Chapter 5
Supply Chain
Management
Supply Chain
Management
• First appearance – Financial Times
• Importance → Inventory ~ 14% of GDP
→ GDP ~ $12 trillion
→ Warehousing/Trans ~ 9% of GDP
→ Rule of Thumb - $12 increase in sales to = $1 savings in
Supply Chain
• 1982 Peter Drucker – last frontier
• Supply Chain problems can cause ≤ 11% drop in stock
price
• Customer perception of company
SCOR
Reference: www.supply-chain.org
Supply Chain
 All activities associated with the flow
and transformation of goods and
services from raw materials to the end
user, the customer
 A sequence of business activities
from suppliers through customers
that provide the products, services,
and information to achieve customer
satisfaction
Supply Chain
“The global network used to deliver
products and services from raw
materials to end customers through
an engineered flow of information,
physical distribution, and cash.”
APICS Dictionary, 10th ed.
Supply Chain Management
 Synchronization of activities
required to achieve maximum
competitive benefits
 Coordination, cooperation, and
communication
 Rapid flow of information
 Vertical integration
Supply Chain Uncertainty
 Forecasting, lead times, batch
ordering, price fluctuations, and
inflated orders contribute to
variability
 Inventory is a form of insurance
 Distorted information is one of
the main causes of uncertainty
Bullwhip effect
Information in the
Supply Chain
 Centralized coordination of
information flows
 Integration of transportation,
distribution, ordering, and production
 Direct access to domestic and global
transportation and distribution
channels
 Locating and tracking the movement
of every item in the supply chain RFID
Information in the
Supply Chain
 Consolidation of purchasing from all
suppliers
 Intercompany and intracompany
information access
 Electronic Data Interchange
 Data acquisition at the point of origin
and point of sale
 Instantaneous updating of inventory
levels
 Visibility
Electronic Business
In Theory:
 Replacement of physical processes
with electronic ones
 Cost and price reductions
 Reduction or elimination of
intermediaries
 Shortening transaction times for
ordering and delivery
 Wider presence and increased visibility
Electronic Business
 Greater choices and more information for
customers
 Improved service
 Collection and analysis of customer data
and preferences
 Virtual companies with lower prices
 Leveling the playing field for smaller
companies
 Gain global access to markets & customers
Electronic Data Interchange
 Computer-to-computer exchange of
business documents in a standard
format
 Quick access, better customer service,
less paperwork, better communication,
increased productivity, improved
tracing and expediting, improves billing
and cost efficiency
Bar Codes
 Computer readable codes attached to
items flowing through the supply chain
 Generates point-of-sale data which is
useful for determining sales trends,
ordering, production scheduling, and
deliver plans
1234
5678
IT Issues
 Increased benefits and sophistication
come with increased costs
 Efficient web sites do not necessarily
mean the rest of the supply chain will
be as efficient
 Security problems are very real –
camera phones, cell phones, thumb
drives
 Collaboration and trust are important
elements that may be new to business
relationships
Suppliers
 Purchased materials account for about
half of manufacturing costs
 Materials, parts, and service must be
delivered on time, of high quality, and
low cost
 Suppliers should be integrated into
their customers’ supply chains
 Partnerships should be established
 On-demand delivery (JIT) is a frequent
requirement - what is JIT and does it
work?
Sourcing
 Relationship between customers and
suppliers focuses on collaboration and
cooperation
 Outsourcing has become a long-term
strategic decision
 Organizations focus on core
competencies
How does
 Single-sourcing is
single source
increasingly a part
differ from sole
of supplier relations
source?
Distribution
 The actual movement of products
and materials between locations
 Handling of materials and products at
receiving docks, storing products,
packaging, and shipping
 Often called logistics
 Driving force today
is speed
 Particularly important
for Internet dot-coms
Distribution Centers
and Warehousing
 DCs are some of the largest business
facilities in the United States
 Trend is for more frequent orders in
smaller quantities
 Flow-through facilities and automated
material handling
 Final assembly and product
configuration (postponement) may
be done at the DC
Warehouse Management
Systems
 Highly automated systems
 A good system will control item
slotting, pick lists, packing, and
shipping
 Most newer systems include
transportation management (load
management/configuration), order
management, yard management, labor
management, warehouse optimization
Vendor-Managed Inventory
 Not a new concept – same process used by
bread deliveries to stores for decades
 Reduces need for warehousing
 Increased speed, reduced errors, and
improved service
 Onus is on the supplier to keep the shelves
full or assembly lines running
 variation of JIT
 Proctor&Gamble - Wal-Mart
 DLA – moving from a manager of supplies to
a manager of suppliers
 Direct Vendor Deliveries – loss of visibility
Collaborative Distribution
and Outsourcing
 Collaborative planning, forecasting, and
replenishment (CPFR) started by Nabisco
 Allows suppliers to know what is really needed
and when
 Electronic-based exchange of data and
information
 Significant decrease in inventory levels and
more efficient logistics - maybe not!
 Companies work together for benefit of all of
the supply chain
Transportation
 Common methods are railroads,
trucking, water, air, intermodal,
package carriers, and pipelines
Railroads
 150,000 miles in US
 Low cost, high-volume
 Improving flexibility
 intermodal service
 double stacking
Complaints: slow, inflexible, large loads
Advantages: large/bulky loads, intermodal
Trucking
 Most used mode in US -75% of total
freight (not total weight)
 Flexible, small loads
 Consolidation,
Internet load match sites
 Single sourcing reduces number of
trucking firms serving a company
 Truck load (TL) vs. Less Than Truck
Load (LTL)
Air
 Rapidly growing segment of
transportation industry
 Lightweight, small items
 Quick, reliable, expensive
(relatively expensive depending on
costs of not getting item there)
 Major airlines and US Postal
Service, UPS, FedEx, DHL
Package Carriers
 FedEx, UPS, US Postal Service, DHL
 Significant growth driven by
e-businesses and the move to smaller
shipments and consumer desire to have it
NOW
 Use several modes
of transportation
 Expensive - relative!!
 Fast and reliable - relative!!
 Innovative use of technologies in some
cases
 Online tracking – some better than others
Intermodal
 Combination of several modes of
transportation
 Most common are truck/rail/truck
and truck/water/rail/truck
 Enabled by the use of containers –
the development of the 20 and 40
foot containers significantly
changed the face of shipping
 ~2% of all US cargo via intermodal
Water
 One of oldest means of transport
 Low-cost, high-volume, slow
(relative)
 Security - sheer volume - millions of
containers annually
 Bulky, heavy and/or large items
 Standardized shipping containers
improve service
 The most common form of
international shipping
Pipelines
 Primarily for oil & refined oil
products
 Slurry lines carry coal or kaolin
 High initial capital investment
 Low operating costs
 Can cross difficult terrain
Global Supply Chain
 Free trade & global opportunities
 Nations form trading groups
 No tariffs or duties
 Freely transport goods across
borders
 Security!!
Global Supply Chain
Problems
 National and regional differences
 Customs, business practices, and
regulations
 Foreign markets are not
homogeneous
 Quality can be a major issue
Security
• ~ 10+ million containers annually
• Customs-Trade Partnership Against Terrorism (CTPAT)
• Port Security – SAFE Ports Act; Scanning of all
Containers
• Cost - $2 billion closing of major port
• 66% of all goods into US comes through 20 major
ports
• 44% through LA/Long Beach
• Cost of attack on major port estimated at $20
Billion
Chapter 7
Forecasting
Forecasting Survey
• How far into the future do you
typically project when trying to
forecast the health of your industry?
 less than 4 months 3%
 4-6 months
12%
 7-12 months
28%
 > 12 months
57%
Fortune Council survey, Nov 2005
Indices to forecast health
of industry
•
•
•
•
•
•
•
•
•
Consumer price index
51%
Consumer Confidence index 44%
Durable goods orders
20%
Gross Domestic Product
35%
Manufacturing and trade inventories
and sales
27%
Price of oil/barrel
34%
Strength of US $
46%
Unemployment rate
53%
Interest rates/fed funds
59%
Fortune Council survey, Nov 2005
Forecasting Importance
• Improving customer demand forecasting
and sharing the information downstream
will allow more efficient scheduling and
inventory management
• Boeing, 1997: $2.6 billion write down due
to “raw material shortages, internal and
supplier parts shortages” Wall Street
Journal, Oct 23, 1987
Forecasting Importance
• “Second Quarter sales at US Surgical
Corporation decline 25%, resulting in a
$22 mil loss…attributed to larger than
anticipated inventories on shelves of
hospitals.” US Surgical Quarterly, Jul 1993
• “IBM sells out new Aetna PC; shortage
may cost millions in potential revenue.”
Wall Street Journal, Oct 7, 1994
Principles of Forecasting
• Forecasts are usually wrong
• every forecast should include an
estimate of error
• Forecasts are more accurate for
families or groups
• Forecasts are more accurate for
nearer periods.
Important Factors to
Improve Forecasting
• Record Data in the same terms as
needed in the forecast – production
data for production forecasts; time
periods
• Record circumstances related to the
data
• Record the demand separately for
different customer groups
Forecast Techniques
• Extrinsic Techniques – projections
based on indicators that relate to
products – examples
• Intrinsic – historical data used to
forecast (most common)
Forecasting
• Forecasting errors can increase the total
cost of ownership for a product
- inventory carrying costs
- obsolete inventory
- lack of sufficient inventory
- quality of products due to accepting
marginal products to prevent
stockout
Forecasting
• Essential for smooth operations of
business organizations
• Estimates of the occurrence, timing,
or magnitude of uncertain future
events
• Costs of forecasting: excess labor;
excess materials; expediting costs;
lost revenues
Forecasting
 Predicting future events
 Usually demand behavior
over a time frame
 Qualitative methods
 Based on subjective methods
 Quantitative methods
 Based on mathematical formulas
Strategic Role of
Forecasting
 Focus on supply chain management
 Short term role of product demand
 Long term role of new products,
processes, and technologies
 Focus on Total Quality Management
 Satisfy customer demand
 Uninterrupted product flow with no
defective items
 Necessary for strategic planning
Strategic Role of
Forecasting
 Focus on supply chain management
 Short term role of product demand
 Long term role of new products,
processes, and technologies
 Focus on Total Quality Management
 Satisfy customer demand
 Uninterrupted product flow with no
defective items
 Necessary for strategic planning
Trumpet of Doom
• As forecast horizon increases, so does the
forecasting error (i.e., accuracy
decreases) – shorten horizon by
shortening of cycles or flow times
• Law of Large Numbers – as volume
increases, relative variability decreases –
forecasting error is smaller: goal –
forecast at aggregate levels; collaborate;
standardize parts
• Volume and activity increase at end of
reporting periods – Krispy Kreme
Components of
Forecasting Demand
 Time Frame
 Short-range, mediumrange, long-range
 Demand Behavior
 Trends, cycles, seasonal
patterns, random
Time Frame
 Short-range to medium-range
 Daily, weekly monthly forecasts of
sales data
 Up to 2 years into the future
 Long-range
 Strategic planning of goals, products,
markets
 Planning beyond 2 years into the future
Demand Behavior
 Trend
 gradual, long-term up or down
movement
 Cycle
 up & down movement repeating over
long time frame
 Seasonal pattern
 periodic oscillation in demand which
repeats
 Random movements follow no pattern
Demand
Demand
Forms of Forecast Movement
Random
movement
Demand
Time
(c) Seasonal pattern
Figure 8.1
Time
(b) Cycle
Demand
Time
(a) Trend
Time
(d) Trend with seasonal pattern
Forecasting Methods
 Time series
 Regression or causal modeling
 Qualitative methods
 Management judgment, expertise, opinion
 Use management, marketing, purchasing,
engineering
 Delphi method
 Solicit forecasts from experts
Time Series Methods
 Statistical methods using historical
data
 Moving average
 Exponential smoothing
 Linear trend line
 Assume patterns will repeat
 Naive forecasts
 Forecast = data from last period
Moving Average
 Average several
periods of data
Sum of Demand
 Dampen, smooth out
In n Periods
changes
n
 Use when demand is
stable with no trend
or seasonal pattern
Simple Moving Average
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
Simple Moving Average
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
Daug+Dsep+Doct
MAnov =
3
90 + 110 + 130
=
3
= 110 orders for Nov
Simple Moving Average
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
–
THREE-MONTH
MOVING AVERAGE
–
–
–
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
Simple Moving Average
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
–
THREE-MONTH
MOVING AVERAGE
–
–
–
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
5
Di

i=1
MA5 =
=
5
90 + 110 + 130 + 75 + 50
5
= 91 orders for Nov
Simple Moving Average
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
–
THREE-MONTH
MOVING AVERAGE
–
–
–
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
FIVE-MONTH
MOVING AVERAGE
–
–
–
–
–
99.0
85.0
82.0
88.0
95.0
91.0
Weighted Moving Average
 Adjusts moving average
method to more closely
reflect data fluctuations
Weighted Moving Average
WMAn =  Wi Di
 Adjusts
i=1
moving
where
average
Wi = the weight for period i,
method to
between 0 and 100
more closely
percent
reflect data
fluctuations
 W = 1.00
i
Weighted Moving
Average Example
MONTH
August
September
October
WEIGHT
DATA
17%
33%
50%
130
110
90
Weighted Moving
Average Example
MONTH
August
September
October
WEIGHT
DATA
17%
33%
50%
130
110
90
3
November forecast WMA3 =
Wi Di

i=1
= (0.50)(90) + (0.33)(110) + (0.17)(130)
= 103.4 orders
3 Month = 110
5 month = 91
Exponential Smoothing
 Averaging method
 Weights most recent data more
strongly
 Reacts more to recent changes
 Widely used, accurate method
Exponential Smoothing
 Averaging method
 Weights most
recent data more
strongly
 Reacts more to
recent changes
 Widely used,
accurate method
Ft +1 = Dt + (1 - )Ft
where
Ft +1 = forecast for next
period
Dt = actual demand for
present period
Ft = previously
determined forecast
for present period
= weighting factor,
smoothing constant
Forecast for Next Period
• Forecast = (weighting factor)x(actual
demand for period)+(1-weighting
factor)x(previously determined
forecast for present period)
0 >  <= 1
Lesser
reaction
to recent demand
Greater
reaction
to recent demand
Seasonal Adjustments
 Repetitive increase/ decrease in
demand
 Use seasonal factor to adjust
forecast
Seasonal Adjustments
 Repetitive increase/
decrease in demand
 Use seasonal factor
to adjust forecast
Di
Seasonal factor = Si =
D
= demand for period/sum of demand
Seasonal Adjustment
YEAR
1999
2000
2001
Total
DEMAND (1000’S PER QUARTER)
1
2
3
4
Total
12.6
14.1
15.3
42.0
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
Seasonal Adjustment
YEAR
1999
2000
2001
Total
DEMAND (1000’S PER QUARTER)
1
2
3
4
Total
12.6
14.1
15.3
42.0
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
D1
42.0
S1 =
=
= 0.28
D 148.7
D3
21.9
S3 =
=
= 0.15
D 148.7
D2
29.5
S2 =
=
= 0.20
D 148.7
D4
55.3
S4 =
=
= 0.37
D 148.7
Seasonal Adjustment
YEAR
DEMAND (1000’S PER QUARTER)
1
2
3
4
Total
1999
2000
2001
Total
12.6
14.1
15.3
42.0
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
Si
0.28
0.20
0.15
0.37
45.0
50.1
53.6
148.7
Seasonal Adjustment
YEAR
DEMAND (1000’S PER QUARTER)
1
2
3
4
Total
1999
2000
2001
Total
12.6
14.1
15.3
42.0
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
Si
0.28
0.20
0.15
0.37
45.0
50.1
53.6
148.7
45
Forecast for 1st qtr 2002
50.1
50*.28
14
53.6
148.7
49.56667 Forecast for 2002 using simple 3 year moving ave
Forecast Accuracy
 Find a method which minimizes error
 Error = Actual - Forecast
 Mean Absolute Deviation (MAD)
Mean Absolute
Deviation (MAD)
 Dt - Ft 
MAD =
n
where
t = the period number
Dt = demand in period t
Ft = the forecast for period t
n = the total number of periods
 = the absolute value
Forecast Control
 Reasons for out-of-control forecasts
 Change in trend
 Appearance of cycle
 Weather changes
 Promotions
 Competition
 Politics
Forecasting
• Long Term – location, capacity, new
product design
• Short Term – production, inventory
control, labor levels, cost controls
Chapter 9/12
Capacity and
Aggregate
Planning
Disney’s Forecasting vs
distribution
• Excellent forecasting and planning
models - results in multiple ticket
plans for Florida residents
• Warehousing & Distribution - 3 days
to process receipt; 3 days dock to
stock; 3 days to pick order
Aggregate Planning
• The process of planning the quantity
and timing of output over the
intermediate range (3-18 months) by
adjusting production rate,
employment, inventory
• Master Production Schedule:
formalizes the production plan and
translates it into specific end item
requirements over the short to
intermediate horizon
Capacity Planning
• The process of determining the
amount of capacity required to
produce in the future. May be at the
aggregate or product line level
• Master Production Schedule anticipated build schedule
• Time horizon must exceed lead times
for materials
Capacity Planning
• Look at lead times, queue times, set up times, run
times, wait times, move times
• Resource availability
• Material and capacity - should be in synch
• driven by dispatch list - listing of manufacturing
orders in priority sequence - ties to layout
planning
• load profiles - capacity of each section
Capacity Planning
• Rough Cut Capacity Planning process of converting the master
production schedule into
requirements for key resources
• capacity requirements plan - timephased display of present and future
capacity required on all resources
based on planned and released
orders
Capacity Planning
• Capacity Requirements Planning
(CRP) - process of determining in
detail the amount of labor and
machine resources required to meet
production plan
• RCCP may indicate sufficient
capacity but the CRP may indicate
insufficient capacity during specific
time periods
Theory of Constraints
• Every system has a bottle neck
• capacity of the system is constrained
by the capacity of the bottle neck
• increasing capacity at other than
bottle neck operations does not
increase the overall capacity of the
system
• inertia of change can create new
bottle necks
Capacity Planning
 Establishes overall level of
productive resources
 Affects lead time
responsiveness, cost &
competitiveness
 Determines when and how
much to increase capacity
Capacity Expansion
 Volume & certainty of anticipated
demand
 Strategic objectives for growth
 Costs of expansion & operation
 Incremental or one-step
expansion
Capacity Expansion Strategies
(a) Capacity lead strategy
(b) Capacity lag strategy
Capacity
Demand
Units
Units
Demand
Capacity
Time
Time
(c) Average capacity strategy
(d) Incremental vs. one-step expansion
One-step expansion
Capacity
Units
Units
Demand
Incremental
expansion
Demand
Figure 9.1
Time
Time
Lead
• Advantages
• anticipates
demand
• first to market
• lure from
competitors
• Disadvantages
• product problems
• product
acceptability
• consumers
unfamiliar with
product
• R&D costs
Lag
• Advantages
• established
demand for
product
• less R&D
• growth market
• Follower strategy
• when to enter
market - downside
if too late in life
cycle
• loss of customers
to first to market
Assumes customers lost to Lead strategy
will return - Western Sizzlin’
Average Capacity
•
•
•
•
Advantages
level production
stable work force
excess capacity
potential
• Chasing half the
time
• market timing
• excess product
Aggregate Production
Planning (APP)
 Matches market demand to company
resources
 Plans production 6 months to 12 months in
advance
 Expresses demand, resources, and capacity
in general terms
 Develops a strategy for economically
meeting demand
 Establishes a company-wide game plan for
allocating resources
 also called Sales and Operations Planning
Sales and Operations
Planning (S&OP)
• Brings together all plans for
business
• performed at least once a month
Adjusting Capacity to Meet
Demand
1. Producing at a constant rate and using inventory
to absorb fluctuations in demand (level
production)
2. Hiring and firing workers to match demand (chase
demand)
3. Maintaining resources for high demand levels
4. Increase or decrease working hours (overtime
and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time
period (backordering)
Strategy Details
 Level production - produce at constant
rate & use inventory as needed to meet
demand
 Chase demand - change workforce levels
so that production matches demand
 Maintaining resources for high demand
levels - ensures high levels of customer
service
Strategy Details
 Overtime & undertime - common when
demand fluctuations are not extreme
 Subcontracting - useful if supplier meets
quality & time requirements
 Part-time workers - feasible for unskilled
jobs or if labor pool exists
 Backordering - only works if customer is
willing to wait for product/services
Level Production
Demand
Units
Production
Time
Figure 9.4 (a)
Level Production
• Advantages
• stable work force
• no overtime or
additional hiring
costs
•
•
•
•
•
Disadvantages
inventory
obsolescence
carrying costs
depends on real
good forecasts
Chase Demand
Demand
Units
Production
Time
Figure 9.4 (b)
Chase Strategy
• Advantages
• less inventory
• less chance for
obsolete
merchandise
• Disadvantages
• Never a stable
production level
• work force
instability
• hiring/firing costs
• always a priority
Demand Management
 Shift demand into other periods
 Incentives, sales promotions,
advertising campaigns
 Offer product or services with
countercyclical demand patterns
 Partnering with suppliers to reduce
information distortion along the
supply chain
Demand Distortion along the
Supply Chain
Aggregate Planning
for Services
1. Most services can’t be inventoried
2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services
The Beer Game
• http://www.masystem.com/beergame
Next Week
• No Class (10 Dec) – final exam to be
posted by 29 Nov
• 3 December:
• Chapter 14
• Reverse Logistics
• Chap 4