SCM Module 1.pptx
- 1. Introduction to Supply Chain Management 1 MODULE – 1
- 2. SCM Defined… (1) Christopher (1998): “SCM is the management of upstream and downstream relationships to deliver superior customer value at lesser cost to the chain as a whole”. 2
- 3. SCM Defined… (2) Zheng et.al (2000) “SCM is the process of optimizing a Co’s internal practices and improving the interaction with its suppliers and customers”. 3
- 4. SCM Defined… (3) Beamon (1999): “An integrated process where raw materials are transformed into final products then delivered to customers”. 4
- 5. What is a Supply Chain? •All stages involved, directly or indirectly, in fulfilling a customer request •Includes manufacturers, suppliers, transporters, warehouses, retailers, customers •Within each company, the supply chain includes all functions involved in fulfilling a customer request (product development, marketing, operations, distribution, finance, customer service) 5
- 6. What is a Supply Chain? Contd… Customer is an integral part of the supply chain Includes movement of products from suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions. Probably more accurate to use the term “supply network” or “supply web” Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers All stages may not be present in all supply chains (e.g., no retailer or distributor for Dell) 6
- 7. What is a Supply Chain? 7 Customer wants TV set and goes to X X Out let Third party DC Samsung TV manufacturer Plastic Producer Packaging Paper Manufacturer Timber Industry Circuit board manufacturer
- 8. 8 Philosophy of supply chain management
- 9. Traditional View: Logistics in the Manufacturing Firm • Profit 4% • Logistics Cost 21% • Marketing Cost 27% • Manufacturing Cost 48% 9 Profit Logistics Cost Marketing Cost Manufacturing Cost
- 10. The Objective of a Supply Chain •Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) •Supply chain profitability is total profit to be shared across all stages of the supply chain •Supply chain success should be measured by total supply chain profitability, not profits at an individual stage 10
- 11. The Objectives of a Supply Chain Sources of supply chain revenue: • the customer Sources of supply chain cost: • flows of information, • products, or • funds between stages of the supply chain Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability 11
- 12. Importance of Supply Chain Management Firms have discovered value-enhancing and long term benefits of SCM Who benefits most? Firms with: Large numbers of products Large number of suppliers Complex products Customers with large purchasing budgets
- 13. Decision Phases of a Supply Chain • Supply chain strategy or design • Supply chain planning • Supply chain operation 13
- 14. Supply Chain Strategy or Design • Decisions about the structure of the supply chain and what processes each stage will perform • Strategic supply chain decisions – Locations and capacities of facilities – Products to be made or stored at various locations – Modes of transportation – Information systems • Supply chain design must support strategic objectives • Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty. 14
- 15. Supply Chain Planning •Planning decisions: • Which markets will be supplied from which locations • Planned buildup of inventories • Subcontracting, backup locations • Inventory policies • Timing and size of market promotions •Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon 15
- 16. Supply Chain Operation •Time horizon is weekly or daily •Decisions regarding individual customer orders •Supply chain configuration is fixed and operating policies are determined •Goal is to implement the operating policies as effectively as possible •Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders •Much less uncertainty (short time horizon) 16
- 18. Flows in a Supply Chain 18 Customer Information Product Funds Producer
- 19. Process View of a Supply Chain • Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages • Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push) 19
- 20. Cycle View of Supply Chains 20 Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retailer Distributor Manufacturer Supplier
- 21. 21 An over Simplified supply chain Delivery of a superior value: Quality flexibility innovation and values flow to the customer Demands for low pricing, high quality, customer supplier Integration across a responsive and flexible supply chain Supplier Supplier Buyer Customer Customer customer Supplier Value acquisition from suppliers Value added in production Value deliver To customers
- 22. Cycle View of a Supply Chain •Each cycle occurs at the interface between two successive stages •Customer order cycle (customer-retailer) •Replenishment cycle (retailer-distributor) •Manufacturing cycle (distributor-manufacturer) •Procurement cycle (manufacturer-supplier) Cycle view clearly defines processes involved and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process. 22
- 23. Customer Order Cycle • Involves all processes directly involved in receiving and filling the customer’s order • Customer arrival • Customer order entry • Customer order fulfillment • Customer order receiving 23
- 24. Replenishment Cycle • All processes involved in replenishing retailer inventories (retailer is now the customer) • Retail order trigger • Retail order entry • Retail order fulfillment • Retail order receiving 24
- 25. Manufacturing Cycle • All processes involved in replenishing distributor (or retailer) inventory • Order arrival from the distributor, retailer, or customer • Production scheduling • Manufacturing and shipping • Receiving at the distributor, retailer, or customer 25
- 26. Procurement Cycle •All processes necessary to ensure that materials are available for manufacturing to occur according to schedule •Manufacturer orders components from suppliers to replenish component inventories •However, component orders can be determined precisely from production schedules (different from retailer/distributor orders that are based on uncertain customer demand) •Important that suppliers be linked to the manufacturer’s production schedule 26
- 27. Push/Pull View of Supply Chains 27 Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives PUSH PROCESSES PULL PROCESSES
- 28. Push/Pull View of Supply Chain Processes •Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand •Pull: execution is initiated in response to a customer order (reactive) •Push: execution is initiated in anticipation of customer orders (speculative) •Push/pull boundary separates push processes from pull processes 28
- 29. Considerations for Supply Chain Drivers Driver Efficiency Responsiveness Inventory Cost of holding Availability Transportation Consolidation Speed Facilities Consolidation / Dedicated Proximity / Flexibility Information What information is best suited for each objective 29
- 30. Competitive Changes Over Time Competitive pressures can change over time More competitors may result in an increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions
- 31. Primary goal Efficient SC Responsive SC’s Product design strategy Supply demand at the lowest cost maximize performance at a minimum product cost Respond quickly to demand. Create modularity to allow postponement of product differentiation Pricing Strategy Lower Margins because price is a prime customer drive Higher margins because price is not a prime customer drive. Manufacturing strategy Lower costs through high utilization Maintain capacity flexibility to buffer 31 Comparison of efficient and responsive supply chain
- 32. Primary goal Efficient SC Responsive SC’s Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to deal with demand/supply uncertainty Lead time strategy Reduce but not at the expense of costs Aggressively reduce even if the costs are significant Supplier strategy Select based on cost and quality Select based on speed, flexibility, reliability and quality. 32
- 33. Drivers of Supply Chain Performance Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites Inventory raw materials, WIP, finished goods within a supply chain inventory policies Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes Information data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance Sourcing functions a firm performs and functions that are outsourced Pricing Price associated with goods and services provided by a firm to the supply chain
- 34. Supply Chain Decision Making Frame work (Supply Chain Framework) 34 Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Drivers Competitive strategy Supply chain strategy
- 35. Facilities Role in the supply chain the “where” of the supply chain manufacturing or storage (warehouses) Role in the competitive strategy economies of scale (efficiency priority) larger number of smaller facilities (responsiveness priority)
- 36. Inventory: Role in the Supply Chain 36 Inventory exists because of a mismatch between supply and demand Source of cost and influence on responsiveness Impact on material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain throughput rate at which sales to end consumers occur I = inventory; R = throughput; T = flow time Inventory and throughput are “synonymous” in a supply chain
- 37. Inventory: Role in Competitive Strategy 37 If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers If cost is more important, inventory can be reduced to make the firm more efficient Trade-off
- 38. Components of Inventory Decisions 38 Cycle inventory Safety inventory Seasonal inventory Overall trade-off: Responsiveness versus efficiency
- 39. Transportation: Role in the Supply Chain 39 Moves the product between stages in the supply chain Impact on responsiveness and efficiency Faster transportation allows greater responsiveness but lower efficiency Also affects inventory and facilities
- 40. Transportation: Role in the Competitive Strategy 40 If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it Can also use slower transportation modes for customers whose priority is price (cost) Can also consider both inventory and transportation to find the right balance
- 41. Components of Transportation Decisions 41 Mode of transportation: Route and network selection In-house or outsource
- 42. Information: Role in the Supply Chain The connection between the various stages in the supply chain – allows coordination between stages Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels
- 43. Information: Role in the Competitive Strategy 43 Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Information technology What information is most valuable?
- 44. Components of Information Decisions 44 Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain) Coordination and information sharing Forecasting and aggregate planning Enabling technologies EDI Internet ERP systems Supply Chain Management software Overall trade-off: Responsiveness versus efficiency
- 45. Sourcing: Role in the Supply Chain 45 Set of business processes required to purchase goods and services in a supply chain Supplier selection, single vs. multiple suppliers, contract negotiation
- 46. Sourcing: Role in the Competitive Strategy 46 Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain In-house vs. outsource decisions- improving efficiency and responsiveness
- 47. Components of Sourcing Decisions 47 In-house versus outsource decisions Supplier evaluation and selection Procurement process Overall trade-off: Increase the supply chain profits
- 48. Pricing: Role in the Supply Chain 48 Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply
- 49. Pricing: Role in the Competitive Strategy 49 Firms can utilize optimal pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times
- 50. Components of Pricing Decisions 50 Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing Overall trade-off: Increase the firm profits
- 51. Examples of Supply Chains • Dell / Compaq • Toyota / GM / Ford • McMaster Carr / W.W. Grainger • Amazon / Borders / Barnes and Noble • Webvan / Peapod / Jewel 51
- 52. Major Supply Chain Issues/Key Issues • Supply Chain Networks • Complexity • Inventory Deployment • Information • Cost and Value • Organizational Relationships • Performance Measurement • Technology • Transportation Management • Supply Chain Security • Talent Management 52
- 53. Importance of Logistics in Business • The Council of Supply Chain Management Professionals (CSCMP), the largest professional organization on logistics, has provided the most useful definition of logistics, and according to that, Logistics management is that part of the SCM that plans, implements, and controls the efficient, effective forward and reverse flows and storage of goods, services and other related information between the point of origin and the point of consumption in order to meet the customers’ requirements.
- 54. Importance of Logistics in Business (Contd) Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfilment, logistics network design, inventory management, supply/demand planning, and management of third-party logistics (TPL) service providers.
- 55. Basic Elements of Logistics • Transportation • Warehousing • Inventory management • Packaging and utilization • Information and communication
- 56. Types of Logistics • Business logistics: moving cargo • General logistics: moving cargo and moving people
- 57. Types of Logistics (Contd) • Inbound logistics or procurement logistics • Production logistics or internal logistics • Outbound logistics or distribution logistics or marketing logistics • Reverse logistics • Green logistics • Defence logistics • Medical logistics • Disaster logistics • War logistics • Agricultural logistics • Tourism logistics
- 58. Logistics Activities and Goals • Network design • Information processing • Transportation • Inventory management • Warehousing, material-handling and packaging
- 59. Operational Objectives of a Logistics System • Rapid response • Minimum variance • Minimum inventory • Movement consolidation • Quality • Life cycle support
- 60. Components of Logistics The basic elements of logistics include the following functions: • Transportation • Warehousing • Inventory management • Packaging and utilization • Information and communication
- 61. Operational Objectives of a Logistics System • Rapid response • Minimum variance • Minimum inventory • Movement consolidation • Quality • Life cycle support
- 62. Estimating Customer Demand and Forecasting in Supply Chain. 62
- 63. Demand Management • Demand management is one of the key areas which impact the supply chain performance. The ideal performance of a supply chain will, however, be when the end-to-end chain and link in the entire value chain is led by the real-term customers’ demand. • If a business can achieve that status of seamlessly meeting the customer demand by coordinating and managing the production operations as well as inventory without any excess stock at any stage, that would be the ideal situation. • Demand management, thus, is a very critical area of influence that determines the performance of the business.
- 64. Estimating the Total Market Demand • Define the market. • Divide the industry demand into its principal or main components. • Forecast the key drivers of demand in each segment and project how they are likely to change. • Conduct sensitivity analyses to understand the most critical assumptions and to gauge risks to base line forecast.
- 65. Demand Accuracy • Customer data relating to the demographics, consumption pattern and buying habits • Seasonality of demands, if any • Break-up of demands by customer segments including institutional customers and bulk customers
- 66. Demand Accuracy (Contd) • Information regarding how, when and where the expected demand has to be met; also, information regarding channel intermediaries • Common trade practices and trade terms • Developing and executing the best practices for logistics, transportation and distribution methods to deliver products and services to consumers in the desired format
- 67. Efficient Demand Management • Efficient demand management means servicing the customer requirement on real-time basis at least cost or at affordable cost which entails delivering the customer order wherever and whenever required at minimal cost of servicing. • Some companies have developed systems and processes to deliver customer orders most efficiently. • Their service level and frequency are much higher than their competitors.
- 68. Why Is Demand Forecast Important? • The entire enterprise resource planning (ERP) commences when the sales forecasting exercise is completed and approved. • The forecast of the annual budgetary revenue is therefore very important for all businesses, irrespective of their types, nature and character. • The bigger the company, more complex the forecast processes would be. • Many decisions including recruitment or staffing, organization structure and design are linked with the business forecast as well as the brand marketing plan to achieve the forecasted volume.
- 69. Factors Influencing Forecast • The forecast for a company’s product lines depends on many internal as well as external factors. • Internal factors largely include the company’s advertisement and promotional plan, product’s past demand in the same market, whether any new product variant in different price segment is being introduced or not, competitive action in the same market, economic growth, product category growth rate and so on.
- 70. Types of Forecasts • Short-term forecasts: These short-term forecasts are usually for periods up to three months. • Medium-term forecasts: Medium-term forecasts are usually for a period of one year. These are thus the annual budget of the business and have significance for the planners. • Long-term forecasts: These are usually for periods of three years and upwards but not more than five years, as beyond five years it is not realistically possibly to forecast considering the expected changes in business environment including technology and so on.
- 71. Business Functions Dependent on Demand Forecast for Their Planning Other functions in a business can be directly and indirectly affected in their planning considerations as a result of the sales forecast and such functions will include the following: • The production and operations department needs to know the sales forecasts so that they can arrange production planning. • The purchase department normally gets it cues to purchase from production via purchase requisitions or bill of materials. • The human resource department is also interested to know the sales forecast from the manpower planning point of view.
- 72. Business Functions Dependent on Demand Forecast for Their Planning (Contd) • The finance and costing department needs to know the medium-term sales forecast for their budgeting purpose. • The research and development department also needs to know the forecasts, although their requirement is more for technological point of view. • All sales promotion and marketing activities are aligned with the sales forecast to ensure that the budgeted numbers are achieved.
- 73. Levels of Forecast Forecasts can be prepared at different levels of aggregation, starting from global level to national and ultimately to SKUs, month-wise as well as weekly, salesperson territory wise, taking into account the seasonal impact on sales performance and consumer demand which can really help the corporation in designing and planning the supply chain to satisfy the projected demand of the customers.
- 74. Demand Forecasting Methods • Qualitative or subjective or judgemental • Extrapolation • Quantitative
- 75. Qualitative or Subjective or Judgemental • Sales force composite • Jury of executive opinion • Intention to buy survey • Industry survey
- 76. Extrapolation • Moving average • Per cent rate of change • Leading indicators • Unit rate of change • Exponential smoothening • Line extension
- 77. Quantitative • Simple regression • Multiple regression • Econometric models
- 78. Consumer–User Survey Method • The method essentially involves asking customers about their likely purchase intention during the forecasting period. • For an industrial product where numbers of customers are not too many, such research are often carried out by involving the salespersons responsible for servicing those customers. • But if there is competition in the product category that your business represents, then it may not be easy to ascertain what percentage of that incremental demand of that customer will really be sourced or purchased from you.
- 79. Sales Force Composite • This method involves salespersons making a product-by-product forecast for their particular sales territory. • The sum total of all salespersons’ forecast covering the entire sales territory would normally be equal to the company’s sales forecast taking a bottom-up approach and sometimes it is also considered as a ‘grass-roots’ approach. • This approach sometimes can be realistic as salespersons involved in generation of or forecasting the numbers in their own territory will be eventually responsible for delivering these forecasted numbers and hence the company can rely on this forecast.
- 80. Delphi Method • This method bears the resemblance of the ‘expert opinion’ method, and the forecasting team is chosen using a similar criterion. The main difference is that they do not meet in a committee. • The project administers a structured questionnaire to each member of the team. The questionnaire can be administered in different stages to ultimately bring out a forecast for the company covering the product categories that the company sells.
- 81. Bayesian Decision Theory • This theory has been placed under qualitative techniques of forecasting, although it is in reality a mix of both subjective and objective techniques. • The technique is similar to the critical path analysis in that it uses a network diagram and probabilities must be estimated for each event over the network. • Bayesian decision theory is a relatively new and somewhat controversial method for dealing with future uncertainties.
- 82. Quantitative Forecasting Techniques • This is also sometimes referred to as objective or mathematical techniques. Quantitative techniques are based on the manipulations of historical data. An underlying assumption of time series forecasting is that the future demand is solely dependent on the past demand. • For example, this year’s demand is 10% more than the last year’s actual sales. Time series analysis takes into account the historical sales over a longer period of years to arrive at a realistic level of the projected sales. • Cause-and-effect forecasting (also referred to as associative forecasting) assumes that one or more factors are related to the demand and that the relationship between cause and effect can be used to estimate the future demand.
- 83. Naive Forecasts • Naive forecasting is the simplest forecasting technique and is often used as the standard of comparison with the forecasts derived from other methods. • A large number of companies (over 30%) use this method of forecasting on a regular basis. • This method actually assumes that nothing is going to change and, therefore, the next quarter’s forecast will actually be the current level of sales performance.
- 84. MAPE Method • When you like to compare the forecasting accuracy over several time periods, the mean absolute percentage error (MAPE) method is the method used by most of the businesses. The MAPE can be calculated using the following formula: 1 (Forecast Actual) / Actual MAPE 100% n i N
- 85. Moving Average Method • The moving average method actually predicts the future sales on the average sales performance for the same product categories in the recent past. As such, the average sales revenue actually achieved for several periods in the recent past is used to predict or forecast the sales for the next period, using the following formula: 𝑆𝑡 + 𝑆𝑡−1 + 𝑆𝑡−2 + … + 𝑆𝑡−𝑛+1 𝐹𝑡+1 = N
- 86. Regression • Linear regression • Multiple regression A class exercise to be done with a case example
- 87. Trend- and Seasonality-Corrected Holt–Winters’ Exponential Smoothing • The trend-corrected exponential smoothing as per Holt’s model is appropriate when the demand is assumed to have a level and a trend in the systematic component but no seasonality, which would mean that Systematic Component of Demand = Level + Trend • Both trend- and seasonality-corrected exponential smoothing as per Winters’ model are appropriate when the systematic component of the demand has a level, a trend and also a seasonality factor, which thus would mean that Systematic Component of Demand = (Level + Trend) × Seasonal Factor
- 88. Applicability of the Methods Forecasting Methods • Moving average method • Simple exponential smoothing • Holt’s model • Winters’ model Where Applicable • No trend or seasonality • No trend or seasonality • Trend but no seasonality • Trend and seasonality
- 89. When to Use Quantitative Forecasting Methods • Quantitative forecasting techniques are best employed in situations where we have access to historical data, and these are also helpful if the time series we are trying to forecast are stable and do not often change the direction. • Quantitative methods have a distinctive advantage in situations where frequent forecasts are to be made for very large numbers of products and product categories which may also need the use of computers and forecasting software because of large numbers of calculations.
- 90. Changing Business Environment • The numerical methods for forecasting sales normally attempt to make projections from historical data and often do not take into consideration the impact of any significant development in the business environment on sales numbers. • Percentage rate of change, unit rate of change and two variable regression are in fact poor predictors of series under a significant turning point in business. • Naive, moving average and exponential smoothing are somewhat better because they tend to lag and then adapt to new realities.
- 91. Forecasting in Practice For deriving realistic forecasts, a close coordination between sales and SCM teams and also the channel partners including the IT team of the company is very much desirable. Share only those data which are valuable for the specific business function. The value of the data depends on where one is located in the entire chain.
- 92. What Industry Practices Industry tends to use simplistic methods to forecast sales. The only concern is the degree of errors in their method. If the degree of error is very low and/or does not put the SCM tasks in difficulty in terms of handling a possible stock-out situation resulting in loss of sales or a sudden spurt in demand offering short-term opportunities to capture and grow, then the methods that are being employed are for all practical purposes working well for the company.