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InventoryInventory

One of the most expensive assets of many companiesrepresenting as much as 50% of total investedcapital

Operations managers must balance inventoryinvestment and customer service

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Functions of InventoryFunctions of Inventory

1. To decouple or separate various parts of theproduction process

2. To decouple the firm from fluctuations in demandand provide a stock of goods that will provide a

selection for customers3. To take advantage of quantity discounts

4. To hedge against inflation

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Main Types of InventoryMain Types of Inventory

Raw materialPurchased but not processed

Work-in-process

Undergone some change but not completed

A function of cycle time for a product

Maintenance/repair/operating (MRO)

Necessary to keep machinery and processesproductive

Finished goods

Completed product awaiting shipment

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The Material Flow CycleThe Material Flow Cycle

InputInput Wait forWait for Wait toWait to MoveMove Wait in queueWait in queue SetupSetup RunRun OutputOutputinspectioninspection be movedbe moved timetime for operatorfor operator timetime timetime

Cycle timeCycle time

95%95% 5%5%

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Inventory ManagementInventory Management

How inventory items can be classified

How accurate inventory records can be maintained

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ABC (Or Pareto) AnalysisABC (Or Pareto) Analysis

Divides inventory into three classes based on annualdollar volume

Class A - high annual dollar volume

Class B - medium annual dollar volume

Class C - low annual dollar volume

Used to establish policies that focus on the few criticalparts and not the many trivial ones

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Control of Service InventoriesControl of Service Inventories

Can be a critical component of profitability

Losses may come from shrinkage or pilferage

Applicable techniques include

Good personnel selection, training, and disciplineTight control on incoming shipments

Effective control on all goods leaving facility

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Independent Versus Dependent DemandIndependent Versus Dependent Demand

Independent demand - the demand for item isindependent of the demand for any other item ininventory

Dependent demand - the demand for item is dependent

upon the demand for some other item in the inventory

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Holding, Ordering, and Setup CostsHolding, Ordering, and Setup Costs

Holding costs - the costs of holding or carryinginventory over time

Ordering costs - the costs of placing an order andreceiving goods

Setup costs - cost to prepare a machine or process formanufacturing an order

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Basic economic order quantity

Production order quantity

Quantity discount model

Need to determine when and how much to order

Inventory Models for Independent DemandInventory Models for Independent Demand

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Basic EOQ ModelBasic EOQ Model

Demand is known, constant, and independent

Lead time is known and constant

Receipt of inventory is instantaneous and complete

Quantity discounts are not possible

Only variable costs are setup and holding

Stock outs can be completely avoided

Important assumptions

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Inventory Usage Over Time

Orderquantity = Q(maximum

inventorylevel)

Usage rate Averageinventoryon hand

Q2

Minimuminventory

Inventoryle

ve

l

Time0

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Minimizing CostsMinimizing Costs

Objective is to minimize total costs

Annualcost

Order quantity

Curve for totalcost of holding

and setup

Holding costcurve

Setup (or order)cost curve

Minimumtotal cost

Optimal order

quantity (Q*)

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Reorder PointsReorder Points

EOQ answers the how much questionThe reorder point (ROP) tells when to order

ROP =

Lead time for a new

order in days

Demand

per day

= d x L

d =D

Number of working days in a year

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Reorder Point CurveReorder Point Curve

Q*

ROP(units)I

nvento

rylevel(units)

Time (days)Lead time = L

Slope = units/day = d

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EOQ: A View of Inventory

Time

Inventory

Order

Size

Note:

No Stockouts

Order when no inventory

Order Size determines policy

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EOQ - Cost Minimization Goal

OrderQuantity(Q)

The Total-Cost Curve is U-Shaped

Ordering Costs

QO

Annua

lCost

(optimal order quantity)or EOQ

Holding Costs

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EOQ: Important Observations

Tradeoffbetween set-up costs and holding costs when determiningorder quantity.

Total Cost is not particularly sensitive to the optimal order quantity

Order Quantity 50% 80% 90% 100% 110% 120% 150% 200%

Cost Increase 125% 103% 101% 100% 101% 102% 108% 125%

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Production Order Quantity ModelProduction Order Quantity Model

Used when inventory builds up over a period of time afteran order is placed

Used when units are produced and sold simultaneously

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Production Order Quantity ModelProduction Order Quantity Model

Inventor y

leve

l

Time

Demand part of cycle withno production

Part of inventory cycle during whichproduction (and usage) is takingplace

t

Maximuminventory

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Probabilistic Models and Safety StockProbabilistic Models and Safety Stock

Used when demand is not constant or certainUse safety stock to achieve a desired service level

and avoid stockouts

ROP = d x L + ss

Annual stock out costs = the sum of the units short xthe probability x the stockout cost/unit

x the number of orders per year

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Safety stock 16.5 units

ROP

Place

order

Probabilistic DemandProbabilistic Demand

Inventoryleve

l

Time0

Minimum demand during lead time

Maximum demand during lead timeMean demand during lead time

Normal distribution probability ofdemand during lead time

Expected demand during lead time (350 kits)

ROP = 350 + safety stock of 16.5 = 366.5

Receive

order

Leadtime

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Probabilistic DemandProbabilistic Demand

Safetystock

Probability of

no stockout95% of the time

Mean

demand350

ROP = ? kits Quantity

Number ofstandard deviations

0 z

Risk of a stockout(5% of area ofnormal curve)

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Fixed-Period (P) SystemsFixed-Period (P) Systems

Orders placed at the end of a fixed periodInventory counted only at end of period

Order brings inventory up to target level

Only relevant costs are ordering and holding

Lead times are known and constant

Items are independent from one another

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Fixed-Period (P) SystemsFixed-Period (P) Systems

On-handinven

tory

Time

Q1

Q2

Target quantity (T)

P

Q3

Q4

P

P

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Fixed-Period SystemsFixed-Period Systems

Inventory is only counted at each review period

May be scheduled at convenient times

Appropriate in routine situations

May result in stock outs between periods

May require increased safety stock

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Material Requirements

Planning (MRP) and ERP

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OutlineOutline

Global Company Profile: Wheeled CoachDependent Demand

Dependent Inventory Model Requirements

Master Production Schedule

Bills of Material

Accurate Inventory Records

Purchase Orders Outstanding

Lead Times for Components

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Outline ContinuedOutline Continued

MRP Structure

MRP Management

MRP Dynamics

MRP and JIT

MRP In Services

Distribution Resource Planning (DRP)

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Outline ContinuedOutline Continued

Enterprise Resource Planning (ERP)

Advantages and Disadvantages of ERP Systems

ERP in the Service Sector

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Learning ObjectivesLearning Objectives

When you complete this chapter you should be able to:When you complete this chapter you should be able to:

Develop a product structureBuild a gross requirements plan

Build a net requirements plan

Determine lot sizes for lot-for-lot, EOQ, and

PPB

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Learning ObjectivesLearning Objectives

When you complete this chapter you should be able to:When you complete this chapter you should be able to:

Describe MRP IIDescribe closed-loop MRP

Describe ERP

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Benefits of MRPBenefits of MRP

Better response to customer orders

Faster response to market changes

Improved utilization of facilities and laborReduced inventory levels

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Dependent DemandDependent Demand

The demand for one item is related to the demand foranother item

Given a quantity for the end item, the demand for allparts and components can be calculated

In general, used whenever a schedule can beestablished for an item

MRP is the common technique

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Dependent DemandDependent Demand

Master production schedule

Specifications or bill of material

Inventory availability

Purchase orders outstanding

Lead times

Effective use of dependent demand inventory modelsrequires the following

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Master Production Schedule (MPS)Master Production Schedule (MPS)

Specifies what is to be made and when

Must be in accordance with the aggregate production plan

Inputs from financial plans, customer demand,engineering, supplier performance

As the process moves from planning to execution, eachstep must be tested for feasibility

The MPS is the result of the production planning process

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MPS is established in terms of specific products

Schedule must be followed for a reasonable length oftime

The MPS is quite often fixed or frozen in the near termpart of the plan

The MPS is a rolling schedule

The MPS is a statement of what is to be produced, not

a forecast of demand

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Changeproduction

plan?Master productionschedule

ManagementReturn oninvestmentCapital

EngineeringDesigncompletion

Aggregateproduction

plan

ProcurementSupplier

performance

Human resourcesManpower

planning

ProductionCapacityInventory

MarketingCustomerdemand

FinanceCash flow

The Planning ProcessThe Planning Process

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The Planning ProcessThe Planning Process

Is capacityplan being

met?

Isexecution

meeting theplan?

Changemaster

productionschedule?

Change

capacity?

Changerequirements?

NoNo

Executematerial plans

Execute capacityplans

Yes

Realistic?

Capacityrequirements plan

Materialrequirements plan

Master productionschedule

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Aggregate Production PlanAggregate Production Plan

Months January February

Aggregate Production Plan 1,500 1,200(Shows the total

quantity of amplifiers)Weeks 1 2 3 4 5 6 7 8

Master Production Schedule(Shows the specific type andquantity of amplifier to beproduced

240-watt amplifier 100 100 100 100

150-watt amplifier 500 500 450 450

75-watt amplifier 300 100

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A customer order in a job shop (make-to-order)company

Modules in a repetitive (assemble-to-order orforecast) company

An end item in a continuous (stock-to-forecast)company

Can be expressed in any of the following terms:

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Bills of MaterialBills of Material

List of components, ingredients, and materials neededto make product

Provides product structure

Items above given level are called parents

Items below given level are called children

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BOM ExampleBOM Example

BB(2)(2) Std. 12 Speaker kitStd. 12 Speaker kit CC(3)(3)Std. 12 Speaker kit w/Std. 12 Speaker kit w/amp-boosteramp-booster11

EE(2)(2)EE(2)(2) FF(2)(2)

Packing box andPacking box and

installation kit of wire,installation kit of wire,bolts, and screwsbolts, and screws

Std. 12 SpeakerStd. 12 Speakerbooster assemblybooster assembly

22

DD(2)(2)

12 Speaker12 Speaker

DD(2)(2)

12 Speaker12 Speaker

GG(1)(1)

Amp-boosterAmp-booster

33

Product structure for AwesomeProduct structure for Awesome((AA))

AA

LevelLevel

00

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Lead TimesLead Times

The time required to purchase, produce, orassemble an item

For production the sum of the order, wait,

move, setup, store, and run timesFor purchased items the time between the

recognition of a need and the availability ofthe item for production

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Time-Phased Product StructureTime-Phased Product Structure

|| || || || || || || ||

11 22 33 44 55 66 77 88Time in weeksTime in weeks

FF

2 weeks2 weeks

3 weeks3 weeks

1 week1 week

AA

2 weeks2 weeks

1 week1 week

DD

EE

2 weeks2 weeks

DD

GG

1 week1 week

1 week1 week

2 weeks to2 weeks toproduceproduce

BB

CC

EE

Start production of DStart production of DMust have D and EMust have D and Ecompleted here socompleted here soproduction canproduction can

begin on Bbegin on B

Figure 14.4Figure 14.4

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Output ReportsOutput Reports

MRP byperiod report

MRP bydate report

Planned orderreport

Purchase advice

Exception reports

Order early or lateor not needed

Order quantity toosmall or too large

Data FilesData Files

Purchasing data

BOM

Lead times(Item master file)

Inventory data

Masterproduction schedule

Materialrequirementplanningprograms

(computer andsoftware)

MRP StructureMRP Structure

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MRP is a dynamic system

Facilitates preplanning when changes occur

System nervousness can result from too many changes

Time fences put limits on preplanning

Pegging links each item to its parent allowing effectiveanalysis of changes

MRP ManagementMRP Management

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Some services or service items are directly linked todemand for other services

These can be treated as dependent demand servicesor items

Restaurants

Hospitals

Hotels

MRP in ServicesMRP in Services

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Uncookedlinguini#30004

Sauce#30006

Veal#30005

Chef;Work

Center #1

Helper one;Work

Center #2

Asst. Chef;Work

Center #3

Cookedlinguini#20002

Spinach#20004

Prepared vealand sauce

#20003

(a) PRODUCT STRUCTURE TREE

Vealpicante#10001


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(b) BILL OF MATERIALS

Part NumberPart Number DescriptionDescription QuantityQuantity Unit of MeasureUnit of Measure Unit costUnit cost

1000110001 Veal picanteVeal picante 11 ServingServing

2000220002 Cooked linguiniCooked linguini 11 ServingServing

2000320003 Prepared veal and saucePrepared veal and sauce 11 ServingServing

2000420004 SpinachSpinach 0.10.1 BagBag 0.940.94

3000430004 Uncooked linguiniUncooked linguini 0.50.5 PoundPound

3000530005 VealVeal 11 ServingServing 2.152.15

3000630006 SauceSauce 11 ServingServing 0.800.80


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(c) BILL OF LABOR FOR VEAL PICANTE

LaborLaborHoursHours

Work CenterWork Center OperationOperation Labor TypeLabor Type Setup TimeSetup Time Run TimeRun Time

11 Assemble dishAssemble dish ChefChef .0069.0069 .0041.0041

22 Cook linguiniCook linguini Helper oneHelper one .0005.0005 .0022.0022

33 Cook vealCook vealand sauceand sauce

Assistant ChefAssistant Chef .0125.0125 .0500.0500


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Using dependent demand techniques through thesupply chain

Expected demand or sales forecasts become grossrequirements

Minimum levels of inventory to meet customerservice levels

Accurate lead times

Definition of the distribution structure

Distribution Resource Planning (DRP)Distribution Resource Planning (DRP)

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An extension of the MRP system to tie in customersand suppliers

Allows automation and integration of many

business processes

Shares common data bases and businesspractices

Produces information in real time

Coordinates business from supplier evaluation tocustomer invoicing

Enterprise Resource Planning (ERP)Enterprise Resource Planning (ERP)

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ERP modules include

Basic MRP

Finance

Human resources

Supply chain management (SCM)

Customer relationship management (CRM)

Enterprise Resource Planning (ERP)Enterprise Resource Planning (ERP)

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ERP and MRPERP and MRP

f S

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Provides integration of the supply chain, production, andadministration

Creates commonality of databases

Can incorporate improved best processes

Increases communication and collaboration betweenbusiness units and sites

Has an off-the-shelf software database

May provide a strategic advantage

AdvantagesAdvantages of ERP Systemsof ERP Systems

Di d t f ERP S t

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Is very expensive to purchase and even more so tocustomize

Implementation may require major changes in thecompany and its processes

Is so complex that many companies cannot adjust to it

Involves an ongoing, possibly never completed, processfor implementation

Expertise is limited with ongoing staffing problems

DisadvantagesDisadvantages of ERP Systemsof ERP Systems

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SAPs ERP ModulesSAPs ERP Modules

Cash to CashCovers all financial related activity:

Accounts receivable General ledger Cash management Accounts payable Treasury Asset management

Dock to DispatchCovers internal inventory management:Warehousing Forecasting Physical inventory Distribution planning Replenishment planning Material handling

Promote to DeliverCovers front-end

customer-orientedactivities:

Marketing

Quote and orderprocessing

TransportationDocumentation and

labelingAfter sales serviceWarranty and

guarantees

Procure to PayCovers sourcingactivities:Vendor sourcingPurchase

requisitioningPurchase orderingPurchase contractsInbound logisticsSupplier invoicing/

matchingSupplier payment/

settlementSupplier

performance

Design to ManufactureCovers internal production activities:Design Shop floor

engineering reportingProduction Contract/project

engineering managementPlant Subcontractor

maintenance management

Recruit to HireCovers all HR- and payroll-oriented

activity:Time and attendance Payroll

Travel and expenses

ERP i th S i S tERP i th S i S t

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ERP systems have been developed for health care,government, retail stores, hotels, and financialservices

Also called efficient consumer response (ECR)systems

Objective is to tie sales to buying, inventory, logistics,and production

ERP in the Service SectorERP in the Service Sector

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Supply Chain Management

St t F ll d

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Structure Followed

What is Supply chain?

Objective of a supply chain

Supply Chain Management

Bull Whip effect

Drivers of Supply chain performanceInventory policies

Types of Distribution networks

Wh t i S l h i ?

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What is Supply chain?

Consists of all parties involved, directly orindirectly, in fulfilling a customer request

Supplier Manufacturer Distributor Retailer Customer

Process View

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Process View

Customer

Retailer

Distributor

Manufacturer

Supplier

Customer

Order Cycle

Replenishment

Cycle

ManufacturingCycle

ProcurementCycle

Pull

Push

Objecti e of a S ppl Chain

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Objective of a Supply Chain

Maximize overall profit

Profit

Revenue generated from customer - costs incurred along the

entire chain

(e.g. manufacturing / storing / distributing the product)

When is Supply chain effective?Manage Product, Information and Fund flow

Why not max individual profitability?

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Why not max. individual profitability?

Manufacturer

Cost = Rs. 1

Retailer

Cost = Rs. 5

Q = 1000

Customer

Cost = Rs. 10

Demand = 900

Profit Rs. 4000

Manufacturer

Cost = Rs. 1

Retailer

Cost = Rs. 5

Q = 1200

Customer

Cost = Rs. 10

Demand = 1080

Profit Rs. 5520

Buy Back

Profit Rs. 4000

Buy Back

at Rs. 3

Profit Rs. 5160

No risk

BearsAll risk

Sharingof

risks

So what is SCM?

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So, what is SCM?

Objective is to be able to have the right products in the right quantities,

at the right place, at the right moment, at minimal cost.

Bull Whip Effect

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Bull Whip Effect

Each organisation seek to solve the problem from its own

perspective

Small changes in consumer demand result in large

variations in orders placed upstream

Dramatic order size variation

Amplification of order size variation as one moves up thesupply chain

Supplier Manufacturer Distributor Retailer Customer

Buys 10Orders 15

Delay 2 weeksDelay 2 weeks

Orders 25

Delay 2 weeks

Orders 40

Causes

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Causes

Little or no communication between supply chain

partners.

Delay times between order processing, demand, and

receipt of products.

Over reacting to the backlog orders.

Inaccurate demand forecasts.

Drivers of Supply Chain Performance

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Facilities

Production/Storage Sites

Responsiveness Vs Efficiency


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Inventory

Raw materials

WIP

Finished Goods

Responsiveness Vs EfficiencySourcing

Outsourcing

Transportation

Transportation

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Transportation

Cost

Inventorycosts

Transportcosts

Totalcosts

Rail Air

Inventory

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Inventory

Where do we hold inventory?

Suppliers and manufacturerswarehouses and distribution centers

retailers

Types of Inventory

raw materials

WIP

finished goods

Why do we hold inventory?

Uncertainty in supply and demand

Lead TimeAvoid stock outs (customer goodwill)

Terms Involved

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Terms Involved

Inventory lot size

Replenishment Lead time

Stock out

Reorder Point

Safety stock

Relevant Costs in an Inventory System

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Relevant Costs in an Inventory System

Procurement costs

Ordering cost (appx. administrative, inspection, transportationetc.)

Holding costs

Maintenance and Handling

Taxes

ObsolescenceStock-outs costs

Lost sales (Customer goodwill)

Backorders

The Inventory Cycle

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The Inventory Cycle

Profile of Inventory Level Over Time

Quantity

on hand

Q

Receiveorder

Placeorder

Receiveorder

Placeorder

Receiveorder

Lead time

Reorderpoint

Demandrate

Time

ConstantDemand

Decisions

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Decisions

When to order

How much to order

Types of System

Continuous Review

Periodic Review

Types of System Continuous Review

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Types of System Continuous Review

Continuously monitoredR Reorder point, L Lead time

Q Order quantity

Time b/w orders vary but Q is fixed

Periodic Review

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Periodic Review

Monitored at periodic intervals of length r

Quantity set as the amount consumed during this interval

Time b/w orders fixed

Distribution

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Distribution

Steps taken to move and store a product from supplier to

customer

Design Options

Manufacturer storage with direct shipping

Manufacturer storage with direct shipping and in-transit merge

Distributor storage with package carrier delivery


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Manufacturer

Customers

Retailer

Drop Shipping

Manufacturer storage with direct shipping and in-transit merge

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g pp g g

Manufacturer

Customers

In-transit Merge by carriersRetailer

Distributor storage with carrier delivery

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g y

Manufacturer

Customers

Warehouse Storage byDistributor/Retailer

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Supply Chain Management and Enterprise

Resource Planning

Supply and Value Chains

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Supply chain refers to the flow of materials, information,

payments, and services from raw material suppliers,

through factories and warehouses (Value Chain), to the

final consumer(Demand Chain). It includes tasks such as

purchasing, payment flow, materials handling, production

planning & control, logistics & warehousing, inventorycontrol, and distribution. When it is managed

electronically it is referred to as an e-supply chain.

upply Chains contribute to increased profitability and competitiveness


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Supply Chain Flows

Materials flows are all physical products, newmaterials, and supplies that flow along the chain.

Information flows relates to all data associated withdemand, shipments, orders, returns andschedules.

Financial flows include all transfers of money,payments, credit card information, paymentschedules, e-payments and credit-related data.

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Supp

lyan

dValueCh

ains

Automotive Supply Chain

Supply Chains Components

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pp y p

The supply chain involves three segments:

Upstream, where sourcing or procurement from external suppliers

occur

Internal, where packaging, assembly, or manufacturing take place

Downstream, where distribution or dispersal take place, frequently

by external distributors.

movement of information and money and the procedures supporting the

movement of a product or a service.

Organizations and individuals are also part of the chain

Supply Chains

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pp y

Value ChainValue Chain Demand ChainDemand ChainSupply ChainSupply Chain

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Supply Chain Problems

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Adding value along the chain is essential forcompetitiveness, however problems exist especially in

complex or long chains and in cases where many business

partners are involved.

due to uncertainties

need to coordinate several activities, internal units,

and business partners.

Supply Chain Problems

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pp y

Demand forecasts are a major source of uncertainties

Competition

Prices

Weather conditions

Technological development

Customer confidence

Uncertainties exist in delivery times

Machine failures

Road conditions

Shipments

Quality problems may also create production delays

Bullwhip Effect

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erratic shifts in orders up and down the supply chain

p

Erratic shifts in orders up and down the supply chain

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order batching

rationing withinthe chain

price fluctuation

poor demandforecasting

Bullwhip Effect

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Distorted information can lead totremendous inefficiencies

excessive inventories

poor customer servicelost revenuesineffective shipmentsmissed production schedules.

Even slight demanduncertainties andvariability becomemagnified if each distinctentity on the chain, makesordering and inventorydecisions with respect toits own interest abovethose of the chain

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A common way to solve the bullwhip problem is bysharing information along the supply chain through

EDI, extranets, and groupware technologies. For

example employing a vendor-managed inventory

(VMI) strategy, the vendor monitors inventory levels

and when it falls below the threshold for each product

this automatically triggers an immediate shipment.

Supply Chain Solutions

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Optimal Inventory LevelsSupply Chain Coordination and Collaboration

Supply Chain Teams

Performance Measurement and Metrics

Various IT-Assisted Solutions

wireless technology

optimal shipping plans

strategic partnerships with suppliers

just-in-time

pp y

Computerized Supply Chains

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The supply chain process is intertwined with the

computerization of its activities. People have wantedto automate the processes along the chain to reduce

cost, expedite processing, and reduce errors.

Computerized Supply Chains

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Material requirements planning (MRP) essentially integrates

production, purchasing, and inventory management ofinterrelated products.

Manufacturing resource planning (MRP II), enhanced MRPmethodology by adding labor requirements and financialplanning.

Enterprise resource planning (ERP) further integrates thetransaction processing as well as other routine activities in theentire enterprise.

Integrations continues along several paths

functional areas

Combining transaction processing and decision support

Business intelligence

CRM software

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RFIDRFID

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Research says worldwide RFID spending will jump

from $300 million in 2004 to $2.8 billion by 2009,

and that most will centre on the global supply chain

(EPC Global the Source January 2005)

An AMR Research study found early EPC/RFID adopters in the retail andconsumer packaged goods (CPG) industries have lowered their supply

chain costs between three and five percent.

EPC= specific instance of a productUPC= A class of product

RFID CapabilitiesRFID Capabilities

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RFID CapabilitiesRFID Capabilities

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2003

Supply Chains Benefits :Tangible benefits

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Inventory reduction

Personnel reductionProductivity improvement

Order management improvement

Financial-close cycle improvements

IT cost reduction

Procurement cost reduction

Cash management improvements

Revenue/profit increases

Transportation logistics cost reduction

Maintenance reduction

On-time delivery improvement.

Supply Chains Benefits : intangible benefits

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Information visibility

New/improved processes

Customer responsiveness

Standardization

Flexibility

GlobalizationBusiness performance

Reduction in duplication of entries

controls and reconciliation are enhanced

rapid assimilation of data into the organization

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Systems can be integrated internally and externally.

Internal integration refers to integration betweenapplications inside a company, whereas external

integration refers to integration of applications among

business partners.

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Back and front office integration in a value chain

Collaborative Planning, Forecasting, Replenishment

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Process for two or more companies in a supply chain

to synchronize their demand forecasts into a singleplan to meet customer demand

Parties electronically exchange

past sales trends

point-of-sale dataon-hand inventory

scheduled promotions

forecasts

CPRFCPRF

and

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Co

llab

orativePl

an

ning,F

orec

asting

Rep

len

ishme

nt

SCOR Model Processes

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Plan

Develop a course

of action that best

meets sourcing,

production and

deliveryrequirements

Source

Procure goods

and services to

meet planned

or actual

demand

Make

Transform

product to a

finished state to

meet planned

or actualdemand

Deliver

Provide products

to meet demand,

including order

management,

transportationand distribution

Return

Return

products,

post-delivery

customersupport

SCOR: Customer FacingSCOR: Customer Facing

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Number of days to achieve anunplanned 20% change in orderswithout a cost penalty

Productionflexibility

Number of days for supply chain torespond to an unplanned significantchange in demand without a costpenalty

Supply chainresponse timeSupply ChainFlexibility

Number of days from order receipt tocustomer delivery

Orderfulfillment leadtime

Supply ChainResponsiveness

Percentage of orders delivered on

time and in full, perfectly matchedwith order with no errors

Perfect order

fulfillment

Percentage of orders shippedwithin24 hours of order receipt

Fill rate

Percentage of orders delivered ontime and in full to the customer

Deliveryperformance

Supply ChainDeliveryReliability

DefinitionPerformanceMetric

PerformanceAttribute

SCOR: Internal FacingSCOR: Internal Facing

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DefinitionPerformance

Metric

Performance

Attribute

SCOR: Internal FacingSCOR: Internal Facing

Revenue divided by total assets including

working capital and fixed assets

Asset turns

Number of days that cash is tied up as

inventory

Inventory days

of supply

Number of days that cash is tied up as workingcapital

Cash-to-cashcycle timeSupplyChain Asset

Management

Efficiency

Direct and indirect costs associated with

returns including defective, planned

maintenance and excess inventory

Warranty/return

s processing cost

Direct material cost subtracted from revenueand divided by the number of employees,

similar to sales per employee

Value-addedproductivity

Direct cost of material and labor to produce a

product or service

Cost of goods

sold

Direct and indirect cost to plan, source and

deliver products and services

Supply chain

management costSupply

Chain Cost

Enterprise Resource Planning

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ERP = Process of planning &

managing all resources & their

use in the entire enterprise.

Leading ERP software producers

SAP, Oracle, J.D.

Edwards, Computer Associates,

People Soft

MAIN OBJECTIVE of ERP

to integrate all departments

& functions across a company onto

a single computer system.

ERP and Supply Chains

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It is comprised of a set of applications that automate routine back-end operations:

such as financial management

inventory management

Scheduling

order fulfillmentcost control

accounts payable and receivable,

It includes front-end operations such as:

POS

Field SalesService

It also increases efficiency, improves quality, productivity, and profitability.

ERP orenterprise systems control all major business processeswith a single software architecture in real time.

Integrating ERP and SCMEnhances the Supply ChainEnhances the Supply Chain

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Creating an ERP/SCM integration model allows companies to quicklyassess the impact of their actions on the entire supply chain, includingcustomer demand.

By providing intelligent decision support and business intelligencecapabilities, the analytical SCM systems complement the ERP system.

i2 corporations

Manugistics SCM solutions

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Build-to-order cars over theBuild-to-order cars over the

InternetInternet

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ERP application including SCM module (Colgate-Palmolive)ERP application including SCM module (Colgate-Palmolive)

Second Generation ERP:Second Generation ERP:

DSS+CRM + E-Com+ Datawarehousing + Datamining + KM + PLMDSS+CRM + E-Com+ Datawarehousing + Datamining + KM + PLM

E-Commerce and Supply Chains

E-commerce is emerging as a superb tool for providing solutions to

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E-commerce

can digitize some products

can replace all paper documents

can replace faxes and telephone calls with electronic messaging

Enhances collaboration and information sharing

typically shortens the supply chain and minimizes inventories

facilitates customer service

introduces efficiencies into buying and sellingenables faster, cheaper, and better communication, collaboration, and

discovery of information

E commerce is emerging as a superb tool for providing solutions toproblems along the supply chain. Many supply chain activities, fromtaking customers' orders to procurement, can be conducted

electronically.

A major role of EC is to facilitate buying and selling along allsegments of the supply chain.

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Upstream Activities improve the upstream supply chain through e-procurement

Internal Supply Activities from entering purchase orders, to recording sales, to

order fulfillment, to tracking shipments, are usually conducted over a

corporate intranet

Downstream Activities enhance the activity downstream activities by providing

online ordering

Vertical exchanges combine upstream and downstream EC supply chainactivities. These B2Bexchanges, provide a medium where buyers and sellers

can meet.

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Order fulfillmentOnline Order Fulfillment & LogisticsOutsourcingI ti S l ti t S l Ch i P bl

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Innovative Solutions to Supply Chain ProblemsAutomated WarehousesOptions for Dealing with Returns

Same day, same hour delivery

Partner Relationship Management

E th t h b i t h t th

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Manual methods include; phone, fax, and mail

EDI is typically used by large corporations

EC PRM functions include:

partner profiles

partner communications

lead management (of clients)

targeted information distribution

connecting the extended enterprise

partner planning

centralized forecasting

group planninge-mail

price lists

Every company that has business partners has to manage therelationships with them. Information needs to flow between the firms and

constantly updated and shared.

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SRM: Supplier Relationship Management

Partner Relationship Management

G S C

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Global Supply Chains

Companies go global (disperse the value chain) for a variety of reasons.

lower costs of materials, products, services and labor

availability of products that are unavailable domestically

the firm's global strategytechnology available in other countries

high quality of products

intensification of global competition

the need to develop a foreign presence to increase sales

fulfillment of counter trade.

Supply chains that involve suppliers and/or customers inother countries are referred to as global supply chains.

Global supply chains are usuallyGlobal supply chains are usually longerlonger than domestic ones, andthan domestic ones, and

moremore complex. Therefore, additional uncertainties are likely.complex. Therefore, additional uncertainties are likely.

Types of Inventory

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Raw materials

Purchased parts and supplies

Work-in-process (partially completed) products (WIP)

Items being transported

Tools and equipment

Forms of Demand

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Dependent

Demand for items used to produce final products

Tires stored at a Goodyear plant are an

example of a dependent demand item

Independent

Demand for items used by external customers

Cars, appliances, computers, and houses

are examples of independent demandinventory

Inventory Costs

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Carrying cost

cost of holding an item in inventory

Ordering cost

cost of replenishing inventory

Shortage cost

temporary or permanent loss of sales

when demand cannot be met

Inventory Control Systems

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Continuous system (fixed-order quantity)

constant amount ordered when

inventory declines to

predetermined level

Periodic system (fixed-time period)

order placed for variable amount

after fixed passage of time

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Documents

SCM lect