MANAGING THE SUPPLY CHAIN

CHAPTER 3

P r. R . H A CH A N A

CONTENT

Supply chain management Demand forecasting Aggregate planning

1. SUPPLY CHAIN MANAGEMENT (1/4)

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request; The supply chain includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even customers themselves; The focus is in those core activities that a business must operate efficiently each day to meet the demand.
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1. SUPPLY CHAIN MANAGEMENT (2/4)

The term supply chain conjures up images of product or supply moving from suppliers to manufacturers to distributors to retailers to customers along a chain. This is cer tainly par t of the supply chain, but it is also impor tant de visuaize informations, funds, and product flows along both directions of this chain; The term supply chain may also imply that only one player is involved at each stage. In reality, a manufacturer may receive material from several suppliers and then supply several distributors. Thus, most supply chains are actually networks. It may be more accurate to use the term supply network or supply we b to describe the structure of most supply chains. 4

1. SUPPLY CHAIN MANAGEMENT (3/4)

Upstream flow of customer Requirements Flow between processes Long-term plans and requirements Market research information Individual orders Payment Potential new products and services Flow between processes Flow between processes Consumer Operation 1 Operation 2 Operation 3

Products and services New products and services Delivery information Payment request / Credit

Downstream flow of products and services for customer

Fulfilment
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1. SUPPLY CHAIN MANAGEMENT (4/4)

Second tier supplier First tier supplier First tier customer Second tier customer

Supply side Purchasing and Information supply flow management

Physical flow

Demand side Physical distribution management Logistics

Materials management Supply chain management

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1.1 OBJECTIVES OF SCM

The objective of ever y supply chain should be to maximize the overall value generated. The value (also known as s upply chain surplus ) a supply chain generates is the difference between what the final product is wor th to the customer and the costs the supply chain incurs in filling the customers request; All flows of information, product, or funds generate costs within the supply chain. Thus, the appropriate management of these flows is a key to supply chain success. Effective SCM involves the management of supply chain assets and product, information, and fund flows to maximize total supply chain surplus.
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1.2 DECISION PHASES IN A SUPPLY CHAIN

Successful SCM requires many decisions relating to the flow of information, product, and funds. Each decision should be made to raise the supply chain surplus. These decisions fall into 3 categories or phases, depending on the frequency of each decision and the time frame during which a decision phase has an impact. As a result, each category of decisions must consider uncertainty over the decision horizon.
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1.2.1 SUPPLY CHAIN STRATEGY OR DESIGN

During this phase, a company decides how to structure the supply chain over the next several years. It decides what the chains configuration will be, how resources will be allocated , and what processes each stage will perform. Strategic decisions include: Whether to outsource or perform a supply chain function inhouse; The location and capacities of production and warehousing facilities; The products to be manufactured or stored at various locations; The modes of transportation to be made; The type of information system to be utilized.
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1.2.2 SUPPLY CHAIN PLANNING

Companies start the planning phase with a forecast for the coming year of demand in different markets. Planning includes making decisions regarding: which markets will be supplied from which locations; The subcontracting of manufacturing; The inventory policies to be followed; The timing and size of marketing and price promotions.
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1.2.3 SUPPLY CHAIN OPERATION

At the operational level, supply chain configuration is considered fixed, and planning policies are already defined. The goal of supply chain operations is to: Handle incoming customer orders in the best possible manner; Allocate inventory or production to individual orders; Set a date that an order is to be filled; Generate pick lists at a warehouse; Allocate an order to a particular shipping mode and shipment; Set delivery schedules of trucks; 11 Place replenishment orders.

1.3 PROCESS VIEWS OF A SUPPLY CHAIN

A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product; There are 2 different ways to view the process performed in a supply chain: Cycle view Push/Pull view

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1.3.1 CYCLE VIEW OF SUPPLY CHAIN PROCESSES

All supply chain processes can be broken down into the following 4 process cycle: Customer order cycle; Replenishment cycle; Manufacturing cycle; Procurement cycle.

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1.3.2 PUSH/PULL VIEW OF SUPPLY CHAIN PROCESSES

With Pull processes , execution is initiate in response to a customer order. So, customer demand is known with certainty. Pull processes may also be referred to as reactive processes. With Push processes , execution is initiated in anticipation of customer orders. Hence, demand is not known and must be forecast. Push processes may also be referred to as speculative processes.
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1.4 DRIVERS OF SUPPLY CHAIN PERFORMANCE

The strategic fit requires that a companys supply chain achieve the balance between responsiveness and efficiency that best suppor ts the companys competitive strategy; To understand how a company can improve SCP, we must examine the logistical and cross-functional drivers of SCP: Facilities; Inventory; Transportation; Information; Sourcing; Pricing.

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2. DEMAND FORECASTING
Some forecasts are accurate. We know exactly what time the sun will rise at any given place on ear th tomorrow or one day next month or even next year. Forecasting in a business context, however, is much more difficult and therefore prone to error. We do not know precisely how many orders we will receive or how many cus tomers will walk through the door tomorrow, next month, or next year. Such forecasts, however, are necessar y to help managers make decisions about resourcing the organization for the future.
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2.1 APPROACHES TO FORECASTING

There are two main approaches to forecasting. Managers sometimes use qualitative methods based on opinions, past experience and even best guesses. There is also a range of qualitative forecasting techniques available to help managers evaluate trends and causal relationships and make predictions about the future; Also, quantitative forecasting techniques can be used to model data; Although no approach or technique will result in an accurate forecast a combination of qualitative and quantitative approaches can be used to great effect by bringing together exper t judgements and predictive models.

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2.1.1 QUALITATIVE APPROACHES A/DELPHI METHOD

Perhaps the best -kno wn appr oach to generating forecast s using exper t s is the D e l phi me thod . It em ploy s a que sti onnaire, e-maile d or po sted to the ex per t s. The re plie s ar e analyse d and s ummari ze d and returned, anonymously, to all the exper ts; The ex per t s ar e then as ke d to r e-consi de r their o riginal re sponse in the light of the re plie s and ar gum ents put for war d by the o ther exper t s. Thi s proc es s i s r epeated seve ral mo re time s to c onclude with either a consensus or at least a narrower range of decisions; One refinement of this approach is to all ocate weight s to the indivi dual s and their sug ges tions base d on, for exam ple, the ir expe rience, their past s ucces s in fo recasting, othe r pe opl es v iew s of their abilities; The o bvi ous pro blem s as sociate d with thi s metho d include construct ing an a ppro priate que stionnaire, sel ecting an a ppro priate panel of exper ts and tr ying to deal with their inherent biases.
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2.1.1 QUALITATIVE APPROACHES B/SCENARIO PLANNING

One method for dealing with situations of even greater uncer tainty is scenario planning. This is usually applied to long-range forecasting, again using a panel; The panel members are usually asked to devise a range of future scenarios. Each scenario can then be discussed and the inherent risks considered; Unlike the Delphi method, scenario planning is not necessarily concerned with arriving at a consensus but looking at the possible range of options and putting plans in place to tr y to avoid the ones that are least desired and taking action to follow the most desired.
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2.1.2 QUANTITATIVE APPROACHES A/TIME SERIES ANALYSIS

Time series examine the pattern of past behaviour of a single phenomenon over time taking into account reasons for variation in the trend in order to use the analysis to forecast the phenomenons future behaviour. Time series analysis does not study the factors that influence the demand; The time series analysis consists of determining the trend underlying the demand and extrapolates the future trend.
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2.1.2 QUANTITATIVE APPROACHES B/REGRESSION ANALYSIS (1/4)

This is the mathematical method of obtaining the line of best fit between the dependent variable (demand) and an independent variable . This is called least square method as the sum of the square of the deviation of the various points from the line of best fit is minimum or least; It gives the equation of the line for which the sum of the squares of vertical distances between the actual values and the line values are at minimum. 21

2.1.2 QUANTITATIVE APPROACHES B/REGRESSION ANALYSIS (2/4)

In a simple regression analysis, the relationship between dependent variable (y) and some independent variable (x) can be represented by a straight line Y= a + bx Where b is the slope of the line a is the y -intercept The values of the constants a and b are determined by the 2 simultaneous equations which are called n ormal e q uations

y Na b x
2 xy a x b x
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2.1.2 QUANTITATIVE APPROACHES B/REGRESSION ANALYSIS (3/4)

To compute the values of a and b : 1. Calculate the deviation (x) for each period and also the sum of deviations; 2 x 2. Find the value of 3. Find the value of xy 4. Calculate the values of a and b
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2.1.2 QUANTITATIVE APPROACHES B/REGRESSION ANALYSIS (4/4)

Substituting the values of get * :

x 0

in equations (1) and (2), we

y Na

xy b x

Which gives the values of a and b as:

a y/ N
b xy / x2
* The s um o f de vi ati o ns i s e qual to z e ro
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2.1.2 QUANTITATIVE APPROACHES C/MOVING AVERAGE FORCECASTING (1/2)

This method uses a past data and caluclates a rolling average for a constant period. At each period, fresh average is computed at the end of each period by adding the demand of the most recent period and deleting the data of the oldperiod; A simple MA is calculated as follows: M A = Su m of d e mands f or p e riods / c h osen n umber of p e riods e.g for the time series of values D 1 , D 2 , D 3 D n for dif ferent periods, the MA for n periods is given by: First value MA = 1
n ( D1 D2 D3 .... Dn )

Second value MA =

1 ( D2 D3 D4 ....Dn 1) n

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2.1.2 QUANTITATIVE APPROACHES C/MOVING AVERAGE FORCECASTING (2/2)

Period n of MA should be carefully selected. The wrongly selected period will distort the data and gives wrong picture of the trend; A 3 months MA has a weightage of 1/3 rd and 5 months MA has a weightage of 1/5 th ; Larger the value of n, the smaller is the effect of random variation and a higher smoothing effect.

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2.1.2 QUANTITATIVE APPROACHES D/WEIGHTED MOVING AVERAGE

Sometimes the forecaster wants to use a MA but does not want all the n periods equally weighted as in simple MA method; In simple MA, equal weightage is given to 1 st month, 2 nd month and 3 rd month in a 3 month MA. But when the organisation wants to attach more weightage to the 3 rd month and least to the 1 st month, we need to calculate the WMA; For example, depending upon the impor tance it assigns weightages e.g 0.2 to 1 st period, 0.3 to 2 nd period and 0.5 to the 3 rd. The sum of these weights should be equal to one.
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3. AGGREGATE PLANNING
Aggregate planning is an intermediate term plannig decision. It is the process of planning the quantity and timing of output over the intermediate time horizon (3 months to 1 year); Within this range, the physical facilities are assumed to be fixed for the planning period. Therefore, fluctuations in demand must be met by varying labor and inventory schedule; Aggregate planning seeks the best combination to minimize costs.
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3.1 AGGREGATE PLANNING STRATEGIES (1/3)

The variables of the production system are labour, materials and capital. These controllable variables constitute pure strategies by which fluctuations in demand and uncertainties in production activities can be accommodated. Vary the size of the work force; Vary the hours worked; Vary inventory levels; Subcontract
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3.1 AGGREGATE PLANNING STRATEGIES (2/3)

S t rategy 1 : Absorb de m and fl uctuations by v ar ying i nventory l e vel, bac k o rdering o r sh i fting de m and

Method

Costs

Produce in earlier period and Cost of holding inventory hold until product is demanded Delay in receipt of revenue , Offer to deliver the products lost sales and customers later when capacity is Cost of advertising discounts available or promotional programms Special marketing efforts to shift the demand to slack period 30

3.1 AGGREGATE PLANNING STRATEGIES (3/3)

S t rategy 2 : C h ange o nly t he pro duction rat e i n ac c ordance w i th n on un iform de mand

Method
Work additional hours without changing the work force size Increase work force size from high production so that overtime is avoided Subcontract work to other firms Revise make or buy decisions to purchase items when capacity is fully loaded

Costs
Overtime premium wages Excess wages during slack period Subcontractors profit Waste of company skills, tooling and equipment unutilized in slack periods.
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