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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 Managementin a Manufacturing Plant
Receivingand
Inspection
RawMaterials,Parts, andIn-process
Ware-Housing
Production
FinishedGoodsWare-
housing
Inspection,Packaging,
AndShippingS
uppl
iers
Cus
tom
ers
Materials Management
PurchasingProduction
ControlWarehousing andInventory Control
Shippingand Traffic
Physical materials flowInformation 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
valueinventory aggregate Average
sold goods ofCost turnoverInventory
weeks52 sold goods ofCost
valueinventory aggregate Averagesupply of Weeks
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?
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.
valueinventory aggregate Average
sold goods ofCost turnoverInventory
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 StructureSalient 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 O
rder
Q
uan t
ity
Time
Retailer’s Orders
Ord
er
Qua
n tit
y
Time
Wholesaler’s Orders
Ord
er
Qua
n tit
y
Time
Manufacturer’s Orders
The magnification of variability in orders in the supply-chainThe magnification of variability in orders in the supply-chain
A lot of retailers each with little variability in their orders….
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 greater variability for a fewer number of wholesalers, and…
…can lead to even greater variability for a single manufacturer.
…can lead to even greater variability for a single manufacturer.
10-11
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 O
rder
Q
uan t
ity
Time
Retailer’s Orders
Ord
er
Qua
n tit
y
Time
Wholesaler’s Orders
Ord
er
Qua
n tit
y
Time
Manufacturer’s Orders
The magnification of variability in orders in the supply-chain
The magnification of variability in orders in the supply-chain
A lot of retailers each with little variability in their orders….
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 greater variability for a fewer number of wholesalers, and…
…can lead to even greater variability for a single manufacturer.
…can lead to even greater variability for a single manufacturer.
10-14
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-SystemDesign 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 productAggregate Plan(Plan for Production of Product Groups)
Aggregate Plan(Plan for Production of Product Groups)
Master Production Scheduling (MPS)(Scheduling Production ofSpecific Components & Parts)
18-24
18-25
Firm orders from knowncustomers
Forecastsof demand from randomcustomers
Aggregateproductplan
Bill ofmaterialfile
Engineeringdesignchanges
Inventoryrecord file
Inventorytransactions
Master productionSchedule (MPS)
Primary reportsSecondary reports
Planned order schedule for inventory and production control
Exception reportsPlanning reportsReports for performance control
Materialplanning(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 TimesA 1 dayB 2 daysC 1 dayD 3 daysE 4 daysF 1 day
Total Unit DemandDay 10 50 ADay 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
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
Day: 1 2 3 4 5 6 7 8 9 10A Required 50
Order Placement 50
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 9th day to receive them on day 10.
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 9th day to receive them on day 10.
18-28
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.
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.
Day: 1 2 3 4 5 6 7 8 9 10A Required 50
Order Placement 50B Required 20 200
Order Placement 20 200
B(4)
E(1)D(2)
C(2)
F(2)D(3)
A (1)
SparesLT = 2
4x50=200
18-29
Total Unit DemandDay 10 50 ADay 8 20 B (Spares)Day 6 15 D (Spares)
18-30
Day: 1 2 3 4 5 6 7 8 9 10A Required 50
LT=1 Order Placement 50B Required 20 200
LT=2 Order Placement 20 200C Required 100
LT=1 Order Placement 100D Required 55 400 300
LT=3 Order Placement 55 400 300E Required 20 200
LT=4 Order Placement 20 200F Required 200
LT=1 Order Placement 200
B(4)
E(1)D(2)
C(2)
F(2)D(3)
A
40 + 15 spares
Part D: Day 6
Finally, repeating the process for all components, we have the final materials requirements plan:
Finally, repeating the process for all components, we have the final materials requirements plan:
Lead TimesA 1 dayB 2 daysC 1 dayD 3 daysE 4 daysF 1 day
Total Unit DemandDay 10 50 ADay 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
8 15 26
Weeks
FrozenModeratelyFirm Flexible
Firm Customer Orders
Forecast and availablecapacity
Capacity
18-34