Supply chain management

Supply Chain Management

By:
Mahesh Alimchandani
GM – SCM, Cummins India Ltd.
Gmail: maheshalim@gmail.com
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Cell: +91-9623275447


1. Introduction

2

1. Introduction

1.1. Key Concepts
1.1.1. Supply Chain

The Supply Chain is:
• the sequence of suppliers that contribute to the
creation and delivery of a good or service to end
customers.
• APICS (1): The processes from the initial raw
material to the ultimate consumption of finished
product, linking across supplier-user companies.
• APICS (2): The functions within and outside a
company that enable the value chain to make
products and provide services to the customers.
3

1. Introduction

1.1. Key Concepts
1.1.2. Logistics

Logistics is:
• the management of the storage and flow of
goods, services and information throughout your
organisation.

4

1. Introduction

1.1. Key Concepts
1.1.3. Supply Chain Management

Supply Chain Management is:
• organizing the cost effective flow and storage of
materials, in-process inventory, finished goods
and related information from point of origin to
point of consumption to satisfy customer
requirements.

5

1. Introduction

1.1. Key Concepts
1.1.4. Objectives

• Greater efficiency; lower costs
• Enhance flexibility; agility
• Improve customer service
• Optimize the value chain

6

1. Introduction

1.2 Principal Issues
1.2.1. Supply Chain (1)

Supply Chain
The supply chain of a company consists of different
departments, ranging from procurement of
materials to customer service.
The supply chain includes activities associated with
inventory (materials) acquisition, storing, use in
production, transit, and delivery to customers.
The activities are planned, executed, and monitored
under the guidelines set by the company’s chosen
customer service levels and in line with the
company’s other operating goals.
7

1. Introduction

1.2 Principal Issues
1.2.1. Supply Chain (2)

•Supplier’
s Partner

•Customer
s

•Store
s
•Employee
s

•Store
s

•Employee
s

•Supplier
•Employee
s

•Distributors
& Resellers

•Store
s
•Inbound
Logistics

•Store
s

•Logistic
s
•Factory

•Line Inventory

•Warehous
e
•Value Flow
• Information Flow
•Value Flow
Enablers

8

1. Introduction

1.2. Principal Issues
1.2.2. Elements of Logistics

Elements of Logistics:
• materials management:
• sourcing and receiving of raw materials or unfinished
products for subsequent use

• material flow system:
• the ability to locate and schedule material through to
end production and disposition

• physical distribution:
• the delivery of finished goods to customers

9

1.2.3. Logistic Goal

1. Introduction

Logistic goal and objectives
The right
products

The right
quantity

Flexibility

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The right
moment

Delivery
reliability

At minimal
cost

Delivery time/
lead time

Inventory
level

1. Introduction

1.2.4. Logistic Steps

Logistic steps:
• accepting a customer order
• receive and enter
• credit clearance / authorize
• delivery commitment

•
•
•
•
•

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supplier ordering
forecasting demand
scheduling manufacturing
inventory management
delivery to customer.

1. Introduction

Supply
Chain
Evolution

1.2.5. Evolution
Quality products
Lowest possible cost

Order fulfillment

Integration of supply chains
Customer service
Preferred partners
Communication
Supply chain communities
Common goals, objectives

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1. Introduction

1.2.6. The Goal

Supply Chain Management Goal
To evolve a company’s supply chain into an optimally
efficient, customer-satisfying process, where the
effectiveness of the whole supply chain is more important
than the effectiveness of each individual department.

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1. Introduction

1.2.7. Focus

Supply Chain Management focuses on business
processes:
•
•
•
•

product design
planning
order management
stock management

instead of functions:
• sales
• purchasing
• production

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1. Introduction

1.2.8. Drivers of Change (1)

Drivers of change:
• outsourcing trend
• actual customer demand: speed, flexibility and
competitive pricing
• new software: ERP, sophisticated application
software

15

1. Introduction

1.2.8. Drivers of Change (2)

• new technologies
•
•
•
•
•

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Electronic Data Interchange (EDI)
internet, intranet, extranet
wireless communications
teleconferencing and telecommuting
bar coding.

1. Introduction

1.2.9. Activities

Supply chain management activities:
•
•
•
•
•
•
•

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Forecasting demand
Selecting suppliers
Ordering material
Managing inventory
Scheduling production
Shipping and delivery
Organizing information exchange

1. Introduction

1.3. Analysis
1.3.1. Diagram

Understand the
customer

Understand the
information flow

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Understand the
product

Understand the
process

1. Introduction

1.3. Analysis
1.3.2. Understand the Customer (1)

Know and understand the customers:
• Your existing customers, i.e.,
• demographics
• existing and potential number
• income levels?

• Who are your potential customers?
• How might these customers be grouped?
• For which percentage of sales is each group
responsible?

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1. Introduction

1.3. Analysis
1.3.2. Understand the Customer (2)

• What is the effect of various methods of
communications (i.e., telephone, fax, e-mail,
internet telephoney systems) in your relation with
your customers?
• What do your customers want from you?
• How well do your competitors meet customers
needs?

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1. Introduction

1.3. Analysis
1.3.3. Understand the Products

Understand the products:
•
•
•
•
•

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How many?
Where are they?
Which percentage of sales?
What is the product life cycle?
What is the product mix?

1. Introduction

1.3. Analysis
1.3.4. Understand the Process

Understand the production process:
• process flow
•
•
•
•
•

linear flow
job shop - batch flow
assembly line
continuous flow
project flow

• order fulfillment strategy
• make-to-order
• make-to-stock.

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1. Introduction

1.3. Analysis
1.3.5. Understand the Information Flow

Understand the information flow:
• What information is required for effective
decision-making at each stage in the supply
chain?
• What data has to flow between each part of the
supply chain?

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1. Introduction

1.4. Performance Indicators (1)

A total view must be taken in assessing
performance.
Performance measurements need to be focused
on what factors add to total performance, total
value or total cost.
The principle performance indicator is customer
service. Optimum service levels are necessary
from each supplier to each customer throughout
the supply chain.

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1. Introduction


Customer Service + Quality

Efficiency

Suppliers

Inputs

Effectiveness

Adding
value

Productivity

Profitability

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Outputs

Customers

Customer
Service

Results

1. Introduction


Effectiveness:
• accomplishment of the right things, on time,
within the requirements specified.

Efficiency:
• resources expected to be consumed divided by
resources actually consumed.

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1. Introduction


Productivity:
• measures of output divided by measures of input
for a given period of time.

Profitability:
• relationship between revenues and costs.

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2. Purchasing and Procurement

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2. Procurement

2.1. Key Concepts

Purchasing: implies the monetary transaction.
Procurement: the responsibility for acquiring the
goods and services the organization needs:
• goods:
• raw materials
• production parts
• maintenance, repair and operating supplies (MRO)

• services:
• consulting services
• utilities
• workers health care benefits.

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2. Procurement

2.2.1. Evolution in Purchasing

Evolution in Strategies for Purchasing
Focus on price
Focus on quality,
reliability,
responsiveness,
and total cost

Strategic focus
- supplier relationships
- forecasting
- cycle time

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2. Procurement

2.2.2. The Procurement Process (1)

The Procurement Process:
• preparation:
• identify needs, such as dependability, long term
availability
• evaluate user requirements to ensure suitability of
purchase
• forecast when and how purchase will be needed
• identify and select suppliers
• develop an efficient ordering system for control

• negotiation:
• bidding processes
• contracts

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2. Procurement

2.2.2. The Procurement Process (2)

• order placing via appropriate channels (i.e.
authorized purchase order)
• receiving including adjustments for damages,
short or over-shipping and incorrect costs
• monitoring supplier performance.

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2. Procurement

2.2.3. Supply Uncertainty

Elements of supply uncertainty:
•
•
•
•

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lead time to supply
quantity supplied
quality of supply
data accuracy on products supplied and prices.

2. Procurement

2.2.4. Selecting a Supplier

In selecting a supplier, a number of factors must
be analyzed:
•
•
•
•
•

price
quality
reliability
credit terms
shipping costs.

Look at the whole transaction cost of dealing with
a supplier (not just the cheapest price).

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2. Procurement

2.2.5. Positive Trends (1)

Positive trends in purchasing and procurement
include:
• reduced number of suppliers
• long-term relationships with suppliers
• suppliers located close to customers for
improved access
• integrated information infrastructure: EDI,
electronic catalogs

35

2. Procurement

2.2.5. Positive Trends (2)

• suppliers considered to be an essential part of the
business
• suppliers involved in future product development
programs.

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2. Procurement

2.3. Analysis

Key considerations in analyzing the purchasing
process:
•
•
•
•
•
•
•

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annual sales
annual purchases
number of suppliers
number of supplier alliances
total number of purchased products or parts
short and long-term cost effective purchasing
efficient business management of the purchasing
process.

2. Procurement

2.4. Suggestions

Analyze what the suppliers requirements are for:
• goods and services: lot sizes, packaging, delivery
frequency, and responsiveness
• information: how much and when
• financing arrangements and costs.

Compare your needs and abilities against these
requirements.

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2. Procurement

2.5. Performance Indicators
2.5.1. Delivery to Schedule

The following formula is used to assess suppliers
delivery to schedule performance.
D%=100-(L*100)/S
D = monthly delivery performance (%)
L = number of line items delivered later than
scheduled
S = number of line items scheduled for delivery
during month
Different tolerances for A, B, C-articles (see
chapter 6)

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2. Procurement

2.5.2. Quality to Specification

The following formula is used to assess quality
performance.
Q%=100-(R*100)/N
• Q = monthly quality performance (%)
• R = number of units rejected during month
• N = number of units delivered during month

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The Supply Chain Management Guide

3. Sales Forecasting

41

3. Sales
Forecasting

3.1. Key Concepts

Sales forecasting is
the process of organizing and analyzing
information in a way that makes it possible
to estimate future sales.

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3. Sales
Forecasting

3.2.1. Demand Uncertainty

Elements of demand uncertainty:
• timing of order
• size and composition of order
• data accuracy on:
• products required
• delivery points
• timing.

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3. Sales
Forecasting

3.2.2. Components of Demand

Components of demand:
• Trend:
• growth or decline over an extended period of time

• Cyclical:
• wavelike fluctuation around the trend

• Seasonal:
• pattern of change that repeats itself year after year

• Random:
• not accounted for by the other components (trend,
cyclical, or seasonal).

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3. Sales
Forecasting

3.2.3. Sales Forecasting Methods (1)

Qualitative sales forecasting methods rely more on
judgment and intuition than on historical data:
• surveys of buyer intentions, such as
questionnaires, telephone polls, and consumer
interviews
• Delphi technique:
• a body of experts, consulted separately, is asked to
arrive at a consensus opinion

• sales force composite:
• based on the combined estimates of experienced sales
personnel.

45

3. Sales
Forecasting


Quantitative sales forecasting methods make use
of past data to predict future sales:
• market tests to gauge consumer response
(usually to a new or modified product) under
actual conditions
• trend projections/analysis (also called Time
Series) involves forecasting sales based on the
historical relationship between sales and time,
which is expressed as a growth rate (percentage)
and each measure is plotted on a growth curve:

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3. Sales
Forecasting


• moving average: all observations are given equal weight
and only a few of the previous observations are
considered
• exponential smoothing: gives greater weight to more
recent observations and considers all past observations

• regression analysis can be used to forecast a
dependent variable (i.e., sales) as a result of
changes in one or more independent variables
(i.e., advertising)

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3. Sales
Forecasting


• input-output models forecast the impact of the
change in the outputs (sales) of one industry on
the out-outs of the purchasing industry (i.e., a
reduction in the supply of tin cans produced by
the metal industry would effect the supply of
canned tuna that would be produced by the fish
canneries).

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3. Sales
Forecasting


Computerized forecasting models include:
• spreadsheets, such as Microsoft Excel (with the
Data Analysis Toolpack), that can perform
calculations automatically with changes in
entered data
• forecasting application software:
• statistical packages, such as Minitab
• forecasting packages specifically designed for
forecasting applications

49

3. Sales
Forecasting

3.2.4. Major Uses of Sales Forecasts (1)

Sales forecasts are used for:
• production:
• production scheduling
• inventory control

• purchasing:
• determination of procurement requirements
• scheduling of purchases to get favorable prices

• finance:
• establishing of operating budgets
• cash flow planning
• capital budget / expenditure decisions

50

3. Sales
Forecasting

3.2.4. Major Uses of Sales Forecasts (2)

• marketing:
• formulation of marketing strategies for products
• setting of sales quotas
• scheduling of advertising expenditures and sales
promotions

• personnel:
• planning of manpower requirements

• top management:
• overall planning and control of operations of the
company.

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3. Sales
Forecasting

3.2.5. Advantages Forecasting (1)

Accurate sales forecasting offers several
advantages:
• reduced excess inventory
• fewer stock shortages which result when demand
exceeds supply
• fewer unnecessary production line changes to
fulfill unanticipated demand
• less overtime hours through improved
predictions in personnel requirements
• improved customer service levels as supply and
demand balance
• more economic purchasing power.
52

3. Sales
Forecasting

3.2.6. Forecast Accuracy

Factors that influence forecast accuracy:
• availability of product demand history
• capability of computer system
• other available history (i.e., new products, design
changes, changes in customer base, promotional
actions, economic indicators)
• responsibility for forecasting: a team effort is
required (Sales, Distribution and Manufacturing).

53

3. Sales
Forecasting

3.3. Checklist

Sales forecasting considerations:
• What are the items to be forecast?
• How far into the future should the forecast
extend?
• What is the length of the time period for stating
the forecast quantity?
• How frequently should the forecast be made,
reviewed and revised?
• What would constitute an acceptable tolerance of
forecast error?

54

3. Sales
Forecasting

3.4. Suggestions (1)

Prior to forecasting sales, scrub the data by
removing the effects of unusual events that are not
likely to happen again. Otherwise, the forecasting
model will show a distorted view of the past.

55

3. Sales
Forecasting


Examples of problems that may require data
adjustments:
•
•
•
•

56

unusual weather
addition or loss of major customers
special promotions
changes in price or package size.

3. Sales
Forecasting


Determine the most accurate forecasting method:
• regularly use a number of different methods to
generate forecasts
• maintain historical accuracy information on each
method
• use the most accurate method to generate
“official” forecasts.

57

3. Sales
Forecasting


Make an ABC-analysis of the items to forecast:
• A-items are reviewed each month by management
• only those B- and C-items with a significant
deviation between forecast and actual demand
need to be reviewed by management.

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4. Production planning and control

59

4. Production
Control

4.1. Key Concepts
4.1.1. Production Planning and Control

The responsibility for:
• number of units of a specific product to be
produced
• time intervals over which production will occur
• availability of equipment, materials and work
force
• cost effective inventory and resource
management.

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4. Production
Control

4.2.1. Production as a Goal or Means (1)

Production as a goal:
• resources are planned and used in the production
process regardless of actual demand
• often based on economies of scale, where lower
cost per item is presumed to generate end
product demand.

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4. Production
Control

4.2.1. Production as a Goal or Means (2)

Production as a means:
• resources are planned and used in the production
process only as a result of product demand
• often based on economies of scope, where end
product demand has greater influence over
production units and costs.

62

4. Production
Control

4.2.2. Economies of Scope vs Scale (1)

Economies of scope production assumptions:
•
•
•
•
•
•
•
•

63

responsive to demand
flexible production plans
variable cost per item
smaller production runs
increased total set up and change over costs
lower product/inventory obsolescence
minimized inventory carrying costs
material is pulled through the production process
as needed.

4. Production
Control

4.2.2. Economies of Scope vs Scale (2)

Economies of scale production assumptions:
•
•
•
•
•
•
•
•

64

responsive to profit margin gains
fixed production plans
lower cost per item
larger production runs
less production set up and change over cost
greater risk of product/inventory obsolescence
higher inventory carrying costs
material is pushed through the production
process.

4. Production
Control

4.2.3. Order Decoupling Point

How far does a customer order penetrate in the
production process?
Purchasing

Production

Warehouse

Distribution

Position of the order decoupling point
Manufacture to
order

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Manufacture to
stock

4. Production
Control

4.2.4. Planning Hierarchy

Aggregate plan: works with aggregate (grouped) units
Master Production Schedule: indicates the quantity and timing
of the production of specific end items.
(actual orders are incorporated)
Materials planning: what material is needed when?
Capacity requirements planning: which equipment, work force
and facilities are required?
Loading: which job on which work center?
Sequencing: in which order have the jobs to be processed?

66

4. Production
Control

4.2.5. Production Control Systems

Formal production control systems for inventory
include:
• Economic Order Quantity (EOQ)
• Materials Requirements Planning (MRP)
• Just-in-Time concept
(See Chapter 6, Inventory Management)

67

4. Production
Control

4.3. Suggestions

Suggestions:
• pull rather than push material through the
production process
• produce nothing until it is needed
• reduce set up times
• reduce lot sizes
• try to move the order decoupling point to an early
stage in the supply chain
• try to remove transaction (steps which ad no
value) from the process.

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5. Material Handling

69

5. Material
Handling

5.1. Key Concepts
5.1.1. Material Handling (1)

Material Handling:
• moving of goods between incoming transport,
storage, processes and outgoing transport
• the set of activities that move production inputs
and other goods within plants, warehouses and
transportation terminals.

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5. Material
Handling

5.1. Key Concepts
5.1.1. Material Handling (2)

Providing the right amount of material:
•
•
•
•
•
•
•

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in the right condition
at the right place
at the right time
in the right position
in the right sequence
for the right cost
by using the right methods.

5. Material
Handling

5.2.1. Materials Handling Manager (1)

The task for the materials handling manager is to
find the methods, the routes, the layouts and the
right components to minimize handling.

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5. Material
Handling

5.2.1. Materials Handling Manager (2)

Six main responsibilities of the materials handling
manager:
•
•
•
•
•
•

73

packaging - unitizing
internal transport
storage
retrieval
identification
communication.

5. Material
Handling

5.2.2. Material Handling System Design

The design of a material handling system depends
upon the the type and the characteristics of the
materials to be handled.

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5. Material
Handling

5.2.3. Material Handling System
Components (1)

Material handling equipment:
•
•
•
•

75

unitizing equipment
material transport equipment
storage and retrieval equipment
automatic identification and communication
equipment.

5. Material
Handling

Components (2)

Unitizing equipment:
• containers, such as cartons, boxes, and bags
• carriers or support, such as pallets, skids, and
plywood
• stretch wrap
• shrink wrap.

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5. Material
Handling

Components (3)

Material transport equipment:
• conveyors (belts and rollers)
• industrial vehicles, such as pallet trucks, lift
trucks, and automated guided vehicles (AGV)
• monorails
• hoists
• cranes.

77

5. Material
Handling

Components (4)

Storage and retrieval equipment:
• unit load storage equipment
• unit load retrieval equipment
• small load storage and retrieval equipment.

78

5. Material
Handling

Components (5)

Automatic identification and communication
equipment:
•
•
•
•
•
•

79

bar coding
radio frequency tag
magnetic stripe
smart cards
voice headsets
machine vision.

5. Material
Handling

5.2.4. Cost-effective Means of Transport (1)

Key factors to consider in selecting means of
transport:
•
•
•
•

80

physical characteristics of loads
the number of loads to be moved
the distance to be moved
the required speed of movement.


5. Material
Handling

Units
moved/
hour

Conveyors

Motorized trolleys

Forklift trucks
Manual trolley
Manual
Movement distance (m)

81

5. Material
Handling


Other factors which influence the means of
transport:
•
•
•
•

cost of building/dismantling loads
packaging costs
space requirements
interface with other storage, transport and
handling systems
• housekeeping issues.

82

5. Material
Handling

5.2.5. Warehousing (1)

The warehouse must be:
• located in the right place
• the right size
• organized

to allow:
•
•
•
•
•

83

efficient delivery and placing
cost-effective use of its space
adequate access to stored materials
security from theft and weather
flexibility to deal with the various items.

5. Material
Handling


The mission (or goal) of a warehouse is set by
demand. The warehouse location is a means to
achieving the mission.
Mission
Balance and buffer
Accumulate and consolidate
Rapid response

84

Location

Demand

Near the manufacturer

Monthly/quarterly replenishments
of stocks

Central to production locations

Weekly/monthly orders

Close to customer

Daily

5. Material
Handling


Within the warehouse, stock must be:
• put into known places and
• in known order

so that it can be:
• retrieved quickly and in the right quantity
• rotated properly (ex. first-in, first-out).

85

5. Material
Handling


Warehousing activities:
•
•
•
•
•
•
•
•

86

receiving goods
identifying goods
sorting goods
dispatching goods to storage
holding goods
picking goods
preparing shipments
dispatching shipments.

5. Material
Handling


 Material receipt
•
•
•
•
•

Scan the incoming part number
Determine the storage location
Location input to operator for storage
Confirmation from operator on storage
Inventory update

 Material tracking
• Monitor material movement in storage
• Maintain FIFO / LIFO etc. as required
• Maintain history for every part number from receipt to dispatch

87

5. Material
Handling


 Material issue
•
•
•
•

Receive dispatch order from ERP
Determine the material to be issued based on FIFO / LIFO etc.
Location input to operator for picking
Confirmation from operator on delivery

 Inventory update
• Inventory count
• Maintain inventory count for every part number stored

88

5. Material
Handling


 ERP Integration
• Inventory updates
• Delivery schedules

 Reports
•
•
•
•
•

89

Inventory on hand
Orders dispatched
Orders on backlog
Orders under process
Shipments completed in a given period of time

5. Material
Handling


WMS Benefits
•Faster inventory turns.
•More efficient use of available warehouse space.
•Reduction in inventory paperwork.
•Improved cycle counting.
•Reduced dependency on warehouse personnel.
•Enhanced customer service.
•Improved stacking productivity.

90

5. Material
Handling

5.3. Suggestions

Suggestions for materials handling:
• use identification systems, such as bar coding to
handle the right material:
• give a part identification number
• give a location identification number

• handle similar materials, packaging and size of
loads at the same time
• implement improvements in material handling
systems which will increase the efficiency of the
overall system.

91


6. Inventory Management

92

6. Inventory
Management

6.1. Key Concepts

Inventory:
• those stocks or items used to support production
and customer service.

Service level:
• probability (%) that stock will be available to meet
demand.

93

6. Inventory
Management

6.2.1. Types of Inventory (1)

Types of Inventory:
• raw materials:
• purchased parts used in manufacturing other items

• work-in-process:
• parts that are in the manufacturing process

• sub-assemblies:
• manufactured parts that are partially completed and
stocked in inventory

94

6. Inventory
Management

6.2.1. Types of Inventory (2)

• finished goods:
• Items ready for sale to a customer

• MRO:
• maintenance, repair and operation supplies.

95

6. Inventory
Management

6.2.2. Functions of Inventory (1)

Functions of inventory:
• safety stocks:
• protect against uncertainties of materials supply and
consumer demand

• cycle stocks:
• result from ordering or producing in lots

• transit stocks:
• materials must be moved from one location to another

96

6. Inventory
Management

6.2.2. Functions of Inventory (2)

• speculative stocks:
• expected price increase

• promotional stocks:
• additional inventory accumulated for a promotional
event.

97

6. Inventory
Management

6.2.3. Elements of Inventory (1)

Elements of inventory
Inventory
Level

Excess stock
Replenishments
Safety stock
Time
98

6. Inventory
Management

6.2.3. Elements of Inventory (2)

Elements of inventory
Over time, demand and the ability to service
demand (replenish inventory) can vary. Forecasts
may not be precise due to uncertainties, so, a
reserve of stock (safety stock) may be necessary to
reduce inventory shortages (stock-outs). Inventory
levels above the safety stock and normal demand
are considered excess inventory.

99

6. Inventory
Management

6.2.4. Inventory Holding

Reasons for holding inventory:
• purchased parts:
•
•
•
•

variations in supplier lead time
quantity discounts
price changes
scarcities of materials

• manufactured parts:
•
•
•
•

100

cover period between production runs
allow flexibility in production scheduling
variations in product demand (safety stock)
economies of scale.

6. Inventory
Management

6.2.5. Inventory Costs (1)

Cost of inventory production and holding:
• order/set-up costs:
• cost of replenishing inventory through changes in the
production run for a different item
• includes labour and other associated costs

• carrying costs:
•
•
•
•

101

cost of capital
insurance costs
costs of space, staff
inventory handling, deterioration, damage,
obsolescence, insurance

6. Inventory
Management

6.2.5. Inventory Costs (2)

• opportunity costs:
• restriction of other investments that could have been
made with the same money

• stock-out costs:
• lost sale
• halted production.

102

6. Inventory
Management

6.2.6. Inventory Management (1)

Objectives of inventory management:
• minimize costs:
• working capital
• carrying costs
• scrap and rework

• highest level of customer service.

103

6. Inventory
Management


Inventory management tasks:
• make decisions about:
• safety stock
• replenishment production runs
• excess stock.

104

6. Inventory
Management


Inventory must be managed differently for:
• independent demand: influenced by market
conditions
• dependent demand: derived from the production
of parent items.
(see following slide)

105

6. Inventory
Management


A

B

C

D

106

Independent demand

Dependent
demand
E

6. Inventory
Management

6.2.7. ABC-Analysis (1)

ABC analysis of inventory:
• select a criterion (sales / usage) based on
importance
• rank the inventory items on criterion
• calculate the cumulative sales and/or usage for all
items
• assign items into A, B, C groups
• assign inventory levels and warehouse locations
for each item.

107

6. Inventory
Management


ABC classification, where items are not of equal
importance:
• A-items
• few items (ex. 15 %) which have a high rate of usage
and/or high unit cost and account for 80 % of the total
value of usage in the inventory

• B-items
• number of items (ex. 25 %) which in total account for 15
% of the total value of usage

108

6. Inventory
Management


• C-items
• great many items (ex. 60 %) with low individual usage
and/or low unit value which in total account for only 5 %
of the total value of usage

109

6. Inventory
Management


ABC analysis chart demonstrates relative
importance of inventory items.
Class of Item

Class A

15%

80%

Class B

25%

15%

Class C

110

% of Items

% of Value

60%

5%

6. Inventory
Management


ABC - Analysis Chart

Number of items

600
500
400

C

300

B

200

A

100
0

111

Product 1 Product 2 Product 3 Product 4

6. Inventory
Management

6.2.7. ABC Analysis (6)

ABC and inventory control efforts:
• A-items
• very careful management
• careful estimates of future usage.

• B-items
• routine management
• routine effort in forecasting demand.

• C-items
• little effort in forecasting demand
• however be careful for strategic items (safety stock).

112

6. Inventory
Management

6.2.8. Inventory Management Systems (1)

Inventory management systems include:
• two-bin replenishment system:
• used for low value , non-critical items (i.e.. class C
items)
• relies on visual inspection of declining inventory
• one bin contains enough material to meet needs
between the time one order is received and another is
placed
• second bin (also called the “reserve bin”) contains
enough material to meet needs between placing an order
and receiving the materials
• if production taps into the reserve bin, additional
materials must be ordered immediately

113

6. Inventory
Management


• reorder point system:
• amount ordered when inventory declines to a
predetermined level
• considers:
• when to order (re-order point)
• how much to order (order quantity)

• periodic review systems:
• after predetermined fixed passages of time, orders are
placed for variable amounts
• consider:
• how much to order (order quantity)
• how long between orders (reorder time interval)

114

6. Inventory
Management


• Materials Requirements Planning (MRP):
• assumes variable demand throughout production
• calculates component requirements based on the Master
Production Schedule (MPS), Bill of Material and
inventory data
• materials are purchased only when the MPS has them
scheduled for use
• materials are pushed through a plant

115

6. Inventory
Management


• MRP II systems share information with other functional
departments, outside the operations area (i.e.,
purchasing, sales, cost accounting). These systems plan
the use of company resources, including scheduling raw
materials, vendors, production, equipment and
processes

• JIT: different approach to reordering:
• activities that add no value are waste
• material only is supplied when it is requested from the
next step in the production process (pull system)
• these requests are called kanbans.

116

6. Inventory
Management

6.2.9. How Much to Order: EOQ (1)

Economic Order Quantity (EOQ):
• the lot size that minimizes total annual inventory
holding and ordering costs
• assumptions:
•
•
•
•

117

annual demand is constant.
forecast is perfect (no random error)
all costs are constant and linear
lead time is known and constant.

6. Inventory
Management

6.2.12. Excess Inventory

Reasons for excess inventory include:
•
•
•
•
•

124

engineering changes
spoilage
defects
technical obsolescence
lack of market demand.

6. Inventory
Management

6.2.13. Inventory Counting Methods (1)

Inventory Counting Methods:
• Cycle counting:
• a few experienced people count continuously
throughout the year
• timely detection of errors
• fewer mistakes in item identification
• minimal loss of production time
• systematic improvement of record accuracy.

125

6. Inventory
Management

6.2.13. Inventory Counting Methods (2)

• End of year:
• many inexperienced people count inventory in a short
hectic period once per year
• no correction or cause of errors
• many mistakes in item identification
• plant and warehouse shutdown for inventory
• no improvement of inventory accuracy.

126

6. Inventory
Management

6.3. Suggestions
6.3.1. 6 Step Action Plan

• Find out why you have inventories
• Analyze the present situation:
• inventory matrix
• ABC-analysis

•
•
•
•

127

Define the inventory levels
Define the inventory system
Define performance indicators
Performance follow-up

6. Inventory
Management

6.3. Suggestions
6.3.2. Inventory Matrix

Fill in the different amounts of inventory
Raw material

Safety
Cycle
Transit
Speculative
Promotional
-------------

128

WIP

Sub-assemblies

MRO

Finished Goods

6. Inventory
Management

6.3. Suggestions
6.3.3. Rationalize Products

• Print and analyze lists of slow-moving and Class
C items
• Monthly evaluation
• Action plans
• Follow-up

129

6. Inventory
Management

6.3. Suggestions
6.3.4. Reduce Excess

Reduce excess:
• try to move the order decoupling point to an early
stage in the supply chain to reduce inventory
holding (carrying) cost:
Sourcing

Production

Warehouse

• ABC - item management
• shorten replenishment cycles.

130

Distribution

6. Inventory
Management

6.4. Performance indicators (1)

Inventory turnover:
Annual cost of sales
Inventory value at cost

Stock coverage:
• stockholding x 52 weeks / annual usage

Customer satisfaction:
• comparison of % of demand actually satisfied
with the defined service level
• number of backorders

131

6. Inventory
Management

6.4. Performance indicators (2)

Excess inventory reduction:
R%=((PE - CE)/PE)*100
R=inventory reduction during month (%)
PE=prior month excess inventory (value)
CE=current month excess inventory (value)

132


7. Distribution

133

7. Distribution

7.1. Key Concepts (1)

Physical distribution:
• the activity that is concerned with:
• receiving parts or finished goods
• storing them until they are required
• and then delivering them to the customer.

134

7. Distribution


Transport operator:
• who does the moving.

Intermodal:
• interchange point from one transportation mode
provider to another.

135

7. Distribution


Consolidation:
• the process of receiving multiple lots in small
quantities, which are accumulated and then
repackaged into one larger lot.

Cross docking:
• unloading the cargo from several trucks and then
immediately reload it into one container for
delivery to a final destination.

136

7. Distribution


Distribution warehouse:
• a facility designed to assemble and then
redistribute goods in a way that facilitates rapid
movement to customers.

Unitization:
• a technique for grouping boxes on a pallet or skid
for later movement by pallet jack, forklift,
conveyor and/or truck.

137

7. Distribution


Containerization:
• the process of combining several unitized loads
into a single well-protected load.

138

7. Distribution

7.2.1. Functions of Physical Distribution

Functions of physical distribution:
• inventory management
• order processing
• warehousing:
• the set of activities involved in receiving and storing
goods and preparing them for reshipment

• materials handling
• transportation.

139

7. Distribution

7.2.2. Distribution Decisions

Important distribution decisions:
• Which transport mode?
• Number and location of distribution warehouses?
• Own or contract-out warehousing and transport?

140

7. Distribution

7.2.3. Transport Modes (1)

Basis of transport mode selection:
• nature, volume, value and criticality of goods
• flexibility of transport mode: coping with demand
change.

141

7. Distribution


Methods of transport:
•
•
•
•
•

trucks
railroads
water
airways
Pipelines

• Package carrier

142

Rail

Air
Piggyback

Birdyback
Truck

Fishyback
Water

Pipeline

7. Distribution


Trucks:
• flexible, on-time, low loss and damage, tracing,
accuracy and wide geographical coverage
• weather and traffic conditions can delay
shipments
• still heavy price competition.
• Low fixed cost

143

7. Distribution


Railroads:
• inexpensive for carload lots
• requires more packing material or must allow for
rough handling
• somewhat slow
• freightforwarders, piggyback truck, and
doublestack containers offer cost savings for
users.
• Idle time is very high
• It is ideal forheavy or high density products
• High fixed cost-raillines
144

7. Distribution


Water transportation:
• ideal for heavy, low-value non-perishables, but
has high fixed costs
• weather can be a problem
• containerization and improved ports allow for
expansion in new products and markets.
• Slowest mode

145

7. Distribution


Airways:
• high costs, so only suitable for high value or
urgent or perishable items
• weight and locations limited
• saves inventory holding costs
• important in international trade.
• Wieght limitation

146

7. Distribution


Pipelines:
• slow but dependable, continuous flow of liquids
or slurries
• harder to establish today due to government
regulations.
• Need to build proper infrastucture.. Big task

147

•Package carriers:
•Preferred mode for e-businesses
•Tracking
•Expensive
•Rapid and reliable
•Time constrained/high value products
•Eg flipkart
•INTERMODAL TRANSPORT:
•Truck + airplane: birdybag
•Truck + ship: fishybag
•Truck + train: piggybag

148

7. Distribution

7.2.4. Outsourcing

Decisions for owning or contracting-out transport
consider:
•
•
•
•
•
•
•

149

total cost
control
customer service
flexibility
management skills
operators
return on investment.

7. Distribution

7.2.5. Distribution Warehouses

Number and location of distribution warehouses
are based on:
• customer service needs
• available transportation services
• cost trade-off.

150

7. Distribution

7.3. Performance indicators

Performance can be assessed on the basis of:
• distribution system flexibility:
• response time to special requests

• distribution system information:
• speed, accuracy and message detail of response

• distribution system malfunction recovery:
• efficiency to recover from malfunction (errors in billing,
damage, claims).

151


8. Customer Service

152

8. Customer
Service

8.1. Key Concepts

Customer Service Standard
A statement of goals and acceptable
performance for the quality of service
that a company expects to deliver
to its customers.

153

8. Customer
Service

8.2.1. What Customers Look for (1)

What customers look for:
• Pre-transaction:
• accessibility of data (catalogue, price lists, literature)
• completeness of data (products, prices, instructions)
• availability of samples

154

8. Customer
Service


• accessibility of the organization:
• experts
• assurance of product suitability, quality, reliability
(employees should be knowledgeable about products)
• customers want to be noticed, appreciated and
recognized as important individuals
• efficiency of the information flow

155

8. Customer
Service


• Transaction:
• reliability: delivery on time, in the right quantities, and
error-free
• quality of products, packaging, palletisation
• information about order processing, dispatch, transport
• flexibility: time, product variants, volumes
• assurance of satisfaction after purchase.

156

8. Customer
Service


• Post-transaction:
•
•
•
•
•

technical support, training, helpdesk
availability of spare parts and repair instructions
product traceability
handling of complaints: speed, monitoring, evaluation
administration: invoices, accounts receivable, and
payments
• performance measurements and evaluation.

157

8. Customer
Service

8.2.2. What Customers Experience (1)

The customer experience is:
• any episode in which the customer comes in
contact with the organization:
•
•
•
•
•

personal contact
telephone
mail
advertising
internet (i.e., e-mail, forms)

• any event that forms a perception of the
organization in the mind of the customer.

158

8. Customer
Service

8.2.2. What Customers Experience (2)

The customer experience is a chain of contacts
the customer undergoes in obtaining a product.
Each link represents a contact. The total
experience depends on the weakest link.
Customer
(start)

Shipping

Sales
Service

159

Customer
(end)

8. Customer
Service

8.2.4. Customer Service Issues

Customer service issues include:
• accurate understanding of customer’s needs and
wants
• the ability to deliver necessary customer service
levels
• variations between plans and their actual
implementation
• effective communications with the customer’s
• difference between supplier’s and customer’s
perception of service level.

160

8. Customer
Service

8.2.5. Service Levels

Which service level approach to you use:
• cut costs and reduce or eliminate service
• maximum service at any cost
• the cost of stock-out is no greater than the cost of
carrying additional inventory (break-even point)
• competitive advantage, where service is
sufficiently higher than competitors’ service.

161

8. Customer
Service

8.3. Analysis
8.3.1. Customer Analysis (1)

Customer Analysis: example table:
The following table helps to identify the customer
groups, their primary expectations, and their
contribution to total sales.
Customer 1
Customer 2
Customer 3
Customer 4
------------------------Total Sales

162

Sales (value) % Total Sales % Cumul
Products
92000
18,4
18,4
A
83500
16,7
35,1
A (75%), B(25%)
73200
14,6
49,7
B
31500
6,3
56,0
C

500000

What the customer wants
3 days ex stock
2 weeks
5 days ex stock
6 weeks order to delivery

8. Customer
Service

8.3. Analysis

Pareto Analysis:
• in many cases, approximately 80% of the turnover
(i.e., stock) can be ascribed to approximately 20 %
of the customers, articles or orders
• Rank the customers, products, etc. in order of
magnitude
• Calculate % that each item contributes to total
value
• derive a cumulative % list
• evaluate the cumulative list and identify
appropriate breakpoints (A, B and C).

163

8. Customer
Service

164

8.3. Analysis

8. Customer
Service

8.3. Analysis
8.3.2. Know the Customer

Know the customer:
• Who is our customer?
• What are the important things we know about our
customers?
• What do our customers expect?
• What do our customers want?

165

8. Customer
Service

8.3. Analysis
8.3.3. Customer Service Levels

Customer service levels:
• Do we consistently meet and exceed
expectations?
• How well do we solve the problems that our
customers experience?
• What service levels will give us a relative edge
over our competitors?
• How, and how quickly, are we using customer
information?

166

8. Customer
Service

8.3. Analysis
8.3.4. Customer Response

Customer response
• What did you like most/least about doing
business with us?
• What will you tell others about us?
• How can we serve you better?

167

8. Customer
Service

8.4. Suggestions

Group (segment ) customers based on service
needs:
• Companies traditionally group customers by
industry or product, and then provide the same
level of service to everyone within the group.
• To improve customer satisfaction, customers
should be grouped by distinct service needs and
services should be tailored to each group.

168

8. Customer
Service

8.5.1. Customer Service Level

Customer service level
• The desired probability versus the actual
percentage that product demand can be met from
stock
• expressed in a number of ways:
•
•
•
•

169

% of orders completely satisfied from stock
% of units demanded which are met from stock
% of units demanded which are delivered on time
% of time there is stock available

8. Customer
Service

8.5.2. Availability

Performance indicators of availability:
• stock-out frequency:
• how many times does demand for a specific product
exceed its availability

• fill rate:
• how much of a specific product is available to satisfy
customer demand

• orders shipped complete:
• how often is customer demand fully met.

170

8. Customer
Service

8.5.3. Operational Performance

Operational performance indicators:
• speed:
• order cycle time

• flexibility:
• ability to handle extraordinary customer requests

• malfunction recovery:
• contingency plans for recovering from service failures.

171

8. Customer
Service

8.5.4. Reliability

Reliability performance indicators:
• ability to comply to:
• planned inventory availability
• operational performance

• capability and willingness to:
• provide accurate and timely customer logistical
information

• commitment to:
• continuous service quality improvement.

172

8. Customer
Service

8.5.5. Quality

Quality performance indicators:
• Ability to deliver:
• items without errors
• shipped goods without damage.

173

The End

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174

Supply chain management

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