule Daily Schedules Operations Schedules (1-4 weeks) Strategic Product Decisions Strategic Capacity Planning Aggregate Plan (12-24 months) Master Schedule (1-12 months) DEMAND MANAGEMENT SUPPLYING FIRM BUYING FIRM Demand Forecasting DEMAND MANAGEMENT Research and Technology Future Customer Demand Demand Management Information Flows 21-16

The Bullwhip Effect Failure to accurately estimate demand and share information among supply chain entities can result in bloated inventory levels due to a cumulative effect of poor information cascading up through a supply chain This effect is infamously known as the “Bullwhip” 21-17

Evolution of Strategic Demand Manual and visual systems for replenishment Reorder Point replenishment (ROP) Statistical Reorder Point techniques Material Requirements Planning (MRP) Distribution Requirements Planning (DRP) Manufacturing Resources Planning (MRP II) Distribution Resources Planning (DRP II) Just-in-Time (JIT) Enterprise Resource Planning (ERP) E-Commerce, E-Procurement, B2B capabilities 21-18

Questions Related to Demand Management What is enough inventory? What is too much inventory? What are the cost implications? What are the effects on customer service levels? 21-19

Forecasting Demand What is a forecast? In terms of SCM, a forecast is an estimate of future demand A calculated guess or estimate about the future demand for a firm’s products and services under conditions of uncertainty Forecasts fall into two categories: »Quantitative »Qualitative 21-20

Comments Frequently Overheard about Demand Forecasts “Forecasts are always inaccurate – why try to improve them?” “Forecasts are always wrong. – they cannot be made right!” “Forecasts constantly change!” “Someone must be to blame for an inaccurate forecast!” “If only we had a good computerized forecasting software module.” “You cannot believe the numbers!” “Using statistical forecasting tools takes too much time.” 21-21

Planning with Time Fences Demand Time Fence Current Production Period Intermediate Planning Period Long - Range Planning Period TIME FROZENSLUSHYFLUID Planning Time Fence 21-22

Implications for Supply Management Demand management organizationally fits within either supply management or SCM Supply professionals manage the relationships in the supply chain; therefore they are in a critical position to facilitate the high levels of communication and trust that are required in Strategic Demand Management

Strategic Logistics Management Strategic LM forms the third side of the Strategic SCM triangle Logistics professionals play an important role in the success of supply chain management in the management of transportation, storage, and warehousing activities Unfortunately, many companies define logistics as synonymous with the term SCM, thus ignoring the contributions and roles of supply management and demand management 21-24

Definition of Logistics Logistics is the part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of raw materials, in- process inventory, finished goods, services and related information from point of origin to point of consumption (including inbound, outbound, internal and external movements) for the purpose of conforming to customer requirements. (Coyle et al.) 21-25

A Generalization of a Typical Logistics System Movement/ Transportation Movement/ Transportation Movement/ Transportation Movement/ Transportation Raw Materials Supply Points Storage Raw Materials Storage Plant 1 Plant 3 Plant 2 Manufacturing Distribution Center Distribution Center Distribution Center Finished Goods Distribution A C B Markets 21-26

Concluding Remarks Substantive changes in the Supply Chain Management field will be driven by: »Institutionalisation of the SCM perspective »Increasing emphasis on supply chain relationships »Increasing emphasis on the long-term view »Use of information technology to enhance supply chain communications »An increasing focus which looks “outward” toward the intricacies of supplier and customer relations 21-27