Scm mis inv supply

SUPPLY CHAIN
INFORMATION SYSTEM
Prof Dr Prem

Chapter Objectives
Be able to:
 Explain why information flows are a necessary part of any supply chain.
 Describe in detail how supply chain information needs vary according to the
organizational level and the direction of the linkages (upstream or
downstream).
 Describe and differentiate among ERP, DSS, CRM, SRM, and logistics
applications.
 Describe what business process management (BPM) tools and cloud computing
are and how they might impact future operations and supply chain activities.

Information System
 Information system – A set of interrelated
components that collect (or retrieve),
process, store, and distribute information
to support decision making, coordination,
and control in an organization.

Supply Chain
Organizational Levels
 Execution and transaction processing
 Routine decision making
 Tactical planning
 Strategic decision making

Supply Chain Information Needs

A Map of Supply Chain Information Systems

Supply Chain Information Systems
 Customer Relationship Management (CRM) – Planning
and control activities and information systems that
link a firm with its downstream customers.
 Market analysis, sell process, order management,
call/service center management
 Supplier Relationship Management (SRM) – Planning
and control activities and information systems that
link a firm with is upstream suppliers.
 Design collaboration, sourcing decisions, negotiations, buy
process, supply collaboration

 Internal Supply Chain Management –
Information flows between higher and
lower levels of planning and control
systems within an organization.

Supply Chain Information Flows

 Enterprise Resource Planning (ERP) systems–
Large, integrated, computer-based business
transaction processing and reporting systems.
 ERP systems pull together all of the classic business functions
such as accounting, finance, sales, and operations into a
single, tightly integrated package that uses a common
database.
 Traditional strengths in routine decision making and in
execution and transaction processing.
 Captures data to support higher-level decision support systems
(DSS).

ERP Systems
Integrating ERP Systems with
Legacy and Best-in-class Applications

Supply Chain
Information Systems
 Decision support systems (DSS) - Computer-
based information systems that allow users
to analyze, manipulate, and present data in
a manner that aids higher-level decision
making

Supply Chain
Information Systems
 Network Design Applications – Logistics
information systems that address such long-
term strategic questions as facility location
and sizing and transportation networks.
 Often using simulation and optimization
modeling

Supply Chain
Information Systems
 Warehouse and transportation planning systems
 Allocating “fixed” logistics capacity in the best possible
way given business requirements
 Warehouse management and transportation
execution systems
 Initiating and controlling the movement of materials
between supply chain partners

Supply Chain Trends
 The emergence of sophisticated business
process management (BPM) tools
 Cloud computing

BPM Tools
 Business process modeling tools – Software tools that aid
business teams in the analysis, modeling, and redesign of
business processes. Harmon, © 2007 Morgan Kaufmann
 Graphically design processes, simulate the performance of new
processes, develop cost estimates.
 Business process management systems (BPMS) products–
Software tools that allow analysts to model processes and
then automate the execution of the process at run time.
Harmon, © 2007 Morgan Kaufmann
 Develop process maps, define business rules, carry out future
business activity.

Cloud Computing
 Cloud computing – A model for enabling
ubiquitous, convenient, on-demand network
access to a shared pool of configurable computing
resources that can be rapidly provisioned and
released with minimal management effort or
service provider interaction.

Cloud Computing
 Cloud Model
 On-demand self-service
 Broad network access
 Resource pooling
 Rapid elasticity
 Measured service

Cloud Computing
 Benefits
 Makes it easier for firms to outsource key portions of
business process information flows to outside firms.
 Allows individual or computer systems to upload and
retrieve information through a wide range of devices
virtually anywhere.
 Makes supply chain information flows faster, more
flexible, and cheaper than ever.

Impact of Information Technology
on Supply Chain Management
 Visibility – Allows managers to “see” the physical
and monetary flows in the supply chain and better
manage them.
 Mirroring – Replaces certain physical processes
with virtual ones.
 Creation of new customer relationships – Taking
raw information and organizing, selecting,
synthesizing, and distributing it in a manner that
creates whole new sources of value.

SUPPLY MANAGEMENT
Prof Dr Prem

Chapter Objectives
Be able to:
 Identify and describe the various steps of the strategic sourcing process.
 Perform and interpret the results of a simple spend analysis.
 Use portfolio analysis to identify the appropriate sourcing strategy for a particular good or
service.
 Describe the rationale for outsourcing and discuss when it is appropriate.
 Perform a simple total cost analysis.
 Show how multicriteria decision models can be used to evaluate suppliers and interpret the
results.
 Understand when negotiations should be used and the purpose of contracts.
 Describe the major steps of the procure-to-pay cycle.
 Discuss some of the longer-term trends in supply management and why they are important.

Supply Management
 Supply Management – The broad set of activities
carried out by organizations to analyze sourcing
opportunities, develop sourcing strategies, select
suppliers, and carry out all the activities required
to procure goods and services.

Why is
Supply Management critical?
 Global Sourcing
Competition against global competitors and
their supply chains.
Advances in information systems have helped.

Why is
 Financial Impact
 Cost of goods sold – The purchased cost of goods from
outside suppliers.
 Merchandise inventory – A balance sheet item that
shows the amount a company paid for the inventory it
has on hand at a particular point in time.
 Profit margin – The ratio of earnings to sales for a given
time period.
 Return on assets (ROA) – A measure of financial
performance defined as Earnings/Total Assets

Profit Leverage
3% purchasing reduction in COGS
Earnings and Expenses Current Reflecting Savings
Sales $65,786 $65,786
COGS $45,725 $44,353
Pretax earnings $4,629 $6,001
Selected Balance Sheet Items
Merchandise inventory $7,596 $7,368
Total assets $17,213 $16,985
Pretax earnings
increase by $1372
(30%)
ROA increases from
26.9% to 35.3%

Why is
 Performance Impact
Purchased goods can have a major effect on
other dimensions such as quality and delivery
performance.

The Strategic Sourcing Process

Assess Opportunities
 Spend Analysis – The application of
quantitative techniques to purchasing data
in an effort to better understand spending
patterns and identify opportunities for
improvement.

Profile Internally and Externally
 Two approaches to creating profiles:
 Category profile – An approach to understand all
aspects of a particular sourcing category that could
ultimately have an impact on the sourcing strategy.
 Industry Analysis – An approach to provide a more
detailed understanding of the characteristics of the
external supply base.

Develop the Sourcing Strategy
 The Make-or-Buy Decision
 A high-level, often strategic, decision regarding which
products or services will be provided internally and
which will be provided by external supply chain
partners.
 Insourcing – The use of resources within the firm to provide
products or services.
 Outsourcing – The use of supply chain partners to provide
products or services.

Advantages and Disadvantages of
Insourcing and Outsourcing

Factors that affect the decision
to Insource or Outsource.

 Total cost analysis – A process by which a firm
seeks to identify and quantify all of the major
costs associated with various sourcing options.
 Direct costs – Costs tied directly to the level of
operations or supply chain activities.
 Indirect costs – Costs that are not tied directly to the
level of operations or supply chain activity.

Insourcing and Outsourcing Costs

 Portfolio analysis – A structured approach used by
decision makers to develop a sourcing strategy for
a product or service, based on the value potential
and the relative complexity or risk represented by
a sourcing opportunity.

 Portfolio Analysis
 The Routine Quadrant – Readily available products or services
(small % of total).
Electronic Data Interchange
 The Leverage Quadrant – Standardized and readily available
products or services (large % of total).
Preferred suppliers
 The Bottleneck Quadrant – Unique or complex products or
services supplied by few suppliers.
 The Critical Quadrant - Unique or complex products or services
supplied by few suppliers, representing large % of total.

Bottleneck Critical
Routine Leverage
Value Potential
High
Complexity or
Risk Impact
High
Low
Low
Portfolio Analysis

 Single sourcing – The buying firm depends on a single
company for all or nearly all of an item or service.
 Multiple sourcing – The buying firm shares its business
across multiple suppliers.
 Cross sourcing – Using a single supplier for a certain part
or service and another supplier with the same capabilities
for a similar part.
 Dual sourcing – Using two suppliers for the same
purchased product or service.

Screen Suppliers and
Create Selection Criteria
 Criteria to evaluate suppliers
 Process and design capabilities
 Management capability
 Financial condition and cost structure
 Longer-term relationship potential

Conduct Supplier Selection
 Weighted-point evaluation system – An evaluation system
to evaluate potential suppliers, track supplier’s
performance over time, and rank current suppliers.
 Method
 Assign weights to performance dimensions.
 Rate the performance of each supplier with
regard to each dimension.
 Calculate the total score.

Negotiate and Implement
Agreements
 Competitive bidding – A request for bids from suppliers with
whom a buyer is willing to do business.
 Request for quotation – A formal request for the suppliers to prepare
bids, based on the terms and conditions set by the buyer.
Description by market grade/industry standard
Description by brand
Description by specification
Description by performance characteristics

Agreements
 Negotiating – A more costly, interactive approach to final supplier
selection.
 Negotiation is used best when:
 The item is a new or technically complex item with only
vague specifications.
 The purchase requires agreement about a wide range of
performance factors.
 The buyer requires the supplier to participate in the
development efforts.
 The supplier cannot determine risks and costs without
additional input from the buyer.

Agreements
 Contracting – The process of creating a detailed
purchasing contract to formalize the buyer-
supplier relationship.
 Fixed-price contract – Stated price does not change.
 Cost-based contract – Price of the good or service is
tied to the cost of some other key input or economic
factor.

The Procure-to-Pay Cycle
 Ordering
 Purchase order – A document that authorizes a supplier to deliver a
product or service and includes the terms and conditions of the
sale.
 Follow-up and expediting
 Receipt and inspection
 Statement of work (scope of work) – Terms and conditions for a
purchased service.
 Settlement and payment
 May be paid through Electric Funds Transfer (EFT)
 Records maintenance

Trends in Supply Management
 Sustainable Supply
 Becoming more conscious of the importance of being
environmentally friendly and using environmental
performance in selecting suppliers.
 Ensuring compliance with regulations.
 Reducing packaging, promoting recycling, reducing
costs.

Trends in Supply Management
 Supply Chain Disruptions
 Caused by natural disasters, economic/political
events.
 Cause a big threat to revenue streams.
 Increased risk due to outsourcing to global
suppliers.

Inventory Management
Prof Dr Prem

Chapter Objectives
Be able to:
Describe the various roles of inventory, including the different types of inventory
and inventory drivers.
Distinguish between independent demand and dependent demand inventory.
Calculate the restocking level for a periodic review system.
Calculate the economic order quantity (EOQ) and reorder point (ROP) for a
continuous review system.
Determine the best order quantity when volume discounts are available.
Calculate the target service level and target stocking point for a single-period
inventory system.
Describe how inventory decisions affect other areas of the supply chain. In
particular, describe the bullwhip effect, inventory positioning issues, and the
impacts of transportation, packaging, and material handling considerations.

Inventory Management
 Inventory – Those stocks or items used to support
production (raw materials and work-in-process
items), supporting activities (maintenance, repair,
and operating supplies) and customer service
(finished goods and spare parts).

Inventory Types
 Cycle stock
 Safety stock
 Anticipation inventory
 Hedge inventory
 Transportation inventory
 Smoothing inventory

Types of Inventory
 Cycle stock – Components or products that are
received in bulk by a downstream partner,
gradually used up, and then replenished again in
bulk by an upstream partner.
 Safety stock – Extra inventory that a company
holds to protect itself against uncertainties in
either demand or replenishment time.

Types of Inventory
 Anticipation inventory – Inventory that is held in
anticipation of customer demand.
 Hedge inventory – A form of inventory buildup to
buffer against some event that may not happen.

Types of Inventory
 Transportation inventory – Inventory that is
moving from one link in the supply chain to
another.
 Smoothing inventory – Inventory that is used to
smooth out differences between upstream
production levels and downstream demand.

Inventory Drivers
 Inventory drivers – Business conditions that force companies to hold inventory.

Independent vs. Dependent
Demand Inventory
 Independent demand inventory – Inventory items
whose demand levels are beyond a company’s
complete control.
 Dependent demand inventory – Inventory items
whose demand levels are tied directly to a
company’s planned production of another item.

Independent vs. Dependent
Demand Inventory
 Example:
Independent demand:
Kitchen table – Need 500 tables five weeks from now
Dependent demand:
Kitchen table legs – Need 4 per table or 2,000 legs
Calculation of dependent demand (Chapter 12)

Inventory Control Systems
 Periodic Review System – An inventory system that
is used to manage independent demand inventory
where the inventory level for an item is checked
at regular intervals and restocked to some
predetermined level.
 Continuous Review System – An inventory system
used to manage independent demand inventory
where the inventory level for an item is
constantly monitored and when the reorder point
is reached, an order is released.

Periodic Review System
Calculating the order quantity (Q)
Q = R-I
where
R = restocking level
I = inventory level at the time of review.

Periodic Review System
Calculating the restocking level (R)

Calculating Service Level
 Service Level – A term used to indicate the amount
of demand to be met under conditions of demand
and supply uncertainty.
 Assumes that the demand during the reorder period and the order lead time is
normally distributed.

Continuous Review System
 Key features:
 Inventory levels are monitored constantly, and a
replenishment order is issued only when the reorder
point is reached.
 The size of a replenishment order is typically based on
the trade-off between holding costs and ordering costs.
 The reorder point is based on both demand and supply
considerations, as well as on how much safety stock
managers want to hold.

 Assumptions:
 Constant demand and lead time
 Holding and Ordering cost known and fixed
 Price of each unit is fixed.

When the demand rate and lead time are constant:
Reorder point = demand x lead time
R = dL

Economic Order Quantity
 Economic Order Quantity (EOQ) – The order
quantity that minimizes annual holding and
ordering costs for an item.
 Holding costs (H)– The cost to hold a single unit in
inventory for a year.
 Ordering costs (S) – The cost of placing an order
regardless of the order quantity.

Total Yearly Inventory Costs
Total holding and ordering costs for the year
= Total yearly holding cost + Total yearly ordering cost =
Yearly holding cost = average inventory x holding cost
Yearly ordering cost = number of orders per year x fixed ordering cost

Comparing Ordering Costs to EOQ

Example
Annual demand (D) = 4,000
Annual holding cost (H) = $15
Ordering cost (S) = $50/order
Order quantity (Q) = 1,000 fans

Example
Calculate the EOQ and use that value as the order
quantity to see if the cost is lower and calculate the
total yearly inventory cost.
Cost Savings:

Reorder Points and Safety Stock
 When demand rate (d) and lead time (L) are constant:
 When demand rate (d) and lead time (L) or both varies:

The impact of varying
demand rates and lead time

Causes of Variability
 The variability of demand
 The variability of lead time
 The average length of lead time
 The desired service level

Safety Stock
 Safety stock:
= z x standard deviation of demand during the reorder
period
=

Reorder Point
 Reorder Point =

Example
 Calculate Safety Stock:
Calculate Reorder Point:

Quantity Discounts
 Quantity Discounts – Price reductions for ordering larger quantities.

Quantity Discounts
 Two-step process:
1. Calculate the EOQ. If the EOQ represents a
quantity that can be purchased for the lowest
price, stop – we have found the lowest cost
order quantity. Otherwise, go to Step 2.
2. Compare total holding, ordering, and item
costs at the EOQ quantity with total costs at
each price break above the EOQ. There is no
reason to look at quantities below the EOQ, as
these would result in higher holding and
ordering costs, as well as higher item costs.

Single-Period Inventory System
 When excess inventory cannot be held in the
future, firms must weigh the cost of being short
against the cost of holding excess units.
 Examples:
 Fresh fish, magazines, newspapers, Christmas trees

 Single-period inventory system – A system used when
demand occurs in only a single point in time.
 Goals:
 Determine a target service level (SLT) that strikes the best balance
between shortage costs and excess costs.
 Use the target service level to determine the target stocking point
(TS) for the item.

 Target service level – The service level at which
the expected cost of a shortage equals the
expected cost of having excess units.
 Target stocking point – The stocking point at
which the expected cost of a shortage equals the
expected cost of having excess units.

Target Service Level
 The target service level (SLT) is the p value at which
holds true

Inventory in the Supply Chain
 Bullwhip Effect
 An extreme change in the supply position upstream in a supply
chain generated by a small change in demand downstream in the
supply chain.
 Inventory Positioning
 Cost and value increases and flexibility decreases down the supply
chain.
 Transportation, Packaging, Material Handling
 Physical size and quantity of lot, how it is packaged, material
handling equipment needed, and disposal of packaging are all
factors in choosing appropriate supplier and distribution process.
© 2010 APICS Dictionary

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