1. Supply Chain Operations: Planning and Sourcing
Chapter – 2

2. Objectives
Gain a conceptual appreciation of the business operations in any supply chain
Exercise an executive level understanding of operations involved in supply chain planning and sourcing
Start to access how well these operations are working within your own company

3. Model of Supply Chain Operations
Plan: means all operations needed to plan and organize the operations in the other three categories.
Source: the activities necessary to acquire the inputs to create products or services.
Make: the operations required to develop and build the products and services that a supply chain provides.
Deliver: the activities that are part of receiving customer orders and delivering products to customers.

4. Model of Supply Chain Operations
Plan
Demand forecasting and Planning
Variables:
Supply
Demand
Product characteristics
Competitive environment
Forecasting methods
Qualitative
Causal
Time series
simulation
Product pricing
Relationship of Cost Structure to Pricing
Inventory management
Cycle inventory
Economic order quantity
Seasonal inventory
Safety inventory

5. Source Make Deliver Procurement Credit and collection Product design
Purchasing
Consumption management
Vendor selection
Contract negotiation
Contract management
Credit and collection
Set credit policy
Implement credit and collections practices
Manage credit risk
Make
Product design
Production scheduling
Facility management
Deliver
Order management
Delivery scheduling
Return processing

6. Plan: Demand Forecasting and Planning
Supply chain management decisions are based on forecasts that define:
which products will be required,
what amount of these products will be called for, and
when they will be needed.

7. Demand Forecasting and Planning…
All forecasts deal with four major variables:
Supply: is determined by the number of producers of a product and by the lead times that are associated with a product.
Demand: refers to the overall market demand for a group of related products or services.
Product Characteristics: includes the features of a product that influence customer demand for the product.
Competitive Environment: refers to the actions of a company and its competitors.

8. Forecasting Methods…
There are four basic methods to use when forecasting:
Qualitative: these methods rely upon a person’s intuition or subjective opinions about a market.
Causal: assume that demand is strongly related to particular environmental or market factors.
Time Series: are the most common form of forecasting. They are based on assumption that historical patterns of demand are a good indicator of future demand.
Simulation: use combinations of causal and time series methods to imitate the behavior of consumers under different circumstances.

9. Aggregate Planning
After the demand is forecasted, the next step is to create a plan for the company to meet the expected demand. This is aggregate planning.
The aggregate plan becomes the framework within which short-term decisions are made about production, inventory, and distribution.
There are three approaches to take in creating aggregate plan.
Amount of production capacity
Level of utilization of the production capacity
Amount of inventory to carry

10. Plan: Product Pricing – Product Promotion & Company Cost Structure
The question here is whether it is better to do price promotions during peak periods to increase revenue or during slow periods to cover cost?
If company has flexibility to quickly vary size of work force and productive capacity then peak periods.
If company cannot quickly vary size of workforce and productive capacity then slow periods.

11. Plan: Effects of Price Decrease
Growth in market size: increase in product consumption by existing and new customers.
Growth in market share: customers buy this product instead of competing product, market size remain unchanged.
Forward buying: customers buy product now than later, market share and size remain unchanged.

12. Plan: Inventory Management
Cycle Inventory: the inventory required to meet product demand over the time period between placing orders for the product.
Seasonal Inventory: when a company or supply chain with a fixed amount of productive capacity decides to produce and stockpile products in anticipation of future demands.
Safety Inventory: necessary to compensate for the uncertainty that exits in a supply chain.

13. Plan: 4 Ways to Reduce Safety Inventory
Reduce demand uncertainty: do better demand forecasts.
Reduce order lead times: shorter lead time means less safety inventory.
Reduce lead time variability: further reduces safety inventory need.
Reduce availability uncertainty: ensure product availability when demand occurs.

14. Source: Procurement
Procurement function can be divided into five main activities:
Purchasing
Consumption management
Vendor selection
Contract negotiation
Contract management

15. Source: Procurement - Purchasing
Routine activities of issuing purchasing orders.
Two types of orders are made:
Direct or strategic materials for production
Indirect or MRO (maintenance, repair, and operations)

16. Source: Procurement – Consumption Mgt.
Understand what categories of product are being bought throughout the company.
Set expected levels of consumption.
When consumption is irregular, bring this to the attention of authorities.

17. Source: Procurement – Vendor Selection
Understand the current purchasing situation.
Search for suppliers who have both products and service capabilities needed.
Narrow down the number of suppliers to do business with.

18. Source: Procurement – Contract Negotiation
Work out specific items, prices, and service levels.
Simplest negotiations are for contracts to purchase indirect products.
Complex negotiations are for contracts to purchase direct materials.

19. Source: Procurement – Contract Mgt.
Measure and manage vendor performance.
Track performance of suppliers and hold them accountable to meet the service levels.
Routinely collect data about performance of suppliers.

20. Source: Credit and Collections
Procurement is the sourcing process for goods and services while credit and collections is process of getting money.
Credit operation selects potential customers to do business with.
Three main activities are:
Set credit policy
Implement credit and collections practices
Manage credit risk