BUSN 6110 CLASS 4 - supply chain research by pengxiang

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									 Chapter 5

Supply Chain
                Supply Chain
•   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
•   Customer perception of company

Reference: www.supply-chain.org
       Supply Chain
ü All activities associated with the flow
  and transformation of goods and
  services from raw materials to the end
  user, the customer
ü A sequence of business activities
  from suppliers through customers
  that provide the products, services,
  and information to achieve customer
        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 Management
 ü Synchronization of activities
   required to achieve maximum
   competitive benefits
 ü Coordination, cooperation, and
 ü Rapid flow of information
 ü Vertical integration
Supply Chain Uncertainty
ü Forecasting, lead times, batch
  ordering, price fluctuations, and
  inflated orders contribute to
ü Inventory is a form of insurance
ü Distorted information is one of
  the main causes of uncertainty
  Bullwhip effect
     Information in the
       Supply Chain
ü Centralized coordination of
  information flows
ü Integration of transportation,
  distribution, ordering, and production
ü Direct access to domestic and global
  transportation and distribution
ü Locating and tracking the movement
  of every item in the supply chain -
     Information in the
       Supply Chain
ü Consolidation of purchasing from all
ü Intercompany and intracompany
  information access
ü Electronic Data Interchange
ü Data acquisition at the point of origin
  and point of sale
ü Instantaneous updating of inventory
ü Visibility
Electronic Business
      In Theory:
ü Replacement of physical processes
  with electronic ones
ü Cost and price reductions
ü Reduction or elimination of
ü Shortening transaction times for
  ordering and delivery
ü Wider presence and increased visibility
   Electronic Business
ü Greater choices and more information for
ü Improved service
ü Collection and analysis of customer data
  and preferences
ü Virtual companies with lower prices
ü Leveling the playing field for smaller
ü Gain global access to markets & customers
Electronic Data Interchange
 ü Computer-to-computer exchange of
   business documents in a standard
 ü Quick access, better customer service,
   less paperwork, better communication,
   increased productivity, improved
   tracing and expediting, improves billing
   and cost efficiency
           Bar Codes
ü Computer readable codes attached to
  items flowing through the supply chain
ü Generates point-of-sale data which is
  useful for determining sales trends,
  ordering, production scheduling, and
  deliver plans

                        1234   5678
            IT Issues
ü Increased benefits and sophistication
  come with increased costs
ü Efficient web sites do not necessarily
  mean the rest of the supply chain will
  be as efficient
ü Security problems are very real –
  camera phones, cell phones, thumb
ü Collaboration and trust are important
  elements that may be new to business
ü Purchased materials account for about
  half of manufacturing costs
ü Materials, parts, and service must be
  delivered on time, of high quality, and
  low cost
ü Suppliers should be integrated into
  their customers’ supply chains
ü Partnerships should be established
ü On-demand delivery (JIT) is a frequent
  requirement - what is JIT and does it
ü Relationship between customers and
  suppliers focuses on collaboration and
ü Outsourcing has become a long-term
  strategic decision
ü Organizations focus on core
  competencies                  How does
ü Single-sourcing is          single source
  increasingly a part        differ from sole
  of supplier relations
ü The actual movement of products and
  materials between locations
ü Handling of materials and products at
  receiving docks, storing products,
  packaging, and shipping
ü Often called logistics
ü Driving force today
  is speed
ü Particularly important
  for Internet dot-coms
   Distribution Centers
    and Warehousing
ü DCs are some of the largest business
  facilities in the United States
ü Trend is for more frequent orders in
  smaller quantities
ü Flow-through facilities and automated
  material handling
ü Final assembly and product
  configuration (postponement) may
  be done at the DC
Warehouse Management
ü Highly automated systems
ü A good system will control item
  slotting, pick lists, packing, and
ü Most newer systems include
  transportation management (load
  management/configuration), order
  management, yard management, labor
  management, warehouse optimization
Vendor-Managed Inventory
ü Not a new concept – same process used by
  bread deliveries to stores for decades
ü Reduces need for warehousing
ü Increased speed, reduced errors, and
  improved service
ü Onus is on the supplier to keep the shelves
  full or assembly lines running
ü variation of JIT
ü Proctor&Gamble - Wal-Mart
ü DLA – moving from a manager of supplies to
  a manager of suppliers
ü Direct Vendor Deliveries – loss of visibility
Collaborative Distribution
    and Outsourcing
ü Collaborative planning, forecasting, and
  replenishment (CPFR) started by Nabisco
ü Allows suppliers to know what is really needed
  and when
ü Electronic-based exchange of data and
ü Significant decrease in inventory levels and
  more efficient logistics - maybe not!
ü Companies work together for benefit of all of
  the supply chain
ü Common methods are railroads,
  trucking, water, air, intermodal,
  package carriers, and pipelines
  ü 150,000 miles in US
  ü Low cost, high-volume
  ü Improving flexibility
      ü intermodal service
      ü double stacking
Complaints: slow, inflexible, large loads
Advantages: large/bulky loads, intermodal
ü Most used mode in US -75% of total
  freight (not total weight)
ü Flexible, small loads
ü Consolidation,
  Internet load match sites
ü Single sourcing reduces number of
  trucking firms serving a company
ü Truck load (TL) vs. Less Than Truck
  Load (LTL)
ü Rapidly growing segment of
  transportation industry
ü Lightweight, small items
ü Quick, reliable, expensive
  (relatively expensive depending
  on costs of not getting item there)
ü Major airlines and US Postal
  Service, UPS, FedEx, DHL
     Package Carriers
ü FedEx, UPS, US Postal Service, DHL
ü Significant growth driven by
  e-businesses and the move to smaller
  shipments and consumer desire to have it
ü Use several modes
  of transportation
ü Expensive - relative!!
ü Fast and reliable - relative!!
ü Innovative use of technologies in some
ü Online tracking – some better than others
ü Combination of several modes of
ü Most common are truck/rail/truck
  and truck/water/rail/truck
ü Enabled by the use of containers –
  the development of the 20 and 40
  foot containers significantly
  changed the face of shipping
ü ~2% of all US cargo via intermodal
ü One of oldest means of transport
ü Low-cost, high-volume, slow
ü Security - sheer volume - millions of
  containers annually
ü Bulky, heavy and/or large items
ü Standardized shipping containers
  improve service
ü The most common form of
  international shipping
ü Primarily for oil & refined oil
ü Slurry lines carry coal or kaolin
ü High initial capital investment
ü Low operating costs
ü Can cross difficult terrain
 Global Supply Chain
ü Free trade & global opportunities
ü Nations form trading groups
ü No tariffs or duties
ü Freely transport goods across
ü Security!!
 Global Supply Chain
ü National and regional differences
ü Customs, business practices, and
ü Foreign markets are not
ü Quality can be a major issue
• ~ 10+ million containers annually
• Customs-Trade Partnership Against Terrorism (C-
• Port Security – SAFE Ports Act; Scanning of all
• Cost - $2 billion closing of major port
• 66% of all goods into US comes through 20 major
• 44% through LA/Long Beach
• Cost of attack on major port estimated at $20
Chapter 7

   Forecasting Survey
• How far into the future do you
  typically project when trying to
  forecast the health of your industry?
      ] less than 4 months 3%
      ] 4-6 months            12%
      ] 7-12 months           28%
      ] > 12 months           57%

          Fortune Council survey, Nov 2005
    Indices to forecast health
           of industry
•   Consumer price index        51%
•   Consumer Confidence index 44%
•   Durable goods orders        20%
•   Gross Domestic Product      35%
•   Manufacturing and trade inventories
        and sales               27%
•   Price of oil/barrel         34%
•   Strength of US $            46%
•   Unemployment rate           53%
•   Interest rates/fed funds    59%
               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, 1997: $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
• Record circumstances related to the
• 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 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
• Essential for smooth operations of
  business organizations
• Estimates of the occurrence, timing,
  or magnitude of uncertain future
• Costs of forecasting: excess labor;
  excess materials; expediting costs;
  lost revenues
ü Predicting future events
ü Usually demand behavior
  over a time frame
ü Qualitative methods
   ü Based on subjective methods
ü Quantitative methods
   ü Based on mathematical formulas
       Strategic Role of
ü Focus on supply chain management
   ü Short term role of product demand
   ü Long term role of new products,
     processes, and technologies
ü Focus on Total Quality Management
   ü Satisfy customer demand
   ü Uninterrupted product flow with no
     defective items
ü Necessary for strategic planning
       Strategic Role of
ü Focus on supply chain management
   ü Short term role of product demand
   ü Long term role of new products,
     processes, and technologies
ü Focus on Total Quality Management
   ü Satisfy customer demand
   ü Uninterrupted product flow with no
     defective items
ü Necessary for strategic planning
     Trumpet of Doom
• As forecast horizon increases, so does the
  forecasting error (i.e., accuracy
  decreases) – shorten horizon by
  shortening of cycles or flow times
• Law of Large Numbers – as volume
  increases, relative variability decreases –
  forecasting error is smaller: goal –
  forecast at aggregate levels; collaborate;
  standardize parts
• Volume and activity increase at end of
  reporting periods – Krispy Kreme
  Components of
Forecasting Demand
ü Time Frame
  ü Short-range, medium-
    range, long-range
ü Demand Behavior
  ü Trends, cycles, seasonal
    patterns, random
          Time Frame
ü Short-range to medium-range
   ü Daily, weekly monthly forecasts of
     sales data
   ü Up to 2 years into the future
ü Long-range
   ü Strategic planning of goals, products,
   ü Planning beyond 2 years into the future
    Demand Behavior
ü Trend
   ü gradual, long-term up or down
ü Cycle
   ü up & down movement repeating over
     long time frame
ü Seasonal pattern
   ü periodic oscillation in demand which
ü Random movements follow no pattern
  Forms of Forecast Movement



                      Time                                       Time
                    (a) Trend                                  (b) Cycle


                       Time                                       Time
               (c) Seasonal pattern                  (d) Trend with seasonal pattern
Figure 8.1
  Forecasting Methods
ü Time series
   ü Regression or causal modeling
ü Qualitative methods
   ü Management judgment, expertise, opinion
   ü Use management, marketing, purchasing,
ü Delphi method
   ü Solicit forecasts from experts
  Time Series Methods
ü Statistical methods using historical
   ü Moving average
   ü Exponential smoothing
   ü Linear trend line
ü Assume patterns will repeat
ü Naive forecasts
   ü Forecast = data from last period
      Moving Average
ü Average several
  periods of data
                       Sum of Demand
ü Dampen, smooth out     In n Periods
  changes                      n
ü Use when demand is
  stable with no trend
  or seasonal pattern
Simple Moving Average
Jan        120
Feb         90
Mar        100
Apr         75
May        110
June        50
July        75
Aug        130
Sept       110
Oct         90
Simple Moving Average
Jan        120        Daug+Dsep+Doct
Feb         90
                    MAnov =
Mar        100                 3
Apr         75
May        110              90 + 110 + 130
June        50                     3
July        75
Aug        130           = 110 orders for Nov
Sept       110
Oct         90
Simple Moving Average
Jan        120            –
Feb         90            –
Mar        100            –
Apr         75        103.3
May        110         88.3
June        50         95.0
July        75         78.3
Aug        130         78.3
Sept       110         85.0
Oct         90        105.0
Nov          –        110.0
Simple Moving Average
Jan        120            –                  5
Feb         90            –                  S1 Di
Mar        100            –        MA5 =
Apr         75        103.3                   5
May        110         88.3
June        50         95.0       90 + 110 + 130 + 75 + 50
July        75         78.3                   5
Aug        130         78.3
Sept       110         85.0       = 91 orders for Nov
Oct         90        105.0
Nov          –        110.0
Simple Moving Average
Jan        120            –               –
Feb         90            –               –
Mar        100            –               –
Apr         75        103.3               –
May        110         88.3               –
June        50         95.0            99.0
July        75         78.3            85.0
Aug        130         78.3            82.0
Sept       110         85.0            88.0
Oct         90        105.0            95.0
Nov          –        110.0            91.0
Weighted Moving Average

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

ü Adjusts      WMAn = S Wi Di
  average      where
  method to      Wi = the weight for period i,
  more closely        between 0 and 100
  reflect data
  fluctuations   S W = 1.00
 Weighted Moving
 Average Example
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 WMA3 =        S Wi Di

 = (0.50)(90) + (0.33)(110) + (0.17)(130)

            = 103.4 orders
3 Month = 110         5 month =
Exponential Smoothing
ü Averaging method
ü Weights most recent data more
ü Reacts more to recent changes
ü Widely used, accurate method
  Exponential Smoothing
                     Ft +1 = a Dt + (1 - a)Ft
ü Averaging method   where
ü Weights most       Ft +1 = forecast for next
  recent data more            period
  strongly             Dt = actual demand for
ü Reacts more to             present period
  recent changes        Ft =previously
                             determined forecast
ü Widely used,               for present period
  accurate method
                        a = weighting factor,
                            smoothing constant
    Forecast for Next Period

• Forecast = (weighting factor)x(actual
  demand for period)+(1-weighting
  factor)x(previously determined
  forecast for present period)
              0 > a <= 1
          Lesser            Greater
         reaction           reaction
    to recent demand   to recent demand
Seasonal Adjustments
ü Repetitive increase/ decrease in
ü Use seasonal factor to adjust
Seasonal Adjustments
ü Repetitive increase/
  decrease in demand
ü Use seasonal factor
  to adjust forecast

   Seasonal factor = Si =
      = demand for period/sum of demand
    Seasonal Adjustment
          DEMAND (1000’S PER QUARTER)
YEAR     1      2        3      4    Total
1999    12.6    8.6     6.3   17.5    45.0
2000    14.1   10.3     7.5   18.2    50.1
2001    15.3   10.6     8.1   19.6    53.6
Total   42.0   29.5    21.9   55.3   148.7
    Seasonal Adjustment
          DEMAND (1000’S PER QUARTER)
YEAR     1      2        3      4    Total
1999    12.6    8.6     6.3   17.5    45.0
2000    14.1   10.3     7.5   18.2    50.1
2001    15.3   10.6     8.1   19.6    53.6
Total   42.0   29.5    21.9   55.3   148.7

       D1   42.0                     D3   21.9
  S1 =    =      = 0.28         S3 =    =      = 0.15
       åD 148.7                      åD 148.7
       D2   29.5                     D4   55.3
  S2 =    =      = 0.20         S4 =    =      = 0.37
       åD 148.7                      åD 148.7
      Seasonal Adjustment
          DEMAND (1000’S PER QUARTER)
YEAR     1      2        3      4    Total
1999    12.6    8.6     6.3   17.5    45.0
2000    14.1   10.3     7.5   18.2    50.1
2001    15.3   10.6     8.1   19.6    53.6
Total   42.0   29.5    21.9   55.3   148.7
 Si     0.28   0.20   0.15    0.37
      Seasonal Adjustment
          DEMAND (1000’S PER QUARTER)
YEAR     1      2        3      4    Total
1999    12.6    8.6     6.3   17.5    45.0
2000    14.1   10.3     7.5   18.2    50.1
2001    15.3   10.6     8.1   19.6    53.6
Total   42.0   29.5    21.9   55.3   148.7
 Si     0.28   0.20   0.15    0.37

                       Forecast for 1st qtr 2002

                 Forecast for 2002 using simple 3 year moving ave
  Forecast Accuracy
ü Find a method which minimizes
ü Error = Actual - Forecast
ü Mean Absolute Deviation (MAD)
Mean Absolute
Deviation (MAD)
                 S | Dt - F t |
           MAD =      n
           t = the period number
        Dt= demand in period t
         Ft= the forecast for period t
          n = the total number of periods
        ú ú = the absolute value
    Forecast Control
ü Reasons for out-of-control forecasts
   ü Change in trend
   ü Appearance of cycle
   ü Weather changes
   ü Promotions
   ü Competition
   ü Politics
• Long Term – location, capacity, new
  product design
• Short Term – production, inventory
  control, labor levels, cost controls
Chapter 9/12

   Capacity and
    Disney’s Forecasting vs
• Excellent forecasting and planning
  models - results in multiple ticket
  plans for Florida residents
• Warehousing & Distribution - 3 days
  to process receipt; 3 days dock to
  stock; 3 days to pick order
  Aggregate Planning
• The process of planning the quantity
  and timing of output over the
  intermediate range (3-18 months) by
  adjusting production rate,
  employment, inventory
• Master Production Schedule:
  formalizes the production plan and
  translates it into specific end item
  requirements over the short to
  intermediate horizon
    Capacity Planning
• The process of determining the
  amount of capacity required to
  produce in the future. May be at the
  aggregate or product line level
• Master Production Schedule -
  anticipated build schedule
• Time horizon must exceed lead times
  for materials
     Capacity Planning
• Look at lead times, queue times, set up times, run
  times, wait times, move times
• Resource availability
• Material and capacity - should be in synch
• driven by dispatch list - listing of manufacturing
  orders in priority sequence - ties to layout
• load profiles - capacity of each section
    Capacity Planning
• Rough Cut Capacity Planning -
  process of converting the master
  production schedule into
  requirements for key resources
• capacity requirements plan - time-
  phased display of present and future
  capacity required on all resources
  based on planned and released
    Capacity Planning
• Capacity Requirements Planning
  (CRP) - process of determining in
  detail the amount of labor and
  machine resources required to meet
  production plan
• RCCP may indicate sufficient
  capacity but the CRP may indicate
  insufficient capacity during specific
  time periods
 Theory of Constraints
• Every system has a bottle neck
• capacity of the system is constrained
  by the capacity of the bottle neck
• increasing capacity at other than
  bottle neck operations does not
  increase the overall capacity of the
• inertia of change can create new
  bottle necks
   Capacity Planning
ü Establishes overall level of
  productive resources
ü Affects lead time
  responsiveness, cost &
ü Determines when and how
  much to increase capacity
Capacity Expansion
ü Volume & certainty of anticipated
ü Strategic objectives for growth
ü Costs of expansion & operation
ü Incremental or one-step
Capacity Expansion Strategies
         (a) Capacity lead strategy          (b) Capacity lag strategy


         Units                               Units

                                 Demand                              Capacity

                                      Time                               Time

         (c) Average capacity strategy       (d) Incremental vs. one-step expansion

                                                              One-step expansion


         Units                               Units

Figure 9.1                            Time                               Time
• Advantages          • Disadvantages
• anticipates         • product problems
  demand              • product
• first to market       acceptability
• lure from           • consumers
  competitors           unfamiliar with
                      • R&D costs
• Advantages             • Follower strategy
• established            • when to enter
  demand for               market - downside
  product                  if too late in life
• less R&D                 cycle
• growth market          • loss of customers
                           to first to market
      Assumes customers lost to Lead strategy
          will return - Western Sizzlin’
       Average Capacity
•   Advantages          • Chasing half the
•   level production      time
•   stable work force   • market timing
•   excess capacity     • excess product
  Aggregate Production
     Planning (APP)
ü Matches market demand to company
ü Plans production 6 months to 12 months in
ü Expresses demand, resources, and capacity
  in general terms
ü Develops a strategy for economically
  meeting demand
ü Establishes a company-wide game plan for
  allocating resources
ü also called Sales and Operations Planning
     Sales and Operations
       Planning (S&OP)
• Brings together all plans for
• performed at least once a month
    Adjusting Capacity to Meet
•   Producing at a constant rate and using inventory
    to absorb fluctuations in demand (level
•   Hiring and firing workers to match demand (chase
•   Maintaining resources for high demand levels
•   Increase or decrease working hours (overtime
    and undertime)
•   Subcontracting work to other firms
•   Using part-time workers
•   Providing the service or product at a later time
    period (backordering)
      Strategy Details
ü Level production - produce at constant rate
  & use inventory as needed to meet
ü Chase demand - change workforce levels
  so that production matches demand
ü Maintaining resources for high demand
  levels - ensures high levels of customer
     Strategy Details
 ü Overtime & undertime - common when
    demand fluctuations are not extreme
ü Subcontracting - useful if supplier meets
         quality & time requirements
ü Part-time workers - feasible for unskilled
          jobs or if labor pool exists
ü Backordering - only works if customer is
     willing to wait for product/services
                  Level Production


Figure 9.4 (a)
     Level Production
• Advantages          •   Disadvantages
• stable work force   •   inventory
• no overtime or      •   obsolescence
  additional hiring   •   carrying costs
  costs               •   depends on real
                          good forecasts
                  Chase Demand


Figure 9.4 (b)
       Chase Strategy
• Advantages        • Disadvantages
• less inventory    • Never a stable
• less chance for     production level
  obsolete          • work force
  merchandise         instability
                    • hiring/firing costs
                    • always a priority
Demand Management
 ü Shift demand into other periods
      ü Incentives, sales promotions,
           advertising campaigns
   ü Offer product or services with
   countercyclical demand patterns
ü Partnering with suppliers to reduce
    information distortion along the
              supply chain
Demand Distortion along the
      Supply Chain
      Aggregate Planning
         for Services
   • Most services can’t be inventoried
• Demand for services is difficult to predict
   • Capacity is also difficult to predict
• Service capacity must be provided at the
         appropriate place and time
 • Labor is usually the most constraining
            resource for services
     The Beer Game
• http://www.masystem.com/beergame
          Next Week
• No Class (10 Dec) – final exam to be
  posted by 29 Nov
• 3 December:
• Chapter 14
• Reverse Logistics
• Chap 4

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