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www.regenesys.co.za
Brad Bell
September 2017
MBA9
OPERATIONS &
SUPPLY CHAIN
MANAGEMENT
SESSION 2
FROM THE PREVIOUS SESSION …
• Did you grab a copy of the prescribed textbook?
• Did you start doing your MCQs online for each section?
CLASS SCHEDULE 2017
SCOPE OF CONTENT
Day
17.1
Supply chain, performance drivers & metrics 1
Supply chain, performance drivers & metrics 2,3
Day
2
7.2 The supply chain process 5,6
7.3 Forecasting & planning 7,8
Day
3
7.4 Global sourcing & procurement 15
7.5 OSCM – management information systems (18)
Day
4
7.6 Ethics & CSI in OSCM -
Overview of group & individual assignments
Unit in study guide Chapter in prescribed text book
MBA9
Operations & Supply Chain Management
SECTION 7.2
The Supply Chain Process
HOW’S OUR PROGRESS?
7.1 (a) Supply chain, performance drivers & metrics
7.1 (b) Supply chain, performance drivers & metrics
7.2 The supply chain process
7.3 Forecasting and planning
7.4 Global sourcing and procurement
7.5 OSCM – management information systems
7.6Enterprise ethics and corporate social
investment in OSCM
Overview of assignments
7.2.1 SUPPLY CHAIN MANAGEMENT 2.0
• There have been changes in the global business
environment, bringing less stability and more turbulence.
Considering supply chain management, a move away from
achieving “lowest global cost” to favouring “local for local”
rather than “single global sourcing” is needed
7.2.2 SUPPLY CHAIN UNDER TURBULENCE
• Daily we are made aware that there is an increase in the
globalisation of supply chain management
• This has an impact on how these networks operate in a
changing and complex world, or what some may say is a
turbulent environment.
• International crises have a direct impact on supply chain
management models
• The question we must ask is, are these models still fit to
meet their intended purposes now and in future?
7.2.3 DISTRIBUTION NETWORK
• A distribution network is an interrelated arrangement of
people, storage facilities and transportation systems that
moves goods and services from producers to consumers
…. the system a company uses to get products from the
manufacturer to the retailer
• Two key dimensions that must be addressed when
designing the distribution network are:
1. Value to the customer; and
2. Cost of meeting customer need.
WHAT IS THIS?
IT’S A MAKRO PICK-UP LOCKER!
• Customer value is affected (from the supply chain
perspective) by:-
• Response time • Product variety
• Availability of product • Customer experience
• Time to market • Order visibility
• Returnability
• In most of them there is a trade-off. Knowledge of the
customer is critical to ensure you know where this trade-off
is
• An example is time to deliver. If the price is right, customers
will wait, so the distribution network can be spread over a
bigger geographic network
RECOMMENDED READING
• Last week, Amazon announced plans to begin integrating the two companies.
• “This is just the beginning – Amazon and Whole Foods Market plan to offer more in-store benefits and lower prices for customers over time as the two companies integrate logistics and point-of-sale and merchandising systems,” Amazon/Whole Foods said.
• Over time, Amazon plans to integrate its Prime membership program into the Whole Foods checkout process. Amazon will also place its Amazon Lockers package pickup machines in some Whole Foods stores, and make Whole Foods’ private label products available on its website.
• Analysts anticipate that Amazon will be able to use its massive buying power and vast supply chain with the infrastructure of Whole Foods’ 460 stores in the US, Canada and the UK to reduce prices purely through logistics.
AND AT THE BOTTOM …
7.2.4 DESIGNING THE SUPPLY CHAIN
• Design decisions are based on the role of the facility;
location of manufacturing, storage, or transport-related
facilities; and the allocation of capacity, market and supply
allocation.
• Designing the supply chain network is driven by factors
influencing every decision in the company and include
strategic, technological, macroeconomic, political,
infrastructure and competitive factors.
• E.g. cost-leader firms will focus on making sure they design
low-cost facilities and find low-cost locations, even if this
puts them further away from the markets they aim to serve.
Or should the organisation focus on responsiveness, it will
ensure it is close to the market.
GRAVITY v NETWORK OPTIMISATION
• Network design models are used in two situations: to
decide where to set up facilities, and to determine the
capacity to be assigned to each facility
• Depending on the design phase, the network optimisation
or gravity models are used:-
• Phase 2: Regional facility configuration = network
optimisation model
• Phase 3: Desirable sites = gravity model
NETWORK OPTIMISATION MODEL
• A manager considers regional demand, tariffs, economies
of scale, and aggregate factor costs to decide the regions
where facilities are to be located (textbook, p 129)
GRAVITY MODEL
• Gravity location models can be useful when identifying
suitable geographic locations within a region. Gravity
models are used to find locations that minimize the cost of
transporting raw materials from suppliers and finished
goods to the markets served (textbook, p 132)
NOTE: EXCEL ‘SOLVER’ ADD-IN
• Network optimisation calculation:-
• Gravity calculation:-
1
2
3
45
6
www.regenesys.co.za
https://www.youtube.com/
watch?v=KxMUE8igQ5I
• https://www.youtube.com/watch?v=KxMUE8igQ5I
7.2.5 GLOBAL SUPPLY CHAIN NETWORKS
• As company product brands proliferate, it becomes almost
mandatory to deliver excellent customer service all over the
world. A brand is after all a promise made and kept, and the
supply chain must deliver a similar experience worldwide
• Before a decision is made to offshore certain functions, the
benefits must be considered and quantified to determine a
comparative advantage, if indeed there is one. Certain
aspects of the value chain may diminish the low-cost
production due to the cost of transport
‘OFFSHORING’
• Companies typically do not gain from offshoring for two
main reasons:
• They focus exclusively on unit cost rather than total cost;
and
• They ignore critical risk factors.
OFFSHORING COSTS
• It is critical that offshoring decisions be made while
accounting for total cost
• Offshoring typically lowers labor and fixed costs but
increases risk, freight costs, and working capital
• Before offshoring, product design and process design
should be carefully evaluated to identify steps that may
lower freight content and the need for working capital
• Including an onshore option can lower the cost associated
with covering risk from an offshore facility
OFFSHORING RISKS
• Disruptions attributable to natural disaster, war, terrorism, labour disputes, supplier bankruptcy;
• Delays attributable to high capacity utilisation at supply source, inflexibility of supply source, or poor quality;
• Systems risk attributable to information infrastructure breakdown and or system integration;
• Forecast risk – inaccurate forecasts given long lead times, seasonality, product variety, short life cycles, small customer base, and or information distortion;
• Intellectual property risk attributable to vertical integration of supply chain, or global outsourcing and markets;
• Procurement risk attributable to volatile exchange rates, input prices, fraction of inputs purchased from a single source, industry-wide capacity utilisation; etc.
7.2.6 DECISION TREES
• ‘Choices and chances’ tree
• A decision tree is a diagram used to determine a course of
action or show a statistical probability
• Each branch of the decision tree represents a possible
decision, occurrence or reaction
• The tree is structured to show how and why one choice
may lead to the next, with the use of the branches
indicating each option is mutually exclusive
BASIC DECISION TREE
Inherit R100 – how to invest?
High risk, high reward
equities
Return of 20%
R120 x 0.66 = R80
Return of 5%
R105 x 0.34 = R36 R116
Low risk, low reward
bonds
Return of 11%
R111 x 0.80 = R89 R111
Return of 9%
R109 x 0.2 = R22
66%
34%
80%
20%
Choices Chances Weighted probabilities
BASIC DECISION TREE
SilverDecisions
You need:-
• Time periods
• Factors
• Probabilities
• Discount rate
Warehousing space
• D = possible demand
• P = possible price
Textbook, p167
COMPLICATED DECISION TREE
WHERE DO THE ‘CHANCES’ COME FROM?
• Guestimate / Experience
or
• (big) data mining / analytics
For example, consider a list of 1000 customers
(1000 cases). Out of all the customers, 100 satisfy
a given rule. Of these 100, 75 are likely to
increase spending, and 25 are not likely to
increase spending. The support of the rule is
100/1000 (10%). The confidence of the
prediction (likely to increase spending) for the
cases that satisfy the rule is 75/100 (75%).
LEKKER LITTLE TOOL
AND NOW IT’S YOUR TURN …
• You have put out a tender, and received 2 bids
• The cheap bidder quoted R100
• 20% of cheap bidders complete on time, within budget, and to your quality requirements
• With 30% more money, another 50% complete successfully
• The other 30% take their 25% deposit and run away, so you have to pay twice (i.e. another contractor at inflated future price = current expensive price)
• The expensive bidder quoted R125
• Expensive bidders have a 100% chance of completing on time, within budget, and to your quality requirements
• In terms of ‘weighted probability’, which would you choose?
www.regenesys.co.za
END
OF
THE
UNIT
Congratulations!
Nice going … !!
Please remember not to forget to
remember to:-
1. Check out the ‘Key Points’
summarising this unit
2. Do your digital assessment
(MCQs) for this unit online
MBA9
Operations & Supply Chain Management
SECTION 7.3
Forecasting and planning
HOW’S OUR PROGRESS?
7.1 (a) Supply chain, performance drivers & metrics
7.1 (b) Supply chain, performance drivers & metrics
7.2 The supply chain process
7.3 Forecasting and planning
7.4 Global sourcing and procurement
7.5 OSCM – management information systems
7.6Enterprise ethics and corporate social
investment in OSCM
Overview of assignments
7.3.1 DEMAND FORECASTING IN SCM
• A demand forecast forms the basis of all supply chain
planning. Managers need to plan the level of available
capacity and inventory based on expected demand
1.Forecasts are always inaccurate – they should include
both the expected value of the forecast and a measure of
forecast error
2.Long-term forecasts are usually less accurate than short-
term forecasts
3.Aggregate forecasts are usually more accurate than
disaggregate forecasts
7.3.2 FORECASTING
• Demand does not arise in a vacuum. It is influenced by a
variety of factors and can be predicted.
• Factors related to demand forecast:
• Past demand;
• Lead time of product replenishment;
• Planned advertising or marketing efforts;
• Planned price discounts;
• State of the economy; and
• Actions that competitors have taken.
FORECASTING METHODS
1. Qualitative: mainly subjective, relying on human
judgement. Appropriate when little historical data are
available
2. Time series: use historical demand to make a forecast on
the assumption that past demand history is a good indicator
of future demand
3. Causal: assumes that the demand forecast is highly
correlated with certain factors in the environment (the state
of the economy, interest rates, etc.).
4. Simulation: this method imitates consumer choices, giving
rise to a forecast
7.3.3 APPROACH TO DEMAND FORECASTING
• Five points are important to facilitate an effective forecast:-
1.Understand the objective of forecasting
2. Integrate demand planning and forecasting throughout
the supply chain
3. Identify the main factors that influence the demand
forecast
4.Forecast at the appropriate level of aggregation
5.Establish performance and error measures for the
forecast
7.3.4 FORECASTING IN PRACTICE
• The following are a few principles with regard to forecasting:-
1.Collaborate in building forecasts. The supply chain benefits of collaboration outweigh the costs
2.Share only the data that truly provide value. The value of data depends on where one is in the supply chain. Point of sale data is useful to the retailer, not to the manufacturer
3.Distinguish between demand and sales. Unmet demand due to stock-outs, competitor actions, pricing, and promotions affect the true demand. If these are ignored, reality is skewed
www.regenesys.co.za
https://www.youtube.com/
watch?v=fp-1_9mLlbc
watch?v=1b-BBhoNo0g
Overview of forecasting methods
• https://www.youtube.com/watch?v=fp-1_9mLlbc
Moving averages forecasting
• https://www.youtube.com/watch?v=1b-BBhoNo0g
7.3.5 THEORY OF CONSTRAINTS
• The theory of constraints has been known as a
management philosophy since the 1990s and was devised
by Eli Goldratt
• The aim is to make breakthrough improvements by
focusing on a constraint that prevents a system from
achieving a higher level of performance
• The philosophy states that each organisation has at least
one constraint (any element or fact that limits the system
from doing more of what it was designed to do)
• The theory of constraint encourages managers to identify
what is preventing them from moving towards their goal,
and to find solutions to this limitation
7.3.6 AGGREGATE PLANNING IN SCM
• Organisations use planning to make decisions about
production, outsourcing, inventory, and backlogs
• To meet or anticipate customer demands companies need
to plan for capacity levels, production levels, outsourcing
and promotions in advance
• The process whereby a company determines planned
levels of capacity, production, subcontracting, inventory,
stock-outs, and even pricing over a specified time horizon is
known as aggregate planning
• The main goal of aggregate planning is to plan so that you
can satisfy demand while maximizing profit.
• Aggregate planning, as the name suggests, solves
problems involving aggregate decisions rather than stock-
keeping unit (SKU)-level decisions
• For example, aggre- gate planning determines the total
production level in a plant for a given month, but it does so
without determining the quantity of each individual SKU that
will be produced
• This level of detail makes aggregate planning a useful tool
for thinking about decisions with an intermediate time frame
of between roughly 3 and 18 months. In this time frame, it is
too early to deter- mine production levels by SKU, but it is
also generally too late to arrange for additional capacity.
• Therefore, aggregate planning answers the question: How
should a firm best utilize the facilities that it currently has?
AGGREGATE PLANNING OBJECTIVES
• Production rate: units to be completed per unit time (such as per week or per month);
• Workforce: the number of workers or units of labour capacity required;
• Overtime: the amount of overtime production planned;
• Machine capacity level: the number of units of machine capacity needed for production;
• Subcontracting: the subcontracted capacity required over the planning horizon;
• Backlog: demand not satisfied in the period in which it arises, but carried over to future periods;
• Inventory on hand: the planned inventory carried over the various periods in the planning horizon.
7.3.7 AGGREGATE PLANNING STRATEGIES
• Planners constantly have to make trade-offs among
capacity, inventory, and backlog costs
• If one of these is increased there is a reduction in the other
two
• To reduce inventory cost, there must be an increase in the
capacity cost or increase the time to deliver
• Ideally, there is a profitable combination to suit all
concerned parties. The main trade-offs available are:-
• Capacity
• Inventory
• Backlog
• The strategies to achieve the balance among these costs are:-
• Chase strategy: The orders come first, then the capacity: the production rate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees as the demand rate varies. In practice, achieving this synchronization can be problematic because of the difficulty of varying capacity and workforce on short notice.
• Flexibility strategy: The orders come first, then the use of the resources: if there is excess machine capacity (i.e., if machines are not used 24 hours a day, seven days a week) and the workforce shows scheduling flexibility. In this case, the workforce (capacity) is kept stable, but the number of hours worked is varied over time in an effort to synchronize production with demand.
• Level strategy: Production is not directly linked to demand,
but rather to capacity: a stable machine capacity and
workforce are maintained with a constant output rate.
Shortages and surpluses result in inventory levels
fluctuating over time. In this case, production is not
synchronized with demand. Either inventories are built up in
anticipation of future demand or backlogs are carried over
from high- to low-demand periods.
7.3.8 ROLE OF IT IN AGGREGATE PLANNING
• IT can usefully be applied in forecasting, given the extent of
the data involved, the frequency of the forecasts and the
importance of high quality results
• Enterprise resource planning (ERP) has improvement
transparency and data integration in supply chain
management, resulting in better forecasts
• Some of the earliest IT supply chain products were
aggregate planning modules known as factory, production,
or manufacturing planning
• Software vendors such as SAP and Oracle provide
advanced planning systems (APSs) to help firms make
aggregate plans
7.3.9 AGGREGATE PLANNING IN PRACTICE
1.Think beyond the enterprise to the entire supply chain.
2.Make plans flexible, because forecasts are always
inaccurate.
3.Rerun the aggregate plan as new data emerge.
4.Use aggregate planning as capacity utilisation increases.
7.3.10 SALES AND OPERATIONAL PLANNING
• Predictable variability is change in demand that can be
forecast
• Products for which demand varies can cause problems in
the supply chain, including stock-outs and excess inventory
in low-demand seasons
• This affects the cost and responsiveness of the supply
chain, so companies must respond so that supply balances
with demand so that profitability can be at its highest
• The goal of sales and operations planning is to
appropriately combine two broad options to handle
predictable variability
7.3.11 MANAGING SUPPLY
• Two factors are used to vary the supply of a product:
• Production capacity; and
• Inventory.
MANAGING CAPACITY
• Using a combination of approaches reduces the cost of
capacity to meet predictable variability
• Some approaches that can be used are:-
• Time flexibility from workforce;
• Use of seasonal workforce;
• Use of dual facilities – specialised and flexible;
• Use of subcontracting; and
• Designing product flexibility into the production
processes.
MANAGING INVENTORY
• The following approaches can be used to reduce the level
of inventory required to meet predictable variability:-
• Using common components across multiple products;
and
• Build inventory of high-demand or predictable-demand
products
7.3.12 MANAGING DEMAND
• Demand can be influenced by using pricing and promotion.
Promotion drives demand through the use of:-
• Market growth;
• Stealing share; and
• Forward buying.
7.3.13 IMPLEMENTING SALES AND
OPERATIONS PLANNING
• The following are practical methods of planning:-
1.Co-ordinate planning across enterprises in the supply
chain.
2.Take predictable variability into account when making
strategic decisions.
3.Ensure that senior leadership owns the sales and
operations planning process.
4.Ensure that the sales and operations planning process
modifies plans as the reality or forecasts change.
AND NOW …
Let’s experiment / become familiar with …
SOLVER!!!
www.regenesys.co.za
END
OF
THE
UNIT
Congratulations!
Nice going … !!
Please remember not to forget to
remember to:-
1. Check out the ‘Key Points’
summarising this unit
2. Do your digital assessment
(MCQs) for this unit online
www.regenesys.co.za
Travel home
safely!
