Supply Chains: Why is forecasting so important?

SUPPLY CHAINS: Why is Forecas8ng so Important?

© North Delta College 2015

Mathema'cs applied to Business Theory 1

INTRODUCTION

Supply Chains are one of the biggest challenges of the modern corporate world. Most major Mul8na8onals recognize that durable advantages over compe8tors can be gained by properly re-‐engineering the supply chain and that supply chains are among the most pivotal cost centres where the whole company’s profit can be improved. In this presenta8on, we will spend some 8me explaining what supply chains are and in par8cular introduce the famous Beer game where the most basic dilemma faced by supply chain management will be thoroughly described: Namely, The strains the chain undergoes even in front of the most simplis8c demand. This will jus8fy the Introduc8on of a new tool for Business Management: Forecas8ng Systems. A more in-‐depth study of these tools will be given in a subsequent presenta8on. We hope you will enjoy this quick tour of Supply chains (20 slides) and the way it demonstrates the urgency of implemen8ng Forecas8ng Systems for most major modern businesses. Mathema'cs applied to Business Theory 2

SUMMARY


PART 1: WHAT ARE SUPPLY-‐CHAINS?

Defini8on of a Supply-‐Chain Tasks in a Supply-‐Chain The Key Challenge of Supply-‐Chain Management PART 2: FROM SUPPLY-‐CHAIN TO DEMAND-‐CHAIN

What is a Demand-‐Chain? Why the Supply-‐Chain is in fact a Demand-‐Chain PART 3: THE BEER GAME

Case-‐Study: Introduc8on to the Beer Game One Full-‐Round of the Game Few Lessons to learn from the Game PART 4: THE NEED OF A GOOD FORECAST

What is Forecas8ng? Why Forecas8ng solves the Beer Game FINAL STATEMENT

PART 1: WHAT ARE SUPPLY CHAINS?

Let us consider a company, call it Satori. The Supply Chain management of Satori consists precisely of those business func8ons related to the physical flows of the company’s products going from the source (i.e. Factory or Suppliers) to the End point (product reaching the customer). The Chief Supply chain Officer’s objec8ves will be to op8mise the underlying processes, (for example: improving Cost/Time) in order to fulfill the Business needs of the company’s Opera8ons. Logis8cs is a part of it, linked with the physical transporta8on and storage of the goods.


Defini8on of a Supply-‐Chain

Picture 1: Product flow from factory to customer

Picture 2: Product flow from suppliers to customers Company =

Satori Supplier Customer Distributor

Customer Regional Warehouse

Local Warehouse Factory

Tasks in a Supply-‐Chain

Suppose Satori produces Kimonos for a worldwide market from a home base in Japan. The Chief Supply-‐Chain Officer of Satori is concerned among others, with the Logis8cs of the company, or finding the best possible suppliers to source the raw material, or making sure that without giving up efficiency, the whole supply chain costs less and s8ll delivers on 8me.



Picture 3: Satori’s supply chain on a map

Americas Europe

Middle-‐East Australia


The Key Challenge of Supply-‐Chain Management

The Key challenge of Supply-‐Chain: Supply on 8me to the client and at the same 8me be Cost effec8ve. It is easy to improve 8meliness by increasing costs. The main challenge is therefore to improve 8meliness while reducing costs. The Matrix which is in every Supply chain manager’s head.


Picture 4: The Key Matrix Money spent in the Supply-‐Chain

More Less

% of On 8me Delivery (OTD)

100 %

NOW

Path of Bad Management Ideal Target

Before going ahead, there are 2 no8ons to properly understand: Demand versus Supply. Demand refers to the needs of the market, in par8cular requests from individual customers. Supply on the other hand is the ability of individual firms to sa8sfy this need. The Supply chain refers therefore to the complete chain inside the individual firm from sourcing raw material to the final delivery of the finished goods to the client crea8ng the Demand.


Demand versus Supply

PART 2: FROM SUPPLY-‐CHAIN TO DEMAND-‐CHAIN

Picture 5: Supply vs. Demand

The Market made up of poten8al Customers

Creates the Demand

Supply the Demand Individual Firms trying to make Profit

What is a Demand Chain?

The Demand chain is another way of looking at this same chain. The difference is that the emphasis this 8me is put on the client. The term supply chain is a "push" concept. The product is pushed from the factory and suppliers to the warehouses and then delivered to the client. The term demand chain is a "pull" concept. The chain is triggered by the client and at the same 8me he is the des8na8on of the chain.



Picture 6: Push vs. Pull

Push

Pull

Source of Product Final Des8na8on of Product

The Impulse is given by the Source

The Impulse in the form of a Trac8on is generated by the Des8na8on itself

Why the Supply-‐Chain is in fact a Demand-‐Chain

The Supply Chain is indeed truly a Demand Chain. The Demand triggers the ini8al impulse on the chain. This is because, only the customers orders get the whole chain ac8vated. The Demand, furthermore, decides the volume of ac8vity on the whole chain.

In the tradi8onal viewpoint the supply starts at the factory or suppliers and ends at the customer’s doorsteps. It is vital to invert this viewpoint and see the source of the chain with the customer and its end at the factory. Indeed the supplying signal (i.e. the placement of orders) goes from the customer to the factory though the supply of the physical goods follows the reverse path.



Picture 7: Inversion of the viewpoint

Factory

Factory Customers

Customers Supply-‐Chain

Demand-‐Chain

Introduc8on to the Beer Game

The Beer Game is a game introduced in several American universi8es to help novices understand the problems faced in Supply chain Management. Basically the supply chain of a beer company, or any company is simulated inside a room. Players are split into teams of 4 or 5. Each team handles one node in the Supply chain. For example one team can handle a factory. Another a warehouse. A third one the sales team. Sales team are given the number of items purchased by customers. Then they start pumping on the supply chain for several rounds in order to make sure the clients always receive goods in 8me for all their orders.


PART 3: CASE STUDY: THE BEER GAME

How the Beer Game works

We are in a Beer company with 4 teams playing. Team 1 in the supply chain is playing the role of the sales team (node 1). Team 4 the factory (node 4). Team 2 and 3, two intermediate warehouses (node 2 and 3 respec8vely). Sales team receives customers order figures from the game referee at each round, and start asking down the chain how many items they want to be sent to the client. As they don't know the sales value for the subsequent rounds, they have to es8mate properly how much to order to warehouse 2. The process repeats itself at each node of the supply chain.



Picture 8: The beer company

Warehouse 2 Warehouse 1

Factory Customers

Team 1 Node 1

Team 2 Node 2

Team 3 Node 3

Team 4 Node 4

A Full Game

There are 4 rounds which are going to be played in our example. At each round, Customer places an order to sales team (Referee gives figure to Team 1) who in turn places an internal order further down the chain and so on un8l we reach the factory. Referee checks at each round the figures produced and if taking into account the lead 8me, he checks if the products are reaching the customers in 8me. At the end of round 4, everybody assess how the whole chain has been working and teams disclose their figures to each others.



What the Factory sees The factory has to produce the beer bonles and seal them before sending them up the chain.

They receive orders from warehouse 1 and produce according to the warehouse 1 demand. Because

of the lead 8me linked first with manufacturing and then with transporta8on, factory has to overproduce in advance in order not to be short of products when demand comes so that the bonles

reach clients on 8me. This is taken into account in Warehouse 1 figures.

Factory receives the following signal from warehouse 1

As we can see the numbers have very linle explicit panern and seem absolutely random.



Picture 9: Factory at the end of the Supply chain

Table 1: Orders received by Factory

Factory Warehouse 1

Numbers of Bonles ordered to Factory by Warehouse 1

Round 1 600

Round 2 800

Round 3 150

Round 4 350

What Warehouse 1 sees


Warehouse 1 has 2 tasks. Receive orders from warehouse 2 & send orders to factory. In the Following table, we indicate the figures Warehouse 1 receive from Warehouse 2 on the leq and the figures they subsequently send to the factory in order to fulfil that demand on the right. As we can see the small unevenness of the original signal on the leq (the source) are amplified on the right (the des8na8on of the signal).


Picture 10: Warehouse 1 node in the supply chain

Table 2: Warehouse 1: Orders received/Orders sent

Warehouse 1 Warehouse 2

Bonles ordered by Warehouse 2 Bonles ordered to Factory

Round 1 500 600

Round 2 600 800

Round 3 350 150

Round 4 400 350

What Warehouse 2 sees

Warehouse 2 has 2 tasks. Receive orders from sales & then send orders to warehouse 1. In the Following table, we indicate the figures Warehouse 2 receive from Sales (The origin of the Demand) on the leq and the figures they subsequently send to Warehouse 1 in order to fulfil that demand on the right.

We can no8ce how the original signal (on the leq) which is nearly steady gets hit by more severe perturba8on at the exit (on the right) Mathema'cs applied to Business Theory 15


Table 3: Warehouse 2: Orders received/Orders sent

Picture 11: Warehouse 2 node in the supply chain Warehouse 2 Sales Team

The Actual Demand

Bonles ordered by Sales Team Bonles ordered to Warehouse 1

Round 1 450 500

Round 2 450 600

Round 3 350 350

Round 4 400 400

The Actual Demand


As unbelievable as it may seem the actual demand at the sales level starts with a very basic signal

Indeed the signal is flat at the source and creates however incredible waves further down the supply chain.


Table 4: With the Sales Team

Bonles ordered by Customers Bonles requested to Warehouse 2

Round 1 400 450

Round 2 400 450

Round 3 400 350

Round 4 400 400

Few Lessons to learn from the Game The key point here is that even if the signal from the market is rela8vely simple, the response inside the supply-‐chain can already be very chao8c. (Stock surpluses, delayed deliveries, shortages, cost increase of the whole chain etc ... You name it.) One can therefore easily imagine what happens at 8mes when this signal becomes complicated at the Demand level itself. (Demand peaks, irregular demand, lack of visibility on the demand). The whole supply chain in these situa8ons can be turned upside down. In order to prevent major chaos, we need to introduce a supply chain management tool that will smoothen the response of the whole supply chain. We will cover this in the next 2 slides. This tool as you might have guessed is precisely forecas8ng.



Picture 12: market signal and supply chain response Market Signal Signal inside the supply-‐chain


What is Forecas8ng?

Forecas8ng is the ability to es8mate in a quan8ta8ve manner how a given variable will evolve in a not too faraway future. This es8mate has to be produced rigorously and in a systema8c manner. The variable can be the outside temperature (weather forecast), your monthly invoicing (business forecast) or customer consump8on (market intelligence), etc... In the Beer game the quan8ty forecasted is the number of bonles that each node in the chain requires. Forecasts have to be accurate within a certain margin of error. Forecas8ng is therefore all about gaining extra visibility on your inner business and therefore helps you in return to make a proper es8mate of your consump8on of a given item for the coming weeks. Thus forecas8ng IS fundamental.

PART 4: THE NEED OF A GOOD FORECAST

Why Forecas8ng solves the Beer Game

If we replace the Beer game by a more sophis8cated supply chain game including forecas8ng we will automa8cally see the following: If the original signal at customer level is flat, the signals throughout the rest of the supply chain will be much more smooth and even and erase the phases of over-‐hea8ng or under-‐usage of the chain we saw in the Beer game.

If the original signal is already quite uneven, forecas8ng will allow the supply side to prevent shortages during peaks and make good usage of period of lower ac8vity


PART 4: THE NEED OF A GOOD FORECAST

Picture 13: Smoother output signal

Picture 14: Avoiding crisis

Input Signal Supply Chain with

Forecas8ng Output Signal

Input Signal

Supply Chain with Forecas8ng

Output Signal

Shortages/ Over Hea8ng of the whole chain

Excess Stocks

Final Statement

Supply chains are concerned therefore with the physical flow of products from suppliers towards the customers.

As we have seen, it is indeed very important to invert the way this flow is looked at and focus on the associated signalling flow, which is demand based and starts first

with the customer.

Strains on the supply chain start precisely when this demand is poorly es8mated now and in the future. The Beer game demonstrated this. The best solu8on, here, is precisely to use a Forecas8ng system at every level of the supply chain. In our next

presenta8on we will describe more accurately such systems.


FINAL STATEMENT

Picture 15: A supply network

Suppliers THE COMPANY Distributors Market