Supply Chain Management Refers to all the management functions related to the flow of materials from the company’s direct suppliers to its direct customers. Includes purchasing, traffic, production control, inventory control, warehousing, and shipping. Two alternative names: – Materials management – Logistics management

Supply Chain Management in a Manufacturing Plant ReceivingandInspectionRawMaterials, Parts, and In-processWare-HousingProductionFinishedGoodsWare-housingInspection,Packaging,AndShipping Suppliers Customers Materials Management PurchasingProductionControl Warehousing and Inventory Control Shipping and Traffic Physical materials flow Information flow

Drivers Of Supply Chain Performance Facilities Inventory Transportation Information Sourcing Pricing

Supply Chain Drivers Information Facilities Sourcing Inventory Transportation Pricing

Formulas for Measuring Supply-Chain Performance One of the most commonly used measures in all of operations management is “Inventory Turnover” In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time 10-5

Example of Measuring Supply-Chain Performance Suppose a company’s new annual report claims their costs of goods sold for the year is $160 million and their total average inventory (production materials + work-in-process) is worth $35 million. This company normally has an inventory turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it mean? 10-6

Example of Measuring Supply-Chain Performance (Continued) = $160/$35 = 4.57 Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before. = $160/$35 = 4.57 Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before. 10-7

Designing The Supply Chain Network: I. Designing Distribution Networks II. Network Design in Supply Chain III. Network Design in Uncertain Environment

Designing Distribution Networks in Supply Chain What is a Distribution Network? Distribution comes into

Supply Chain Structure Salient Features Number of layers: Supply chain always involves multiple layers Delays in the chain: There are finite delays between each pair of layers to receive and send information and goods Decision making patterns: Decisions of “how much” and “when” to order are taken independently by each member in the chain Independence of each member of the supply chain: Since each member is organisationally a separate unit, there is considerable independence in policy and decision making

Bullwhip Effect Order Quantity Time Retailer’s Orders Order Quantity Time Wholesaler’s Orders Order Quantity Time Manufacturer’s Orders The magnification of variability in orders in the supply-chain A lot of retailers each with little variability in their orders…. …can lead to greater variability for a fewer number of wholesalers, and… …can lead to even greater variability for a single manufacturer

What causes Bullwhip effect? The more – the number of layers, – the delay, – the rate of change, the greater the fluctuations Each layer – updates its forecast in varying patterns – places order at different times – price fluctuations (promotions) – rationing of supply

How to avoid Bullwhip effect? Devise new strategies for minimising the number of layers, delay in information exchanges and rate of change – Improve quality of demand forecast update use of point of sales data, EDI, Internet – Share sales, capacity and inventory data across the supply chain partners – Lead time reduction, reduction in fixed costs in ordering

Bullwhip Effect Order Quantity Time Retailer’s Orders Order Quantity Time Wholesaler’s Orders Order Quantity Time Manufacturer’s Orders The magnification of variability in orders in the supply- chain A lot of retailers each with little variability in their orders…. …can lead to greater variability for a fewer number of wholesalers, and… …can lead to even greater variability for a single manufacturer

Hau Lee’s Concepts of Supply Chain Management Hau Lee’s approach to supply chain (SC) is one of aligning SC’s with the uncertainties revolving around the supply process side of the SC A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies Types of SC’s – Efficient SC’s – Risk-Hedging SC’s – Responsive SC’s – Agile SC’s 10-15

Hau Lee’s SC Uncertainty Framework Demand Uncertainty Low (Functional products) High (Innovative products) Efficient SC Ex.: Grocery Responsive SC Ex.: Computers Risk-Hedging SC Ex.: Hydro- electric power Agile SC Ex.: Telecom Low (Stable Process) High (Evolving Process) Supply Uncertainty 10-16

What is Outsourcing? Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers 10-17

Reasons to Outsource Organizationally-driven Improvement-driven Financially-driven Revenue-driven Cost-driven Employee-driven 10-18

Value Density Value density is defined as the value of an item per pound of weight It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped 10-19

Sourcing/Purchasing-System Design Matrix 10-20

Mass Customization Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network 10-21

What is Logistics? The movement of goods through the supply chain “the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities” 11-22

Decisions Related to Logistics How to best transport goods – Modes of transportation Truck, ship, rail pipelines – Warehouses Consolidation Cross Docking Hub-and-Spoke systems Facility Location 11-23

Aggregate Production Plan & Master Production Scheduling (MPS) Time-phased plan specifying how many and when the firm plans to make or buy each component / parts of the main product Aggregate Plan (Plan for Production of Product Groups) Aggregate Plan (Plan for Production of Product Groups) Master Production Scheduling (MPS) ( Scheduling Production of Specific Components & Parts) 18-24

18-25 Firm orders from known customers Forecasts of demand from random customers Aggregate product plan Bill of material file Engineering design changes Inventory record file Inventory transactions Master production Schedule (MPS) Primary reports Secondary reports Planned order schedule for inventory and production control Exception reports Planning reports Reports for performance control Material planning (MRP computer program)

Material Requirements Planning Materials requirements planning (MRP) is a means for determining the number of parts, components, and materials needed to produce a product MRP provides information regarding requirement of materials, components & parts for scheduled production. It specifies: How Much to Order ( Right Quantity) When to Order ( Right Time) 18-26

Example of MRP Logic and Product Structure Tree B(4) E(1)D(2) C(2) F(2)D(3) A Product Structure Tree for Assembly A Lead Times A1 day B 2 days C1 day D 3 days E4 days F1 day Total Unit Demand Day A Day 8 20 B (Spares) Day 6 15 D (Spares) Given the product structure tree for “A” and the lead time and demand information below, provide a materials requirements plan that defines the number of units of each component and when they will be needed 18-27

LT = 1 day First, the number of units of “A” are scheduled backwards to allow for their lead time. So, in the materials requirement plan below, we have to place an order for 50 units of “A” on the 9 th day to receive them on day

Next, we need to start scheduling the components that make up “A”. In the case of component “B” we need 4 B’s for each A. Since we need 50 A’s, that means 200 B’s. And again, we back the schedule up for the necessary 2 days of lead time. B(4) E(1)D(2) C(2) F(2)D(3) A (1) Spares LT = 2 4x50= Total Unit Demand Day A Day 8 20 B (Spares) Day 6 15 D (Spares)

18-30 B(4) E(1)D(2) C(2) F(2)D(3) A spares Part D: Day 6 Finally, repeating the process for all components, we have the final materials requirements plan: Lead Times A1 day B 2 days C1 day D 3 days E4 days F1 day Total Unit Demand Day A Day 8 20 B (Spares) Day 6 15 D (Spares)

Material Requirements Planning System Based on a master production schedule, a material requirements planning system: – Creates schedules identifying the specific parts and materials required to produce end items – Determines exact unit numbers needed – Determines the dates when orders for those materials should be released, based on lead times 18-31

MRP Reports Planned orders to be released at a future time Order release notices to execute the planned orders Changes in due dates of open orders due to rescheduling Cancellations or suspensions of open orders due to cancellation or suspension of orders on the master production schedule Inventory status data 18-32

Types of Time Fences Frozen – No schedule changes allowed within this window Moderately Firm – Specific changes allowed within product groups as long as parts are available Flexible – Significant variation allowed as long as overall capacity requirements remain at the same levels 18-33

Example of Time Fences Weeks Frozen Moderately Firm Flexible Firm Customer Orders Forecast and available capacity Capacity 18-34