Supply Chain Management

First appearance – Financial Times Importance - → Inventory ~ 14% of GDP → GDP ~ $12 trillion → Warehousing/Trans ~ 9% of GDP → Rule of Thumb - $12 increase in sales to = $1 savings in Supply Chain 1982 Peter Drucker – last frontier Supply Chain problems can cause ≤ 11% drop in stock price Customer perception of company

SCOR Reference:

Supply Chain “The global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.” APICS Dictionary, 10th ed.

Supply Chain Uncertainty Forecasting, lead times, batch ordering, price fluctuations, and inflated orders contribute to variability Forecasting, lead times, batch ordering, price fluctuations, and inflated orders contribute to variability Inventory is a form of insurance Inventory is a form of insurance Distorted information is one of the main causes of uncertainty Bullwhip effect Distorted information is one of the main causes of uncertainty Bullwhip effect

Information in the Supply Chain Centralized coordination of information flows Centralized coordination of information flows Integration of transportation, distribution, ordering, and production Integration of transportation, distribution, ordering, and production Direct access to domestic and global transportation and distribution channels Direct access to domestic and global transportation and distribution channels Locating and tracking the movement of every item in the supply chain - RFID Locating and tracking the movement of every item in the supply chain - RFID

Information in the Supply Chain Consolidation of purchasing from all suppliers Consolidation of purchasing from all suppliers Intercompany and intracompany information access Intercompany and intracompany information access Data acquisition at the point of origin and point of sale Data acquisition at the point of origin and point of sale Instantaneous updating of inventory levels Instantaneous updating of inventory levels Visibility Visibility

Electronic Data Interchange Computer-to-computer exchange of business documents in a standard format Computer-to-computer exchange of business documents in a standard format Quick access, better customer service, less paperwork, better communication, increased productivity, improved tracing and expediting, improves billing and cost efficiency Quick access, better customer service, less paperwork, better communication, increased productivity, improved tracing and expediting, improves billing and cost efficiency

Bar Codes Computer readable codes attached to items flowing through the supply chain Computer readable codes attached to items flowing through the supply chain Generates point-of-sale data which is useful for determining sales trends, ordering, production scheduling, and deliver plans Generates point-of-sale data which is useful for determining sales trends, ordering, production scheduling, and deliver plans

IT Issues Increased benefits and sophistication come with increased costs Increased benefits and sophistication come with increased costs Efficient web sites do not necessarily mean the rest of the supply chain will be as efficient Efficient web sites do not necessarily mean the rest of the supply chain will be as efficient Security problems are very real – camera phones, cell phones, thumb drives Security problems are very real – camera phones, cell phones, thumb drives Collaboration and trust are important elements that may be new to business relationships Collaboration and trust are important elements that may be new to business relationships

Suppliers Purchased materials account for about half of manufacturing costs Purchased materials account for about half of manufacturing costs Materials, parts, and service must be delivered on time, of high quality, and low cost Materials, parts, and service must be delivered on time, of high quality, and low cost Suppliers should be integrated into their customers’ supply chains Suppliers should be integrated into their customers’ supply chains Partnerships should be established Partnerships should be established On-demand delivery (JIT) is a frequent requirement - what is JIT and does it work? On-demand delivery (JIT) is a frequent requirement - what is JIT and does it work?

Sourcing Relationship between customers and suppliers focuses on collaboration and cooperation Relationship between customers and suppliers focuses on collaboration and cooperation Outsourcing has become a long-term strategic decision Outsourcing has become a long-term strategic decision Organizations focus on core competencies Organizations focus on core competencies Single-sourcing is increasingly a part of supplier relations Single-sourcing is increasingly a part of supplier relations How does single source differ from sole source?

Distribution The actual movement of products and materials between locations The actual movement of products and materials between locations Handling of materials and products at receiving docks, storing products, packaging, and shipping Handling of materials and products at receiving docks, storing products, packaging, and shipping Often called logistics Often called logistics Driving force today is speed Driving force today is speed

Distribution Centers and Warehousing DCs are some of the largest business facilities in the United States DCs are some of the largest business facilities in the United States Trend is for more frequent orders in smaller quantities Trend is for more frequent orders in smaller quantities Flow-through facilities and automated material handling Flow-through facilities and automated material handling Final assembly and product configuration (postponement) may be done at the DC Final assembly and product configuration (postponement) may be done at the DC

Warehouse Management Systems Highly automated systems Highly automated systems A good system will control item slotting, pick lists, packing, and shipping A good system will control item slotting, pick lists, packing, and shipping Most WMS include transportation management (load management/configuration), order management, yard management, labor management, warehouse optimization Most WMS include transportation management (load management/configuration), order management, yard management, labor management, warehouse optimization

Vendor-Managed Inventory Not a new concept – same process used by bread deliveries to stores for decades Not a new concept – same process used by bread deliveries to stores for decades Reduces need for warehousing Reduces need for warehousing Increased speed, reduced errors, and improved service Increased speed, reduced errors, and improved service Onus is on the supplier to keep the shelves full or assembly lines running Onus is on the supplier to keep the shelves full or assembly lines running variation of JIT variation of JIT Proctor&Gamble - Wal-Mart Proctor&Gamble - Wal-Mart Home Depot Home Depot

Collaborative Distribution and Outsourcing Collaborative planning, forecasting, and replenishment (CPFR) Collaborative planning, forecasting, and replenishment (CPFR) Allows suppliers to know what is really needed and when Allows suppliers to know what is really needed and when Electronic-based exchange of data and information Electronic-based exchange of data and information Europe’s ECR/QR Europe’s ECR/QR

Transportation Common methods are railroads, trucking, water, air, intermodal, package carriers, and pipelines Common methods are railroads, trucking, water, air, intermodal, package carriers, and pipelines

Railroads 150,000 miles in US 150,000 miles in US Low cost, high-volume Low cost, high-volume Improving flexibility Improving flexibility intermodal service intermodal service double stacking double stacking Complaints: slow, inflexible, large loads Advantages: large/bulky loads, intermodal

Most used mode in US -75% of total freight (volume not total weight) Most used mode in US -75% of total freight (volume not total weight) Flexible, small loads Flexible, small loads Consolidation, Internet load match sites Consolidation, Internet load match sites Single sourcing reduces number of trucking firms serving a company Single sourcing reduces number of trucking firms serving a company Truck load (TL) vs. Less Than Truck Load (LTL) Truck load (TL) vs. Less Than Truck Load (LTL) Trucking

Air Rapidly growing segment of transportation industry Rapidly growing segment of transportation industry Lightweight, small items Lightweight, small items Quick, reliable, expensive (relatively expensive depending on costs of not getting item there) Quick, reliable, expensive (relatively expensive depending on costs of not getting item there) Major airlines and US Postal Service, UPS, FedEx, DHL Major airlines and US Postal Service, UPS, FedEx, DHL

Package Carriers UPS, US Postal Service, FedEx Ground UPS, US Postal Service, FedEx Ground Significant growth driven by e-businesses and the move to smaller shipments and consumer desire to have it NOW Significant growth driven by e-businesses and the move to smaller shipments and consumer desire to have it NOW Use several modes of transportation Use several modes of transportation Innovative use of technologies in some cases Innovative use of technologies in some cases Online tracking – some better than others Online tracking – some better than others

Intermodal Combination of several modes of transportation Combination of several modes of transportation Most common are truck/rail/truck and truck/water/rail/truck Most common are truck/rail/truck and truck/water/rail/truck Enabled by the use of containers – the development of the 20 and 40 foot containers significantly changed the face of shipping Enabled by the use of containers – the development of the 20 and 40 foot containers significantly changed the face of shipping

Water One of oldest means of transport One of oldest means of transport Low-cost, high-volume, slow (relative) Low-cost, high-volume, slow (relative) Security - sheer volume - millions of containers annually Security - sheer volume - millions of containers annually Bulky, heavy and/or large items Bulky, heavy and/or large items Standardized shipping containers improve service Standardized shipping containers improve service The most common form of international shipping The most common form of international shipping

Pipelines Primarily for oil & refined oil products Primarily for oil & refined oil products Slurry lines carry coal or kaolin Slurry lines carry coal or kaolin High initial capital investment High initial capital investment Low operating costs Low operating costs Can cross difficult terrain Can cross difficult terrain

Global Supply Chain Free trade & global opportunities Free trade & global opportunities Nations form trading groups Nations form trading groups No tariffs or duties No tariffs or duties Freely transport goods across borders Freely transport goods across borders Security!! Security!!

Forecasting

Forecasting Survey How far into the future do you typically project when trying to forecast the health of your industry?  less than 4 months3%  4-6 months12%  7-12 months28%  > 12 months57% Fortune Council survey, Nov 2005

Indices to forecast health of industry Consumer price index 51% Consumer Confidence index44% Durable goods orders20% Gross Domestic Product35% Manufacturing and trade inventories and sales27% Price of oil/barrel34% Strength of US $46% Unemployment rate53% Interest rates/fed funds59% Fortune Council survey, Nov 2005

Forecasting Importance Improving customer demand forecasting and sharing the information downstream will allow more efficient scheduling and inventory management Boeing, 1987: $2.6 billion write down due to “raw material shortages, internal and supplier parts shortages” Wall Street Journal, Oct 23, 1987

Forecasting Importance “Second Quarter sales at US Surgical Corporation decline 25%, resulting in a $22 mil loss…attributed to larger than anticipated inventories on shelves of hospitals.” US Surgical Quarterly, Jul 1993 “IBM sells out new Aetna PC; shortage may cost millions in potential revenue.” Wall Street Journal, Oct 7, 1994

Principles of Forecasting Forecasts are usually wrong every forecast should include an estimate of error Forecasts are more accurate for families or groups Forecasts are more accurate for nearer periods.

Important Factors to Improve Forecasting Record Data in the same terms as needed in the forecast – production data for production forecasts; time periods Record circumstances related to the data Record the demand separately for different customer groups

Forecast Techniques Extrinsic Techniques – projections based on indicators that relate to products – examples Intrinsic – historical data used to forecast (most common)

Forecasting Forecasting errors can increase the total cost of ownership for a product - inventory carrying costs - obsolete inventory - lack of sufficient inventory - quality of products due to accepting marginal products to prevent stockout

Forecasting Essential for smooth operations of business organizations Estimates of the occurrence, timing, or magnitude of uncertain future events Costs of forecasting: excess labor; excess materials; expediting costs; lost revenues

Forecasting Predicting future events Predicting future events Usually demand behavior over a time frame Usually demand behavior over a time frame Qualitative methods Qualitative methods Based on subjective methods Based on subjective methods Quantitative methods Quantitative methods Based on mathematical formulas Based on mathematical formulas

Strategic Role of Forecasting Focus on supply chain management Focus on supply chain management Short term role of product demand Short term role of product demand Long term role of new products, processes, and technologies Long term role of new products, processes, and technologies Focus on Total Quality Management Focus on Total Quality Management Satisfy customer demand Satisfy customer demand Uninterrupted product flow with no defective items Uninterrupted product flow with no defective items Necessary for strategic planning Necessary for strategic planning

Strategic Role of Forecasting Focus on supply chain management Focus on supply chain management Short term role of product demand Short term role of product demand Long term role of new products, processes, and technologies Long term role of new products, processes, and technologies Focus on Total Quality Management Focus on Total Quality Management Satisfy customer demand Satisfy customer demand Uninterrupted product flow with no defective items Uninterrupted product flow with no defective items Necessary for strategic planning Necessary for strategic planning

Time Frame Time Frame Short-range, medium- range, long-range Short-range, medium- range, long-range Demand Behavior Demand Behavior Trends, cycles, seasonal patterns, random Trends, cycles, seasonal patterns, random Components of Forecasting Demand

Time Frame Short-range to medium-range Short-range to medium-range Daily, weekly monthly forecasts of sales data Daily, weekly monthly forecasts of sales data Up to 2 years into the future Up to 2 years into the future Long-range Long-range Strategic planning of goals, products, markets Strategic planning of goals, products, markets Planning beyond 2 years into the future Planning beyond 2 years into the future

Demand Behavior Trend Trend gradual, long-term up or down movement gradual, long-term up or down movement Cycle Cycle up & down movement repeating over long time frame up & down movement repeating over long time frame Seasonal pattern Seasonal pattern periodic oscillation in demand which repeats periodic oscillation in demand which repeats Random movements follow no pattern Random movements follow no pattern

Forms of Forecast Movement Time (a) Trend Time (d) Trend with seasonal pattern Time (c) Seasonal pattern Time (b) Cycle Demand Demand Demand Demand Random movement Figure 8.1

Forecasting Methods Time series Time series Regression or causal modeling Regression or causal modeling Qualitative methods Qualitative methods Management judgment, expertise, opinion Management judgment, expertise, opinion Use management, marketing, purchasing, engineering Use management, marketing, purchasing, engineering Delphi method Delphi method Solicit forecasts from experts Solicit forecasts from experts

Time Series Methods Statistical methods using historical data Statistical methods using historical data Moving average Moving average Exponential smoothing Exponential smoothing Linear trend line Linear trend line Assume patterns will repeat Assume patterns will repeat Naive forecasts Naive forecasts Forecast = data from last period Forecast = data from last period

Moving Average Average several periods of data Average several periods of data Dampen, smooth out changes Dampen, smooth out changes Use when demand is stable with no trend or seasonal pattern Use when demand is stable with no trend or seasonal pattern stock market analysis - trend analysis stock market analysis - trend analysis

Moving Average Average several periods of data Average several periods of data Dampen, smooth out changes Dampen, smooth out changes Use when demand is stable with no trend or seasonal pattern Use when demand is stable with no trend or seasonal pattern Sum of Demand In n Periods n

Simple Moving Average Jan120 Feb90 Mar100 Apr75 May110 June50 July75 Aug130 Sept110 Oct90 ORDERS MONTHPER MONTH

Jan120 Feb90 Mar100 Apr75 May110 June50 July75 Aug130 Sept110 Oct90 ORDERS MONTHPER MONTH Example 8.1 MA nov = 3 = = 110 orders for Nov Simple Moving Average D aug +D sep +D oct

Jan120– Feb90 – Mar100 – Apr May June July Aug Sept Oct Nov –110.0 ORDERSTHREE-MONTH MONTHPER MONTHMOVING AVERAGE Example 8.1 Simple Moving Average

Jan120– Feb90 – Mar100 – Apr May June July Aug Sept Oct Nov –110.0 ORDERSTHREE-MONTH MONTHPER MONTHMOVING AVERAGE Example 8.1 = = 91 orders for Nov Simple Moving Average

Example 8.1 Simple Moving Average Jan120– – Feb90 – – Mar100 – – Apr – May – June July Aug Sept Oct Nov – ORDERSTHREE-MONTHFIVE-MONTH MONTHPER MONTHMOVING AVERAGEMOVING AVERAGE

Weighted Moving Average Adjusts moving average method to more closely reflect data fluctuations Adjusts moving average method to more closely reflect data fluctuations

Weighted Moving Average WMA n = i = 1  Wi DiWi DiWi DiWi Di where W i = the weight for period i, between 0 and 100 percent  W i = 1.00 Adjusts moving average method to more closely reflect data fluctuations Adjusts moving average method to more closely reflect data fluctuations

Weighted Moving Average Example MONTH WEIGHT DATA August 17%130 September 33%110 October 50%90

Weighted Moving Average Example MONTH WEIGHT DATA August 17%130 September 33%110 October 50%90 November forecast WMA 3 = 3 i = 1  Wi DiWi DiWi DiWi Di = (0.50)(90) + (0.33)(110) + (0.17)(130) = orders 3 Month = month = 91

Averaging method Averaging method Weights most recent data more strongly Weights most recent data more strongly Reacts more to recent changes Reacts more to recent changes Widely used, accurate method Widely used, accurate method Exponential Smoothing

F t +1 =  D t + (1 -  )F t where F t +1 =forecast for next period D t =actual demand for present period F t =previously determined forecast for present period  =weighting factor, smoothing constant Averaging method Averaging method Weights most recent data more strongly Weights most recent data more strongly Reacts more to recent changes Reacts more to recent changes Widely used, accurate method Widely used, accurate method Exponential Smoothing

Forecast for Next Period Forecast = (weighting factor)x(actual demand for period)+(1-weighting factor)x(previously determined forecast for present period) 0 >  <= 1 Lesser reaction to recent demand Greater reaction to recent demand

Seasonal Adjustments Repetitive increase/ decrease in demand Repetitive increase/ decrease in demand Use seasonal factor to adjust forecast Use seasonal factor to adjust forecast

Seasonal Adjustments Repetitive increase/ decrease in demand Repetitive increase/ decrease in demand Use seasonal factor to adjust forecast Use seasonal factor to adjust forecast Seasonal factor = S i = DiDiDDDiDiDD = demand for period/sum of demand

Seasonal Adjustment Total DEMAND (1000’S PER QUARTER) YEAR1234Total

Seasonal Adjustment Total DEMAND (1000’S PER QUARTER) YEAR1234Total S 1 = = = 0.28 D1D1DDD1D1DD S 2 = = = 0.20 D2D2DDD2D2DD S 4 = = = 0.37 D4D4DDD4D4DD S 3 = = = 0.15 D3D3DDD3D3DD

Seasonal Adjustment Total DEMAND (1000’S PER QUARTER) YEAR1234Total S i

Seasonal Adjustment Total DEMAND (1000’S PER QUARTER) YEAR1234Total S i Forecast for 2011 using simple 3 year moving ave Forecast for 1st qtr 2011

Forecast Accuracy Find a method which minimizes error Find a method which minimizes error Error = Actual - Forecast Error = Actual - Forecast

Forecast Control Reasons for out-of-control forecasts Reasons for out-of-control forecasts Change in trend Change in trend Appearance of cycle Appearance of cycle Weather changes Weather changes Promotions Promotions Competition Competition Politics Politics