Supply Chain & Supply Chain Management

Module 01: Supply Chain Management Framework

1-Understanding Supply Chain Management (SCM):

Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies. It is said that the ultimate goal of any effective supply chain management system is to reduce inventory (with the assumption that products are available when needed). As a solution for successful supply chain management, sophisticated software systems with Web interfaces are competing with Web-based application service providers (ASP) who promise to provide part or all of the SCM service for companies who rent their service.

Supply chain management flows can be divided into three main flows:

·         The product flow: The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs.

·         The information flow: The information flow involves transmitting orders and updating the status of delivery.

·         The finances flow: The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements.

There are two main types of SCM software:

- planning applications and

- Execution applications.

Planning applications use advanced algorithms to determine the best way to fill an order. Execution applications track the physical status of goods, the management of materials, and financial information involving all parties.

Some SCM applications are based on open data models that support the sharing of data both inside and outside the enterprise (this is called the extended enterprise, and includes key suppliers, manufacturers, and end customers of a specific company). This shared data may reside in diverse database systems, or data warehouses, at several different sites and companies.

By sharing this data "upstream" (with a company's suppliers) and "downstream" (with a company's clients), SCM applications have the potential to improve the time-to-market of products, reduce costs, and allow all parties in the supply chain to better manage current resources and plan for future needs.

Increasing numbers of companies are turning to Web sites and Web-based applications as part of the SCM solution. A number of major Web sites offer e-procurement marketplaces where manufacturers can trade and even make auction bids with suppliers.

The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as follows:

Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, and finance and information technology.— CSCMP

A typical supply chain begins with the ecological, biological, and political regulation of natural resources, followed by the human extraction of raw material, and includes several production links (e.g., component construction, assembly, and merging) before moving on to several layers of storage facilities of ever-decreasing size and increasingly remote geographical locations, and finally reaching the consumer.

Many of the exchanges encountered in the supply chain are therefore between different companies that seek to maximize their revenue within their sphere of interest, but may have little or no knowledge or interest in the remaining players in the supply chain. More recently, the loosely coupled, self-organizing network of businesses that cooperates to provide product and service offerings has been called the Extended Enterprise.

As part of their efforts to demonstrate ethical practices, many large companies and global brands are integrating codes of conduct and guidelines into their corporate cultures and management systems. Through these, corporations are making demands on their suppliers (facilities, farms, subcontracted services such as cleaning, canteen, security etc.) and verifying, through social audits, that they are complying with the required standard. A lack of transparency in the supply chain is known as mystification, which bars consumers from the knowledge of where their purchases originated and can enable socially irresponsible capitalist practices.

Omni channel Supply Chain is the latest term used in retail. This is how customers can shop anytime, anywhere, any place.

2-Supply chain:

A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable. Supply chains link value chains.

3-The objective of a supply chain:

Supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products or perhaps services for distribution to customers.

(Definition) Supply Chain Management is the design, planning, execution, control and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply chain demand, and measuring performance globally.

Other highlights:

·         Supply chain management is about creating net value.

·         There should be value creating activities in the supply chain that transcends the activities of particular entities in the chain.

·         Managing supply chain requires a balancing act among competing interests.

Value Chain and Mapping

Value Chain

A value chain is a string of collaborating players who work together to satisfy market demands for specific products or services.

(Definition) The value chain is made up of the functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment.

The intent of a value chain it to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user.

Not all value chain activities are technically part of the supply chain. Those activities might include:

·         Engineering

·         Marketing

·         Finance

·         Accounting

·         Information Technology

·         Human Resource

·         Legal

Value Stream

(Definition) It is the process of creating, producing and delivering a goods or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of goods, and the distribution network.

For a service, the value stream consists of supplier, support personnel and technology, the service “producer”, and the distribution channel.

The value stream may be controlled by a single business or a network of several businesses.

A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. It also includes timing.

Value Stream Mapping
(Definition) Value stream mapping is drawing the current production process/flow and then attempting to draw the most effective production process/flow.

Mapping the stream aids in process improvement.

Key Objectives:

There are five primary objectives that supply chain management can help a company or organization accomplish:

Objective 1: Add Value for Customers and Stakeholders

Objective 2: Improve Customer Service

Objective 3: Effectively Use System Wide Resources

Objective 4: Efficiently Use System Wide Resources

Objective 5: Leverage Partner Strengths

Objective 1: Add Value for Customers and Stakeholders: Supply chain management aims to create value through financial benefits, match the values of its various customers, and appeal to social value of its customers, stakeholders and community.

(Definition) Value is the worth of an item, goods or service.

Adding value to a goods or service is the responsibility of each entity and process in the supply chain.

(Definition) Value Added is the actual increase of utility from the view point of the customer as a part is transformed from raw material to finished inventory. It is the contribution made by an operation or a plant to the final usefulness and value of a product as seen by the customer.

The goal is to add value at each step in a service oriented value chain as well as in manufacturing oriented supply chain.

Utility may not be the only value, or worth, of a goods or service from a customer’s point of view. Price, availability, and attractiveness are also values to consider.

Financial Benefits: Profit and Profit Margin

·         Adding value that customers desires promotes increased sales, which improves the bottom line.

·         In order to be successful and have longevity, any organization must have a positive cash flow.

* Triple Bottom Line (TBL):

·         Term coined by John Elkington 1994.

·         This refers to the concept that corporate success should also be measured in 3 dimensions:

o    Economic

o    Social

o    Environmental

Measuring Value One Stakeholder at a Time

·         When planning any new supply chain activity or monitoring continuing practices, it is important to identify all the stakeholder groups and determine the impact the activity will have on each one.

·         The primary stakeholder in any business is the business itself. A business must be profitable to survive and create value for any other stakeholder group.

·         Customers are also significant stakeholders in supply chain. Each business must create value for its customers as well as profits for itself. Moreover, the end result of each partner’s activities must optimize value for the supply chain as a whole.

·         There are also stakeholders that are external to the supply chain’s business partners and end customers. These include public or private investors, lenders, and communities and governments. To investors and lenders, supply chain value may be defined as capital growth, dividend income, or interest payments and eventual return on invested capital. Value as defined by these external partners must be considered when making business decisions.

·         Communities and local governments may also feel the impact of supply chain operations because they affect community members and their environment, both built and natural. The location of a retail outlet, warehouse, or other supply chain facility will have impact on the community where it is built and maintained. The community, and its political leadership, may judge this impact to be a positive value or a detriment.

Balancing Varied Stakeholder Values:

Supply Chain Stakeholders	Stakeholder Values
Firms in supply chain	Profit margin, market share, revenues, expenses, image and reputation.
End customers	Affordable, safe, attractive, useful products; affordable, timely, secure, easy, pleasant services; sustainable manufacturing practices.
Investors	Return on Investment (Capital growth, dividend income), comprehensive and comprehensible communications.
Lenders	Interest rate, long-term stability, return of principal.
Communities / Environment	Tax based enhancement, sustainable manufacturing practices, environmental impact (safety, ethics, convenience, and natural resources), and growth of attractive jobs.
Governments	Legality, regulation, overall impact on community members and environment.
Employees	Job security, wages and benefits, opportunity, good working conditions, sustainable and safe manufacturing process.

Green, Sustainable Supply Chain Management:

·         One value that is important to most of these groups is sustainable manufacturing process and practices, because it impacts so many around the globe.

·         Green Supply Chain Management (GSCM) has been brought to the forefront of most companies’ strategic goals in response to the demands from customers and stakeholders.

·         The objective of supply chain sustainability is to create, protect and grow long term environmental, social, and economic value for all stakeholders involved in bringing products and services to market.

·         Today GSCM requires supply chain managers to integrate environmental thinking into each step within the supply chain. That means that they must employ innovative environmental technologies to provide practical solutions to the environmental problems facing the global community.

(Definition) Green Supply Chain is a supply is a supply chain that considers environmental impacts on its operations and takes action along the supply chain to comply with environmental safety regulations and communicate this to customers and partners.

·         Sustainability figures significantly in supply chain management decisions for the following reasons:

-          Government and regulatory pressures.

-          Good environmental management and sustainability concerns.

-          Public opinion and power of consumer choice.

-          Potential for competitive advantage.

-          In addition to adding value, sustainable supply chain management can make good business sense, which can:

§  Drive growth

§  Reduce costs.

·         Without forward looking environmental and social policies and supply chain practices and organization’s reputation may suffer among investment analysts.

·         Supply chains must create three types of values:

-          Financial

-          Customer

-          Social

Financial Value:

One method of increasing the financial value is to reduce costs.

Cut cost to yield net gain at the bottom line:

·         Cost cutting needs to aim for net gains at the bottom line.

(Definition) Inventory optimization software is a computer application having the capability of finding optimal inventory strategies and policies related to customer service and return on investment over several echelons of a supply chain.

·         Changes at any one point in the system will create changes elsewhere, therefore changes have to be viewed historically. Supply chain management necessitates cross-functional team work for the lateral chain. If a leaner supply chain can deliver the same customer satisfaction with a great profit, then cost cutting is justified.

It takes money to make money:

·         The end result should be net gain.

·         If an improvement in the supply chain brings in more revenue than the cost of investment, then it is justified.

·         Purchasing automated machinery to improve warehousing, upgrading hardware and software, training managers in team building and other investments may be necessary to build and maintain a competitive supply chain.

·         The ultimate aim must always be for creation of value at the customer’s end of the chain with sufficient profits to satisfy the needs of other stakeholders.

·         Typical measures of success in the use of invested money and assets more generally are:

o    Return on Investment (ROI)

o    Return on Assets (ROA)

(Definition) Return on Investment (ROI) is a relative measure if financial performance that provides a means for comparing various investments by calculating the profits returned during a specified time period.

(Definition) Return on Assets (ROA) is defined as net income for the previous 12 months divided by total assets.

Gains should be equally distributed:

·         Possibly the most common mistake in this regard is to send all cost savings all the way to the consumer’s end of the chain. If all efficiencies are plowed into retail price reductions, the supply chain itself will suffer from lack of financial sustenance.

·         Investors require a competitive return on loans and equity. The maintenance and upgrade to the chain’s infrastructure requires virtually continuous investment.

·         Employees have to be compensated at a competitive arte, trained in new processes and products, and more fundamentally, recognized for their contributions.

·         Teamwork among supply chain entities can create improved value for customers for a net financial gain that is equitably shared by all stake holders.

Customer Value

(Definition) Market Driven is responding to customer needs.

·         The ultimate goal of market-driven supply chain management must always be to deliver products and services that the customer values and of course will pay for.

·         Depending up the market being served, a supply chain may be managed so that it delivers one or more of these values to its end customers:

o    Quality of product or service

o    Affordability

o    Availability Service

o    Sustainability

Social Value

·         Generally a supply chain’s contribution to the society come from three factors:

o    Creating a positive good by delivering socially desirable and useful products or services.

o    Avoiding or reducing negative environmental side effects from extraction, processing and construction.
(Definition) The Reverse Supply Chain moves items from the consumer back to the producer for repair or disposal.

o    Integrating sustainability into the supply chain.

·         The SCOR model has applicability in sustainable chain management.

Objective 2: Improve Customer Service:

(Definition) Customer Service is the ability of a company to address the needs, inquiries and requests from customers.

OR

(Definition) Customer Service is a measure of the delivery of a product to the customer at the time specified.

Fundamental attributes of basic customer service:

1.      Availability is the ability to have the product when it is wanted by a customer.

2.      Operational Performance deals with the time needed to deliver a customer order.

3.      Customer Satisfaction takes into account customer perception, expectations and opinions based on the customer’s experience and knowledge.

Objective 3: Effectively Use System Wide Resources:

·         Resources can be in form of employees, raw materials, equipment, etc.

·         Being effective means that supply chain gets the right product and the right amount to the right customer at the right time.

Objective 4: Efficiently Use System Wide Resources:

(Definition) Efficiency is a measurement (usually expressed in percentage) of the actual output compared to the standard output expected. It measures how well something is performing relative to existing standards. Efficiency is inward-focused, in that a company looks internally to determine how a supply chain process can be done less expensively, in less time, and with fewer resources.

Efficiency is one of the measures of capacity in a supply chain environment.

Capacity is all about what can be accomplished by employing all the resources in the supply chain network that includes work centers, storage sites, people and equipment.

(Definition) Capacity has few meanings:

1.      The ability of a system to perform its expected function.

2.      The ability of a worker, machine, work center, plant or organization to produce output per time period.

3.      Required mental ability to enter into a contract.

When a supply chain is operating at high efficiency, it means that its utilizing its resources well to produce the level of output in a production plan within the time allowed.

Objective 5: Leverage Partner Strengths:

(Definition) A Partnership in a supply chain is a relationship based on trust, shared risk and rewards aimed towards achieving a competitive advantage.

Well-chosen partners will benefit from a high level of mutual trust, respect of each other’s expertise and contributions and shared vision.

A strong and useful partnership will yield a combination of the following as it performs the functions needed by your organization:

·         Adding value to products, such as shorter time to market.

·         Improving market access, such as providing new market channels.

·         Building financial strength through increased income and shared costs.

·         Adding technological strength if there is internal expertise in use of more advanced software and systems.

·         Strengthening operations by lowering systems costs and cycle times.

·         Enhancing strategic growth to break through barriers to new industry and opportunities.

·         Improving organizational skills that facilitate shared learning and insights of both firms’ management and employees.

Supply chain management technologies and practices can help a company select the appropriate sales partners and support them by:

·         Providing timely and accurate information.

·         Helping them deal successfully with channel customers.

·         Aiding them in leveraging their strengths such as innovation, speed, high quality, low costs, etc.

4-The importance of supply chain decisions:

Success of the supply chain depends on a close association between the efficient management of flows (information, funds and products) and its design. Dell has put together its success on planning, operation and superior design of its supply chain. In shorter span of time, Dell has become the world’s biggest personal computer manufacturer. The significant part of Dell’s success is the efficient flow of information, funds and products inside its supply chain.

Dell sells directly to the customers and circumvents retailers and distributers. Dell understands the needs and preferences of its customers and has close relations with customers that help in developing enhanced forecasts. In order to match the demand and supply, Dell makes strong effort to attract customers in real time via internet or phone calls towards the personal computer configuration that could be build given the parts/components available.
In operations Dell centralized inventories and manufacturing in few locations and delay last assembly until instructions of orders get there. This strategy makes Dell able to keep low levels of inventory and provide an immense variety of personal computers configurations. Dell’s competitors sell through retailers and hold several weeks’ figure of inventory. Dell preserves no inventory in few components such as monitors manufactured by Sony. Transporters pick required number of computers from Dell’s Texas plant and pick requisite monitors from Sony’s plant in Mexico. Dell then assembles them by customers’ specification and delivers to the specific destinations. This strategy permits Dell to save money and time related to the supplementary handling of monitors.

Dell supply chain success is due to the efficient flow of information at all the stages on the present state of demand; this is the importance of the supply chain decision at Dell Company.

5-Decision phases in a supply chain:

Decision phases can be defined as the different stages involved in supply chain management for taking an action or decision related to some product or services. Successful supply chain management requires decisions on the flow of information, product, and funds that fall into three decision phases.

Here we will be discussing the three main decision phases involved in the entire process of supply chain. The three phases are described below –

01.Supply Chain Strategy: In this phase, decision is taken by the management mostly. The decision to be made considers the sections like long term prediction and involves price of goods that are very expensive if it goes wrong. It is very important to study the market conditions at this stage.

These decisions consider the prevailing and future conditions of the market. They comprise the structural layout of supply chain. After the layout is prepared, the tasks and duties of each is laid out.

All the strategic decisions are taken by the higher authority or the senior management. These decisions include deciding manufacturing the material, factory location, which should be easy for transporters to load material and to dispatch at their mentioned location, location of warehouses for storage of completed product or goods and many more.

02.Supply Chain Planning:

Supply chain planning should be done according to the demand and supply view. In order to understand customers’ demands, a market research should be done. The second thing to consider is awareness and updated information about the competitors and strategies used by them to satisfy their customer demands and requirements. As we know, different markets have different demands and should be dealt with a different approach.

This phase includes it all, starting from predicting the market demand to which market will be provided the finished goods to which plant is planned in this stage. All the participants or employees involved with the company should make efforts to make the entire process as flexible as they can. A supply chain design phase is considered successful if it performs well in short-term planning.

03. Supply Chain Operations

The third and last decision phase consists of the various functional decisions that are to be made instantly within minutes, hours or days. The objective behind this decisional phase is minimizing uncertainty and performance optimization. Starting from handling the customer order to supplying the customer with that product, everything is included in this phase.

For example, imagine a customer demanding an item manufactured by your company. Initially, the marketing department is responsible for taking the order and forwarding it to production department and inventory department. The production department then responds to the customer demand by sending the demanded item to the warehouse through a proper medium and the distributor sends it to the customer within a time frame. All the departments engaged in this process need to work with an aim of improving the performance and minimizing uncertainty.

6-Process Views of a Supply Chain:

Supply chain management is a process used by companies to ensure that their supply chain is efficient and cost-effective. A supply chain is the collection of steps that a company takes to transform raw materials into a final product. The five basic components of supply chain management are discussed below−

Plan: The initial stage of the supply chain process is the planning stage. We need to develop a plan or strategy in order to address how the products and services will satisfy the demands and necessities of the customers. In this stage, the planning should mainly focus on designing a strategy that yields maximum profit.

For managing all the resources required for designing products and providing services, a strategy has to be designed by the companies. Supply chain management mainly focuses on planning and developing a set of metrics.

Develop (Source): After planning, the next step involves developing or sourcing. In this stage, we mainly concentrate on building a strong relationship with suppliers of the raw materials required for production. This involves not only identifying dependable suppliers but also determining different planning methods for shipping, delivery, and payment of the product.

Companies need to select suppliers to deliver the items and services they require to develop their product. So in this stage, the supply chain managers need to construct a set of pricing, delivery and payment processes with suppliers and also create the metrics for controlling and improving the relationships.

Finally, the supply chain managers can combine all these processes for handling their goods and services inventory. This handling comprises receiving and examining shipments, transferring them to the manufacturing facilities and authorizing supplier payments.

Make: The third step in the supply chain management process is the manufacturing or making of products that were demanded by the customer. In this stage, the products are designed, produced, tested, packaged, and synchronized for delivery.

Here, the task of the supply chain manager is to schedule all the activities required for manufacturing, testing, packaging and preparation for delivery. This stage is considered as the most metric-intensive unit of the supply chain, where firms can gauge the quality levels, production output and worker productivity.

Deliver: The fourth stage is the delivery stage. Here the products are delivered to the customer at the destined location by the supplier. This stage is basically the logistics phase, where customer orders are accepted and delivery of the goods is planned. The delivery stage is often referred as logistics, where firms collaborate for the receipt of orders from customers, establish a network of warehouses, pick carriers to deliver products to customers and set up an invoicing system to receive payments.

Return: The last and final stage of supply chain management is referred as the return. In the stage, defective or damaged goods are returned to the supplier by the customer. Here, the companies need to deal with customer queries and respond to their complaints etc.

This stage often tends to be a problematic section of the supply chain for many companies. The planners of supply chain need to discover a responsive and flexible network for accepting damaged, defective and extra products back from their customers and facilitating the return process for customers who have issues with delivered products.

7-Competitive Supply Chain Strategy:

8-Competitive and supply chain strategies:

9-Achieving strategic fit:

10-Expanding strategic scope:

11-Measuring Supply Chain Performance:

3 Core Metrics & 10 Soft Metrics for Measuring Supply Chain Performance:

The average Supply Chain management professional measures their Supply Chain by reviewing cost reduction. Is cost reduction all that there is in measuring Supply Chain performance? Sure, supply chain cost reduction is important in reducing the cost of goods sold (COGS) and increasing profit, but there are other measurements which should not be forgotten.

3 Key Metrics for Measuring Supply Chain Performance beyond Cost Reduction:

If cost reduction is not the only thing to measuring supply chain performance, that begs the questions: "Maybe we should be measuring other Supply Chain Management activities and what would they be?"

1.    Inventory measurement: is critical and it is money after all in that it took a capital expense to procure. The goal is to keep inventory levels at a minimum to meet customer needs. A pull system is better than a push system. Review Inventory turns and Return on Assets.

2.    What about measuring working capital in the Supply Chain? The handful of companies in the top quartile of working capital performance had working capital expenditures as a percentage of overall revenues of between 6% and 10%. In comparison, the poorest-performing companies in the lowest quartile had a range of working capital between 23% and 39% as a percentage of revenues.

3.    Isn’t time important? Shouldn’t time, both international and domestic, be measured? Absolutely time is a critical component of measuring supply chain performance. What kinds of "time" measurements exist?

o    Promise time,

o    lead time,

o    cycle time,

o    transit time,

o    delivery time,

o    unloading time,

o    processing time,

o    queue time,

o    quality assurance time,

o    processing time,

o    turnaround time,

o    receiving time,

o    And shipping time to the customer, (and I bet you could think of more "times" to measure!).

For clarity, in measuring supply chain performance, we should be focusing on:

1.    inventory,

2.    working capital,

3.    And time.

Cost reduction is still very important. We just can’t forget cost reduction. It is the main measurement benchmark in measuring supply chain performance, isn’t it?
Transportation is measured just as a cost rather than what it does for the rest of the organization. Again, not saying cost reduction is an indicator of poorly measuring supply chain performance, but it's not the only thing to measure when considering transportation. Other areas to consider measuring as it relates to transportation:

• Managing inventory
• Ensuring that lost sales are minimized
• The supply chain is efficient by transit time

We still focus on costs. We are all in business to be successful and profitable, aren’t we?
We should not forget that non-cost based measurements could prove to be beneficial to Supply Chain professionals.

10 Soft Metric Considerations in Measuring Supply Chain Performance:

1.    Collaboration and frequent communication between Supply Chain partners, including those considered at one time as a competitor: the supply chain has become increasingly collaborative, and supply chain entities are taking note of how collaboration between once-perceived enemies and competitors can actually help build trust with consumers, maintain compliance with authoritative entities, ensure transparency across the organization, be applied and implemented through different software, and further drive customer-centric focus. 

2.    Customer Service Levels: When it comes to how a shipper defines the value of a logistics provider or 3PL to the bottom line, there are often several Key Performance Indicators (KPIs) and Logistics Metrics taken into consideration. Every company knows customer service is important, but it is seldom well-defined, and even more rarely measured in logistics operations. 

3.    Effective, successful Key Performance Indicators (KPIs)/a balanced scorecard: Effective KPI management starts with some key areas to have both parties understand. These are core principles which will guide the rest of the more detailed and statistical KPIs found in the Service Level Agreement.  

4.    Using supply chain technology to aid in measurement & efficiency: In today's highly competitive marketplace, it’s imperative for businesses to innovate new ways to streamline their supply chain and optimize productivity. With the aid of modern supply chain technology applications, you can create better visibility within your supply chain, which will enable you to have more control over your business and stay ahead of the competition. Technology can help to simplify your supply chain management, which will enable your business to operate more efficiently, give you more visibility and control over your inventory, and help to reduce your operational costs.

5.    RFID, AIDC, and IOT Systems: The advantages of using RFID-, AIDC-, and IOT- based technologies seem fairly simple. Each of these logistics technologies provides a benefit that meets the demands of its respective driving forces. However, these technologies are poised to give benefits throughout the industry in several other ways as well. 

6.    Risk Management methods: Supply chain risk management and resiliency are hot-button topics in the industry. However, minute supply chain entities do not understand how resilience relates to risk management and what it means for improving focus on the supply chain. As the supply chain continues to grow in complexity and regulation, the opportunities for problems and other events to impact operations negatively will consequently grow. As a result, supply chain entities need to understand how risk management and resiliency applies to both good and bad situations and how an organization can improve supply chain risk management and resiliency processes. 

7.    Cyber Security Systems: We are all now familiar with the concept of the Internet of Things and if you take the manufacturing industry, for example, many manufacturers are now widely operating in an increasingly connected environment and making the most of the Industrial Internet of Things. 

8.    GPS: Global Positioning System (GPS) is a navigation system that depends on satellites to locate vehicles anywhere on Earth. It was originally developed by the United States Defense Department at an unknown cost. The first such satellites were launched in 1979. A few years later, the GPS system was made available for civilian use. As of November 2013, there were 31 GPS satellites in operation. 

9.    Supply Chain Visibility: Supply chain visibility has long been a goal supported by supply chain professionals. Until recently, however, technologies that could make this goal a reality have not been available. Today, however, there is hardly an activity that doesn’t produce some kind of data that can help companies understand what is going on within their supply chains. As the ability to see more clearly and deeper into supply chains improves, supply chains will become safer and more secure. Lora Cecere, of Supply Chain Insights writes, “Today 1/3 of fruits and vegetables and poultry products are thrown away due to spoilage. Companies struggle with counterfeit goods. In the future, I expect the automation of the chain of custody with better control of temperature and secure handling.”

10.                       Staying abreast of the state-of-the art in Supply Chain Management: extended Lean initiatives in the Supply Chain, Robotics, and Voice of the Customer (VOC) to improve Supply Chain performance. 

But, we should never forget the major ingredient in measuring supply chain performance: PEOPLE. PEOPLE make it all happen. IT systems and tools truly enhance the Supply Chain, but without PEOPLE communicating and collaborating, there is no Supply Chain Management success.

12-Drivers of supply chain performance,

Five Supply Chain Drivers

As you simulate how your supply chain works, you learn about the demands it faces and the capabilities it needs to be successful. Develop your supply chain to meet these needs.  Supply chain development is guided by the decisions you make about the five supply chain drivers.  Each of these drivers can be developed and managed to emphasize responsiveness or efficiency depending on the business requirements.

These five drivers provide a useful framework in which to think about the supply chain capabilities you need. They are illustrated in this diagram:

Production –  This driver can be made very responsive by building factories that have a lot of excess capacity and that use flexible manufacturing techniques to produce a wide range of items.  To be even more responsive, a company could do their production in many smaller plants that are close to major groups of customers so that delivery times would be shorter.  If efficiency is desirable, then a company can build factories with very little excess capacity and have the factories optimized for producing a limited range of items.  Further efficiency could be gained by centralizing production in large central plants to get better economies of scale.

Simulate your decisions about production in SCM Globe by the products you define and the facilities you create to make these products.

Inventory – Responsiveness can be had by stocking high levels of inventory for a wide range of products.  Additional responsiveness can be gained by stocking products at many locations so as to have the inventory close to customers and available to them immediately.  Efficiency in inventory management would call for reducing inventory levels of all items and especially of items that do not sell as frequently.  Also, economies of scale and cost savings could be gotten by stocking inventory in only a few central locations.

Simulate your decisions about inventory with SCM Globe by setting production levels at factories and defining on-hand amounts for different products at different facilities.

Location – A location approach that emphasizes responsiveness would be one where a company opens up many locations so as to be physically close to its customer base.  For example, McDonald’s has used location to be very responsive to its customers by opening up lots of stores in its high volume markets. Efficiency can be achieved by operating from only a few locations and centralizing activities in common locations.  An example of this is the way Dell serves large geographical markets from only a few central locations that perform a wide range of activities.

Simulate this decision in SCM Globe by the method you use to select locations for your facilities (factories, warehouses and stores) and the storage capacities and operating expenses you define for these facilities.

Transportation – Responsiveness can be achieved by a transportation mode that is fast and flexible.  Many companies that sell products through catalogs or over the Internet are able to provide high levels of responsiveness by using transportation to deliver their products often within 24 hours.  FedEx and UPS are two companies who can provide very responsive transportation services.  Efficiency can be emphasized by transporting products in larger batches and doing it less often.  The use of transportation modes such as ship, rail, and pipelines can be very efficient. Transportation can be made more efficient if it is originated out of a central hub facility instead of from many branch locations.

Simulate transportation decisions in SCM Globe by the modes of transportation you select to move products between facilities and the frequencies of those deliveries to different facilities.

Information – The power of this driver grows stronger each year as the technology for collecting and sharing information becomes more wide spread, easier to use, and less expensive.  Information, much like money, is a very useful commodity because it can be applied directly to enhance the performance of the other four supply chain drivers.  High levels of responsiveness can be achieved when companies collect and share accurate and timely data generated by the operations of the other four drivers. The supply chains that serve the electronics markets are some of the most responsive in the world.  Companies in these supply chains from manufacturers, to distributors, to the big retail stores collect and share data about customer demand, production schedules, and inventory levels.

SCM Globe simulates real-time information sharing between all participants in a supply chain by making data about operating costs and on-hand inventory available for all the facilities in the supply chain. As you run a simulation you can see what is happening from end to end across your supply chain. At present in the real world, most companies are not able to see much about the overall status of the supply chains they participate in. So in that sense the information available from the SCM Globe simulations is not that readily available to companies in actual supply chain practice.

Please note however that the cost of information continues to drop and the cost of the other four drivers mostly continues to rise.  Over the long run, those companies and supply chains that learn how to maximize the use of information sharing to increase their coordination and get optimal performance from the other drivers will gain the most market share and be the most profitable.

What are the supply chain drivers?

The supply chain drivers are grouped under two main drivers:

1. Logistics drivers

2. Cross functional drivers

The following are the important drivers of the supply chain?

LOGISTICS DRIVERS:

1. Facilities --   warehouse or storage locations or factory location.

2. Inventory -- stock of raw materials or finished goods

3. transportation--- moving of goods from one place to another.

CROSS FUNCTIONAL DRIVERS:

4. Pricing - cost of goods

5. Information --- information is nothing but the customer needs and wants

6. Sourcing -- procuring raw materials for production activities.

13-Framework for structuring drivers,

14-Facilities,

15-Inventory

The Role of Inventory in Supply Chain Management

Managing customer and vendor relationships is a critical aspect of managing supply chains. In many cases, the collaborative relationship concept has been considered the essence of supply chain management. However, a closer examination of supply chain relationships, particularly those involving product flows, reveals that the heart of these relationships is inventory movement and storage. Much of the activity involved in managing relationships is based on the purchase, transfer, or management of inventory. As such, inventory plays a critical role in supply chains because it is a salient focus of supply chains.
Perhaps the most fundamental role that inventory plays in supply chains is that of facilitating the balancing of demand and supply. To effectively manage the forward and reverse flows in the supply chain, firms have to deal with upstream supplier exchanges and downstream customer demands. This puts an organization in the position of trying to strike a balance between fulfilling the demands of customers, which is often difficult to forecast with precision or accuracy, and maintaining adequate supply of materials and goods. This balance is often achieved through inventory.
For example, a growing trend is the implementation of sales and operations planning (S&OP) processes.⁴ The fundamental purpose of S&OP is to bring the demand management functions of the firm (for example, sales forecasting, marketing) together with the operations functions of the firm (for example, manufacturing, supply chain, logistics, procurement) and level strategic plans. This often involves extensive discussions about the firm’s on-hand inventory, in-transit inventory, and work-in-process. Such discussions allow the sales and marketing group to adequately plan for the forthcoming time horizon by gaining a realistic picture of the inventory levels available for sale. Additionally, the operations groups are able to get updated and direct sales forecasting information, which can assist in planning for future inventory needs. Such information may very well result in shifts in manufacturing plans or alterations to procurement needs because of the strategic decision to focus on specific units of inventory instead of others in the near future.
Another example of balancing through inventory is the use of point-of-sale⁵ (POS) data for perpetual inventory management in the retail industry. For many retailers, every “beep” of a cash register upon scanning of an item’s bar code during checkout triggers a series of messages that another unit of inventory has been sold. This information is not only tracked by the retailer but is also shared with upstream vendors. As items are depleted from inventory, in some cases, both the retailer and vendor work collaboratively to determine when reordering is necessary to replenish the depleted inventory, especially at the distribution center level. This is a balancing of supply and demand because demand information is tracked to determine when to best place replenishment orders based on the time required to get the inventory to the store location. In essence, inventory decisions are used to effectively time when supply inflows are needed to handle demand outflows.

 16-Transportation,

Supply Chain Management (SCM) can be divided into three main areas: purchasing, manufacturing, and transport. From end to end, this includes decisions about which input materials to use, production quantities, inventory levels, distribution network configuration, and transportation for both the input materials as well as for the finished products. Logistics Management is the component of SCM that focuses on how and when to get raw materials, intermediate products, and finished goods from their respective origins to their destinations. Today, international trade is commonplace and increasing market share in emerging markets is highly desirable.  It is therefore safe to say goods are rarely consumed where they are produced, and transportation services are the essential trait d’union between all of the elements of the Supply Chain.  Effective, cost efficient Logistics Management can be a real point of competitive differentiation.  But how does a company achieve this?
To practice effective, cost efficient Logistics Management, an organization must lay the foundation for a responsive, economical transportation network.  With a responsive, economical transportation network, an organization is able to implement major strategic changes to reduce costs and increase customer service levels with very little disruption to the overall supply chain flow.
A responsive transportation network begins with end-to-end network visibility.  Visibility allows the business to centralize production operations to lower-cost areas without impacting customer service levels, because any uncertainty within the network can be monitored and appropriately managed to keep inventory levels as low as possible.
An economical transportation network actually begins with a shift in attitude.  Businesses are often trapped in the traditional view that transportation is a necessary evil – an inevitable source of cost and risk.  And who can blame them?  Transport is by far the largest component of the cost structure of a business’ logistics. According to sector research (Chang, 1998), transport accounts for as much as 30% of the total cost of logistics operations – almost as much as warehousing and Inventory together!
Now consider the impact of transportation activities on the overall economy of a country. The numbers are impressive. In the United States in 2005, freight transport activities accounted for 10% of the GDP. In Germany alone, the Freight Logistics Sector (the largest in Europe) came in third in total revenue (after retail trade and the automotive industry) with a whopping 170 billion Euros, or 7% of the German GDP.
While the data certainly lends itself to the mindset that transportation is a “cost albatross,” if you will, around one’s neck, this attitude is rapidly changing. In fact, Supply Chain Managers who are outpacing their competition have done so largely by acknowledging transportation as a ready vehicle through which to drive cost savings and create value within the Supply Chain.  How? Technology, for one.   More and more sophisticated tools allowing Managers to monitor, control, and optimize transportation networks are available, and in the wake of the Cloud – are available with increasingly easy implementations.
That said, while a Bloomberg survey reports that 73% of Supply Chain Managers are undergoing this shift in attitude toward transportation and identifying transportation as their key focus in 2014, the same survey also reported that the current adoption rate of transportation solutions is somehow lagging – with 46% of participants reporting current use of a solution, and another 22% reporting plans to adopt one in 2014.
The road ahead is therefore still long, but the systemic impact of transportation-related figures clearly demonstrates that transportation is much more than just the financial drain associated with trucks, pallets, and warehouses. When the appropriate tools to manage complexity and guarantee visibility are in place, transportation provides an organization with the opportunity to continuously create operational efficiency and improve the bottom line – ultimately unlocking previously untapped value for shareholders.

17-Information,

18-Sourcing,

A successful sourcing strategy requires a thorough understanding of a company’s business strategy, the resources required to deliver that strategy, the market forces and the unique risks within the company associated with implementing specific approaches. A periodic review of the sourcing strategy ensures achievement of desired results and continued alignment with business objectives. Some of the sourcing strategies that are used in supply chain management today include:
Single sourcing: A method whereby a purchased part is supplied by only one supplier. A JIT manufacturer will frequently have only one supplier for a purchased part so that close relationships can be established with a smaller number of suppliers. These close relationships (and mutual interdependence) foster high quality, reliability, short lead times, and cooperative action.
Multisourcing: Procurement of a good or service from more than one independent supplier. Companies may use it sometimes to induce healthy competition between the suppliers in order to achieve higher quality and lower price.
Outsourcing: The process of having suppliers provide goods and services that were previously provided internally. Outsourcing involves substitution—the replacement of internal capacity and production by that of the supplier.
Insourcing: The goods or services are developed internally.

19-Pricing,

20-Obstacles to achieving strategic fit.

A company has to make sure that its supply chain strategy and competitive strategy fit together. Strategic fit means that both the supply chain strategy and competitive strategy have the same goal.

Module 01 is assessed through a single exam of 100 marks comprising MCQ, True/False and Filling the gap questions

Module 02 Supply Chain Network design & Inventory Management

1-Designing Distribution Systems:

Factors Influencing Distribution Network Design:

At the highest level, performance of a distribution network should be evaluated along two dimensions:

1. Customer needs that are met

2. Cost of meeting customer needs

The customer needs that are met influence the company's revenues, which along with cost decide the profitability of the delivery network. While customer service consists of many components, we will focus on those measures that are influenced by the structure of the distribution network. These include:

• Response time

• Product variety

• Product availability

• Customer experience

• Order visibility

• Return ability

Response time is the time between when a customer places an order and receives delivery. Product variety is the number of different products / configurations that a customer desires from the distribution network. Availability is the probability of having a product in stock when a customer order arrives. Customer experience includes the ease with which the customer can place and receive their order. Order visibility is the ability of the customer to track their order from placement to delivery. Return ability is the ease with which a customer can return unsatisfactory merchandise and the ability of the network to handle such returns. It may seem at first that a customer always wants the highest level of performance along all these dimensions. In practice, however, this is not always the case. Customers ordering a book at Amazon.com are willing to wait longer than those that drive to a nearby Borders store to get the same book. On the other hand, customers can find a far larger variety of books at Amazon compared to the Borders store.

* Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in the supply chain. Distribution is a key driver of the overall profitability of a firm because it directly impacts both the supply chain cost and the customer experience. Performance of a distribution network is evaluated along two dimensions: customer needs that are met and cost of meeting customer needs.


*Response time is the time between customer order placement and when customer receives the order
*Product variety is the number of different products/configurations that a customer desires from the distribution network
*Product availability is the probability of having a product in stock when a customer order arrives
* Customer Experience includes the ease with which the customer can place and receive their order
*Order visibility is the ability of the customer to track their order from placement to delivery
*Return ability is the ease with which a customer can return unsatisfactory merchandise and the ability of the network to handle such situations.

*Designing Supply Chain Network for each industry or business involves arriving at a satisfactory design framework taking into all elements like product, market, process, technology, costs, external environment and factors and their impact besides evaluating alternate scenarios suiting your specific business requirements. No two supply chain designs can be the same. The network design will vary depending upon many factors including location and whether you are looking at national, regional or global business models.

1.    Supply Chain Network in Simple and basic Terms Involves determining following process design:

Procurement

§  Where are your suppliers

§  How will you procure raw materials and components

Manufacturing

§  Where will you locate the factories for manufacturing/assembly

§  Manufacturing Methodology

Finished Good

§  Where will you hold inventories, Number of Warehouses, Location of warehouses etc.

§  How will you distribute to markets - Transportation and Distribution logistics

All above decisions are influenced and driven by Key Driver which is the Customer Fulfillment.

2.    Designing Supply Chain Network involves determining and defining following Elements:

§  Market Structure

§  Demand Plotting or Estimation

§  Market Segment

§  Procurement Cost

§  Product /Conversion Costs

§  Logistics Costs including Inventory holding costs

§  Over heads

§  Cost of Sales

3.    Network Design aims to define:

§  Best fit Procurement model - Buying decision and processes- VMI, JIT, Kanban, procurement cost models etc.

§  Production processes - One or more number of plants, plant capacity design, Building to order, build to stock etc, in-house manufacturing or outsource manufacturing and related decisions including technology for production.

§  Manufacturing Facility design - Location, Number of factories, size of unit, time frames for the plant setup project etc.

§  Finished Goods Supply Chain network - Number of warehouses, location & size of warehouses, inventory flow and volume decisions, transportation.

§  Sales and Marketing Decisions - Sales Channel and network strategy, Sales pricing and promotions, order management and fulfillment process, service delivery process definitions.

4.    Network Design also examines:

§  Derives cost estimates for every network element

§  Examines ways to optimize costs and reduce costs

§  Extrapolates cost impact over various product lines and all possible permutations and combinations to project profitability

5.    Some of the key factors that affect the supply chain network modeling are:

§  Government Policies of the Country where plants are to be located.

§  Political climate

§  Local culture, availability of skilled / unskilled human resources, industrial relations environment, infrastructural support, energy availability etc.

§  Taxation policies, Incentives, Subsidies etc. across proposed plant location as well as tax structures in different market locations.

§  Technology infrastructure status.

§  Foreign investment policy, Foreign Exchange and repatriation Policy and regulations.

Supply Chain Network designs not only provide an operating framework of the entire business to guide the managements, they also examine the structure from strategic view point taking into account external influences, interdependencies of all processes and critically evaluate opportunities to maximize profitability.

Supply Chain Design consultants use various design software and optimization techniques coupled with inputs from industry consultants and experts.

·          2-The role of distribution in the supply chain,

The supply chain and distribution channel is not your daddy's supply chain and distribution channel anymore. In fact, today's distribution chain is facing unprecedented changes that pose challenges and rewards to all participants in the supply and distribution trade.

Partners all along the "traditional" distribution and supply chain channel are being challenged by new entrants into supply and distribution markets across many industries. The waters have been muddied by the Internet and the introduction of consumers and end-users into supply chain distribution.

Successful distribution and supply chain management is characterized by a solid organization featuring a centralized hub supported by satellite chain distributor. Picture it as the spokes of a wheel connected at the middle--the hub.

The "new" supply chain and distribution channel has several key components, which fall under the supply chain management "umbrella." These components include:

1. Distribution--the physical logistics of moving inventory along a chain of distribution.

2. Inventory management--the entities that control how much is moved and where it is stored.

3. Customers--identifying who the "real" customers are and keeping their loyalty despite all of the changes to the supply chain and distribution channel.

Plan the chain of distribution carefully

Manage your plan from within your chain, not from above. If you use statistics and historical data, you are not getting the whole picture. Talk to your partners and understand their needs using the traditional one-on-one approach.

Choose your distribution chain players

Who do you trust to make you successful? The answer should be your distributor partner. Not only is that partner a known commodity, but they can also provide business in the growing global market. Your newest partner could be half a world away, thanks to globalization and the new global economy.

Use supporting distribution chain management software

Technology has made supply chain management for distributors manageable and reliable. Supply chain management software helps in planning, projecting and implementing the chain of distribution.

• Plan and implement a supply chain and distribution program, understanding the role of each player along the distribution channel, including the "new" global community and the changing face of end-users.
• Research the tools and training needed to have a successful supply chain distribution strategy.

·          3-Factors influencing distribution network design

·          

 4-Design options for a distribution network:

Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in the supply chain. Distribution is a key driver of the overall profitability of a firm because it directly impacts both the supply chain cost and the customer experience. Performance of a distribution network is evaluated along two dimensions: customer needs that are met and cost of meeting customer needs. There are two key decisions when designing a distribution network:

1. Will product be delivered to the customer location or picked up from a preordained site?
2. Will product flow through an intermediary (or intermediate location)?

1. Manufacturer storage with direct shipping


2. Manufacturer storage with direct shipping and in-transit merge

3. Distributor storage with package carrier delivery

4. Distributor storage with last mile delivery

5. Manufacturer/distributor storage with customer pick-up

6. Retail storage with customer pick-up

5-Network Design:

5 Steps to Design a Supply Chain Network

You’re patting yourself on the back. You’ve sorted through the Marine Shipping chaos. In the face of volatile Marine Transportation rates, you just negotiated great prices to transport your North American produced bulk liquid via tank containers to ten Pacific region countries. The contracts are signed and locked in for the next year, holding costs to a known level. A month later you discover there may be a better way. Rather than transport your bulk liquid separately to each of your ten Pacific region customers, you can send all the product on a parcel tanker to a terminal in Singapore, drum it, and ship the drums from Singapore to each of your customers. And you can do this at considerable savings without a reduction in customer service. You looked at so many options, why didn’t you consider this one?
How do you make sure your business is aiming before it fires? The business process of supply chain network analysis and design will help you ensure that you are using the best modes of transportation, the best routes, and the right mix of intermediate assets (e.g. storage, inventory, etc.), to get your products where they need to be to meet your business goals. And the icing on the cake is that it is a relatively easy and cost effective process.
So how does it work? Here is a proven process to design a supply chain network that best meets your business objectives.
1) Clearly define your objectives. No logistics manager is likely to improve all aspects of their logistic and distribution network all at once. The most critical step of the network analysis and design process is to identify your primary objectives. A partial list of critical decisions you might consider is:

• What level of customer service does my market demand?
• What modes of transportation should be used to balance cost vs customer service objectives?
• Which warehouses should supply product to which customers?
• How many warehouses do I need and where should they be located?
• Where should inventory be stored and how much inventory should I be carrying of each product?
• Which manufacturing plants should be making product for which customers/warehouses?
• What routes should I be using to get product from source to destination?
• Are there opportunities for pooling resources that have been overlooked?

Identify your objectives as those decisions that are most important to the bottom line and those that you can do something about.
2) Gather supporting data. In order to make intelligent decisions, you need solid data to support those decisions. This step is usually the most time consuming part of the process. The good news is that the data is available and reusable. Most likely it exists in your new ERP or legacy system. Typical data elements include: demand by product and container type, transportation rates, transportation lead times, warehousing costs (both fixed and variable costs), and inventory costs. If your objectives include determining the manufacturing source of products, you will also need data like manufacturing and raw material costs.
3) Model your supply chain network. Today’s technology can help you make better decisions as there are many vendors offering supply chain network optimization tools. Alternatively, you can cost efficiently configure your own. Choose wisely, as all software is not created equal. Make sure the software you select fully addresses the decisions you need to make and can represent your unique business and logistics network. Typical model components include capacity limitations, customer service requirements, lead times by mode, operating capabilities and the cost of different options.
4) Analyze your supply chain network. There is no silver bullet. Using supply chain optimization tools to make better decisions for your business requires good old-fashioned analysis. Relying on people to leverage the benefits of technology is the path to success. A good supply chain analyst will be both an expert about your business and an expert with the supporting technology. They will need to review many “what if” scenarios with the business management to finalize the supply chain network design.
5) Implement and refine. The supply chain network analysis and design process is not a static process. Successful ideas are implemented and cost savings are realized. And then things change: a large new customer is added at a new location, more production capacity is added, demand takes a nosedive, or raw material prices swing dramatically. Thus, like all good planning processes, the supply chain network analysis and design process must be on going. This process should be revisited regularly (annually/quarterly,) and/or when big things happen within the business.
How do you measure the success of this business process? Firstly, it must generate bottom line savings in your supply chain operations. Secondly, the business process must embed itself firmly in the corporate culture. Treating supply chain analysis as a one-time effort limits your business from fully reaping the fruits of your labor.
“Although we have achieved cost savings between 4% and 11% of our total logistics costs in our network designs, the biggest value that we’ve seen from this type of analysis is a common understanding of the delivery chain among Manufacturing, Marketing, Sales, Logistics, and Planning. This common understanding of cost and customer service trade-offs results from the more complete “picture” of the network that emerges from this analysis and the ability to churn out “what-if” analysis to cover most credible business scenarios. It is this understanding and the ability to quickly understand and exploit changes in the market that is the enduring value of a continuing network analysis process”, says Ted Schaefer, Global Logistics Strategy & Design Manager at the Rohm and Haas Company.
Those businesses that integrate the supply chain network analysis and design process into their corporate culture will reap the benefits of efficient and focused logistics operations year after year. With a process like this in place you can be assured that you aim before you fire.

**************************

Dr. Alan Kosansky received his Doctorate in Applied Mathematics from The Johns Hopkins University in 1991. He is the co-founder and president of Profit Point Inc. He has taught at Villanova University and has shared his expertise at many national conferences. Dr. Kosansky has pioneered the application of advanced analytic techniques to transportation procurement, dynamic scheduling, supply chain management and financial optimization. His methods have repeatedly helped manufacturers to reduce their transportation, manufacturing, and inventory costs, and businesses to realize higher profits.
Ted Schaefer is the Global Logistics Strategy & Design Manager at the Rohm and Haas Company. He has been with Rohm and Haas for 18 years, spending the last 12 years in the operation or redesign of various segments of the Company’s Supply Chains. He has done network analysis and designs for the Rohm and Haas Monomers Business in North America, Europe, and Asia. He is a member of the Council of Logistics Management and APICS.

6-The role of network design in the supply chain,

7 Factors of Solid Supply Chain Network Design

What's is supply chain network design and optimization? We will explain the concept and factors you should consider in supply chain network design project.

Background of Optimization

Many supply chain practitioners use the word "optimization" as the synonym for "improvement" or "enhancement". However, an optimization is actually the mathematical technique aims to find the best possible solutions. Supply chain optimization is then the application of mathematical models to find the solutions that minimize total costs or maximize overall profits.

Application of Supply Chain Optimization

Optimization is widely used to create the best possible production plan or to find the shortest delivery routes. At strategic level, it's used to find the best way to configure a supply chain network such as,

- How many warehouse a company should have?
- Location and size of each warehouse?
- Product assignment to each warehouse?
- Which customer receives which product from where?

Since supply chain network design is the analysis that will be done every 2-3 years only, many people are not familiar it. But, when it’s done right, the potential cost saving is monumental.

7 Factors of Solid Supply Chain Network Design

1. Location and Distance:
you need this data to define the basic structure of supply chain network. Location includes customers, suppliers, warehouse, manufacturing facilities, seaports, airports and so on. You can use the zip code or gps coordinate to find a location. To find the distance between each point in the network, it can follow the straight line or the actual road contour. But, which approach is more appropriate?

2. Current and Future Demand:
Once determining the location, you need to group the demand / supply points so you can determine the current and future demand. Anyway, how to group the demand points effectively?

3. Service Requirements:
Things such as maximum allowable transit time or maximum allowable distance dictate the location of potential warehouses.

4. Size and Frequency of Shipment
These factors have the direct impact on cost (more frequency = more cost, smaller size = higher cost).

5. Warehousing Costs
Fixed cost is relatively easy to find but variable costs such as labor cost can be tricky because it is not static.

6. Trucking Costs
Suppose you're dealing mainly with trucking, you need to find the appropriate cost data. LTL rates can be very complicated because of rates depend on "class", "exception" and "commodity". Moreover, rate for "Boston to Chicago" may not be the same as "Chicago to Boston"

7. Mode of Transportation
Since material flows from one point to another, you need to identify the mode of transportation that you're currently using.

Supply Chain Network Design Consideration

After the above data is collected properly, you need to construct a basic model and validate it. Model output, such as total costs, should be pretty much the same as in your real world operations. Only after basic model is validated properly, you then create and compare the possible alternatives that will help you cut costs or improve profit.

Since an optimization software usually runs the proprietary algorithm, it's quite difficult to make a real comparison accepts for other product features, user interfaces and computational time.

As a result, the key to the success of supply chain network design project is the experienced consultants that help you to gather high quality data, validate model and propose the alternative supply chain structure that matters to your business.

7-Factors influencing network design decisions,

Supply chain network design decisions include the assignment of the role of facility, location of processing (manufacturing), storage, and transportation-related facilities, and allocation of capacity and the market at each facility. Supply chain network design decisions are grouped into:

The role of facilities
Location facilities
Allocation of capacity
Market allocation and bid

Network design decisions have a significant impact on performance because this decision determines the composition of the supply chain and the accompanying set of constraints in the supply chain of other triggers can also be used to reduce supply chain costs or to improve its response. All of these network design decisions impact on each other and should be a consideration.

Decisions regarding the role of the facility are important because it determines the decision of supply chain flexibility in the amendment to bring together a bid.
Facility location decisions have long-term impact on supply chain performance because it is very expensive in stopping the facility or move to a different location. Decision of the right location can help to better respond to supply chain for low cost.
Capacity allocation decisions also have a significant impact on supply chain performance. Given the capacity allocation can be changed more easily than the location, capacity decisions tend to remain in a few years. Allocating too many facilities does not produce many uses, this high-cost memyebabkan.
The allocation of resources and market demand on the facility also has a significant impact on supply chain performance because it affects the total production, inventory, and transportation costs that occurred in the supply chain to satisfy customer demand. This decision should be considered so that allocations can be changed as market conditions or changes in plant capacity.

Factors affecting the network design decisions:
here’s a variety of factors that influence decisions in the supply chain network design.

1. Strategic Factors
A company's competitive strategy has a significant impact on decisions in the supply chain network design. Companies that focus on cost leadership will try to find or create the lowest cost for facilities manufakturingnya. Companies that focus on response rate tends to place a facility that closed in the market and may choose a location to high cost if they meet the company's choice to react quickly to changing market needs. Global supply chain network to support corporate strategic objectives with the role of different facilities in different places.

2. Technological factors
Characteristics contained in production technology have a significant impact on network design decisions. If the production technology displays economies of scale are significant, few high-capacity sites will be more effective. Unlike the case with fixed-cost facilities is lower, many local facilities are prepared because this will help lower transportation costs. Flexibility in production technology have an impact pad level of consolidation that can be achieved by the network.

3. Macroeconomic factors
These factors include taxes, customs duties, exchange rates, and other economic factors that do not exist within the company. This factor has a significant impact on the success or failure of the supply chain network.

4. Political Factors
Political stability in a country is of paramount consideration because it has a significant impact on role in the choice of location. Companies prefer to place the facility at a location or state which has a stability that provide clarity in terms of trade rules and ownership.

5. Infrastructure factors
The existence of good infrastructure is an important prerequisite in allocating facilities in certain areas. Poor infrastructure will further add to business costs.

6. Competitive Factors
Companies must consider the strategy, size, and location of competitors when designing their supply chain network. Making important decisions the company is now set for the company's facilities are not accessible by competitors or in other words away from competitors.

7. Customer response time and local presence
Companies that have targeted customers who can respond in a quick time to put the facilities that are closed to the customer. If the company sends its products to customers, it means that transportation should be slightly built and continue to increase response time is short. This choice resulted in an increase or increase in transportation costs. Furthermore, many situations that require these facilities to customers.

8. The cost of logistics and facilities
Logistics and facilities costs that occur in the supply chain can undergo changes such as the number of facilities, location and capacity allocation. Companies should consider, supplies, transportation and facility costs as the company's supply chain network design. The increasing cost of supplies and facilities, the greater the number of facilities used in the supply chain. The lower the transportation cost, the greater the number of facilities. If the number of facilities increased at a point where the journey economis of scale is lost, then the transportation cost increases. The total number of logistics is the entire inventory, transportation and facility costs.

The framework in network design decisions:
The success in designing a supply chain network will maximize profits when the demand satisfied customer needs and have the power response. Network design decisions are made in four stages:

Establish design or supply chain strategy: The purpose of this phase is to establish a large supply chain design. This includes also determine the stages in the supply chain, and each supply chain function to be used.
Appointing the regional facility: The purpose of this phase is to identify areas where it is placed, the rules that apply, and capacity.
Selecting the desired set of potential sites: The purpose of step three is selecting the desired set of potential sites in each region where the facilities would be placed. The place should be chosen based on the analysis provided in the infrastructure to support production of the desired methodology.
The choice of location: The purpose of this phase is to choose the right location and the location of capacity for each facility. Attention is limited to the desired potential places that have been selected in three stages.

Model facility location and capacity allocation:
The success of managers in establishing facilities and allocating capacity should be optimized in sseluruh profitability of the supply chain network while increasing the power to respond to the right on the customer. Managers must consider many trade-offs during the design network. Managers use the model of network design in two different circumstances, namely:

Model used to decide the location where the facility will be established and the existing capacity at each facility. Managers must make decisions based on the time will come where the location and capacity can not be changed.
The model used to determine the direct demand for the availability of facilities and identify the path along the product will be passed. Managers must consider its decision on the basis of such request prices, changes in exchange rates and changes in customs.

8-Framework for network design decisions,

Describe the four phases in the framework for network design decisions.
Answer:
Phase I: Define a Supply Chain Strategy:
The objective of the first phase of network design is to define a firm’s supply chain strategy. The supply chain strategy specifies what capabilities the supply chain network must have to support a firm’s competitive strategy. Phase I starts with a clear definition of the firm’s competitive strategy as the set of customer needs that the supply chain aims to satisfy. Next, managers must forecast the likely evolution of global competition and whether competitors in each market will be local or global players. Managers must also identify constraints on available capital and whether growth will be accomplished by acquiring existing facilities, building new facilities, or partnering. Based on the competitive strategy of the firm, an analysis of the competition, any economies of scale or scope, and any constraints, managers must determine the supply chain strategy for the firm.
Phase II: Define the Regional Facility Configuration:
The objective of the second phase of network design is to identify regions where facilities will be located, their potential roles, and their approximate capacity. An analysis of Phase II is started with a forecast of the demand by country. Such a forecast must include a measure of the size of the demand as well as a determination of whether the customer requirements are homogenous or variable across different countries. The next step is for managers to identify whether economies of scale or scope can play a significant role in reducing costs given available production technologies. Next, managers must identify demand risk, exchange rate risk, and political risk associated with different regional markets. They must also identify regional tariffs, any requirements for local production, tax incentives, and any export or import restrictions for each market. The tax and tariff information is used to identify the best location to extract a major share of the profits. In general, it is best to obtain the major share of profits at the location with the lowest tax rate. Managers must identify competitors in each region and make a case for whether a facility needs to be located close to or far from a competitor’s facility. The desired response time for each market must also be identified. Managers must also identify the factor and logistics costs at an aggregate level in each region. Based on all this information, managers will identify the regional facility configuration for the supply chain network using network design models discussed in the next section. The regional configuration defines the approximate number of facilities in the network, regions where facilities will be set up, and whether a facility will produce all products for a given market or a few products for all markets in the network.
Phase III: Select Desirable Sites:
The objective of Phase III is to select a set of desirable sites within each region where facilities are to be located. The set of desirable sites should be larger than the desired number of facilities to be set up so that a precise selection may be made in Phase IV. Sites should be selected based on an analysis of infrastructure availability to support the desired production methodologies. Hard infrastructure requirements include the availability of suppliers, transportation services, communication, utilities, and warehousing infrastructure. Soft infrastructure requirements include the availability of skilled workforce, workforce turnover, and the community’s receptivity to business and industry.

Phase IV: Location Choices:
The objective of this phase is to select a precise location and capacity allocation for each facility. Attention is restricted to the desirable sites selected in Phase III. The network is designed to maximize total profits, taking into account the expected margin and demand in each market, various logistics and facility costs, and the taxes and tariffs at each location.
Diff: 3
Topic: 5.3 Framework for Network Design Decisions
4) Explain the two situations in which managers use network design models.
Answer: Managers use network design models in two different situations. First, these models are used to decide on locations where facilities will be established and the capacity to be assigned to each facility. Managers must make this decision considering a time horizon over which locations and capacities will not be altered (typically in years). Second, these models are used to assign current demand to the available facilities and identify lanes along which product will be transported. Managers must consider this decision at least on an annual basis as demand, prices, and tariffs change. In both cases, the goal is to maximize the profit while satisfying customer needs.

9-Global supply chain network design,

To take advantage of global sourcing and manufacturing cost efficiencies—and to tap into burgeoning consumer markets overseas—companies must put as much effort into designing their global supply chain as they do in managing it. Old habits die hard, but forward-thinking companies are embracing a holistic approach to design.

In years past, companies redesigned their supply chain networks infrequently, usually in response to a significant change in operations prompted by a merger or acquisition, the introduction of a new product, or a shift in sales profiles.
Today, however, market dynamics drive leading companies to examine supply chain design more often.
Take global sourcing, for example. Many companies undertake complex global sourcing initiatives, but fail to support them with similarly diligent network design analyses, notes Iain Prince, a senior manager with Accenture's global supply chain practice. 
"This is a critical disconnect, because a wholesale revamp of sourcing processes and policies affects virtually every aspect of an organization's supply chain network," he says.
Global sourcing creates a whole new network-design ballgame, he explains, because of several factors:

• The influence of low-cost labor.
• Geographic distances and their impact on service and availability.
• Barriers associated with language and technology sophistication.
• Volatility and reliability issues.
• Cultural and political barriers related to local governance.
• Additional supply chain links, handoffs, and customs challenges.
• Inventory visibility problems.
• The role of immediacy and perishability in determining the optimal network.
• The impact of extensive transit times on inventory cost and ownership.

"Companies must assess network-related tradeoffs to reconcile the convenience and reliability of local or near-shore suppliers against the economies associated with sourcing from low-cost countries," Prince says.
"If companies do not conduct a holistic assessment of global sourcing's impact on their supply chain network, their new suppliers may be the only ones who benefit from the arrangement."

The New Reality

As globalization increases, firms across all industries must grapple with a number of new realities.
"Many companies are multi-national, but do not operate in an integrated, global fashion," says Jamie Hintlian, a partner with Accenture's health and life sciences supply chain management practice.
"They may have a presence in a variety of markets on different continents, but only a limited ability to coordinate and leverage global supply and demand. That presents both a tremendous opportunity and a challenge.
"For a global organization to function effectively, it must implement a truly global planning process, with strict rules for creating and aggregating forecasts around the world," Hintlian says.
Truly global companies face many challenges—from cultural and language differences, to disparate business processes within the same company, to different rules or practices for managing supply and demand.
Many companies that grow through acquisitions, for instance, maintain extensive manufacturing capacity around the world—some of which are redundant or inefficient. In these situations, companies need to optimize or rationalize their networks to fewer sites that are capable of serving global markets.
"Companies need to ask: 'How do we establish a supply and demand network and reconcile it with global sales and operations planning so we make the most of our rationalized corporate infrastructure?'" Hintlian adds.
Companies have also begun to recognize that the supply chain is critical to making international business strategies function effectively.
"Organizations are starting to develop business and supply chain strategy concurrently and collaboratively," Hintlian says. "In the past, business strategy was developed, then articulated across the organization, with various departments working independently to execute that strategy.
The result? Organizations with conflicting functional goals."

Designing for Total Landed Cost

Working collaboratively on global supply chain design requires examining different areas of the business and how they impact the supply chain. Modeling supply chain flow, and pinpointing areas for improvement, is a smart way to begin.
"Enterprises designing a global supply chain should start by surveying the business, looking at trade flows, understanding where trade partners succeed and fail, and projecting where company growth is heading," says Jim Preuninger, CEO of Management Dynamics Inc., an East Rutherford, N.J.-based software company that provides global trade management solutions.
"Based on this data," Preuninger explains, "they can model the business and run benchmarks against the information to identify and prioritize opportunities for improvement.
"One organization may look to improve customer service by providing better in-transit shipment visibility. Another may want to automate its purchasing department so it can identify the total landed cost for multiple global sourcing options," he says.
Designing and managing a global supply chain from a total-landed-cost perspective means factoring in the cost of carrying inventory over time.
"Companies are not only managing the costs of capital and carrying inventory, they are also managing obsolescence costs," notes Raj Pinkar, vice president, global solutions and implementation, UPS Supply Chain Solutions.
"A firm that manufactures high-end, high-value laptop computers with a six-month average life span, for example, shouldn't transport its cargo on a ship that adds 21 days to the supply chain."
Visibility is also critical to the success of a global supply chain. Companies that can effectively track shipments in transit have a better handle on freight status, and can make transportation decisions on the fly.
"When a shipment arrives at the destination port, a company could, for example, opt for a DC bypass model—immediately moving product to its destination instead of placing it in a warehouse—then releasing it," says Charles Covert, vice president, consulting service and solutions implementation, UPS Supply Chain Solutions.
"The availability of accurate supply chain information as needed is the real key to success," agrees C. John Langley, professor of supply chain management, Georgia Institute of Technology. "In the absence of valuable data, companies need to protect themselves. If they are uncertain about delivery reliability, they carry extra inventory.
"Instead, they should quantify delivery time variability, then scientifically determine how much inventory to carry."

Risky Business

Risk mitigation is another increasingly important consideration for companies designing a global supply chain.
As Western organizations continue to outsource manufacturing to low-cost countries in Asia, the Caribbean, Eastern Europe, and Latin America, the frequency and severity of supply chain disruptions increase significantly.
The repercussions of a supply chain failure can be extraordinarily severe. At stake are billions of dollars in stock market capitalization, market-share losses from failed product launches, or even the possibility of business failure.
"Most organizations are not adequately prepared to manage supply chain risks," says a recent research paper published by the Supply Chain Research Consortium at North Carolina State University.
"Recent studies suggest only 5 percent to 25 percent of Fortune 500 companies are prepared to handle crises or disruptions, and a $50-million to $100-million cost impact can be incurred for each day a company's supply chain network is disrupted," the paper reports.
"Stock market reaction to supply chain disruptions is also significant," the report says. "Firms that have announced major supply chain problems have seen shareholder values drop 10.28 percent on average, with an average recovery time of 50 trading days."
High-tech markets are particularly vulnerable. Sony, for instance, has pulled its digital camera manufacturing out of China and moved it into Japan.
"Sony executives recognized that the difficulty of coping with unpredictable market requirements for digital cameras was not aligned with the slow responsiveness, disruption potential, and inflexibility of long supply lines from China," the paper explains.
"Sony realized that manufacturing in China is not a cure-all for pricing pressure, especially in fast-changing, high-tech consumer markets."
Certain attributes of a company's global supply chain environment can amplify or mitigate the impact of disruptions, finds the research. These "disruption amplifiers" fall into one of two categories:
1. The extent to which a firm relies on global sources of supply.
2. The complexity of the product or process. (See sidebar, below, for a list of specific amplifiers in these two areas.)
"One technique companies use to protect against increased risk is creating a priority supply chain for products or materials that would have a greater negative economic impact if their supply were interrupted," notes Langley.
"Companies take a portion of the supply flow for these products and create a reliable alternative. "This strategy may be costly, but it can minimize the impact of supply chain failure," he says.

Spread it around

UPS' Pinkar agrees.
"When companies design a global supply chain, they should not keep all their eggs in one basket," he advises. "An effective global supply chain, for example, would include a few manufacturing or sourcing locations dispersed around the globe—in China and Eastern Europe, for instance.
"That way, if one plant has difficulty getting product into or out of a manufacturing facility, the company can shift production to another location.
"Companies need to identify failure risk points and design alternatives," he says.
Once they recover from a supply chain disruption, many companies take steps to redesign their networks in order to minimize or eliminate a recurrence.
Strategies include developing tools to allow dynamic management of supply chain systems, and redesigning/re-optimizing the supply chain, according to respondents to the Supply Chain Research Consortium study.
"In supply chain systems, optimization cannot be a single, static model," the study notes. "Rather, tools that adjust with the dynamic nature of supply chain events are needed.
These tools should have global scope for enterprise redesign considerations, and need to provide solutions in real time or near real time."
Designing a global supply chain has grown more complicated as companies source and sell far and wide—and collaboration is key. "Managing a successful global supply chain today is like coaching a football team," says Langley.
"If every player does what he does best individually, the team won't win many games because it is not operating as a team. The same applies to a supply chain. If a company tries to keep inventory levels, transportation costs, and stockout rates low, it won't develop a successful global supply chain.
"Instead, companies have to balance trade-offs to facilitate optimal functioning," he continues. "Leading companies are becoming skilled at determining the mix of activities that provides optimal service at an acceptable cost."

Rethinking Transportation on a Global Scale

In 2005, American Power Conversion Corp. (APC), West Kingston, R.I., a $2-billion provider of AC- and DC-based back-up power products and services, realized its supply chain needed help. Rapid growth was straining the staff and existing supply chain processes.
"Because the business was growing so quickly, everyone was absorbed in their narrow scope of responsibility," recalls Carl Rossi, APC's director of transportation.
"The company lost sight of transportation and distribution center operations as a whole. Employees spent their days putting out fires and no one paid attention to the big picture."
It was time for a change. The company added a vice president of supply chain in September 2005, and hired Rossi in November 2005. When he arrived, Rossi found a fractured organization.
"My team was scattered around the world," he says. "We manufacture 60 percent of our products in the Philippines, 35 percent in India, and the rest in China.
"We sell all over the world, and operate distribution centers in Europe, Africa, Asia, the Middle East, North America, and South America. The DCs are all managed by third parties, but manufacturing is company owned and operated.
"I quickly found out the company captured little data on transportation movement, pricing, and service, and put no central focus on these areas," he continues. "That lack of focus meant each of our entities maintained its own processes and procedures."
In addition, Rossi realized that APC paid excessive transportation costs. In 2005, for instance, the company spent $39 million on air freight, in large part as a reactionary fix for problems that cropped up in its global supply chain.
The first action Rossi took was to meet with his direct reports around the world and craft a strategy to rein in those excessive transport costs, starting with air freight.
"Collectively, our manufacturing, sales, and logistics team members designed and implemented an approval process to shut off all but critical use of air freight while we looked at the root causes driving that use," he explains.

Air and Ocean RFQ

APC utilized too many air carriers—14—so Rossi cut that number to three, then relayed this information to the carriers. "I showed them our current volume, shared our goal, and launched an RFQ for our global airfreight business," he explains.
At the same time, the company developed a new RFQ for ocean freight, where it also used too many providers.
"We move 28,000 TEUs a year, but we weren't receiving volume pricing because we did not have one focal point for managing ocean freight," Rossi explains.
Rossi's next step was to gather APC employees from every plant around the world at the Rhode Island headquarters for the company's first global transportation meeting.
"Our field staff knows more about the daily activities of our global supply chain than the corporate executives," says Rossi. "They all felt that we could do better.
"I asked everyone attending the meeting to explain their role, and list their transportation requirements," he continues. "We quickly identified that the requirements of a factory in the Philippines are different from those of a plant in China."

A Global Transportation Council

At the meeting, the group decided to develop an actively managed supply chain that would identify and meet participants' needs, and at the same time, reconcile those needs with overall corporate demands. The group established a global transportation council to collectively oversee APC's transportation activities.
"Before this initiative, we didn't have a clear picture of our weekly transportation spend," says Rossi. "Now, one key employee—Louis Galvin in Galway, Ireland—is responsible for collecting weekly freight expenses worldwide.
"We also capture distribution costs. As a result, we can actively manage using facts rather than gut feelings."
After the meeting adjourned, the U.S. team got down to business, concentrating on reining in APC's maverick spending. A core team of APC transportation specialists conducted face-to-face meetings with the ocean carriers that responded to the company's RFQ.
After the second round of negotiations, Rossi and the specialists presented their findings to the global transportation council, and received its buy-in.
"The end result is a smaller base of ocean carriers, which allows us to conduct quarterly business reviews with each one. When we experience problems, we have a forum for resolving issues," Rossi says.
The transportation council next looked into the issue of excessive airfreight spend. What business issues led to the company's heavy reliance on air cargo?
"By 2005, production levels at our plants in India and the Philippines had grown so much they ran out of places to store packaging material," explains Rossi. "The plant began storing corrugated cartons and wooden pallets outside.
"During the monsoon season, we received wet pallets, cartons, and product coming into the United States via ocean container."
The wet pallets also provided a fertile breeding ground for bugs.
"We couldn't use the products in these containers, so we had to contract airfreight replacements to fill our orders. Our hardware products include a transformer, a battery, and circuitry—they are heavy, which means they are expensive to ship by air," Rossi notes.

Meaningful Results

In 2005, 36 percent of APC's shipments from manufacturing plants to its distribution center were transported by air. In 2006, the company cut that number to 18 percent.
"But that doesn't tell the whole story," notes Rossi. "Because of our inadequate method for tracking freight expenses, we knew we also spent $15 million on air freight for other product categories. We brought that under control, too. So in total, we reduced airfreight expenditure from $39 million to $12.5 million."
APC remedied the problems that were forcing it to use air freight by eliminating their root causes. Today, APC plants store all corrugated material and pallets inside, and the company changed its pallet composition to a type of wood that insects can't infest and that doesn't absorb moisture.
At its Indian facilities, the company instituted a container liner program—which Rossi and his team call the "baked potato"—for certain products. "We line the container with a big foil bag, load the goods, and seal it up," he says. "No moisture can get in."
Since redesigning its supply chain network to include visibility into global transportation expenditures, APC can leverage its total transportation spend with carriers.
"We have sent a clear message to the carrier base that they can't cut their own deal with our facilities in other countries," says Rossi.
The benefits of more effectively managing global transportation are impressive. Using a consensus-driven global approach, APC significantly reduced transportation costs and removed waste during the past year.

Happy Campers

"Transportation accounted for 11.3 percent of revenue in the fourth quarter of 2005; in Q4 2006, it was down to 8.2 percent of revenue. As result of this collaborative effort, we reduced year-over-year ocean container costs by about 11 percent," Rossi says.
Needless to say, APC senior management is delighted. "My boss is quite happy," affirms Rossi. "We achieved positive results because we boosted our staff's enthusiasm about their roles.
"It's rare to achieve a direct correlation between action and clear financial results," he says, "but that is exactly what we accomplished."

10-Managing risk in global supply chain:

11-Inventory Management in Supply Chain:

12-Role of inventory in supply chain management,

Inventory refers to the raw materials, completely finished and unfinished products which are ready or will be ready for sale. Inventory is the main part of any supply chain and it plays vital role in the supply chain decisions. Efficient management of an inventory is a big challenge for a manager. For example high amount of inventory has high cost of storage, obsolescence and spoilage whereas; low inventory is risky due to loss of potential sales to the customers. Role of the inventory in the supply chain is described below:

To match the supply and demand situation some inventory always exists in the supply chain process. For example, a steel manufacturer intentionally keeps mismatch, because it is economical to produce in greater amount and can be stored for future sales. In a retail store, inventory is intentionally kept for meeting the future demand. Role of inventory in supply chain is to maximize the product demand; it is possible to make product ready and available when it demanded. Other important role of inventory is to minimize the cost by possible ways and also by achieving the economies of scale during the process of production and distribution.

Inventory is a main ingredient of cost in the supply chain process and has enormous impact on responsiveness. Quantity and location of inventory can move from one end of the spectrum to the other in a supply chain process. For example: in the apparel industry, greater inventory exists at the retail level and has a greater responsiveness level because customer may walk into shop and buy anything they like. On the other hand, little inventory may be efficient but it would result in poor customer service. In such case consumers have to wait for few days due to which the possibilities of customers’ switching increases.

In the supply chain process inventory has significant relationship with material flow time. Material time is generally known as a time which starts when raw material enters in supply chain process and ends when the final product is produced. In supply chain process, throughput is the rate where sales are generated. Thus inventory, flow time and throughput can be related by using a law as given below:

I= Inventory
T= Flow time
D= Throughput
I=   DT

For example, if the output is 700 units per hour and flow time is 20 hours, then according to the law, inventory is 700 x 20 = 14,000 units. If inventory is reduced to 7,000 units while holding output constant, then flow time will decrease to 10 hours (7,000/700=10). It must be noted that association between throughput and inventory must have consistent units.

In the supply chain process conceptual conclusion is that flow time and inventory are synonymous and output is often determined by demand. Managers must be able to reduce the levels of inventory needed without reducing responsiveness or increasing cost, because lower flow time could be advantageous in a supply chain process.

13-inventory costs:

Inventory costs are the costs related to storing and maintaining its inventory over a certain period of time. Typically, inventory costs are described as a percentage of the inventory value (annual average inventory, i.e. for a retailer the average of the goods bought to its suppliers during a year) on an annualized basis. They vary strongly depending on the business field, but they are always quite high. It is commonly accepted that the carrying costs alone represent generally 25% of inventory value on hand.

That being said, it is not easy to establish a clean definition. Inventory cost, total inventory cost (TIC), total cost of inventory ownership, the nomenclature surrounding the terms of “inventory costs” can be in itself somewhat tricky, and what it covers tends to vary slightly depending on the sources and the business fields concerned.

For retailers or wholesalers, as well as for most ecommerce, inventory is usually the largest asset, as well as the largest expense item. Assessing inventory costs is therefore essential and has repercussions on the finances of the company as well as on its management. It helps companies determine how much profit can be made on the inventory, how costs can be reduced, where changes can be made, which suppliers or items must be chosen, how capital must be allocated, etc.

Difficulties of properly assessing inventory costs:

We routinely observe that a lot of companies don’t know exactly the full costs tied to their inventory. Worse, many companies rely on the false premise that regular accounting gives a reasonable estimate of the costs of their inventory.

First, inventory cost measurement, in itself, is a tough problem. There are a number of alternative cost accounting systems that can be relevant for some purposes while being inadequate or dangerous for others (cf. Edward A. Silver, David F. Pyke and Rein Peterson, see below References n°4). Then, it is neither always possible nor economical to keep track of all costs, or to split them and allocate them properly. To start assessing inventory costs, one has to understand that the relevant numbers won’t always appear in conventional accounting records, and when it seems that they do, one still has to be careful about the set of rules and assumptions used to produce those numbers. For instance, at the time of combining the different costs, one needs to make sure that the elements are consistently expressed either as before-tax figures or after-tax and not a mix of the two.

Second, the true cost of inventory simply entails many elements and goes far beyond the cost of goods sold or raw materials. Managing and maintenance expenses immediately come to mind, but it doesn't stop here. Add to this insurances, interests, shrinkage, etc. The list is actually long. In this article we endeavor to produce a clear typology of these costs to help managers get a better understanding of where they should start looking for when determining their inventory costs.

While we might try to give rule of thumb estimates for some of these, the reader has to keep in mind that each of these costs is extremely business specific and depends on policies and management decisions (ex: the decision to use third party services providers, or to apply a just-in-time inventory policy, etc.).

Categorizing inventory costs:

Again, while there are a lot of common grounds in the literature, the categories and subcategories of inventory costs fluctuate and overlap, or are designated under different names. We don’t pretend to expose below the “right” typology, but simply one that hopefully can make sense (again focusing on commerce) and be useful for manager to get a full picture on inventory costs.

Inventory costs fall into 3 main categories:

• Ordering costs (also called Setup costs)
• Carrying costs (also called Holding costs)
• Stock-out costs (also called Shortage costs).

We briefly define these notions, but among those three categories, the carrying costs retain the bulk of our attention.

Ordering costs:

The ordering cost (also called setup costs, especially when producers are concerned), or cost of replenishing inventory, covers the friction created by orders themselves, that is, the costs incurred every time you place an order. These costs can be split in two parts:

• The cost of the ordering process itself: it can be considered as a fixed cost, independent of the number of units ordered. It typically includes fees for placing the order, and all kinds of clerical costs related to invoice processing, accounting, or communication. For large businesses, particularly for retailers, this might mainly boil down to the amortized cost of the EDI (electronic data interchange) system which allows the ordering process costs to be significantly reduced (sometimes by several orders of magnitude).
• The inbound logistics costs, related to transportation and reception (unloading and inspecting). Those costs are variable. Then, the supplier’s shipping cost is dependent on the total volume ordered, thus producing sometimes strong variations on the cost per unit of order.

It is not easy to produce even a rough estimate of the ordering cost, since it includes elements that are very business specific and even item specific: suppliers can be local or overseas, they can adopt rules to deliver only per palette instead of per unit, or only when a certain number of items is ordered; then of course, suppliers can provide volume discounts, etc.

There are ways to try to minimize those costs, more precisely to determine the right trade-off of carrying costs vs. volume discounts, thus essentially balancing the cost of ordering too much and the cost of ordering too less (basically, a smaller inventory typically leads to more orders, which means higher ordering costs, but is also implies lower carrying costs). This is usually achieved through the calculation of the Economic Order Quantity (EOQ). Without going into details here, let’s just add the following reminder: though a classical way often appears in the literature to compute the EOQ with the Wilson formula, this particular formula - going back to 1913 - is a poor fit for retailers, mainly because it assumes that the ordering cost is a flat. Nevertheless, it is possible to determine optimal order quantities by devising a cost function taking into account volume discounts, as detailed in our article.

Carrying costs:

Carrying costs are central for a “static” viewpoint on inventory, that is, when focusing on the impact of having more or less inventory, independently of the inventory flow.

Again the typology varies in the literature; the categorization we propose is the following:

• Capital costs (or financing charges)
• Storage space costs
• Inventory services costs
• Inventory risk costs

Capital costs:

It is the largest component among the carrying inventory costs. It includes everything related to the investment, the interests on working capital and the opportunity cost of the money invested in the inventory (instead of in treasuries, mutual funds …). Determining capital costs can be more or less complicated depending on the businesses. Some basic rules can be given: it is important to understand is the part financed externally versus the part financed through internal cash flow, and it is likewise important to assess the risk of inventory in one’s business.

A classical way to determine the capital costs is to use a WACC (weighted average cost of capital), that is, the rate a company is expected to pay on average to all its security holders to finance its asset. See the Wikipedia article for the formula. Stephen G. Timme and Christine Williams-Timme (see below References n°5) also propose to express the WACC as the cost of equity and the after-tax cost of debt.

Typically, capital costs tend to be vastly underestimated. The common mistake is to reduce them to short-term borrowing rates. According again to S. G.Timme and C. Williams-Timme, among others, for the great majority of companies, the capital costs reach 15%, while many companies tend to simply apply a rate of 5%.

What companies also forget to measure and take into account is the risk attached to their inventory, which sometimes can be quite high (fresh products can lose their entire value in a matter of days if not sold, consumer electronics have a high risk of obsolescence, …). If the company had decided to put its money in a similarly risky investment rather than on the inventory, what would have been the return on investment?

Storage space costs

They include the cost of building and facility maintenance (lighting, air conditioning, heating, etc.), the cost of purchase, depreciation, or the lease, and the property taxes.

These costs are obviously vastly dependent on the kind of storage chosen, whether the warehouses are company owned or rented, for instance. For smaller businesses, when the same building is used for different purposes, the portion of the building associated with receiving and storing inventory must be determined.

In this category, we should also make note of a problematic phenomenon: the saturation of the storage space. It can cause the costs to increase in an absolutely non-linear way by creating all kind of extra costs. For instance, when a warehouse reaches the point of saturation, it becomes hardly possible to move within the warehouse; the flows stop, sometimes entirely, and it is very difficult to remedy quickly to this situation by finding in an emergency extra storage capacity. For companies subject to this kind of problems, the time and money necessary to clean the mess and restart the flows are considerable. We observed that in some instances, 3 or 4 occurrences of such events per year were enough to keep the supply chain teams busy for more than half of their time during the year.

Inventory services costs

They include insurance, IT hardware and applications (for some businesses, RFID equipment and such), but also physical handling with the corresponding human resources, management, etc. We can also put in this category the expenses related to inventory control and cycle counting. Finally, although they are kind of a category on their own, taxes can also be added here.

When using Third Party Logistics (3PL) Providers, those costs might come as a package with the storage space costs and can be quite straightforward to determine.

Inventory risk costs

They cover essentially the risk that the items might fall in value over the period they are stored. This is especially relevant in the retail industry and with perishable goods.

Risks first include shrinkage, which is basically the loss of products between the purchase from the suppliers (i.e. recorded inventory) and the point of sale (i.e. actual inventory), caused by administrative errors (shipping errors, misplaced goods, …), vendor fraud, pilferage and theft (including employee theft), damage in transit or during the period of storage (because of incorrect storage, water or heat damage, …).

In retail, shrinkage is mainly caused at the point of sale level. The following estimates can be found:

• In the United States, a National Retail Security Survey is conducted annually by the University of Florida on 100 retailers. According to this study, in the United States in 2009 shrinkage represented 1.44% of retail sales - 43% of it due to employee theft.
• According to the same survey, in 2011 (survey published in 2012), shrinkage represented 1.41%.
• Another study from the Centre for Retail Research, which publishes the Global Retail Theft Barometer (a study on 43 countries), places it at 1.45% of retail sales for 2011.

The highest rates are found for grocery on fresh meat and cheese, for health and beauty on shaving products and perfumes and for apparel product lines on accessories and outerwear.

Inventory risk costs also take into account the obsolescence, that is, the costs lead by items going past their use-by dates, or by items becoming obsolete (especially true for consumer electronics, but also sometimes for items benefiting from a new package, …).

Determining the value of the inventory risk costs is not always as straightforward as it can appear. For instance, we need to consider the value of the write-offs over a given period of time (divided by the average inventory during the same period). However, write-offs are not always taken into account correctly, cycle counts are not always regular, and so on. In some companies, items that should be write-offs are still kept for years.

Finally, it should be noted that what we have chosen to put here under the two labels of storage space costs and inventory risk costs are sometimes put together and simply labeled as noncapital carrying costs, which emphasizes the fact that the capital costs form indeed the largest bulk of the inventory costs. While the capital costs alone can be evaluated at approximately 15%, all the other costs put together reach more or less this same percentage (10% according to S.G. Timme and C.Williams-Timme, 19% according to the Annual State of Logistics Report by Robert V. Delaney of Cass Information Systems). The key factor of the fluctuation of this value is the risk of obsolescence.

A first approach to the carrying costs: quick estimates and formula

While we have emphasized the difficulty of precisely assessing the carrying costs with all of their multiple components and the fact that these costs are always very business specific, some rough estimates can nevertheless be given.

Most companies tend to underestimate the total carrying costs (or total cost of holding inventory). For most retail and manufacturing businesses, experts’ evaluations of the cost of carrying inventory range from 18% per year to 75% (or, according to Helen Richardson, see below References n°3, between 25-55%). As previously mentioned, the leading factor to determine this percentage are the capital costs (including the investment in inventory) and the type of products (intuitively, the more perishable the products, the higher the costs).

The standard rule of thumb puts the carrying costs at 25% of inventory value on hand (cf. James R. Stock and Douglas M. Lambert, Strategic Logistics Management, 2nd Edition, Irwin Professional Publishing, 1987).

Another quick method of calculating the cost of carrying inventory consists in adding 20% to the current prime rate for borrowing money. For instance, if the prime rate is 10%, the carrying costs would be 10+20=30%.

For the reasons mentioned previously, it is hard to give more precise estimates. Let’s simply say that for the categories mentioned above, the following estimates can be found in the literature:

• Capital costs : 15%
• Storage space costs : 2%
• Inventory service costs : 2%
• Inventory risks costs : 6%

One notable reference is the study of Helen Richardson (References n°3) from 1995. According to H. Richardson, total inventory costs could be placed between 25-55% with the following distribution:

• Cost of Money 6% - 12%
• Taxes 2% - 6%
• Insurance 1% - 3%
• Warehouse Expenses 2% - 5%
• Physical Handling 2% - 5%
• Clerical & Inventory Control 3% - 6%
• Obsolescence 6% - 12%
• Deterioration & Pilferage 3% - 6%

It means that, on average, over a year, in the most favorable case (25%), a distributor spends $250 for every $1000 carried in inventory.

Practical example:

Let’s consider a company with an average inventory value of $10M. In order to compute the carrying costs, we first need to add all the noncapital costs. Let’s assume they go as follows:

• Storage space costs: 200k
• Inventory service costs: 800k
  - Physical handling: 200k
  - Insurance: 100k
  - Clerical charges, equipment and control expenses: 300k
  - Taxes: 200k
• Inventory risk costs: 900k
  - Shrinkage (incl. theft, …): 300k
  - Obsolescence: 600k

This represents a total of 1.9M USD.

To obtain a percentage, we divide this total by the average inventory value: 1.9M USD / 10M USD = 19%.

We finally add the capital costs. Let’s assume they are at 10% in this case, that is to say 1M USD.

In our example, the total inventory carrying costs reaches 2.9M USD for an average inventory value of 10M USD. The inventory carrying rate equals 19%+10%= 29%.

Stock out costs

Finally, to get a complete vision of the inventory costs, we should also add the stock out costs (or shortage costs), that is, the costs incurred when stock outs take place. For retailers, it can include the costs of emergency shipments, change of suppliers with faster deliveries, substitution to less profitable items, etc. While this kind of costs can be determined quite precisely, others are not so easy to pinpoint, such as the cost in terms of customer loss of loyalty or the general reputation of the company.

Modeling the cost of stock outs is in itself a vast topic that goes beyond the scope of this article. Let’s simply mention that basically the cost of inventory is counter-balanced by the opportunity cost of stock-outs. Balancing the cost of inventory with cost of stock-outs is typically achieved through the tuning of service levels.

Direct benefits of reducing inventory

As evidenced above, the costs surrounding inventory are significant. Therefore, initiatives meant to reduce the inventory are very valuable – not only do they have an impact immediately measurable on the inventory itself; they also reduce the capital costs, carrying costs, risks and so on.

One common mistake companies make, according to S. G. Timme and C. Williams-Timme (see References n°5) when assessing the benefits of supply chain initiatives is precisely underestimating their impact on the inventory costs:

“When evaluating supply chain initiatives, companies often discount or even omit the benefits of reducing inventory noncapital carrying costs because they do not possess credible estimates of these costs. Most agree that the benefits exist. But without credible estimates, the benefits typically are excluded from the analysis. This practice is understandable. Nevertheless, if the impact on these costs cannot be reasonably measured, the true value of many supply chain initiatives will be understated”.

That being said, it can be argued that not all expenses are so easily reduced. But while it is true that some expenses (concerning warehousing or equipment for instance) can’t easily be reduced without significant changes in the organization, most of them are directly related to the inventory value, and can be easily quantified as a percentage of average inventory value (taxes or insurance, or obsolescence). Therefore, any reduction of the inventory value carries indeed great benefits.

The benefits carried by any improvement surrounding inventory management are the reason why Lokad specializes in inventory optimization. Lokad offers several webapps to serve that purpose, chief among them, our inventory forecasting web app dedicated to demand forecasting, that aims to deliver optimized sales forecasts and reorder points to keep just the right amount of inventory.

14-Approaches to inventory management,

15-Just-in-time (JIT) procurement,

16-Materials requirement planning,

17-The order quantity,

18-A re-order level system,

19-Bulk purchase discounts,

20-cycle inventory,

21-safety inventory

Module 02 is assessed through a single exam of 100 marks comprising MCQ, True/False and Filling the gap questions

| SEMESTER 02 (3 Months) |

Module 03 Planning for Demand and Supply in Supply Chain

·         Managing Demand in Supply Chain:

Demand Management: The function of recognizing all demands for goods and services to support the market place. It involves prioritizing demand when supply is lacking. Proper demand management facilitates the planning and use of resources for profitable business results.
The last few decades have seen an increasing demand for enterprise software applications that can streamline supply chain processes and provide lean manufacturing capabilities. At the other end of the supply chain, companies have been moving towards outsourcing their product distribution in order to keep sales overhead in check without sacrificing revenue.

These recent trends have resulted in a unique dilemma. While companies can produce products more efficiently, they have little knowledge regarding what to produce, for whom and when. They now have better visibility into their supply chains but they lack the same kind of visibility into their often-fragmented demand chain.

The current economic slowdown and huge inventory write-offs resulting from this lack of visibility have highlighted the need for a systematic way to predict and manage demand. New technologies provide the capability to extend supply chain visibility that can support a truly dynamic collaborative internal environment; but companies are looking beyond sources within the enterprise, such as sales and promotions groups, to include customers in the demand management cycle.

Accurate forecasting remains central to the success of a demand management initiative, but demand management is much more than just forecasting. Traditionally, forecasting involves looking at past demand data to predict future demand. Demand management goes beyond the static forecasting of yesterday, replacing it with a more fluid, ongoing view of determining demand that involves all demand-chain constituents. Currently there is a thrust towards real-time synchronization of the supply chain to the demand signals. This collaborative method enhances the accuracy of forecasting since all factors affecting that forecast can be viewed by all stakeholders, including customers. Companies can begin to bridge the gap between their supply and demand chains by doing the following:

1. Reshaping relationships with channel partners to ensure accurate demand forecasts. Manufacturers should implement a closed-loop process for gathering, analyzing and filtering demand forecasts from channel partners. The demand management system should be tightly integrated with management systems for entitlement and other benefit programs for channel partners. This would help to ensure that just-in-time manufacturing is performed for the right products, in the right quantity, at the right time.

2. Basing inventory allocations on real-time demand forecasts that incorporate information from all channels—both direct and indirect.
This increases revenues by targeting allocations to those channels and locations that are the most effective sellers.

3. Ensuring that your own house is in order.
According to Andy De, director of solutions marketing for i2, demand management solutions are most effective when paired with other supply chain applications. Says De, “Having an accurate picture of demand is irrelevant if you don’t have a supply chain that can meet it.” In addition to cooperation from other supply chain partners, in order to achieve the benefits of a truly dynamic collaborative environment, companies need to get their internal demand management processes in order (3). For example, the promotions group in a company responsible for creating and driving demand is often disconnected from the operational group that produces the product and as a result ends up spending money promoting a product that operations cannot deliver. Ensuring that the different groups that have a stake in the demand process are connected is important.

4. Ensuring the presence of accurate intelligence along with collaboration and automation.
New technological developments have enabled real time flow of information within and across enterprises leading to better forecasts and an enhanced ability to respond rapidly to customer requirements. The downside to these automated processes is that they could be transferring bad information. Despite sophisticated statistical methods, it is impossible to eliminate market uncertainty from the forecasting process. Customers’ purchasing departments have every incentive to inflate estimates. It is important to have people in place who can analyze the forecast to see how it fits in the total market so that the company builds to actual end-unit demand rather than estimates that have been distorted as they travel through intervening layers (4). Providing greater supply chain visibility to downstream supply chain partners will eliminate their need to overstate forecasts.

5. Choosing demand management applications that address the unique challenges faced by the specific business. Many existing applications fail to fulfill the specific demand management needs of companies. Some enterprise applications support fixed pricing strategies but their solutions cannot easily maintain dynamic forms or manage prices across channels. Other applications are limited in terms of other demand management challenges. Certain customer relationship management systems, such as those from Siebel Systems or KANA, assist sales personnel but lack insight into price sensitivity and supply chain capacity and are therefore of little value in terms of deciding which orders to take and which offers to recommend.

In the near future, companies are likely to embrace three continuous demand management strategies that incorporate feedback loops from downstream processes and market conditions: I) linking forecasts based on causal variables, like economic indicators, to current sales activity and field-level orders to create market sensitive demand forecasts that set corresponding capacity and inventory recommendations; II) linking capacity to changes in demand so that companies can optimize service levels, safety stocks, and inventory levels, even in conditions of sudden demand variability; III) adjusting price and contract terms to changing market conditions (5).

·         The Role of Forecasting in a Supply Chain:

Forecasting is an imperfect science, but it is also a necessity for most businesses. That's particularly true when it comes to supply chain management. Proper forecasting helps ensure you have enough supply on hand to satisfy demand. Business analysts use supply chain management systems and other tools to forecast demand weeks and months in advance.

Supply Chain Management

Many businesses have to be on point when it comes to ordering supplies to meet the demand of its customers. An overestimation of demand leads to bloated inventory and high costs. Underestimating demand means many valued customers won't get the products they want. Supply chain management is the process by which a company ensures it has just enough supply to meet demand. According to the Association for Operations Management (APICS), supply chain management involves the "design, planning, execution, control and monitoring of supply chain activities." A few of the objectives are to build a competitive infrastructure, synchronize supply with demand and measure a company's performance.

Forecasting

Forecasting demand, and coordinating activities to meet demand, are full-time jobs. Companies with global operations use sophisticated software and systems to forecast demand, but small businesses can forecast supply chain needs using simple techniques. The methods of moving averages and exponential smoothing seek to smooth out demand to allow for seasonality in the results. With moving averages, you drop the oldest sales numbers and add newer numbers, making the average move over time. For example, to calculate sales over a four-week moving average, add weeks two through five, drop the sales from week one and divide by four. Exponential smoothing is similar to moving averages except that older data receives progressively less weight and new data receives greater weight. When there is definitive trend, however, the moving averages and exponential smoothing forecasts might lag behind the trend.

High Inventory

If your business overestimates demand, it ends up with more inventory than is necessary. This can increase your labor and storage costs if workers have to move this inventory to another storage facility to make way for new inventory. If your business supplies perishable goods, you might incur a further loss due to deterioration of unsold inventory. In such a case, you might need to sell inventory at a discount, which reduces your company's profit margins and income.

Shortage of Inventory

Suppose you suddenly find yourself inundated with large orders. This is a nice problem to have -- if you have enough inventory to meet demand. It's not so nice if you failed to forecast how much supply you would need and wind up with a shortage of inventory. In such a case, some disgruntled customers might take their business elsewhere. One option is to make a large, last-minute rush order, but this usually leads to much higher supplier prices, which reduces your profit margins and net income.

Insight

Supply chain management (SCM) software can help facilitate the process of forecasting and measuring the supply chain synchronizes the supply and demand cycle through the use of real-time information. As a result, inventory is less likely to sit unused. For example, a baked goods manufacturer using SCM software can monitor its inventories and place an electronic order to its suppliers in anticipation of a spike in demand. Experience is also an asset when it comes to managing your supply chain. Having years of demand data helps you better predict future demand.

·         Characteristics of Forecasts:

Forecasting:

For an organization to provide customer delight it is important that organization can understand what customer wants and how much does they want. If an organization can gauge future demand that manufacturing plan becomes simpler and cost effective.
The process of analyzing and understanding current and past information to understand the future patterns through a scientific and systemic approach is called forecasting. And the process of estimating the future demand of product in terms of a unit or monetary value is referred to as demand forecasting.
The purpose of forecasting is to help the organization manage the present as to prepare for the future by examining the most probable future demand pattern. However, forecasting has its constraint for example we cannot estimate a pattern for technologies and product where there are no existing pattern or data.

Business Forecasting Objective:

The very objective of business forecasting is to be accurate as possible, so that planning of resources can be done in a very economical manner and therefore, propagate optimum utilization of resources. Business forecasting helps in establishing relationship among many variables, which go into manufacturing of the product. Each forecast situation must be analyzed independently along with forecasting method.

Classification of Business Forecasting:

Business forecasting has many dimensions and varieties depending upon the utility and application. The three basic forms are as follows:
Economic Forecasting: these forecasting are related to the broader macro-economic and micro-economic factors prevailing in the current business environment. It includes forecasting of inflation rate, interest rate, GDP, etc. at the macro level and working of particular industry at the micro level.
Demand Forecast: organization conduct analysis on its pre-existing database or conduct market survey as to understand and predict future demands. Operational planning is done based on demand forecasting.
Technology Forecast: this type of forecast is used to forecast future technology upgradation.

Timeline of Business Forecasting:

A forecast and its conclusion are valid within specific time frame or horizon. These time horizons are categorized as follows:
Long Term Forecast: This type of forecast is made for a time frame of more than three years. These types of forecast are utilized for long-term strategic planning in terms of capacity planning, expansion planning, etc.
Mid-Term Forecast: This type of forecast is made for a time frame from three months to three years. These types of forecasts are utilized production and layout planning, sales and marketing planning, cash budget planning and capital budget planning.
Short Term Forecast: This type of forecast is made of a time frame from one day to three months. These types of forecasts are utilized for day to day production planning, inventory planning, workforce application planning, etc.

Characteristics of Good Forecast:

A good forecast is should provide sufficient time with a fair degree of accuracy and reliability to prepare for future demand. A good forecast should be simple to understand and provide information relevant to production (e.g. units, etc.)

Forecasting Methods:

Forecasting is divided into two broad categories, techniques and routes. Techniques are further classified into quantitative techniques and qualitative techniques. Quantitative techniques comprise of time series method, regression analysis, etc., whereas qualitative methods comprise of Delphi method, expert judgment.
Routes forecasting consist of top-down route and bottom-up route.

·         Components of a Forecast and Forecasting Methods:

 Strategic Forecasts:

Medium & Long term forecasts that are used to make decisions related to design and plans for meeting demand. How demand will be met strategically.

Tactical Forecasts:

Short-term (few weeks or month) forecasts used as input for making day-to-day decisions related to meeting demand.

About Forecasting:

1. Perfect forecast is virtually impossible!
2. Rather than searching for the perfect forecast, it is far more important to establish the practice of continual review of forecast and to learn to live with inaccurate forecast
3. When forecasting, a good strategy is to use 2 or 3 methods and look at them for the commonsense view.

Forecasting techniques:

1. Qualitative - use managerial judgment, used when situation is vague and little data exists (new products, new technologies)
2. Quantitative - rely on mathematical methods, used when situation is "stable" and historical data exists (existing products, current technology)

Demand Management:

The purposes are to coordinate and control all sources of demand so the supply chain can be run efficiently and the product delivered on time.

Basic sources of demand:

1. Dependent demand - demand for products or services caused by the demand for other products or services. Not much the firm can do, it must be met.

2. Independent demand - demand that cannot be directly derived from the demand for other products. Firm can:
a) Take an active role to influence demand - apply pressure on your sales force
b) Take a passive role to influence demand - if a firm is running on a full capacity, it may not want to do anything about demand. Other reasons are competitive, legal, environmental, ethical, and moral.

Basic types of forecasting:

1. Qualitative - subjective or judgmental and are based on estimates and opinions

2. Time series analysis (focus of this chapter) - based on the idea that data relating to past demand can be used to predict future demand

3. Casual relationships - linear regression techniques, assumes that demand is related to some underlying factor or factors in the environment.

4. Simulations - allows the forecaster to run through a range of assumptions about the condition of the forecast.

Components of demand:

1. Average demand for a period of time

2. Trend lines - usually the starting point in developing a forecast. Adjusted for seasonal effects, cyclical elements and any other expected events that may influence the final forecast. A linear trend is a straight continuous relationship.

3. Seasonal elements

4. Cyclical elements - more difficult to determine, cyclical influence comes from political elections, war, economic conditions, or sociological pressures.

5. Random variation - caused by chance events. If we can't identify the cause of the reminder portion of demand, it is assumed to be purely random chance.

6. Auto-correlation - the value expected at any point is highly correlated with its own past values. When demand is random, it may vary widely from one week to another. Where high auto-correlation exists, demand is not expected to change very much from one week to the next.

Common types of trends:

1. Linear - is a straight continuous relationship.
2. S-Curve - typical of product growth and maturity cycle
3. Asymptotic - starts with the highest demand growth at the beginning then tappers off.
4. Exponential - explosive growth. Sales will continue to increase - assumption that may not be safe to make.

Time series analysis:

Try to predict the future based on a past data.

1. Short term - under 3 months - tactical decisions such as replenishing inventory or scheduling EEs in the near term

2. Medium term - 3 M-2Y - capturing seasonal effects such as customer's respond to a new product

3. Long term - more than 2 years. To identify major turning points and detect general trends.

Which forecasting model the firm should choose depends on:

1. Time horizon to forecast
2. Data availability
3. Accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel.

Regression: is a functional relationship between 2 or more correlated variables. It is used to predict one variable given the other.

Linear Regression

Linear regression is a special type of regression where the relations between variable forms a straight line Y = a+bX.
Y - dependent variable
a - Y intercept
b - slope
X - independent variable

It is used for long-term forecasting of major occurrences and aggregate planning. It is used for both, time series forecasting and casual relationship forecasting.

Time series:

Chronologically ordered data that may contain one or more components of demand.
Decomposition of time series - identifying and separating the time series data into these components.

Trend - easy to identify
Cycle, Autocorrelation & Random Composition - hard to identify.

Seasonal Factor:

Is the amount of correction needed in ta time series to adjust for the season of the year.

2 types of Seasonal Variations

1. Additive Seasonal variations (the seasonal amount is constant) - Forecast = Trend + Seasonal variations

2. Multiplicative Seasonal variations (seasonal variations is a % of demand) - Forecast = Trend X Seasonal factor

Decomposing Using Least Square Regression

1. Determine the seasonal factors
2. Depersonalize the original data
3. Develop a least sq. regression line for the depersonalized data
4. Project the regression time through the period of the forecast
5. Create the final forecast by adjusting the regression line by the seasonal factors.

Error Range

Errors come from 2 sources:
1. usual errors similar to the standard deviation of any set of data
2. Errors because the line is wrong

Simple Moving Average

Frequently centered, it is more convenient to use past data to predict the following period directly.
if you want to forecast June with a 5-month moving average, we can take the average of Jan, Feb, March, Apr, and May.
The longer the moving average period, the more the random elements are smoothed, but lag the trend. Main disadvantage is that all individual elements must be carried as data because a new forecast period involves adding new and dropping the earliest data. In a forecasting model using simple moving average the shorter the time span used for calculating the moving average, the closer the average follows volatile trends

Weighted moving average

Allows any weights to be placed on each element, providing, of course, that the sum of all weights equals 1.
A company wants to forecast demand using the weighted moving average.

If the company uses two prior yearly sales values (i.e., year 2009 = 110 and year 2010 = 130), and we want to weight year 2009 at 10% and year 2010 at 90%, which of the following is the weighted moving average forecast for year 2011?

128

Exponential Smoothing

Is the most used forecasting technique. The most recent occurrences are more indicative of the future (highest predictable value) than those in the more distant past. We should give more weight to the ore recent time periods when forecasting. Each increment in the past is decreased by (1- alpha). The higher the alpha, the more closely the forecast follows the actual.

Most recent weighting = alpha(1-alpha) na 0
Data one time period older = alpha(1-alpha) na 1
Data two time period older = alpha(1-alpha) na 2

Which of the following forecasting methods is very dependent on selection of the right individuals who will judgmentally be used to actually generate the forecast?

Delphi Method

Random errors can be defined as those that cannot be explained by the forecast model being used. T/F?

True

6 major reason for Exponential Smoothing being well accepted

1. Exp. models are surprising accurate
2. Formulating an exp. model is relatively easy
3. The user can understand how the model works.
4. Little computation is required to use the model
5. Computer storage requirements are small because of the limited use of historical data.
6. Tests for accuracy as to how well the model is performing are easy to compute.

Adaptive forecasting

Adjusting the value of alpha.

Smoothing constant Delta

To correct the trend, we need two smoothing constants
- Smoothing constant alpha ()
- Trend smoothing constant delta (δ)

Delta reduces the impact of the error that occurs between the actual and forecast. If both alpha and delta are not included, the trend overreacts to errors.

Choosing the appropriate value for Alpha

Value must be between 0 and 1

1. 2 or more predetermined values of Alpha - depending on the degree of error, different values of Alpha are used. If the error is large, Alpha is 0.8, if error is small, Alpha is 0.2

2. Computed values of Alpha - exponentially smoothed actual error divided by the exponentially smothered absolute error.

Sources of errors

1. Bias Errors - occur when a consistent mistake is made

2. Random Errors - those that cannot be explained by the forecast model being used.

Measurement of Errors

1. Standard Error - linear regression

2. Mean Square Error (or variance) - standard error is a square root of a function. Average of Square error.

3. Mean Absolute Deviation - the average forecast error using absolute value of the error of each past forecast. Average absolute error. The ideal MAD is zero which would mean there is no forecasting error. The larger the MAD, the less the accurate the resulting model.

4. Mean Absolute % Error - Average absolute % Error

Tracking Signal

- is a measurement that indicates whether the forecast average is keeping pace with the genuine upward or downward changes in demand.
- is the # of mean absolute deviations that the forecast value is above or below the actual occurrence.
- +- 5 limits are acceptable

# 3 - Casual Relationship Forecasting

- When one occurrence causes another.
- Uses independent variable other than time to predict future demand.
- Any independent variable must be a leading indicator.

Multiple Regression Analysis

is appropriate when a number of factors influence a variable of interest.

Qualitative Techniques in Forecasting

Knowledge of experts and require much judgment
(new products or regions)

1. Market Research - looking for a new products and ideas, likes and dislikes about existing products. Primarily SURVEYS & INTERVIEWS

2. Panel Consensus - the idea that 2 heads are better than one. Panel of people from a variety of positions can develop a more reliable forecast than a narrower group. Problem is that lower EE levels are intimidated by higher levels of management. Executive judgement is used (higher level of management is involved).

3. Historical Analogy - a firm that already produces toasters and wants to produce coffee pots could use the toaster history as a likely growth model.

4. Delphi Method - very dependent on selection of the right individuals who will judgmentally be used to actually generate the forecast. Everyone has the same weight (more fairly). Satisfactory results are usually achieved in 3 rounds.

OBJECTIVE - Collaborative Planning, Forecasting, and Replenishment (CPFR)

To exchange selected internal information on a shared Web server in order to provide for reliable, longer-term future views of demand in the supply chain.

Web-based Forecasting: Collaborative Planning, Forecasting, and Replenishment (CPFR)

1. Creation of a front-end partnership agreement
2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment

Largest hurtle is lack of trust over complete information sharing btw supply chain partners. Front-end partnership agreements nondisclosure agreements and limited information access may help to overcome these fears.

·         Basic Approach to Demand Forecasting:

SUMMARY OF 6 STEPS BASIC APPROACH TO DEMAND FORECASTING

1.  Understand the Objective of Forecasting: Every forecast support decisions that are based on the forecast, so an important first step is to identify these decisions clearly. Examples of such decisions include how much of a particular product to make, how much to inventory, and how much to order. All parties affected by a supply chain decision should be aware of the link between the decision and the forecast. All parties should come up with a common forecast for the promotion and a shared plan of action based on the forecast. Failure to make these decisions jointly may result in either too much or too little product in various stages of the supply chain.

2.  Integrate Demand Planning and Forecasting throughout the Supply Chain: To accomplish this integration, it is a good idea for a firm to have a cross-functional team, with members from each affected function responsible for forecasting demand – and an even better idea is to have members of different companies in the supply chain working together to create a forecast.

3.  Understand and Identify Customer Segments: Customers may be grouped by similarities in service requirements, demand volumes, order frequency, demand volatility, seasonality, and so forth. In general, companies may use different forecasting methods for different segments. A clear understanding of the customer segments facilities an accurate and simplified approach to forecasting.

04.    Identify Major Factors That Influence the Demand Forecast: Ø on the demand side, a company must ascertain whether demand is growing, declining, or has a seasonal pattern.Ø on the supply side, a company must consider the available supply sources to decide on the accuracy of the forecast desired.Ø on the product side, a firm must know the number of variants of a product being sold and whether these variants substitute for or complement each other.Ø Clearly, demand for the two products should be forecast jointly.

05.    Determine the Appropriate Forecasting Technique: In selecting an appropriate forecasting technique, a company should first understand the dimensions that are relevant to the forecast. The company should understand the differences in demand along each dimension and will likely want different forecast and techniques for each dimension.

06.  Established Performances and Error Measures for the Forecast: The real test of how well a demand management/planning process is working should be how high the percentage of perfect order achievement is compared to the number of days of inventory and the amount of capacity needed to achieve that level. These measures should be highly correlated with the objectives of the business decision based on these forecast. 

·         Time-Series Forecasting Methods:

Time series forecasting methods produce forecasts based solely on historical values. Time series forecasting methods are widely used in business situations where forecasts of a year or less are required. The time series techniques used in ezForecaster are particularly suited to Sales, Marketing, Finance, and Production planning. Time series methods have the advantage of relative simplicity, but certain factors need to be considered:
Time series methods are better suited to short-term forecasts (i.e., less than a year).
Time series forecasting relies on sufficient past data being available and that the data is of a high quality and truly representative.
Time series methods are best suited to relatively stable situations. Where substantial fluctuations are common and underlying conditions are subject to extreme change, then time series methods may give relatively poor results.
Classically, researchers approach the problem of modeling a time series by identifying four kinds of change. These four components are known as the Trend, Cyclical Fluctuation, Seasonality and Residual Effect.
The Trend is the increase or decrease in the series over a long period of time. For this reason is also known as the long-term trend.
The Cyclical Fluctuation or (Cyclicity) is the wavelike up and down fluctuations about the trend that is attributable to economic or business conditions. This fluctuation is also known as business cycle. During economic expansion, the cycle lies above the trend; during a downturn, beneath it.
The Seasonality or (Seasonal Variation) in a time series is the fluctuation that occurs each month, each year etc. Seasonal variations tend to be repeated from year to year.
Lastly, the Residual Effect is what remains, having removed the Trend, Cyclical and Seasonal components of a time series. It represents the random error effect of a time series, caused by events as widespread as wars, hurricanes, strikes and randomness of human actions.
Forecasting is not an exact science. Often the four components are difficult to discern. For this reason, ezForecaster offers a variety of forecasting techniques, ranging from simple methods through sophisticated state-of-the-art techniques.

·         Responding to Predictable Variability in a Supply Chain:

·          Managing Supply:

 Supply chain managers are increasingly being relied on to deliver greater returns to shareholders – and are also being held responsible for “supply chain glitches” that negatively impact a company’s stock value! The majority of supply chain glitches occur due to lack of alignment between demand planning and supply planning, which results in too much or not enough inventory, or too much/not enough capacity.
Research by Vinod and Singhal (Supply Chain Management Review, December, 2002) suggests that the average shareholder value loss associated with the six most often cited glitches are significant. Parts shortages are often caused by poor forecasting, planning, dependence on a single supplier, long leadtimes, low inventory levels, and poor communication of information. Order changes at the last minute are normal occurrences, so flexibility and responsiveness has a big impact. The importance of rapid rampup and roll out of new technologies is underscored by the significant penalties incurred when these activities are delayed. The average associated loss in shareholder value is about 8.5 percent. Further, the research shows that the economic implications are not short-run in nature; economic performance can be affected before and after the announcement of a glitch, with an average loss in shareholder value of about 18.5 percent.
How can managers prevent these glitches from happening? Very simply, through a regular review of supply and market data, and developing systems for “sensing” trends and changes, and the ability to react to them before they occur in these markets.
Supply chain problems have their root cause in a lack of communication between the four critical areas of marketing, logistics, operations, and supply management. In order to ensure well-informed decisions are made regarding customer requirements, demand forecasts, new product introduction, regional market conditions, and global logistics needs, organizations need to develop an infrastructure to collect, desseminate, and consolidate market and supply information. This is not a random process, but in fact requires that executives dedicate the resources to ensure that the process is carried out on a regular basis.
Key elements of this process involve developing both qualitative and quantitative elements of market intelligence. Formal demand planning methods such as forecasts and market analysis must be validated and indeed corrected based on competitive market intelligence, collected through direct feedback from sales representatives, product development planners, and logistics specialists. All pictures of the future market requirements including customer order winners and qualifiers, regional demand forecasts and market conditions, product development QFD’s, and global logistics requirements must be established.
On the Supply side, formal commodity research using secondary data, supply market conditions, pricing data, etc can help establish potential trends. However, such analysis must again be validated through direct engagement with key experts that are resident in your supply base. As one strategic sourcing manager at Sonoco Products recently noted to me, “I spend a lot of time hanging around paper plants, taking the engineers out to lunch, so that I can pick their brains on what is happening in the industry!” This type of informal dialogue is key to establishing an effective technology roadmap, as well as understanding supplier capability and capacity to fulfill requirements. This is especially true in periods of mergers and consolidation facing many industries in this environment, and the financial vulnerability of many suppliers in the market.
As this information is collected, it becomes the basis for a) long-term product lifecycle planning, b) sales and operations planning, and c) quarterly goals and objectives review. Each of these is a different planning and feedback process unto itself.
Product Life Cycle Planning
Most companies do not do a good job of handing off product development decisions through the major elements of product planning, product development, and product management. A well-executed stage gate process involving integrating the marketing team with engineering to keep engineering attuned to changes in the market and to get feedback back to product development within days of market introductions to maximize market acceptance can do the job effectively.
Sales and Operations Planning
Long-term product demand forecasts must in turn be combined with logistics forecasts, supply network forecasts, and global and regional facility planning reports, as well as capabilities. When a full picture of these three structural elements are combined, an annual sales and operations plan is generated that includes critical assumptions based on these long-term forecasts. In turn, a pro forma SOP is generated, and having multiple parties in the supply chain assess its impact from both a market, supply chain, and financial perspective. Each elements should have an equal say in assessing its impact on key elements of technology, supply and logistics strategy, and financial metrics, bearing in mind the total impact on the customer. In this manner, in an iterative fashion, an executable sales and operations plan begins to emerge.
Quarterly Objectives and Review
Once the plan is established, a set of impact statements should be forthcoming, which communicates in clear and certain terms the effect of this plan in terms of demand forecasts, capacity, transportation requirements, supply market requirements, and customer priorities. These impact statements should be shared with critical internal functions (sales and distribution), but also with critical suppliers and logistics channel partners. As the year progresses, on a quarterly basis critical customer metrics, supplier scorecard metrics, and sales/ customer satisfaction metrics should be tracked and reviewed in a “balanced scorecard” dashboard. This ensures that performance in all areas is not suffering due to an inappropriate strategy occurring at the expense of one or more other elements in the integrated strategy.
By effectively linking these three elements of demand and supply planning, organizations will be better prepared to deal with the uncertainties of a difficult market climate, yet be prepared to react should the economy improve…..

·         Managing Demand:

·         Price Management in Supply Chain:

·         The Role of Pricing and Revenue Management in a Supply Chain:

 The Role of RM in SCs

Revenue management is the use of pricing to increase the profit generated from a limited supply of supply chain assets

–SCs are about matching demand and capacity

–Prices affect demands

Yield management similar to RM but deals more with quantities rather than prices

Supply assets exist in two forms

–Capacity: expiring

–Inventory: often preserved

Revenue management may also be defined as offering different prices based on customer segment, time of use and product or capacity availability to increase supply chain profits

Most common example is probably in airline ticket pricing

–Pricing according to customer segmentation at any time

–Pricing according to reading days for any customer segment

»Reading days: Number of days until departure.

Importance of Revenue Management:

´ Revenue Management has contributed millions to the bottom line, and it has educated our people to manage their business more effectively. When you focus on the bottom line, your company grows.

                             — Bill Marriott Jr., Chairman and CEO, Marriott International

Revenue Management as Music

´  The truth is that …. just as an orchestra generates rich harmony from a wildly diverse array of musicians and instruments, a hotel relies on a myriad of specific systems and teams to generate revenue and perpetuate a healthy operation.
                                      - Jean Francois Mourier, Founder & CEO, RevPar Guru Inc.

´ Operations keep the lights on,

Strategy provides a light at the end of the tunnel, but

Revenue Management is the engine that keeps the organization moving forward.

- adopted from Joy Gumz

Definitions of Revenue Management:

´ “Revenue Management is the application of disciplined analytics that predict consumer behaviour at the micro-market level and optimize product availability and price to maximize revenue growth.”

´ “Selling the Right Product to the Right Customer at the Right Moment at the Right Price on the Right Distribution Channel…..”

´ “Application of disciplined tactics that predict buyer response to prices, optimize product availability, and yield the greatest business income.”

·         Pricing and Revenue Management for Perishable Products:

·         Pricing and Revenue Management for Seasonal Demand:

·         Pricing and Revenue Management for Bulk and Spot Contracts:

·         Using Pricing and Revenue Management in Practice:

·         Aggregate planning and coordination:

·         The Role of Aggregate Planning in a Supply Chain:

·         The Aggregate Planning Problem:

·         Aggregate Planning Strategies:

·         Lack of Supply Chain Coordination and the Bullwhip Effect:

·         The Effect on Performance of Lack of Coordination:

·         Managerial Levers to Achieve Coordination:

Module 03 is assessed through a single exam of 100 marks comprising MCQ, True/False and Filling the gap questions

Module 04 Sourcing, transportation and other decisions in SCM

·         Sourcing Decisions in Supply Chain

·         The Role of Sourcing in a Supply Chain,

·         In-House or Outsource,

·         Total Cost of Ownership,

·         Supplier Selection-Auctions and Negotiations,

·         Sharing Risk and Reward in the Supply Chain,

·         The Impact of Incentives When Outsourcing

·         Transportation Decisions in a Supply Chain

·         The Role of Transportation in a Supply Chain,

·         Modes of Transportation and Their Performance Characteristics, 

·         Design Options for a Transportation Network,

·         Trade-Offs in Transportation Design,

·         Tailored Transportation

·         Contemporary issues in Supply Chain Lean Supply Chain,

·         Agile Supply Chain,

·         Role of IT in Supply Chain,

·         Green Supply Chain

Module 04 is assessed through a single exam of 100 marks comprising MCQ, True/False and Filling the gap questions.