1. Introduction to Global Supply Chain Management Module Three: Sales & Operations Planning In The Age of Globalization 1

2. 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 2

3. The Essence of Supply Chain Management: Buy-Side & Sell-Side Activities In An Outsourced World SUPPLIERSSUPPLIERS MANUFACTURER DISTRIBUTION SYSTEM CUSTOMERSCUSTOMERS MATERIALS MANAGEMENT Buy-Side DISTRIBUTION MANAGEMENT Sell-Side 3

4. …With Conflicting Functional Goals SUPPLY CHAIN ACTIVITIES PURCHASINGPURCHASING -Large purchases -Quantity Discounts -Multiple Suppliers SALESSALES -Total Availability -Any quantity -Wide Variety MANUFACTUREMANUFACTURE -Large lots -Infrequent set ups -Less variety FINANCEFINANCE -Low costs -Higher revenues -Improved ROA -High ROI 4

5. Sales & Operations Planning -Dan Gardner, April 2015 5 “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.”

6. S&OP: Constantly Aligning Strategy, Tactics & Demand 6

7. 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 7

8. 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 8

9. 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 9

10. S&OP: A Supply Chain Balancing Act To a very real extent, S&OP is a balancing act between the need to maximize sales/profits and the amount that must be invested in inventories That balancing act begins with a forecast and S&OP then comes down to making adjustments between forecasted and actual sales Within that framework top line sales, landed costs, lead times and inventory investment reign supreme 10

11. Balancing Sales & Inventories: Financial Outcomes 11 Inventory Investment Sales & Profits Balance Sheet Income Statement Cash Flow from Operating Activities

12. The “Cascade Effect” of Forecasting on Sales & Operations Planning 12

13. S&OP: Everything Starts with a Forecast 13

14. Characteristics of The Forecasting Discipline Virtually all supply chain (S&OP) activities begin with a forecast Forecasts are almost always wrong – Forecast vs. actual outcomes should be calculated as soon as possible – As time goes by, actual sales figures should “Consume the Forecast” 14

15. Characteristics of The Forecasting Discipline Consuming the Forecast is the cornerstone of Sales & Operations Planning Forecasts should be carried out on a long, medium, short and immediate basis Performed only for “Independent Demand” items (finished goods) 15

16. Characteristics of The Forecasting Discipline Must consider cycles, trends, seasonality & random variation – Retail: Seasons, events & holidays – Importance of the “Retail Calendar” Forecasts are more accurate for families or groups of products Forecasts are more accurate for nearer time periods 16

17. Characteristics of The Forecasting Discipline Forecasts must be based on demand, not shipments – Backorders Forecast adjustments must consider bias and random variation Forecasts are especially difficult for new products (no historical data) 17

18. Forecasting & SCM The forecasting function is a primary building block of S&OP, Supply Chain Management and inventory management Forecasting of independent demand permeates the entire Supply Chain – Independent demand determines dependent demand (Quantities of raw materials needed to manufacture products) – Both independent & dependent demand impacts inventory levels throughout the Supply Chain 18

19. Types of Forecasting Methods Qualitative techniques are non- scientific and based on experience, judgement and informed opinions – Input from sales personnel or people closest to the end customer – Market research (buying habits, demographic inferences, etc) – Panel Consensus – Delphi Method (similar to Panel Consensus but input is anonymous) 19

20. Types of Forecasting Methods Extrinsic techniques are projections based on external indicators that are related to the demand for a given product Extrinsic techniques are based on Economic Indicators – Housing starts – Manufacturing output of autos – Birth rate Statistics are often times generated by government entities, trade associations, banks etc. – Distinction between primary & secondary data 20

21. Types of Forecasting Methods Intrinsic techniques use historical, product-specific data used to forecast Based on the assumption that what happened in the past is likely to happen in the future (time-series) Several techniques are available, all of which should link forecast periods to historical periods – Comparable store sales by month & year – Take into account differences in the Sales Calendar – Consider errors from the previous period 21

22. Criteria for Choosing Forecasting Models Availability & reliability of data Level of granularity required – Product family vs. specific products Length of forecast horizon Level of accuracy required – Look at accuracy of past forecasts vs. actual outcomes Resource requirements – Internal & external Cost of compiling the data 22

23. Sales & Operations Planning: The Integration & Synchronization of Buy-Side Activities SUPPLIERSSUPPLIERS MANUFACTURER DISTRIBUTION SYSTEM CUSTOMERSCUSTOMERS MATERIALS MANAGEMENT Buy Side DISTRIBUTION MANAGEMENT Sell Side 23

24. 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” 24

25. 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 25

26. 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 – Consuming the forecast 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 26

27. 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 27

28. 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 28

29. 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 29

30. Software-Based MRP Item Table Item: ABC Order Qty: 1,000 Lead Time: 2 weeks Based on the MPS, BOM and available inventories, MRP software nets, offsets, explodes requirements and creates Planned Order Releases. As actual activity “Consumes the Forecast,” algorithms in the software automatically cascade updates to the MRP Product Records 30

31. Essential Information for MRP Item Record Item name, description, item number and Harmonized System number Vendor(s) Unit cost Unit of measure Stock locations Inventory classification (ABC) 31

32. Essential Information for MRP Item Record Usage On-hand balance at each location Amount allocated On-order info by due date Re-order and safety stock information Order quantity Lead time 32

33. Sales & Operations Planning: The Integration & Synchronization of Sell-Side Activities SUPPLIERSSUPPLIERS MANUFACTURER DISTRIBUTION SYSTEM CUSTOMERSCUSTOMERS MATERIALS MANAGEMENT Buy-Side DISTRIBUTION MANAGEMENT Sell-Side 33

34. 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. 34 Dan Gardner, April 2015

35. Software-Based DRP Product Table By using a product’s Bill of Distribution, DRP software implodes requirements up the distribution channel to create product-specific, time-phased Planned Order Releases. When S&OP activities are truly integrated and synchronized, DRP results will be cascaded back up the supply chain to Buy-Side functions like MPS & MRP. 35

36. Distribution Requirements Planning Used for independent demand products (finished goods) 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 36

37. 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 37

38. Elements of the DRP Discipline Time periods (known as time buckets) Gross Requirements Scheduled Receipts Projected On-Hand Planned Order Receipt – Date & quantity of order Planned Order Release – Based on BOD 38

39. Inputs to the DRP Process Item forecasts by due date Open customer orders by due date Beginning on-hand quantity by item Replenishment lead times by item Safety stock by item Order quantities by item 39

40. Outputs of the DRP Process Projected On-Hand by time bucket Net Requirements by time bucket Exception Reporting – Identifies those items that require action Planned Orders by time buckets System-generated action messages – Release planned order – Lead-time violation – Expedite scheduled receipt – De-expedite a scheduled receipt – Cancel an order 40

41. 41 Introduction to Global Inventory Management

42. 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 42

43. Global Inventory Management: Integrating & Synchronizing the Supply Chain SUPPLIERSSUPPLIERS MANUFACTURER DISTRIBUTION SYSTEM CUSTOMERSCUSTOMERS MATERIALS MANAGEMENT Buy Side DISTRIBUTION MANAGEMENT Sell Side 43 Raw materials, components, sub-assemblies, work-in-process, finished goods, accessories, service parts, MRO

44. …With Conflicting Functional Goals SUPPLY CHAIN ACTIVITIES PURCHASINGPURCHASING -Large purchases -Quantity Discounts -Multiple Suppliers SALESSALES -Total Availability -Any quantity -Wide Variety MANUFACTUREMANUFACTURE -Large lots -Infrequent set ups -Less variety FINANCEFINANCE -Low costs -Higher revenues -Improved ROA -High ROI 44

45. 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

46. Different Types of Inventory & Operating Models Also Influence How Supply Chains Are Designed Operating Model Raw materials Components/sub-assemblies Work In Process Finished goods Distribution inventory Accessories Spare parts MRO Types of Inventory Build to stock Build to order Assemble to Order Engineer to Order Just In Time Vendor Managed Inventories 46

47. Inventory Management: Guiding Principles & Objectives Maximize customer service (availability of product) Contribute to the maximization of sales Minimize inventory investment Continuously reduce costs Constantly increasing inventory accuracy 47

48. Inventory Management: Guiding Principles & Objectives Increase productivity Integrate & synchronized Buy-Side, Sell-Side and inventory management activities Enhance overall supply chain performance Increase overall company profitability 48

49. 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 49

50. 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 Accounting principles – First In/First Out – Last In/First Out 50

51. 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) 51

52. 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 52

53. 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 53

54. End of Module Three Congratulations!!!