BUAD 331 Supply Chain Management
Exam 2 Study Guide
360Degree Customer Order Cycle
Order Cycle: Time it takes for customer to recognize they have a need till the time that need is fulfilled – order cycle for customer extend beyond business cycle time and customers hold business to it
o Buyer Tasks: Recognized Need, Order preparation, order transmittal. o Seller Tasks: Order receipt/processing, order fulfillment, order shipment, invoice & billing, service & support, and order completion.
o The Business Cycle starts when the order is placed to the time it is delivered, but ignores the customer’s order cycle.
EX: Stank’s computer crashes (Stank’s view: time starts when computer crashed and time ends when he got computer back; Apple’s view: time starts when they receive order and time ends when they ship the order)
Order Fulfillment Decisions – 3 questions
Fulfillment is the job of supply chain management
o What goods should I produce?
o How much of these goods should I produce?
o When and where should I get these products to activate demand?
o Marketing and supply chain come together when there is an order (an order activates the supply chain – actual operations start)
We create value by:
o BOH (balance on hand): Do I have it?
o Forecast: Do I have enough for the future?
o Service Level: Cost and revenue curves Don't forget about the age old question of psy 2012 usf
o Quantities and leadtime
Anticipatory Order Fulfillment –get the lowest cost per unit (SAM’s); been around forever o Deploying inventory in anticipation of projected sales levels and location supports demand o Must forecast (educated guess) long time in advance – grocery stores o Make, buy, and ship in bulk for lowest unit cost Don't forget about the age old question of 170000-50000
o Deploy inventory when and where they want it
o Problems: since we did everything so far in advance, it might not be what the customer wants in the future so hope we got it right to match actual demand (accuracy forecasting is wrong 65% of the time because we apply the model in the wrong situations); Main problem: There is a tradeoff between low operating cost and inventory management (with lower unit costs, we have more inventory on hand à BAD)
o Large volumes
o Not much variation à highly predictable environment
o SKU: Stockkeeping unit
o SKUL: Stockkeeping unit by location
Components of Total Inventory Costs
o Must consider the costs of ordering/setup and carrying costs
o As size of order increases, setup costs often decrease because you don’t have to setup as often; you want to be where the costs intersect on the EOQ model (see below) o Components of Inventory Cost
o Typically includes fees for placing the order and costs related to invoice processing (can be considered a fixed cost). For larger businesses, it may mainly be the cost of the Electronic Data Interchange system (which helps reduce the costs of the ordering process).
o Also includes costs related to transportation and reception (unloading & inspecting), which are variable costs. The suppliers shipping cost is dependent on the volume of the order, this can produce large variations on per unit order cost. Don't forget about the age old question of joshua price byu
The price of holding inventory, which includes storage costs, maintenance, inventory services costs (insurance), and inventory risk costs (losses due to theft).
o Buying and producing in bulk very few times à low unit costs but a lot of inventory o Buying and producing in small quantities very often à minimal inventory Naïve EOQ and ROP/Sawtooth Model – Cycle Stock
Economic Order Quantity: trading off fixed order costs (setup costs) and inventory carrying costs; Problem: ignores variance; minimizes the tradeoff between low operating costs and inventory management
Sawtooth Inventory Model: shows the reorder point visually
o Exceptions to the model: a) variance in demand (you might sell 30 items one day and only 2 the next – safety stock is not in the model) and b) weather conditions (Knoxville people can’t drive in the snowpocalypse)
o ROP (Reorder Point): says when to reorder more inventory – when inventory reaches a certain level, you should order some more to avoid stock outs based on your sales history ROP = Average lead time x Average Daily Demand
o Cycle Stock: inventory we carry to meet average demand
Impact of Variance – Safety Stock
With more variability, we have more inventory to compensate – BAD
o Safety Stock: inventory we carry just in case demand is greater; moves the Sawtooth Model up; we have safety stock because of demand and lead time variation In order to reduce inventory costs of safety stock you must have reliable suppliers (drives uncertainty out of system). Don't forget about the age old question of amy fluitt ucla
Reduced Safety Stock = Less demand variance.
o Average Inventory = (Cycle Stock / 2) + Safety Stock
Must average cycle stock because at the beginning of the month we have 60 units and then at the end we have 0 units, so on average, we should have 30 units at any given time Cycle Stock is only HALF as expensive as Safety Stock – safety stock is TWICE as expensive as cycle stock; we get the biggest bang for our buck by attacking safety stock before cycle stock; to reduce safety stock, we must attack variations in lead time and demand because those variations are why we have safety stock in the first place
Impact of Shortened Order/Setup Costs and Reduced Variance – LEAN Fulfillment o Containing little fat à collaborative plan that requires lots of communication between me and my customers and me and my suppliers We also discuss several other topics like an effective offer requires reasonably certain terms.
o Matches functional products
Order small amounts of products
Shorter cycle time – decreases cycle stock (inventory for average demand) Still an anticipatory model – just not near as far into the future as anticipatory Reduction in ordering/setup costs drives lower total costs at lower order quantity Cut safety stock by managing reliability of suppliers and reducing variance
o Optimize fulfillment: lower cycle stock (reducing average lead time) and safety stock (reducing supply and demand variance)
o Synchronization of activities through shared information, Process reengineering, Supplier partnerships/delivery lead time and variance reduction, quality improvement, Reduce process and network complexity, Performance cycle acceleration and postponement, and Use appropriate metrics.
Responsive Order Fulfillment (Agile/Nimble Fulfillment)
o EX: Tshirt guy and 3D printing
o Matches innovative products
o 3 Key Techniques
a) Postponement: the process by which the commitment of a product to its final form or location is delayed for as long as possible.
i.As long as the product can remain a generic work in progress, the more flexibility there will be to ensure the right product at the right place and time.
b) Agility: is needed in less predictable environments where the demand for variety is high. Eliminates uncertainty by postponing form and/or time and place utility until order received and then rapidly respond when order is received. If you want to learn more check out asustat
c) Speed: by maintaining close relationships with suppliers companies can reduce the in bound lead times across the supply chain.
i. Using joint supplier/customer teams to realign and reengineer processes on both sides can help reduce lead times.
o Visibility: the ability to see up and down the supply chain to know what products are needed, where they are needed and when they are needed – information systems are key
o Speed: the ability to produce the quantities fast enough before customer loses sight of the value in the product
High costs lead to:
a) NO inventory because small quantities are being made quickly
b) Higher profit margin (high selling costs – high manufacturing costs)
Good decision ONLY if what we save is more than the inventory costs
Risk management and information management are CRUCIAL
Less predictable environment
Mass customization – lots of product variation
Flexibility in Order Fulfillment
o Lean Fulfillment: all about raising efficiency, product focused. Functional Products. Reduce uncertainty by managing demand and order cycle time variance.
Reducing cycle stock – less inventory and less supply variance. Reducing safety stock – less demand variance.
o Agile Fulfillment: all about effectiveness. Customer focused. Innovative products.
Used in less predictable environments with high variable demand. Eliminates uncertainty by postponing form and or time/place utility until order is received and then responds rapidly when order is placed.
Shift from a product forced push to a customer forced pull.
o Order Penetration Point:
The point that customer order penetrates the supply chain process. The further up the supply chain this point is the faster the response time will be.
o Time Based Completion – Customers in all markets, industrial or consumer, are increasingly time sensitive
o Time Sensitive Markets
Shortening Life Cycles
o These all contribute to cost of time > what a customer must bear while waiting for delivery or while seeking out alternatives
o Product Life Cycle suggests that there is a recognizable pattern of sales from launch through to final decline
Shortened PLC means shortening lead times and cycle times
Leads to Lean Ops > small batches and less waste
o Moving away from anticipatory fulfillment
Less time available to develop new products, to launch them and to meet marketplace demand
The ability to fast track product development, manufacturing and logistics has become a key element of competitive strategy
Must be able to quickly respond demand once a product is on the market Leadtime to resupply a market determines the organizations ability to exploit demand during life cycle
o Achieved through reductions in the ordertodelivery cycle
Customers Drive for Reduced Inventory
o Firms are focusing on reducing inventories to release capital locked up in inventory and holding costs. Instead, the supplier must substitute responsiveness for inventory whenever possible
Improved Flexibility and Responsiveness to customers is gained
Timeliness of delivery (delivery of the complete order at the time required by the customer) becomes the #1 awardwinning criterion
Accomplished w/ JIT
o Responsiveness is achieved through agility in the supply chain
Agility – speed at which value chain responds to changes in demand
Customers can be serviced more rapidly with a higher degree of flexibility and the cost should be less because the pipeline is shorter
The longer the pipeline from the source of materials to the final user, the less responsive to changes in demand the system will be
o Reliability is the consistency of the leadtime. It can be argued that reliability is more important that a shortened lead time (to a certain point) because the impact of a failure to deliver on time is more severe than the need to order further in advance In short, Reliability is the consistency of Responsiveness
Volatile markets reliance on forecasts dangerous
o Forecasting error increases as lead time increases, and vice versa
Could reduce safety stock to combat volatility, but a better option is to reduce lead times, which reduces error in forecasting and reduces need for inventory Goal is to reduce lead times at every stage in the logistics pipeline as close to zero as possible to be able to respond better to volatility in markets
o Process where manufacturing and procurement lead times are linked to the needs of the market place; Goals include:
o Events consist of Value Added Time (VAT) and NonValue Added Time (NVAT) Value Added Time is time spent doing something than creates a benefit for which the customer is prepaid to pay
Form and Time/Place Utility
o Fabrication, Assembly, Conversion, Transportation, etc
NonValue Added Time – time spent on an activity whose elimination would lead to no reduction of benefit to the customer
Storing inventory moving that inventory in a warehouse, repositioning it, storing it, moving it out / being inspected, being counted, waiting in general NVAT results from self inflicted rules, such as
o Economic Batch Quantities
o Economic Order Quantities
o Minimum Order Sizes
o Fixed Inventory Review Periods
o Production Planning Cycles
o Forecasting Review Period
Three Things that Add Value:
1) Providing it in a form that customers want to consume it (form utility)
2) Having it available where someone wants to consume it (place utility) 3) Having it available when someone wants to consume it (time utility)
The rest is NONValue Adding
o The goal is to reduce pipeline length and/or speed up pipeline flow, and better the visibility of demand.
Supply Chain Information Flows:
o Information can be exchanged for inventory. Reduce variation, which reduces safety stock (costs twice as much as cycle stock) which means I can invest my profits in opening a new store instead of buying inventory.
o Leverage volume across the network (UT procurement of office supplys)
Coordination and Planning Planning what you are going to do. Occurs at high levels. Weeks or months in advance. Uses aggregate data of demand and capacity. Balances the load and capacity of different resources over time. (Ex: Building Boeing Plant)
Operating and Scheduling Actual operations/getting the job or task done. Happens hours or days in advance. Includes scheduling for individual jobs and tasks, and specific tools and capabilities. (Ex: Things done daily to ensure they are completed)
*Slides note importance of knowing examples of each process
Synchronized Planning through Shared Information:
o Many companies’ existing information sharing processes are not collaborative; rather it is a tier system that information trickles down.
o Using a collaborative process can reduce information lag from 14 days to 1 day and increase the planning horizon
o Information facilitates responsiveness
o Information enables consolidation (economies of scale)
Supply Chain IT Infrastructure:
o Enterprise Resource Planning Gives the system the capability to talk to all the different parts of your organization, shares all the data from different places in one consistent, standardized data warehouse.
One software that allows departments to communicate with each others Designed to create an overarching backbone of information
o Advanced Planning and Scheduling Coordinating and planning software that puts data in a consolidated plan.
Eliminates assumptions; what if scenarios
o Supply Chain Execution Software Operations and scheduling software that allows people who work with the physical products to do their jobs appropriately.
o *In the future Supply Chains will likely use RFIC (Radio Frequency Identification Control) so suppliers will know what to make based on what consumers are ordering, what manufacturing should make, what we need to ship, etc.. will all be linked.
o Synchronization combines info systems capabilities and appropriate relationships to reduce order cycle times for the delivery of the right product to satisfy demand.
Improved IT results in – Electronic Data Interchange, bar coding, electronic point of sale, laser scanners, and Enterprise Resource Planning systems.
Horizontal Process Integration:
o The Relationship Continuum
Current and future success depends on the ability to identify outstanding supply chain partners and develop appropriate relationships with them.
Not all relationships are created equal.
o Transactional Structures: driven by the need to efficiently conduct operations with a # of low value suppliers. Focus on max efficiency and good relations.
a. High # of relationships
b. Price dominated
c. Little interaction, short duration
d. Motivate desired behavior through reward and punishment
a. Low # of relationships
b. Joint problem solving
c. Aligned objectives
d. Motivate desired behavior through info sharing
o Strategic Partnerships: seek to create a longterm mutually beneficial relationship where both risk and reward can be shared. Focus on open communication supported by linked info system and crossorganizational teams drive cooperative planning.
a. Executive partner base
b. Mutual dependency
c.Shared goals and objectives
d. Close interaction over long term
Sources of supply chain complexity:
1. Network complexity—the more nodes and links that exist in a network, the more complex it becomes
2. Process complexity—innumerable processes extend lead-times and variability
3. Range complexity—tends to grow; decreases forecasting accuracy, increases variable costs
4. Product complexity—increases with number of unique parts 5. Customer complexity—too many non-standard or customized options for customers
6. Supplier complexity—too many suppliers adds costs; hard to manage relationships with many; increased transaction costs; too few suppliers is also dangerous
7. Organizational complexity—increases with mergers and globalization; silos
8. Information complexity—increased by the other complexities; difficulty moving data and lack of visibility can create bullwhip effect
Pareto Law (80:20 Rule) also applies to complexities—find sources of the most complexity, and figure out which elements are non-value adding so that you can eliminate them