1 Week 8: Production and Supply Chain Process MIS2101: Management Information Systems

2 Agenda Introduction Production Problems due to lack of communication Integrated Production Process Supply Chain Management

3 The supply chain In the sales process, the organization is the supplier In the purchasing process, the organization is the buyer The movement of goods from supplier to the end customer is the “supply chain” Supplier  Organization  Customer Oat/Wheat Farmer  Fitter Snacker  Customer Components of a supply chain People, Technology, Information, Goods, Processes Supply Chain Management looks at the entire supply system from raw materials to finished goods on the retail shelf

4 Supply Chains

5 Production A production plan answers: Quantity of product to make? When to make product? How much raw materials to procure and when? A successful company must be able to Develop a good production plan Execute the plan Make adjustments when customer demand differs from the forecast

6 Production Approaches Products are made for inventory in anticipation of orders Most consumer products Products are made to fulfill specific orders Expensive products or high-customization products Combination of make-to- stock and make-to-order Final product assembled from stock for a customer (Dell!) Make to Stock Make to Order Assemble to order

7 Production Problems in “Un- integrated” systems Hard to know how much and when to produce Problems arise in: Communication InventoryAccounting

8 Communication Issues - External “Bullwhip Effect” in Forecast Driven Distribution Channels Small fluctuation is downstream channels result in large fluctuations in manufacturer’s predictions

9 Communication issues - Internal If production isn’t integrated with marketing: Production doesn’t know about sales promotions or unexpected planned orders Results: depleted inventory, overtime, expedited shipments, and material shortages Marketing doesn’t know about planned maintenance Results: unexpected reduction in production and unmet demand

10 Inventory Problems Production manager schedules production based on experience, rather than formal planning techniques Primarily compares current warehouse inventory levels with “normal” values Inventory information is not available in real-time, and does not recognize inventory that has been sold but not shipped Inventory available to commit to future orders is not known

11 Inventory Problems Inventory shortages may mean unplanned production changeovers, resulting in: Lost production capacity Potential shortages of other products Actual sales data is not available on a timely basis, because: Lack of organizational trust

12 Accounting Problems Most companies use standard costs to account for manufacturing costs Standard costs are based on historical costs for materials, labor and factory overhead Manufacturing costs are estimated by multiplying production quantities by standard costs Actual production costs invariably deviate from estimates using standard costs, and adjustments must be made regularly

13 Sales and Operations Planning (SOP) Case Study Kellogg’s achieved significant savings from coordinated sales and operations planning (SOP) Changed focus based on how they were evaluated Marketing and sales: Evaluated on tons of cereal sold Manufacturing: Evaluated on tons of cereal produced No one evaluated on profit! Kellogg’s new sales order process focused on profit Kellogg’s has reduced capacity, inventory and capital needs while increasing sales

14 Production planning process Develop aggregate production plan for groups of products Break down aggregate plan into product specific plans for smaller time periods Determine raw material requirements based on plan

15 An integrated process Predicts future demand for products Break production plan down into smaller time increments Create production schedule based on production plan from demand management Uses the schedule to determine products and staffing Determines what company should produce Requires starting inventory levels and sales forecast based on capacity Determines amount and timing of raw material orders Takes quantity and timing information from MRP and creates orders for suppliers

16 Forecasting in an Integrated System Accurate historical sales values available for forecasting “Fix” historical sales: If production was unable to meet demand sales does NOT represent actual demand Unusual conditions like weather The effect of sales promotions This is essentially data warehousing and data mining! Sales provided from SD module Field where planner can “correct” the sales value

17 MRP Materials Requirements Planning (MRP) is a process to determine the quantity of a material to manufacture or purchase and the time when the production/purchase order should be released. The three key concepts in MRP are: Bill of Materials Lead Time Lot Sizing The output of the MRP process is a set of planned orders.

18 Lead Times and Lot Sizing To determine timing and quantity of purchases Lead time includes: Time for supplier to receive and process order Time to take material out of stock, package it, load it on a truck and deliver it to the manufacturer Time required at manufacturer to receive the material: Unload the truck, inspect the materials, move to storage location or production line Lot sizing: determining production or order quantities In many cases, lot sizes for purchased items are constrained by packaging and transportation

19 Purchasing and ERP Provides way to convert Requirements to Purchase Order automatically Help the purchasing specialist select the best vendor (best price) Options to evaluate vendors Convert MRP data to a purchase order

20 Production and Accounting in an Integrated System Information entered for material movement automatically updates accounting records Info can be entered through data entry, barcode, RFID, etc. Material received (for MRP) and the purchase order

21 Implications for Supply Chain Management Supply chain participants often use competitive bidding to reach a “winning” prices by reacting Creates adversarial relationship among participants

22 Supply Chain with ERP (Integration) Production plans can be shared along the supply chain in real time Managers can evaluate impact of plans on total cost across the supply chain Collaboration among participants leads to: Improved product quality Reduced paperwork Reduced inventories Increased customer responsiveness

23 Measures of Success Cash to Cash Cycle Time Time between paying for raw materials to collecting money from customers From 100 days to one month (with SCM) Supply Chain Costs Buying and handling inventory, processing orders, information systems support Reduces from 12% to 5% with SCM Other Metrics (used by Staples) On-Time Performance: meeting delivery dates Initial Order Lead Time: time needed to fill the order

Why supply chains are important Cost Efficiency (Walmart) Agility (Gap) Complexity (Walmart) Need for innovation (iPhone APIs) Blurred organizational boundaries (Cisco)

New Technologies in Supply Chain Management RFID Attached to items that RFID is intended to track Consists of Electronic Integrated Circuit Miniature Antenna Substrate

Benefits on RFID in Supply Chain RFID Innovate ways to identify, locate and monitor goods as they travel through supply chain of many industries. Increased accuracy of orders Reduce inventory handling cost Improve Inventory handling Fewer misplaced items(in warehouse) Reduce losses from theft

RFID in Supply Chain Management (Contd) Check out the video on use of RFID in Inventory Management.

28 SCM with Customer Collaboration Case Study – Wal-Mart POS data from bar code scanners is recorded in a massive data warehouse at Wal-Mart headquarters Wal-Mart uses data mining techniques to predict what customers will buy at different times of the year Data is shared with Wal-Mart suppliers to plan production Wal-Mart also allows its 5000 suppliers to directly access its data warehouse through its Retail Link program Wal-Mart is leading the effort to leverage RFID technology

29 Summary An ERP system can improve the efficiency of production and purchasing processes Begins with Marketing sharing sales forecast Production plan is created based on forecast and shared with Purchasing so raw materials can be ordered properly. Production planning can be done without an integrated system, but integrated system that allows MRP and Production to be linked to Purchasing and Accounting

30 Key Learnings Production Process Production Plan Production Approaches Problems in Un-integrated Systems Communication, Inventory, Accounting Bull Whip Effect, Standard Costs Integrated Production Process Sales Forecast Sales and Operations Plan Demand Management Production Purchasing

31 Key Learnings Key Terms Lead Time Lot Size Why do we need to calculate optimal lot sizes? ERP and Supply Chain Success Metrics Case Studies