Phase II Project File

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To quantify the bullwhip effect in a two echelon supply chain: A casestudy of Eicher-Metacut manufacturer-supplier relationship.

A PROJECT REPORT

Submitted by

CHATURVEDI ANUP

VERMA AVIRAL

PATIDAR GANESH

SONI PRASANNA

SEJKAR SONU

in partial fulfillment for the award of the degree

of

BACHELOR OF ENGINEERING

in

MECHANICAL ENGINEERING

DEVI AHILYA VISHVAVIDYALAY

INSTITUTE OF ENGINEERING & TECHNOLOGY

INDORE (M.P.) 452017

DECEMBER 2009


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ACKNOWLEDGEMENT

Words tend to loose their effectiveness when we turn the pages of theencyclopedia of our hearts to express gratitude and thankfulness.

We would like to convey ourheartiest thanks to our project guide Dr. Nagendra Sohani. From the bottom ofthe heart without whom devoted indulgence and expert guidance the projectcould not have had taken the shape.

We here by find the golden opportunity to acknowledge

our sincere thanks to Dr. M. Chandwani directorIET-DAVV and Dr. AsheshTiwari (HOD- Mechanical Engineering) for letting us undertake this project.

DEVI AHILYA VISHVAVIDYALAYA




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BONAFIDE CERTIFICATE

Certified that this project report To quantify the bullwhip effect in a two echelon supply

chain: A case study of Eicher-Metacut manufacturer-supplier relationship. is the bonafide

work of Anup Chaturvedi, Aviral Verma, Ganesh Patidar, Prasanna Soni and Sonu

Sejkar who carried out the project work under my guidance.

SIGNATURE SIGNATURE

GUIDE HEAD OF THE DEPARTMENT

MECHANICAL ENGINEERING

DirectorDEVI AHILYA VISHVAVIDYALAYA




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Abstract

In this project we quantified the Bullwhip effect in Eicher-Metacut Vendor-Vendee relationship. We visited the manufacturing plants of Eicher and Metacutand through questionnaire found out the way of working in the two firms. Wethen came to know about various methods employed for effective management.We were also able to determine the difficulties faced in achieving targets ofdemand and supply. Further, we collected various data regarding demand order,supply delivery and inventory. We analysed this data and detected the Bullwhipeffect using various statistical tools. We also carried out a study of variousresearch papers and literature so as to understand various standard practicesinvolved in two firms, and also to find out various researches carried out on theBullwhip effect. Through this we came to know about various tools used to detectthe Bullwhip effect and to minimise it. Finally, we proposed some solutions tominimise Bullwhip effect, and to strengthen the Vendor-Vendee relationship.


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Table of Contents

Description Page

No.

ACKNOWLEDGMENT iBONAFIDE CERTIFICATE iiABSTRACT iiiTABLE OF CONTENTS iv1.0 INTRODUCTION 11.1 EICHER MOTORS PROFILE1.2 METACUT PROFILE1.3 EICHER-METACUT RELATIONSHIP

1.4 PROBLEMS FACED BY TWO COMPANIES2.0 LITERATURE REVIEW

2.1 General2.2 Conclusions of Literature Review3.0 PROBLEM DEFINITION

3.1 Motivation3.2 Objective and Main Goals3.3 Research Approach3.4 Scope of Work-------------------------------------------------------------------------------

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4.0 METHODOLOGY

4.1 GENERAL4.2 . . . . . . . . . . . . .4.2.1 General

4.2.2 ..4.2.2.1 General

4.2.2.2 . . . . . . . . . .

4.2.2.3 . . . . . . . . . .4.2.3 .4.3 . . . . . . . . . . .. . . . . . .

5.0 CONCLUSION AND FUTURE WORK

5.1 Conclusion5.2 Scope For Future Work


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PUBLICATIONS FROM THIS WORK

REFERENCES

APPENDIX

A.

B.C ..

1. Introduction

1.1 Eicher Motors Profile

Eicher began its business operations in 1959 with the roll out of Indias first tractor. Today theEicher Group is a significant player in the Indian automobile industry with a gross salesturnover of over INR 19,000 million ($424 million) in the year 2005-06. The Eicher Group hasdiversified business interests in design & development, manufacturing and local/ internationalmarketing of Trucks & Buses, Motorcycles, Automotive Gears and components. In addition to


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this, Eicher has also invested in the potential growth areas of Customised EngineeringSolutions, City Map & Travel Guides. The activities of the Group are divided into thefollowing business units covering all the business interests.

Eicher Motors Limited

Eicher MotorsRoyal EnfieldEicher Engineering Components

:: Commercial Vehicles :: Motorcycles :: Gears

Eicher Engineering Solutions Customised Engineering Solutions

Good Earth Publications City Maps & Travel Guides

Eicher has around 2500 employees located in 4 manufacturing facilities and 49 marketing &area offices all around India. The Group has around 308 vendors supplying components andsub-assemblies, which testifies to the strength of the vendor base. The Groups products arebrought to the customers through its strong network of around 142 dealers distributed acrossthe length and breadth of the country. Eicher is present in over 40 countries across the world.Over 85 executives work exclusively in the area of R&D. Product development and product-engineering facilities are available at each of Eichers major manufacturing locations.Expertise has been developed in the areas of design and development of Trucks & Buses,Automotive transmission, Electronic instrumentation, Material science, Metrology as well asprototype manufacturing and testing.

1.1.1 Supply chain of Eicher

Demand is generated in Eicher in two ways. Firstly, the annual business planning of Eicherconducts a market survey studying the trend of market and the requirement of the customers.Also, they look for their competitors latest launches and prices. If a new product is launchedby the competitor, the marketing department sends its details to the R&D department forconsideration of the possibilities of design and development of a similar kind of product to belaunched in competition. On the basis of this rigorous study they create their annual productiontarget of all the vehicles. This annual plan also incorporates their annual growth rate target.This whole planning is done by the top management to provide a long term growth for thecompany. Secondly, the order from the dealers to Eicher is also added in the productionschedule as it arrives.
http://trucks.eicherworld.com/http://www.royalenfield.com/http://gears.eicherworld.com/http://ees.eicherworld.com/http://maps.eicherworld.com/http://trucks.eicherworld.com/http://www.royalenfield.com/http://gears.eicherworld.com/http://ees.eicherworld.com/http://maps.eicherworld.com/


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This production target is forwarded to PPC (Production Planning & Control) department whichdivides it into monthly, weekly and then daily production plan. This plans information is thenprovided to the Production department and the Materials department. Now, as the materialdepartment has the responsibility to manage regular purchases, costing, material control andsupply for spares, so it manages inventory of all materials. For this, Materials department send

production plans to the vendors and tells them how much they should produce and maintain asinventory. Now, the vendor supplies the raw material (as machined parts, castings, etc.) to thestores where it undergoes quality check and then kept as inventory. The production departmentutilizes this inventory for production. In doing so, they maintain continuous interaction withthe materials department in case they felt short of any material and have to change the dailyplan and need some other material. The material department then consults the vendors and lookfor the available options. The finished product then stored in the warehouse and thendistributed by the distribution department to the dealers.

1.1.2 Production scheduling and inventory management in EICHER motors: -

Production scheduling is solely based on the amount of inventory available to Eicher.Scheduling people have data of on hand inventory, inventory at vendors and on wheelinventory. Now, if due to any reason the required inventory does not reach on time as planned,the schedule for production has to be changed to avoid stoppage of production. This is done byplanning personnel who maintains proper flow of machine parts required for assembly. Heanalyse the amount of different machine parts available in store so as to suggest the number ofvehicles that can be assembled according to available order they have to deliver. Then

rescheduling of roll out plan is done by inserting the number of other vehicles for whichproduction line may be used.

Inventory management at Eicher involves ABC analysis which helps in deciding the order upto level and reorder point of different vehicles and machine parts. This also involves the tradeoff between the inventory turn out ratio and the amount of capital involved in inventory. Nowthe order placed by Eicher to its vendors adds some other factors to avoid any shortage. Thesefactors are, along with average inventory level, safety stock, service level requirement factor,and uncertainty avoiding factor. Eicher uses central warehouse system for efficient supply ofmaterials. This allows its vendors to directly unload the shipment to the central warehouseavoiding the need of warehouse at production site and avoids traffic.

The product manufactured by Eicher Motors are classified as

Light commercial vehicle Heavy commercial vehicle


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1.2 Metacuts Profile[1]

METACUT ENGINEERING PVT. LTD was set up in the year 1991 as an ancillary to EicherMotors Ltd. for high tech precision machining of LCV components using CNC and other

machines. Unit was promoted by a technocrat having 15 years of varied experience inengineering and automobile industry.

Manufacturing unit of company is located at Pithampur (M.P.) in the vicinity of Eicher MotorsLtd.

Main Customers of the company are:

Eicher Motors Ltd, Pithampur

Gajra Gears Ltd, DewasHindustan Motors Ltd, Pithampur

L&T Case Ltd, Pithampur

Crompton Greaves Ltd, Pithampur

VA Tech Hydro Pvt. Ltd., Bhopal

Company also Executes Orders from other customers as and when capacity is available.

Company is mainly engaged in job work for Eicher Motors Ltd. Castings for the products aresupplied by Eicher Motors Ltd. and company does full machining/assembly of components forsupply to Assembly line.Following main components are machined:

Front wheel hubs for various models of vehicles Rear wheel hubs for various models of vehicles

Metacut


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Flange Plate for Fuel Injection Pumps Compressor Mounting Bracket Rear Cover

Company is doing job work on CNC Lathes and machining centers for other customers andmachined variety of components like

Planetary Housing for Automotive Gear BoxPump housing for Centre for Advanced TechnologyPump Housing for L&T Case Equipment Ltd.Pole End Plates for Hydroelectric Generators

Company also produces components using its own raw materialFollowing components are sold to Crompton Greaves Ltd:

Drive Rod for Point machineLock Rod for point machine

Manpower

Company has got qualified and skilled manpower. Presently two graduate engineers, sixdiploma engineers are working with the company. Most of CNC operators are educated up tohigh school and above and are trained for the job.

Plant and Machinery

Following Plant and Machinery and Quality Control equipment are installed in the plant:

CNCs

Lathes

NCM 25 CNC Lathe with Hinumeric 2100 T control, 12 tool turret, swing over bad 400,ABC-500 from NC Machine, Cochin Econo 26 CNC Lathe with Hinumeric 2100 T control, 8 tool turret, swing over bad 400,ABC-1000 from HMT Universal Ultra CNC Lathe with Siemens 810D control, 12 Tool turret, Turning Dia315,ABC -1000 with Chip Conveyor from GLIL


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VMCs

Arrow 750 Vertical Machine Center with Acramatic 2100 control, 21 tool drum, travels750X510X510 from Cincinnati Milacron BT40 Vertical Machine Center with Sinumeric 810D control, 20 tool drum, travels

510X460X410 from BFW

Others

Center Lathe, swing over bad 350, ABC 1000 from Kamani, Rajkot BVR-3 Radial Drill Machine, 2 Nos, max. drill capacity in steel - 32 from Batliboi RR-25 Rapid Drill Machine, max. drill capacity in steel - 25 from Accumax, Rajkot SPM for spherical seat machine from Precitec, Bangalore Pillar drill machine, maximum drilling capacity in steel - 25 from EIFCO, Coiambatore Tool & Cutter Grinder from Yantra Nirmal, Pune Press Machine 40T Generating Set 55 KVA from Batliboi & Co.

Inspect ion Equipments

Height Measuring machine, Vertical 3 from Trimos, Switzerland Surface Roughness Tester from Mitutoyo Air Gauging Equipment from Baker Mercer Tool Presetter from Keejan, Taiwan Surface Plate Granite from MMT Bench Center from MMT Hardness Testing Machine model KB 3000H Micrometer, Vernier Calipers, Depth Vernier, Dial Indicator. From Mitutoyo

1.3 Eicher-Metacut supplier relationship: -


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In 1996, Eicher Motors decided to implement Japanese supply chain improvement techniques.

For this many people and firms interested in becoming a part of the process were called upon.Mr. Mehta (the founder of Metacut) was also present in the meet and decided to invest capitalto establish a machining firm under the guidance of Eicher Motors. Hence, Metacut Pvt. Ltdcame into existence. It was started with traditional lathe machines with limited capacity. Eicherdevelop Metacut and gave it an ancillary status under which Eicher is committed to placeorders with Metacut. Slowly and steadily Metacut grew and at present it has two Machiningfirms with latest CNC Lathes installed. During this period Eicher puts in a lot of effort inimproving Supplier-Manufacturer relationship with Metacut through various training,development programs, and information sharing through latest technological means.

Metacut performs machining operations on the casting for Eicher. The raw material is provided

by Eicher itself. primary machining operations, if required, is performed by the Metacutsvendors & the final machining is done by Metacut. Machining operations are carried out usingCNC Lathes so that precision & accuracy can be achieved. There are 17 components that arebeing machined Metacut for Eicher the raw material i.e. casting for these components isprovided by other suppliers of Eicher via door delivery system.

Under the strategic alliance of Eicher and Metacut, the Metacut has to maintain inventorysufficient for three days work. Metacut keep 2 days inventory at its own warehouse and 1 dayinventory at Eichers. The Japanese method Kanban is employed to maintain the inventory.According to this method, the daily requirement orders are taken from Eicher on the basis ofinventory available at its warehouse. This order is taken on a daily basis on each morning and

is given to the production department of Metacut which further matches it with the ongoingproduction schedule. For this, the analysis of raw material inventory and work in processinventory is carried out and the difference of units of required product is then added to theproduction plan of that day. Here, a trade off between machine set up cost and profit margin ofthe product is done to decide whether or not the production schedule should be changed.

Metacut


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1.4 Problems faced by the two companies: -

1). Highly variable demand by Eicher to Metacut has made it very difficult for Metacut to

maintain the inventory of different products according to the safety stock norms so set.

2). Full utilization of transportation capacity is not possible for Metacut under such variabledemand environment.

3). Varying demand for different products induce frequent changes in the production planningof Metacut which has increased its production cost (abrupt change in setups)

4). Long queue of trucks (for unloading) at the Eichers warehouse increases the lead time forMetacut.

5). The backorders generated by Metacut leads to increase in the planning cost of Eicher asthey have to change their production plan due to unavailability of those parts(undelivered byMetacut).

2. Literature survey

This chapter elaborates various standard practices employed for effective management of asupply chain and gives a brief over researches carried out on Bullwhip Effect. This surveyhelped us to understand the supply chain of Eicher and Metacut.

2.1 Research on bullwhip effect: -

[Lee, Padmanabhan, and Whang (1997a) and Lee, So, and Tang (2000) popularized the termBullwhip Effect, where a retailers orders to their suppliers tend to have a larger variancethan the consumer demand that triggered the orders. This demand distortion propagatesupstream with amplification occurring at each echelon. Lee, Padmanabhan, and Whang


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(1997b) identified four major causes of the Bullwhip Effect: (1) users interpreting orders (thedemand); (2) order batching; (3) promotions, which artificially stimulate demand; and (4)supply shortages, which also lead to artificial demands. The Bullwhip Effect has beendocumented as a significant problem in an experimental, managerial context (Sterman 1989),as well as in a wide variety of companies and industries (Buzzell, Quelch, and Salmon 1990;

Kelly 1995; Holmstrom 1997; Metters 1997). Many proposed strategies for mitigating theBullwhip Effect have a history of successful application (Clark 1994; Gill and Abend 1997;Hammond 1993; Towill 1997). Fine (2000) discusses the Bullwhip Effect as one of two lawsthat govern supply chain dynamics, focusing on the strategic issues that arise. Anderson andMorrice (2000) analyzed the Bullwhip Effect in service industries, which cannot holdinventory, and in which backlogs can only be managed by adjusting capacity. Anderson, Fine,and Parker (2000) suggest the amplification of demand volatility is particularly large indistribution and component parts supply chains, e.g., machine tools. Johnson and Whang(2002) survey emerging research on the impact of e-business on supply chains. Much earlier,however, Forrester (1961) had defined a simplified form for the equations describing therelation between inventory and orders. In this paper, it is demonstrated that the fundamental

differential delay equations describing an inventory reacting to a surge in consumer demandcan be solved exactly. Forrester pioneered the simulation approach and established theimportance of integrating information flow with material flow. Burbidge (1961) emphasizedthe now well accepted principles of cycle time reduction and order synchronization, and latercoined his Law of Industrial Dynamics (Burbidge 1984): If demand is transmitted along aseries of inventories using stock control ordering, then the demand variation will increase witheach transfer. Simulation has since been employed extensively to analyze supply chains(Berry and Towill 1995; Disney and Towill 2002a, 2002c).]21

O donell et al (2006) proposed a genetic algorithm model to find the optimum ordering policyfor each member of sc to reduce cost and bullwhip effect. Boute et al (2008) suggestedapplying order smoothening techniques to clamper demand variability. Shukla et al describedan aftermath of bullwhip effect as the backlash effect using MIT beer distribution game. Lee etal discuss the four major causes of bullwhip effect. Nienhaus describe the bullwhip effect onthe basis of study of the beer distribution game. Kriper, Shankar et al proposed a way tomeasure the bullwhip effect and showed that the lead time reduction is more beneficial inreducing bullwhip effect as compared to the information sharing. in the white paper by theMotorola supply chain mobility it is said tht real time access to the data help in improvingmanagement process which trough manual way lead to different types of loses . Lin et al(2004) proposed that the adjusting retailers order size using portfolio theory reduces bullwhipeffect.Wang et al (2005) describes reasons of information distortion other than bullwhip effect andcoined the term extended bullwhip effect. Warbutton (2002) showed how bullwhip effectoccurs by solving differential day equation for the retailers inventory. Xiong and Helo (2006)proposed a multiechelon fuzzy inventory model in which in damping demand fluctuation andhence bullwhip effect. Huang et al (2006) developed a new method for a dynamicquantification and calculations of bullwhip effect based on classic control theories. Fuenti andLozano (2007) describe an application of a multi-agent methodology to reduce the bullwhipeffect. Zhon and Disney (2005) showed that the larger return rates lead to the less bullwhip


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effect and less inventory variance. Hung and Ryu (2008) explain a behavioral cause foroccurrence of the bullwhip effect.Petuhora and Merkuryev proposes an analytical model for the analysis and numericalevaluation of bullwhip effect in a supply chain and further uses similar techniques to validatethe results. Meixell and Wu (2005) studied the demand propagation using experiments and

stimulation techniques and also impact of design policies on it Hsiao and Shieh (2005)quantified as the bullwhip effect using Arima model. Nienhus et al (2006) how humanbehaviour amplify the bullwhip effect using beer simulation game. C.Lin and T.lin (2005)examines the occurance of bullwhip effect caused by the order variance from the retailers. Wuetal (2005) prposed a plan for a supply chain disruption analysis which may lead to thedetermine the bullwhip effect. Martin and Peterson have described the methods to to measurethe performance of the bullwhip effect. Chen et al qualifies the bullwhip effect considering itstwo major cuuses i.e demand forecasting and order lead times and suugested that it can bereduced by the centralized demand information. Holland and Sodhi quantified bullwhip effectthrough its various causes individually using simulation. Prapanagou and Halikas proposed amodel to propose and analyse the bullwhip effect. Yung et al presented a system dyanamics

approach to study the bullwhip effect. Delhoun and reiter determined the differntt decisionpatterns of the inventory control which are responsible for propagating the bullwhip effect.Chen and Disney shoed that an order up to policy with a proportional feedback controller helpsin reducing bullwhip effect. Disney et al showed that if altruistic nature is adopted by a retailer(by dampening its order variability) bullwhip effect can be reduced.

2.2 Various practices applied for supply chain management

2.2.1 Supplier Partnership

Introduction: -

An organization spends a substantial portion of every sales dollar on the purchase of rawmaterials, components, and services. In fact 60% of the cost of goods sold in 2000 consisted of purchased goods. This is an increase from 20% in 1970. Therefore, supplier quality cansubstantially affect the overall cost of a product and or service. One of the keys to obtaininghigh-quality products and services is for the customer to work with suppliers in a partneringatmosphere to achieve the same quality as attained within the organization.Customers and suppliers have the same goal-to satisfy the end user. The better the suppliers

quality, the better the suppliers long term position, because the customer will have betterquality. Because both the customer and the supplier have limit resources, they must work

together as partners to maximize their on investment.

There have been a number of forces that have changed supplier relation. Prior to the 1980s,procurement decisions were typically based on price, thereby awarding contracts to the lowestbidder. As a result, quality and timely delivery were sacrificed. One force, Deming fourthpoint, addressed this problem. He stated that customers must stop must awarding businessbased on the low bidder because price has no basis without quality. In addition, he advocated


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single suppliers for each item to help develop a long term relationship of loyalty and trust.These actions will lead to improved products and services.

Another force changing supplier relation was the introduction of the just in time (JIT) concept.It calls for raw material and components to reach the operation in small quantities when they

are needed not before. The benefit of JIT is that inventory related costs are kept to a minimum.Procurement lost is small and delivery is frequent. As a result, the supplier will have manymore process setups, thus becoming a JIT organization itself. The supplier must drasticallyreduce setup time or its cost will increase. Because there is little or no inventory, the quality ofincoming material must be very good or the production line will be shut down. To besuccessful, JIT requires exceptional quality and reduced setup time.

The practice of continuous process improvement has also caused many suppliers to developpartnerships with their customers. Citing the company effective use Kaizen, the CEO ofFreudenber NOK approached Chrysler to implement a Kaizen project for every part itsupplied to the automark to reduce controllable/variable costs. The company freed 30% of its

floor space and increased revenues by 300% resulting in a strong alliance with its customer.Because approximately half of all revenues currently generated in the U.S. economy arederived from product and service developed in the last five year, many original equipmentmanufacturing (OEMs) are developing strategic partnerships with their suppliers. Suppliersare now taking on increased product development responsibilities. In the development ofproduct, many suppliers are becoming involved in product design and complexity, formation ofspeciation, and component testing.

A final force is ISO 9000, and in particular QS 9000 (ISO/TS 16949), which is mandated bythe major automotive assembly firms. Specifically, first tier and tiers subsequent to the OEMsmust maintain supply chain development through three key factors: zero defects, 100% on-time delivery, and a process for continuous improvement.These forces have changed adversarial customer-supplier relationships into mutually-beneficialpartnership. Joints efforts improve quality, reduce costs, and increase market share for bothparties.

Principles of Customer/Supplier RelationsDr.Kaoru Ishikawa has suggested ten principles to ensure quality products and services andeliminate unsatisfactory conditions between the customer and the supplier:

1. Both the customer and the supplier are fully responsible for the control of quality.

2. Both the customer and the supplier should be independent of each other andrespect each others independence.

3. The customer is responsible for providing the supplier with clear and sufficientrequirement so that the supplier can know precisely what to produce.


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4. Both the customer and the supplier should enter into a non adversarial contractwith respect to quality, quantity, price, delivery methods, and terms of payments.

5. The supplier is responsible for providing the quality that will satisfy the customerand submitting necessary data upon the customers request.

6. Both the customer and the supplier should decide the method to evaluate thequality of the product or service to the satisfaction of both parties.

7. Both the customer and the supplier should establish in the contract the method bywhich they can reach an amicable settlement of any disputes that may arise.

8. Both the customer and the supplier should continually exchange information,sometimes using multifunctional teams, in order to improve the product or service quality.

9. Both the customer and the supplier should perform business activites such as

procurement, production and inventory planning, clerical work, and systems so that anamicable and satisfactory relationship is maintained.

10. When dealing with business transaction, both the customer and supplier shouldalways have the best interest of the end user in mind

Although most of these principles are common sense, a close scrutiny shows that a truepartnering relationship exists with long-term commitment, trust and shared vision. Ishikawa,like Deming, preaches a family-type relationship, where each party preserves their identity and

independence.

Partnering: -

Partnering is long-term commitment between two or more organization for the purpose of

achieving specific business goals and objectives by maximizing the effectiveness of eachparticipants resources. The relationship is based upon trust, dedication to common goals andobjectives, and an understanding of each participants expectations and values. Benefitsinclude improved quality, increased efficiency, lower cost, increased opportunity forinnovation, and the continuous improvement of products and services. Partnering is amultifaceted relationship requiring constant nurturing to achieve continuous improvement andmaximum benefit.


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There are three key elements to a partnering relationship: long-terms commitment,trust, and shared vision.

1. Long-Term Commitment: Experience has shown that the benefits of partnering are notachieve quickly. Problems require time to solve or processes need constant improvement.Long-term commitment provides the needed environment for both parties to work towardcontinuous improvement. There must be total organizational involvement from the CEO to theworkers.

Each party contributes its unique strengths to the processes. When these strengths are notsufficient, investments in new equipment, systems, or personnel may be required. The partiestake risks that are commensurate with their rewards and the degree of the relationship. Asupplier might not take these risks, such as acquiring new equipment or systems, without along-term commitment

Chrysler requires about 70 percent of the manufacturing tools it uses to be used by its supplieras well. Chrysler works early in the supplier relationship to expose and train the supplier to useCAE, CAD, and CAM software tools. Without supplier involvement, the use of advancedtechnologies within Chrysler would have had only marginal impact on the competition.

2. Trust. Trust enables the resources and knowledge of each partner to be combined toeliminate an adversarial relationship. Partners are then able to share information and acceptreduced control. Mutual trust forms the basis for a strong working relationship. It should beviewed as a business paradigm shift and begins with the purchase contract that is nonadversarial. The purchasing function of the organization must be subordinate to the overall

relationship goals and objectives. Open and frequent communication avoids misdirection anddisputes while strengthening the relationship.

The parties should have access to each others business plans and technical information, such asproduct and process parameters. IN addition, they may share or integrate resources such astraining activities, administrative systems, and equipment. The strength pf partnering is basedon fairness and parity. Both parties become mutually motivated when win-win solutions aresought rather than win-lose solutions.

3. Shared Vision. Each of the partnering organization must understand the need to satisfythe final customer. To achieve this vision, there should be an open and candid exchange of

needs and expectations. Shared goals and objectives ensure a common direction and must bealigned with each partys mission. Employees of both parties should think and act for theircommon good. Each partner must understand the other partners business so that equitabledecisions are made. These decisions must be formulated and implemented as a team. Thus, thesharing of business plans aids in mutual strategic planning.

Sourcing: -


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There are three types of sourcing: sole, multiple and single. A sole source of supply impliesthat the organization is forced to use only one supplier. This situation is due to factors such aspatents, technical specifications, raw material location, only one organization producing theitem, or the item being purchased by another plant or division of the organization. Partnering is

a natural consequence of this type of sourcing, provided the supplier is willing to work togetherto satisfy the end user.Multiple sourcing is the use of two or more suppliers for an item. Usually three suppliers arechosen, and their portion of business is a function of their performance in terms of price,quality, and delivery. The theory of multiple sourcing is that competition will result in betterquality, lower costs, and better service. However, in practice, an adversarial relationship mayresult without the claimed advantages. Multiple sourcing also eliminates disruption of supplydue to strikes and other problems.

Single sourcing is a planned decision by the organization to select one supplier for anitem when several sources are available. It results in large, long-term contracts and a partneringrelationship. With a guaranteed future volume, the supplier can direct its resources to improve

the processes. For the organisation, the advantages are reduced business and production cost,complete accountability, supplier loyalty, and a better end product with less variability.Delivery disruption is always a problem and is even more so with JIT implementation. For thesupplier, the advantages are new business and production processes because of economies ofscale. Single sourcing has allowed organisations to reduce their supplier base for example,Xerox eliminated 90% of its suppliers and improved supplier quality from 92% to 99.97% insix years through supplier consolidation, Merck cut its supplier base 75% in eight years; andWhirlpool reduced its suppliers 50% in four years.

Supplier Selection: -

Before discussing supplier activities, it must be decided whether to produce or outsource aparticular item. This decision is a strategic one that must be made during the design stage. Thefollowing three questions need to be answered:1. Hoe critical is the item to design of the product or service?

2. Does the organization have the technical knowledge to produce the item internally? Ifnot, should that knowledge be developed?

3. Are there suppliers who specialize in producing the item? If not, is the organizationwilling to develop such a specialized supplier?

These questions must be answered in terms of cost, delivery, quality, safety, and theacquisition of technical knowledge. One organization outsourced their trucking operation,warehousing, and accounts payable because it could be done better and cheaper.Once the decision has been made to outsource, then the supplier must be selected. Followingare ten conditions for selection and evaluation of supplier.1. The supplier understands and appreciates the management philosophy of the organization.


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2. The supplier has a stable management system. In determining this condition, severalquestions should be asked: Is there a quality policy statement that includes objectives forquality and its commitment to quality? Is the policy implemented and understood at alllevels of the organization? Is there documentation that indicates who is in charge andresponsible for quality in the organization? Is there a member of top management with the

authority to execute a quality system? Does the management have scheduled reviews of itsquality system to determine its effectiveness?

3. The supplier maintains high technical standard and hash the capability of the dealing withfuture technological innovation

4. The supplier can provide those raw material and part required by the purchaser and thosesupplied meet the quality specification

5. The supplier hash the capability to produce the amount of production needed or can attend

that capability6. There is no danger of the supplier breaching corporate secrets

7. The price right and the delivery that can be met. In addition, the supplier is easilyaccessible in term of transportation and communication. There must also be a system totrace the product of lot from receipt and all change of production delivery.

8. The supplier is sincere in implementing the contract provision. Does the supplier have asystem for contract review, and does that system include a contract review of requirementand how difference between the contract and\or accepted order requirement should be

resolved? Further, does the system allow the inclusion of amendment? Also does thesystem include maintaining records of reviewed contracts?

9. The supplier has an effective quality system and improvement program such asISO/QS9000.

10. The supplier has a track record of customer satisfaction and organization credibility. Arecent study by Anderson, the University of Cambridge and Cardiff Business School foundJapan to be the leader in the number of world class automotive supplier plants, but the U.Sheld the top three supplier positions. Of the 13 supplier plants identified asworld classfive were from Japan.

Supplier certification: -

After supplier selection and approval the next step is the certification process, which startsafter the supplier begins shipment of the product. This process has been described by the


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customer/supplier Technical Committee of ASQ, which developed the following eightcertification criteria.1. The customer and supplier and shall have agreed upon specification that are mutually

developed justifiable, and not ambiguous. Rarely do specifications contain all theinformation needed for manufacturing a product. With new product the design team can

significantly impact lead time and quality by working with the customer. However, forthose products traditionally manufactured by the company which are now being transferredto the supplier several considerations should be made. In addition to design specificationmanufacturing, assembly and packaging instruction should also be considered.

2. The supplier shall have no product-related lot rejection for a significant period of time, say,one year, or significant number of lots, say, 20.

3. The supplier shall have no nonproduct-related rejection for a states period of time, say,three months, or number of lots, (say, five). Nonproduct-related nonconformities such aswrong count or a billing error are not as serious as product-related ones and are usuallycorrectable in a short period of time.

4. The supplier shall have no negative nonproduct-related incidents for a stated period, say,

six months, or number of lots, say, ten. This criterion covers incidents or problems thatoccur even though inspections and tests showed conformance to specifications. Most likelythe suppler would have been notified of the incident by memorandum or other writtencommunication.

5. The supplier shall have a fully-documented quality system. ISO 9000 is an excellent modelto build a system even if registration is not the goal.

6. The supplier shall have successfully passed an on-site system evaluation. This evaluationcould be by third party such as an ISO 9000 register or by a secondary party-the customer.

7. The suppler must conduct inspections and tests. Laboratory results are used for batchprocesses, and statistical process control (SPC) is used for piece part production.

8. The suppliers shall have the ability to provide timely inspection and test data. Because thisdocumentation is necessary when the product arrives, it must by computer or courier

Occasionally it may be necessary to decertify a supplier as a result of a majorproblem .It is suggested that a supplier is allowed one failure before decertification.Some organizations have gone beyond simple certification to a preferred supplier program.This achievement requires outstanding product and service performance by some of thesuppliers. The main benefit of a preferred position is in new part development and subsequentpurchases.

There are a number of benefits to certification. First, it eliminates receivinginspections, which allow the supplier to ship directly to stock. Second. a customer/supplier partnership is created with each partner being responsible for its on appropriate quality.Finally, the number of supplier is reduced to a manageable level thus further reducingoverhead cost.

Supplier Rating: -

The customer rate supplier to:1. Obtain an overall rating of supplier performance.


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2. Ensure complete communications with supplier concerning their performance in thearea of quality service delivery and any other measure the customer desires action

3. Enhance the relationship between the customer and the supplier.A successful supplier rating system requires three key factor (1) an internal structure toimplement and sustain the rating program,(2) a regular and formal review process, (3) a

standard measurement system for all the suppliers. A supplier rating system (often referred toas a scorecard system) is usually based on quality, delivery and service: how ever somecustomer have added other categories such as machinability and cost .These categories mayalso have subcategories .These basic categories are weighted, with quality usually given thegreatest weight. A score is given to each category by means of a numerical value or a lettergrade which can then be converted to a numerical value. Show a supplier scorecard for a headstack assembly developed by Conner Peripherals a manufacturer and marketer of storagesolution for the computer industry. Objectives criteria and weights were established for each ofthe categories of quality, process control and technology, support, delivery, producttechnology, lead time and purchasing.Reports are issued and prepared quarterly, and grades should be provided to each supplier. To

make reading the scorecards more effective, GM has initiated the use of a traffic light standardfor its supplier quality scorecard. Supplier quality performance metric and ratings arecategorised into one of the three colors of the traffic light. Red, yellow and green colors areused to report performance metrics. Problem (red) and potential problem (yellow) metrics canbe identified at a quick glance. Federal Express (FedEx) and John Deere have web-basedsystems for their supplier scorecardsfurther enhancing the effectiveness of the scorecards.

Relationship Development: -

The previous information on partnering, supplier selection, principles of customer/supplierrelations, certification, and periodic rating contribute to the establishment of the relationship.Additional topics of inspection, training, teams, and recognition and reward contribute to themaintainability and growth of the relationship.

Inspection: -The goal of inspection is to eliminate, substantially reduce, or automate the inspection activity.There are four phases of inspection: (1) 100% inspection, (2) sampling, (3) audit, and (4)identity check. In the initial phase, 100% inspection of the critical quality characteristics byboth the customer and the supplier is recommended. As the customer gains confidence in thesuppliers quality performance, a change to sampling is initiated. As the supplier gainsconfidence in its quality performance, a change to sampling is recommended, provided there isstatistical control of the process using control charts and process capability. At this point, thecustomer changes to auditing the suppliers performance using a ship-lot scheme or some typeof random sampling of the submitted lots.

In the third phase, the supplier continues statistical control of the process and initiates itsown auditing. The customer now has complete confidence in the supplier and initiates identitychecks, which verify the item number and quality of the accounting and inventory control.

The fourth and final phase occurs when both customer and supplier perform only identitychecks. There is statistical control of the process and continuous improvement of the process.


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Experience in Japan and in the U.S. has shown that it takes about five years to achieve thisfinal level of quality.

Training: -In small organization, the senior manager performs many different functions. Frequently no

one has expertise in quality or the ability to train the work force. Therefore, the customer or aconsultant must start the training process. Larger organization may invite the supplier to attendtheir courses or present the course at the suppliers plant. Such training and the types ofcourses may be requirement for partnership. Training should be viewed as an investment, notan expense.

Team Approach: -Customer/supplier teams are established in a number of areas, such a product design, processdesign, and the quality system. It is a good idea to involve suppliers when the team is firstassembled rather than at the end of its activities . Team meeting should occur at both partiesplant so they obtain a greater understanding of the processes.

Recognition: -Creating incentives for supplier in one way to ensure that they remain committed to a qualityimprovement strategy. Incentives may be in the form of a preferred supplier category with itsrewards. Usually the supplier is interested in recognition such as publication of outstandingcontributions in the customers newsletter; a letter of commendation that can be posted on theTQM bulletin board; or a plaque that can be mounted in a suppliers reception area.

2.2.2 Forecasting

The three rules of forecasting are1. The forecast is always wrong.2. The longer the forecast horizon, the worse the forecast.3. Aggregate forecasts are more accurate.Nevertheless, forecasting is a critical tool in the management toolbox. By correctly managinginventory, managers can make the best possible use of forecasts, in spite of the inherentdifficulties of forecasting. In addition, forecasts arent just for inventory decision making;decisions about whether to enter a particular market at all, about whether to expand productioncapacity, or about whether to implement a given promotional plan can all benefit fromeffective forecasting. In this section, we explore a variety of the techniques that can be used,separately or in combination, to create forecasts. Of course, it would be possible to write an

entire book on forecasting ; our goal here is to introduce the different approaches to forecastingand suggest when each of these approaches is appropriate.Although there are many different forecasting tools and methods, they can be split into

four general categories.Judgment method involves the collection of expert opinions.Market research methods involve qualitative studies of consumer behavior.Time-series methods are mathematical method in which future performance is extrapolatedfrom past performance.


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Causal methods are mathematical methods in which forecasts are generated based on a varietyof system variables.Below, we discuss these methods in more detail.

Judgment methods

Judgment methods strive to assemble the opinions of a variety of experts in a systematic way.For example, salespeople frequently have a good understanding of expected sales, since theyare close to the market. A sales-force composite can be assembled that combines eachsalespersons sales estimate in a logical way.Panels of expert can be assembled in order to reach a consensus. This approach assumes thatby communicating and openly sharing information, a superior forecast can be agreed upon.These experts can be externals experts or internal experts from a variety of functional areaswithin a company.The Delphi method is structure technique for reaching a consensus with a panel of experts

without gathering them in a single location. In read, the technique is designed to eliminate the

danger of one or few strong willed individual dominating the decision making process. InDelphi method, each member of group of experts is surveyed for his or her opinion, typicallyin writing. The opinions are compiled and summarized and each individual is given theopportunity to change his or her opinion after seeing the summery. This process is repeateduntil conscious is achieved.

Market Research Methods

Market testing and market surveys can be valuable tools for developing forecast, particularly ofnewly introduce products. In market testing, focus groups of potential customers are assembledand tested for their response to products and these response is extrapolated to the entire marketto estimate the demand for products. Market survey involve gathering these data from a verityof potential customers, typically through interviews, telephone based surveys and writtensurveys.

Time Series method

This method uses a verity of past data to estimate future data. There are verities of techniquesthat are commonly used, each of which has different advantage and disadvantages. We explorethe relationship between time series forecasting methods and the bullwhip effect.

Exponential smoothing: Each forecast is a weighted average of previous forecast and the lastdemand point. Thus, this method is similar to moving average, except that this is a weightedaverage of all past data points, with more recent points receiving more weight.

Methods for data with trends: The previous two approaches assume that there is no trend indata. If there is a trend, method such as regression analysis and Holts method are more useful,as they specifically account for trends in data. Regression analysis fits a straight line to datapoints, with holts method combines the concept of exponential smoothing with the ability tofollow a linear trend n data.


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Methods for seasonal data: A verity of techniques account for seasonal changes in demand. Forexample, seasonal decomposition methods remove the seasonal pattern from data and thenapply the approaches.

More complex methods: A verity of more complex methods has been proposed. However,these more complex methods are typically not used in practice, and indeed there is someevidence that complex methods dont outperform more simple methods.

Causal Methods

Causal methods generate forecast based on data other then the data beingpredicted. More specifically, the forecast is a function of some other pieces of data. Forexample, the causal sales forecast for next quarter mat be a function of inflation, GNP, theweather, of anything besides the sales in this quarter.

Selecting the Appropriate Forecasting TechniqueWith so many forecasting techniques available, which one is appropriate for a given situation?

Chambers, Mullic and Smith (CMS), in seminal Harvard Business Review article, pose threequestions that help with this decision:

What is the purpose of forecast? How is it to be used? If gross sales estimates are sufficient, aless complex technique may be appropriate, whereas if detailed estimates are required, moreadvance technique may be necessary.

What are dynamics of the system for which the forecast will be made? Is the system sensitiveto the type of economic data that would indicate that a causal model makes a sense? Is thedemand seasonal or trending upwards or downwards? All of these impact the choice offorecasting tool.

How important is the past in estimating the future? If the past is very important, time-seriesmethod makes sense. If significant system wide changes render the past less important,judgment or marker research methods may be indicated.

CMS also point out that at different stages of product life cycle, different forecast techniquesare appropriate. In the product development phase, market research method may indicate the potential sales of different products and designs. In the testing and introduction phases,additional market research may be valuable; the judgment method can be useful for predictingfuture demand of products. In the rapid growth phase of product life cycle, time-series datamay be more valuable. Finally once a product becomes a mature, time series analysis will bevaluable, as will causal methods, which predict long term sales performance based onestimates of economic data.Finally the quality of forecast can frequently be improved by combining a verity of techniques.Georgoff & Murdick observe that the result of combine forecast greatly surpass mostindividual projection, techniques, and analysis by experts.


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2.2.3 Cross-Docking:

It is a strategy that Wal-Mart made famous. In this system, warehouse function as inventorycoordination points rather than as inventory storage points. In typical cross-docking system,goods arrive from warehouse from manufacturer, are transferred to vehicles serving theretailers, and are delivered to retailers as rapidly as possible. Goods spend very little time instorage at warehouse- often less then 12 hours. This system limits inventory costs anddecreasing lead time by decreasing storage time.

Of course, Cross-Docking system requires a significant start-up investment and is verydifficult to manage:1. Distribution centers, retailers, supplier must be linked with advance information systemto insure that all pickups and delivery are made within the required time windows.2. A fast and responsive transport system is necessary for a Cross-Docking system to work.

3. Forecasts are critical, necessitating the sharing of information.4. Cross-Docking strategies are effective only for large distribution in which a large no. ofvehicles are delivering and picking up goods at the Cross-Dock facility at any one time. Insuch systems, there is enough volume every day to allow shipment of fully loaded trucks fromthe suppliers to the warehouses. Since this system typically included many retailers, demand issufficient so item that arrive at the Cross- Docking facilities can be delivered immediately tothe retail outlet in full truckload quantities.Very few major retailers utilize one of these strategies exclusively. Typically, differentapproaches are used for different products, making it necessary to analysis the supply chainand determine the appropriate approach to use for a particular product or product family.To evaluate this concept we proceed with a simple question: What are the questions which

influence distribution strategies? Obviously customer demand and location, service level, andcosts, including transportation and inventory costs, all play a role, it is important to note thatinterplay of inventory and transportation cost. Both cost depend on shipment size, but inopposite ways. Increasing the lot size reducing the delivery frequency and enables the shipperto take advantages of price break in shipping volume, therefore reducing transportation cost.However, large lot size increase inventory cost per item because item remain in inventory for alonger period of time until they consumed.Demand variability also has an impact on distribution strategy. Indeed demand variability has ahuge impact on cost; the larger the variability, the more safety stock needed. Thus, stock heldat the warehouse provides protection against demand variability and uncertainty, and due torisk pooling, the more warehouses a distributor has, the more safety stock is needed. On theother hand, if the warehouse is not used for inventory storage, as in the cross-docking strategy,are if there is no warehouses at all, as in direct shipping, more safety stock is required in thedistribution system. This is true because in both cases each store needs to keep enough safetystock. Thus effect is mitigated however, by distribution strategies that enable batter demandforecasts and smaller safety stocks, and trace shipments strategies described below. Anyassessment of different strategies must also consider lead time and volume requirements aswell as the capital investment involved in the various alternatives.


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Table summarizes and compares the three distribution strategies discussed in this section. Theinventory-at-warehouses strategy referrers to the classical distribution strategy in whichinventory is kept at the warehouses. The allocation row in the table refers to the point at whichthe allocation of different products to different retail outlets needs to be made. Clearly, indirectshipment, allocation decisions have to be made earlier than in the other two, so forecast

horizons need to be longer.

StrategyAttribute

Direct shipment Cross-Docking Inventoryat warehouses

Risk pooling Take advantagesTransportation Costs Reduced inbound

costsReduced inbound

costsHolding Costs No warehouse

Costs No holding costs

Allocation Delayed Delayed

2.2.4 Retailer supplier partnership:The formation of strategic alliances between retailers and there suppliers is becomingubiquitous in many industries. Suppliers have far batter knowledge of their lead time andproduction capacity than retailers do. Thus, as margins get dither and customers satisfactionbecomes even more important it makes sense to create cooperative effort between suppliersand retailers in order to leverage the knowledge of both parties.

Types of RSP

The types of retailer supplier partnership can be viewed on a continuum. At one end isinformation shearing, while help the vendor plan more efficiently, and at the other is theconsignment scheme, where the vendor completely manages and owns the inventory until theretailer sales it.

In a basic quick response strategy, supplier recessive POS data from retailers and use thisinformation to synchronies there production and inventory activities with actual sales at theretailer. In this strategy, the retailer still prepares individual orders, but the POS data are used

by the supplier to improve forecasting and scheduling to reduce lead time.In a continuous replenishment strategy some time called rapid replenishment, vendor receivePOS data and use these data to prepare shipments at previously agreed upon intervals tomaintain specific levels of inventory. In an advance form of continuous replenishment,suppliers may gradually decrease inventory levels at the retail store or distribution center aslong as service levels are met. Thus in a structure way, inventory levels are continuouslyimproved. In addition the inventory levels need not be simple levels but could be based on


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sophisticated models that change the appropriate level based on seasonal demand, promotionand changing consumer demand.

In a vendor-managed inventory system, sometimes called a vendor-managed replenishmentsystem, the supplier decides on the appropriate inventory levels of each of the products and the

appropriate inventory policies to maintain these levels. In the initial stages, vendorssuggestion must be approved by the retailer, but eventually the goal of many VMI programs isto eliminate retailer oversight on specific order. This type of relationship is perhaps mostfamously exemplified by Wal-Mart and P&G whose partnership began in 1985, hasdramatically improve P&Gs on tome deliveries to Wal-Mart while increasing inventory turns.Other discount stores followed suit, including K mart which by 1992 has developed over 200VMI partners. These VMI projects have in general been successful project at Dillarddepartment store; JCPenny and Wal-Mart have shown sales increases of 20-25% and 30%inventory turnover improvements.Requirements for RSP

The most important requirement for an effective RSP, especially one toward the VMI and ofthe partnership spectrum, is advance information system, on both the supplier and retailer sideof the supply change. Electronic data interchange, EDI, or internet based private exchanges-torelay POS information to the supplier and delivery information to the retailer-are essential tocut down on data transfer time and entry mistake. Bar coding and scanning are essential tomaintain data accuracy, and inventory, production control, and plan in system must be online,accurate, and integrated to take advantage of the additional information available.

As in all initiative that can radically change the way a company operate, the top managementcommitment is require for the project to succeed. This is specially torque because informationthat has been kept confidential up to this point will now have to be shared with suppliers andcustomer, and cost allocation issues will have to be considered at a very high level. It is alsotrue because such a partner ship may shift power within the organization from one group toanother. For instance, implementing a VMI partnership: the day-to-day contacts with retailershift from sales and marketing personal to logistic personal.

This implies that incentives for and computation of the sells force have to be modified sinceretailers inventory levels are driven by supply change needs, not by prizing and discountstrategies. This change in power may require significant involvement of top management.

Finally, RSP require the partners to develop a certain level of trust without which the alliancesis going to fail. In VMI, for example, suppliers need to demonstrate that they can manage theentire supply change; that is, they can manage not only their on inventory but also that of theretailer, similarly in quick response, confidential information is provided to the suppliers whichtypically search many competing retailers. In addition, strategic partnering in many cases resultin significant reduction in inventory at the retailer outlet. The suppliers need to make sure thatthe additional available space is not use to benefit the suppliers competitors. Furthermore, thetop management at the supplier must understand that the immediate effect of decrease theinventory at the retailer will be a one time loss in sales revenue.


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Inventory ownership in RSP

Several important issues must be considered whenentering into a retailer supplier partnership.One major issues is the decision concerning who makes the replenishment decisions. This

places the partnership on the continuum of strategic partnership possibilities. This can be donein stages, first with information and, later, decision making, which is shared between thepartners.Inventory ownership issues are critical to the success of this kind of strategic alliance effect,specially one involving VMI. Originally, ownership of goods transferred to the retailer whengoods were received. Now, some VMI partnerships are moving to a consignment relationshipwhich the suppliers own the goods until they are soiled. The benefit of this kind of relationshipto the retailer is oblivious: lower inventory costs. Further more, since the supplier owns theinventory, it will be more concerned with managing it as effectively as possible. One possiblecriticism of the original VMI scheme is that the vendor has an incentive to move to the retaileras much inventory as the contract allows. If this is the fast moving item and the partner had a

grid upon two weeks of inventory, this may be exactly what the retailer wants to see in a stock.If however this is a more complex problem of inventory management, the vendor needs to havean incentive to keep inventories as low as possible, subject to some agreed upon service level.For example, Wal-Mart no longer owns the stock for many of the items it carries includingmost of its grocery purchase. It only owns them bravely as they are being passed through thecheck out scanner.

It is less clear, however, why consignment arrangement is beneficial to supplier since thesupplier owns inventory for a long period of time. Many times, as in case of Wal-Mart, thesupplier has no choice because the markets dictate this kind of agreements. Even if this is notthe case, such an arrangement is beneficial to supplier because it allows the supplier tocoordinate distribution and production, thus reducing total cost. To better understand this issue,the discussion of the difference between global optimization and local optimization. In thetraditional supply chain each facility does what is best for that facility; that is the retailermanages its own inventory without regard to the impact on the supplier. The suppliers in turnidentify a policy that will optimize its own cost subject to satisfaction of the retailer demand. Inaddition the supplier can further decreases total cost by coordinating production anddistribution for several retailer. This is precisely why global optimization allows for significantreduction in total cost system cost.Sometimes, depending on the relative power of the supplier and the retailer, the supply contractmust be negotiated so that the supplier and retailer shear overall system savings. Retailers mustalso take this into account when comparing the cost of competing vendors: different logisticsschemes have different costs.

Issues in RSP Implementation

For any agreement to be a success, performance measurement criteria must also be agreed to.These criteria should include no financial measures as well as the traditional financial


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measures. For example non financial measure could include point of sale (POS) accuracy,inventory accuracy, shipment and delivery accuracy, lead time and customer fill rates.When information is being shared between retailers and suppliers, confidentially becomes anissue. Specifically, a retailer who deals with several suppliers within the same product category

may find that category information is important to the supplier in making accurate forecast andstocking decision. Similarly, there may be a relationship between stocking decision made byseveral suppliers. How can these potential conflicts be managed, with the retailer maintainingthe confidentially of each partner?When entering any kind of strategic alliance, it is important for both parties to realize that therewill initially be problems that can only be worked out through communication and cooperation.In many cases, the supplier in a partnership commits to fast response to emergencies andsituational changes at the retailer. If the manufacturing technology or capacity do not currentlyexist at the supplier, they may need to be added. For example VF Mills, the market of

Wrangler jeans and a pioneer of quick response method in the clothing industry, had tocompletely reengineer its production process, including retraining and additional capitalinvestment.

Steps in RSP Implementation

1. Initially, the contractual terms of agreement must be negotiated. These includes decision

concerning ownership and when it is to be transferred, credit terms, orderingresponsibilities, and performance measure such as service or inventory levels, whenappropriate.

2. Next the following three task must be executed:

If they do not exist, integrated information system must be developed for both supplier andretailer. This information system must provide easy access to both parties. Effective forecasting techniques to be used by the vendor and the retailer must be developed. A tactical decision support tool to assist in coordinating inventory management and

transportation policies must be developed. The system developed, of course, well depend on theparticular nature of the partnership.

Advantage and disadvantage of RSP:

A huge advantage of RSPs is the knowledge the supplier has about order quantities, implying

an ability to control the bullwhip effect. This of course varies from one type of partnership toanother. In quick response, for instance, this knowledge is achieved through transfer ofcustomer demand information that allows the supplier to reduce lead time, while in VMI theretailer provider demand information and the supplier makes ordering decision thus completelycontrolling the variability in order quantities. Of course, this knowledge can be leveraged toreduce overall system costs and improve overall system service level. The benefit to thesupplier in terms of batter service level, decreased managerial expanses, and decreasedinventory cost are obvious. The vendor should be able to forecast uncertainties and thus batter


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coordinate production and distribution. To be more specific, reduce forecast uncertainties leadto reduce safety stocks, reduced storage and delivery cost, and increased service level, as wenoted in our discussion of the bullwhip effect.In addition to important benefit listed above, implementing a strategic partnership provides a

verity of side benefits. It provides a good opportunity for the reengineering of the retailer-supplier relationship. For example, redundant order increase can be eliminated, manual taskscan be automated, task such as ticketing merchandise and designing displays can be reassignedfor system wide efficiency, and unnecessary control steps can be eliminated from theprocess .many of this advantages stem from the same changes and technology needed toimplement partnership in the first place.Many of the problem s with retailer supplier partnerships have been discussed above and aresummered here:

It is necessary to imply advance technology ,which is often expensive It is essential to develop trust in what once may have been n adversarial suppler-retailer

relationship In strategic partnership the supplier often has much more responsibility then formerly.this may force supplier to add personal to meet this responsibility. Finally, and perhaps most critically, expenses at the supplier often increase as managerialresponsibility increases. Also , inventory may initially be shifted back to the supplier; if aconsignment arrangement is used, inventory costs in general may increase for thesupplier .thus ,it may be work out contextual relationship in which the retailer sharedecrease the system inventory cost with the supplier.

2.2.5 Kaizen System:It strives for batter quality. Quality is an endless journey not a final destination. Organizationsare always experimenting, measuring, adjusting and improving. They search for potential andactual trouble spot for improvement of product design and process.KAIZEN is a Japanese word KAI means change and ZEN means batter. KAIZEN meanschange for batter. It implies continuous improvement: Consistently Every time Every step and Every place, leading to self-development.

It involves 5-S for improvement.1. Seri It involves difference between necessary and unnecessary and discardingunnecessary.2. Seiton It means put things in order.3. Seiso It means keep the workplace clean.4. Seiketsu It means personal cleanliness.


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5. Sitsuke It means discipline.

2.2.6 Just-in-Time Manufacturing (JIT):

JIT is a Japanese production management philosophy which has been applied in practice sincethe early 1970s. This involves reducing waste and using materials and resource in mostefficient manner possible.

JIT production is defined as aphilosophy that focuses attention on eliminating waste bypurchasing or manufacturing just enough of the right items just in time.Some observers have called JIT hand-to-mouth approach to production. It aims at having aright part at precise right time and into right quantity to go into assembly.

JIT philosophy is based upon two criteria:

1. JIT refers to production and supply of required no of parts when needed.2. Another criterion is JIDOKA which means utilizing the full capacity of workforce.

Benefits of JIT

a) Reduction of wastages. b) There is a massive reduction in work-in-process which result in lower spacerequirements.c) Stronger and more reliable working relationship with supplier.d) Higher profit, reduction in lead time, customer satisfaction.e) Fewer inventories of raw materials.

Limitations of JIT

a) The system success depends upon co-operation between employer-employee, training ofoperators for different kind of job. b) There is no flexibility- only first come first served principal is applied bymanufacturing items in order to release Kanban.c) There is no safety stock.d) JIT production is effective only where daily demand is fairly stable.

2.2.7 Kanban system:

A Kanban system is system of inventory and production control which uses Kanban as theprincipal information transmission device. Kanban is a Japanese word meaning signal. AKanban is a card or tag usually attached to work-in-process ports and it is used to facilitate theproper moment of these parts.


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The functions of Kanban:

1. They are used as a means for process improvement, which helps to reduce the level of inprocess inventory.2. The role played by Kanban in production control is to tie the different manufacturing

process together and to ensure that the necessary amount of materials and parts arrive at theappropriate time and place.

2.2.8 Inventory Management and control System

Definition of Inventories

Inventories are stock of materials of any kind stored for future use, mainly in the productionprocess. Thus, today inventory is tomorrow production. However semi-finished goods awaitinguse in the next process or finished goods awaiting release for sale are also included in thebroad category of inventories which are nothing but idle resources. Therefore inventories arematerial or resource of any kind having some economic value either awaiting conversion or usein future.

Apart from these there are also many indirect materials such as maintenance material fuel andlubricant etc., which are used in a manufacturing organisation. They are also classified asinventories of material for future use .But they differ only in their use and classification from

raw and other direct materials. All of them earn nothing yet they are badly required to bestocked and to be used as and when the needs arise.

THE NEED FOR INVENTORY AND ITS CONTROL

Inventories of materials are needed by all manufacturing organization big or small .Butinventories tend to become big without proper control Materials and inventories serve somesocial purpose in industries which stems for some economic motives.By shear common sense .it should be recognized that if you should stop to few you lose.Store keeping and inventory control:-

Apart from inventory control a good system of store keeping is important in

ant system of material management. It has to be realized that only material that are on hand canbe put to used. And it is assumed that inventory record agree with the physical stock of thematerial in the store if however it is found that they do not agree record must be adjust after periodical physical verification of store. Needless to mention that no amount of inventorycontrol will work successfully if accurate record are not maintain and much of its value willbe lost. If store or badly kept and handle, therefore certain amount of care is always necessaryto ensure good shop keeping. The essential ingredients of good storekeeping are that adequate


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physical facility should be provided and properly qualified personnel should be employed whowill be responsible for all stores under their charge.As already mentioned proper classification and condition of store based on slandered onslandered nomenclature are essential prerequisites for the smooth operation of stores. Themethod of classification should correspond to those used for purpose of inventory control

although actual arrangement of the stock need not follow this method which will largelydepend upon the nature of the item its accessibility and frequency of issues.All issues stored should be prices. There are several methods for this choice of which lies withthe top management. One method is to charge average prices. A second method is to value thestock at started cost, supplies by the cost-accounting section. The third method is Fires in Firstout method. Forth one is Last in last out method is. They are generally known as FIFO andLILO method respectively. Still are generally method is Cost or Market price, methodwhichever is lower. However the choice has little bearing on a actual storeroom operation. Assuch evaluation of their merits or demerits is a digression for our purpose. Suffice it to say thatcontrol of physical materials is as a part of material management as any system of stock orinventory control.

A PRACTICAL APPROACH

The problem of inventory control in industry is therefore of considerable important. Policies ofinventory control in a firm may be complex but the essential principles are straightforward.As we have already seen there must be opposing cost. The problem is to determine the policywhich balance off these costs and which is therefore in some way the optimal policy .Forresolution of any particular problem two question must be answered:1. how much a particularitem should be ordered? And (2) when and how often it be ordered? As we have already seenin answering theseTwo basis questions we must analyze and consider opposing cost. If there were no costassociated with ordered tooMuch then enormous quantity could be ordered. Similarly had it been the case that their wereno cost associated with ordered too little then no stock would we keeping in the same way iftheir were no cost associated with ordered too frequently or alternatively no cost associatedwith ordered frequently enough then also their would have been no problem . It would havebeen much easier to place one replenishment ordered for the total requirement say per annumand the problem could be solved. But it would be also mean that the annual requirement. Thisaverages could be substaintly reduced by ordering say twelve times during a year but theordering .This basic dilemma therefore has to be faced in the case of each and every inventoryitems in ordered to see that investments in inventory of that particular item can be kept lowand an optimum mix of the various costs arrived at.One of the practical difficulties in inventory control is in fact the estimation of cost the cost ofinventory holding as has already been enunciated is determined by a number of factor whichmay vary from commodity to commodity. The major factor is the capital tied up butsometimes the cost of deterioration and obsolesces may also be high other charge wouldinclude storage cost of administration inspection taxes. Behavior of this cost is different indifferent cases. So that holding or carrying cost is expressed as a percentage of basis purchaseprisce but this is only half of the truth . Some of the cost components will not vary according tothe purchase price of the concerned item but clearly other will not.


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Again in the most of the inventory situation in industry one is concerned not with one itemalone. But hundred and thousand of stock items . The same treatment in not necessary of all theitema. A mention has already been made this connection of controlling inventory throughABC- classification which is graduated control inventory according to value it may sometimes be necessary to evaluate the critically of the item to the production process and control

inventory accordingly.FSN Analysis

In a similar manner , FSN study may be made to weed out unwanted material and part. Fstands for fast, S stands for slow moving and N stands for non-moving materials and parts .This will automatically reduced inventory costs. Suppose a part or material has not been issuedwith in a period of three year this can be completely weeded out. If a part moves sparinglywithin this period its stock can be substantially reduced Fast moving however pose no suchproblem.

VED Analysis

VED Analysis is also the same in principle . The only difference that it find out which materialand part are valuable which are essential and which are desirable each of the first alphabetsstanding for the complete word-meaning.This is also essentially meant for a sizeable reduction in inventory.

THE NEED FOR A SYSTEM APPROACH

Indeed in many aspect of industrial management one of the most difficult problems is to strikea proper balance between the scientific techniques on the one hand and on the other hand acomplete dependence upon the decision. And judgment of any or some people the topechelon . in the former case people with high salaries keep themselves busy and concert overwith the inventory control problem and so-called quantitative formula . In the latter case asmall group of man generally much lower at the hierarchical level exersices a much lesserdegree of control and end up with high level of inventory and low degree of coordination . forany manufacturing inter price to be economical viable it is of at most important to reach aworking compromise between low control cost and maximum out put cost that is low level ofinventory with high rate og inventory turn of which is operationally physible and economicalsound. During the past decade or so , much work has been done in the area of analytical modelof inventory control These technique may be broadly labeled. As Operation researchTechniques . essentially aimed at reduced the dimensions of hunch judgement and intuition inthe decision making area they provide the dimensions the decision maker with accurate timelyand more comprehensive information for a more realistic appraisal of the problem alternative .some have greeted these development and overestimated their contributes . Other blindlyfollowing these mathematically formula and having burnt their fingers have completelydiscarded them as working mechanisms . Both are right for wrong thing done . Mathematicallyformula and application of electronic computer are not any foolproof technique or push buttondevice that can completely eliminative the need for executive decision making which is a greatcontributing factor that puts much in to economics health of an industry . Like any other tool ortechniques they are nothing more than a mechanism for extending the capabilities of man.


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Therefore they are useful only when they are intelligently used. It behaves us to see how acontrol mechanism can work of course with low cost and operational efficiency.He performance of a system can only be a measured by the customer level magnitude ofinventory investment and the cost of operation. Aggregate inventory management is likelooking at the wood and not seeing a tree. Industrialization is an open system and its

constituent not only interacts continually with each other but is also to throughInvestment in inventory absorbs a large portion of the working capital of a company and alarge proportion of the total assets of a business is represented by it. By improving the returnon the investment by increasing the rate of the inventory turnover, management often wants toensure economic efficiency. Yet merely reducing the investment in inventory will not ensureoverall efficiency. For this, cost of ordering and stock out costs must also be considered.

MATERIAL PLANNING SYSTEM (MPS)/MATERIALS REQUIREMENT

PALNNING (MRP): -

Theeconomic order quantity was developed on this basis. But since this assumes

constant and equal inflow from the inventory, additional inventory staff was considerednecessary for the stock which would then depend upon the actual deviation from the constantaverage. But when production is discontinuous because of the lumpy demand. Provisioning ofthe safety stock, probility of the safety stock increases which ultimately effects customerservice level, while too much safety stock increases the investment in the inventory in theaggregate and decreases the rate of inventory turnover. Thus while inventory costs lead-timeand the volume of usage are important to any total materials. Control system, the nature odemand is also of paramount importance.

In a good control system there are some distinct phases of controlsuch as-----

1. planning2. operations3. analysis, and4. feedback

Planning is a forecasting technique while operations are the actions phase, through which plansare put into actions. Performance of actions are then measured against planned forecasts andanalyzed. Then trough exception principle any deviation are noted and corrective steps aretaken by some feedback mechanism and reporing system. Together they provide a servomechanism in yhe control process.

BASIC TOOL

Independent demand versus conditional requirement . The basic tool of material planning isthe sales forecast of finished goods used in production planning is based on passes past seles ormarket forecast the take in to account change in demand data or market forecast take in to


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account changes in the demand in end product such as raw material component and . thuswhile the end product demand is independent others are not .

The order point techniques based on EOQ are suited on the items that have independentdemands since they use past sale data to forecast to future demands. But, for future we havesome demands to be analysed from the past. Rather than in planning for their requirements and

timely availability master production scheduling shows the number the value of the finishedgoods and sub-assemblies. The bills of material for each item define its precise requirements ofmaterials and components. By, consumption total requirements are arrived on a time needbasis.Depending on the nature of the industry, production process and the item demand for an itemmay be constant or variable. And can be discreet or continuous. Thus variability of the demandand the complexity of the production process at edge determining factors in the order pointsystem or the time phased materials planning system. in the job lot or the production systemdemand discontinuity is well pronounced a product is broken down into various parts andsubassemblies and the material planning system coordinates the ordering delivery schedule andthe start off date of the production, which minimizes the time of time of the inventory carrying.

TIME ELEMENT

Thus the stress is on timing rather on the quantity. This also reduces the production stoppageusing the stoppage stock outs. At the same time it eliminates the need of maintaining largestocks which reduces the carrying cost of inventory further.

In real life manufacturing the phenomenon of discontinuous demand illustrates the necessityand proper timing of delivery schedule rather than the control of the inventory throughinventory the EOQ formula that depends on the data coming from the lower subgroups arevariable in nature. The need to replenish arises when the inventory level falls below the certainlevel. It also assumes that the constant need is predetermined.But the material planning is straight forward and clear. It assumes that the materials arerequired only when they are needed an this would be available in time. Primarily because ofdata processing

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Phase II Project File