Enterprise Resource

Planning Systems
1
History of organizational systems
ERP emerged from MRPII
MRPII grew from MRP
MRPII extended MRPs focus on production and
inventory to other functions such as Order
Processing, Finance etc.
ERP is different from MRPII replacing legacy apps,
managing globalization, handling regulatory
requirements and improving integration of functions
Introduction to ERP

Extension of materials resource planning.
ERP is a process of managing all resources and
their use in the entire enterprise In a
coordinated manner
Enterprise is the group of people with
common goal.
Enterprise act as a single entity
What is ERP?
Enterprise Resource Planning
Support business through optimizing,
maintaining, and tracking business functions
Broken down into business processes
HRM
Distribution
Financials
Manufacturing
ERP system: Definition
ERP is a set of integrated business
applications, or modules which carry out
common business functions such as general
ledger, accounting, or order management
ERP is a package encompassing all major
functions of the business.


What makes ERP different
Integrated modules
Common definitions
Common database
Update one module, automatically updates
others
ERP systems reflect a specific way of doing
business
Must look at your value chains, rather than
functions
Characteristics of Enterprise Systems
Integration: seamless integration of all the
information flowing through a company
financial and accounting, human resource
information, supply chain information, and
customer information.

Packages: Enterprise systems are not developed in house.
IS life cycle is different: 1)mapping organizational
requirements to the processes and terminology employed by
the vendor and 2) making informed choices about the
parameter setting.
Organizations that purchase enterprise systems enter into
long-term relationships with vendors. Organizations no
longer control their own destiny.

What is ERP offering?
ERP is business process infrastructure
ERP software automates and integrates the
basic processes of a firm
ERP Business Technology architecture

Business Function and Process
Managers now think in terms of business
process
Take the customers perspective
1. Customer is always right
2. If not reread rule #1


Business Process
A business process is a collection of activities that takes
inputs and creates outputs that are a value to a customer
A business process consists of activities or tasks that
transform information from one form to another to achieve
a business outcome.

Inputs Process Output
Operations Marketing
Accounting
and finance
Employment
Relations
Business Processes Cut Across
Functional Lines
Business process type
Management processes used to manage system operations.
Operational processes used to provide core business
functions, which is often used interchangeably with the term
business processes.
Supporting processes that provide support for the other
process types (for example IT support).

Business Function
Business functions refer to a set of operations that are
executed regularly to carry out a part of the mission for an
organization. This term can also be defined as the essential
functions such as sales and production that an organization
cannot do without.
Integrated management information
OUTPUTS
PROCESS
INPUTS
ENVIRONMENT
Characteristics
0f information
Accuracy
Relevancey
timeliness


Role of the Enterprise
Integrator
Faciltator
Owner of the project
Understanding the responsibilities



Integrated Data model
Use of this integrated model is analysis and
decision making
ERP Myths
More work and procedure
Make many employee redundant and jobles
Sole of responsibility of the mgnt
Just for the managers/decision makers
Just for manufacturing organization
Impress customer
Package will take care of everything
One ERP package will suit every body
Very expensive
Reasons for the growth of erp

Enable improved business performance
Support business growth requirements
Provide flexible,integrated,real time decision
Eliminate limitation in legacy system

Adv of ERP

Business integration
Flexibility
Better analysis and planning capabilities
Use of latest technology

Example of before ERP Systems
Faculty wants to buy a new Printer.
For this reason Secretary gives a purchasing
order by filling purchasing order forms.

New Printer Purchasing Process
1. Purchase order form for a new printer
2. Head of Department Confirmation- Faculty Head
3. Purchase order document sent to Account Office
4. Account Office Secretary sents the purchase order to the Responsibles
5. Purchase order- Responsible personal Confirmation
6. Purchasing department- Manager Confirmation
7. Transfer to Finance Department Secretary for processing
8. Finance Department Responsibles Confirmation
9. Transfer to Rectors Office
10. Rectors Secretary- Confirmation
11. Confirmation Transfer, to Purchase Department Secretary
12. Purchase Responsible personal commends with Purchase
Example
Faculty wants to buy a new HP Printer.
For this reason Secretary gives a purchasing
order with using Online ERP systems
After ERP Systems
SAP SYSTEM ONLINE
HEAD OF DEPARTMENT
REQUEST OF NEW
HP PRINTER
CONFIRMATION
SAP SYSTEM ONLINE
PURCHASE
RESPONSIBLE
FINANCIAL
ACCOUNTING
SAP SYSTEM ONLINE
PURCHASEING MANAGER
CONFIRMATION
SECRETARY
SAP SYSTEM ONLINE
FINANCE DEPARTMENT
CONFIRMATION
SAP SYSTEM ONLINE
RECTORS OFFICE
CONFIRMATION
SAP SYSTEM ONLINE
PURCHASE DEPARTMENT
PURCHASE
OF NEW
HP PRINTER
Non-ERP Process
1. Salesperson enters customer order
2. Salesperson notifies CRM of order
3. CRM employee records order
4. Salesperson notifies accounting
5. Accounting employee records sale
6. Salesperson notifies warehouse
7. Warehouse employee records order
8. Warehouse employee notifies packing & shipping
9. Shipping employee records order
10. Shipping employee notifies procurement
11. Procurement employee records order for raw materials
replacement
12. Procurement employee notifies production to make more
13. Production employee records order

ERP System Process
1. Sales person enters customer order on sales order system (SOS)
2. SOS:
1. Notifies CRM
2. Notifies Accounting
3. Records sale in Accounting System
4. Notifies Warehouse
5. Records order on Warehouse Management System (WMS)
3. WMS
1. Notifies packing & shipping
2. Records order on Packing and Shipping System (PSS)
4. PSS
1. Notifies procurement
2. Records order for raw materials with Procurement Management System (PMS)
5. PMS
1. Notifies production to do work
2. Enters manufacturing order on Production Planning System (PSS)


Disadvantages of ERP
Customization of the ERP software is limited.
ERP systems can be very expensive
ERPs are often seen as too rigid and too difficult to adapt to
the specific workflow and business process of some
companiesthis is cited as one of the main causes of their
failure.
Some large organizations may have multiple departments
with separate, independent resources, missions, chains-of-
command, etc, and consolidation into a single enterprise may
yield limited benefits.
The need to reengineer business processes

Business Modeling
Business models are used to describe and
classify businesses
Interconnection and Independencies of the
various sub system and business processes
Integrated system making the processes
managing its facilities and materials, the
resources
Integrated Data Model
Benefits of ERP
Information integration
Reduction of lead-time
On-time shipment
Cycle time reduction
Better customer satisfaction
Improved supplier performance
Increased flexibility

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Benefits of ERP(ctd..)
Reduced quality costs
Improved resource utilization
Better analysis and planning capabilities
Improved information accuracy and decision-
making capability
Use of latest technology

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Justifying ERP investments
Payback Parameters
Tangible benefit from ERP system
Intangible benefits from ERP system
Accounting
Product and process design
Production and material management
Sales
MIS function
Other factors
(ERP investment)
Lower implementation cost
Lower production and business transaction cost
Lower cost of reporting
Lower personnel cost
Lower business process change and Enhancement
cost
Supporting and enhancing the customer and partner
experience
Enabling new business opportunities
LIMITATIONS OF THE ERP SYSTEM
The ERP system has 3 significant limitations:

1.Managers cannot generate custom reports or queries without the
help from a programmer and this inhibits them from obtaining
information quickly, which is essential for making a competitive
advantage.

2.ERP systems provide current status only, such as open orders.
Managers often need to look past status to find trends and patterns
that aid better decision-making.

3.The data in the ERP application is not integrated with other
enterprise or division systems and does not include external
intelligence.
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There are many technologies that help to overcome these limitations. These
technologies when used in conjunction with the ERP package, help in overcoming
the limitations of a stand-alone ERP system and thus help the employees to make
better decisions.
Some of these technologies are:

1. BUSINESS PROCESS RE-ENGINEERING (BPR)
2. MANAGEMENT INFORMATION SYSTEMS (MIS)
3. DECISION SUPPORT SYSTEMS (DSS)

4. EXECUTIVE INFORMATION SYSTEMS (EIS)

5. DATA WAREHOUSING

6. DATA MINING

7. ON-LINE ANALYTICAL PROCESSING (OLAP)

8. SUPPLY CHAIN MANAGEMENT(SCM)
9. PRODUCTION LIFE CYCLE MANAGEMENT
10. CUSTOMER RELATION MANAGEMENT
11. GEOGRAPHICAL INFORMATION SYSTEM

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BUSINESS PROCESS RE-ENGINEERING (BPR)
DEFINITION :
BPR as the fundamental rethinking and radical redesign of
business processes to achieve dramatic improvements in critical,
contemporary measures of performance such as cost, quality,
services and speed.

One of the main tools for making this change is the Information
Technology (IT).

Any BPR effort that fails to understand the importance of IT, and
goes through the pre-BPR analysis and planning phases without
considering the various IT options available, and the effort of the
proposed IT solutions on the employees and the organization is
bound to crash during take off.
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ADVANTAGES OF BPR

1. It helps in integrating the various business processes of the
organization.

2. With good ERP package, the organization will be able to achieve
dramatic improvements in areas such as cost, quality, speed,
etc.
Hence, many BPR initiatives are used in ERP implementation.
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MANAGEMENT INFORMATION SYSTEMS (MIS)
The main characteristics of MIS are:

1. MIS supports data processing functions of transaction handling and
record keeping.

2. MIS uses an integrated database and supports a variety of functional
areas.

3. MIS provides operational, tactical and strategic levels of organization
with timely, structured information.

4. MIS is flexible and can adapt to the changing needs of the
organization.
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DEFINITION :
MIS is a computer based system that optimizes the collection, collation,
transfer and presentation of information throughout an organization, through an
integrated structure of databases and information flow.
Comparison of MIS vs DPS
MIS DPS(DATA PROCESSING SYSTEM)
1
It uses an integrated database. 1 It does not use an integrated database.
2
It provides greater flexibility to the
management
2 It provides no such flexibility
3
Integrates the information flow
between functional areas.
3 DPS tends to support a single functional area.
4
Focus on information needs of all
levels of management
4 DPS focus on departmental-level support
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DECISION SUPPORT SYSTEMS (DSS)
Managers spend a lot of time and effort in gathering and analyzing
information before making decisions. Decision support systems
were created to assist managers in this task.

A DSS can help close this gap and allow managers to improve the
quality of their decisions.

To do this, the DSS hardware and software employ the latest
technological innovations, planning and forecasting models, 4th
generation languages and even artificial intelligence.
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DEFINITION:
Decision support systems are interactive information systems that
rely on an integrated set of user-friendly software and hardware tools, to
produce and present information targeted to support management in the
decision making process.


The main characteristics of a DSS are:

1.A DSS is designed to address semi-structured and unstructured
problems.

2.The DSS mainly supports decision-making at the top
management level.

3.DSS is interactive, user-friendly and can be used by the decision
maker with little or no assistance from a computer professional.

4.DSS makes general purpose models, simulation capabilities and
other analytical tools available to the decision maker.

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Comparison of DSS vs MIS
DSS MIS
1
It focuses on decision
making.
1 It emphasizes on planning
reports on a variety of
subjects.
2
Quite unstructured and is
available on request.
2 It is standard, scheduled,
structured and routine.
3
It is immediate and user-
friendly.
3 It is constrained by the
organizational system.
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EXECUTIVE INFORMATION SYSTEMS (EIS)

Top level executives and decision makers face many problems and
pressures. They have to make the right decisions at the right time to take
the company forward.
An EIS is concerned with how the decisions affect an entire organization.
An EIS takes the following into considerations:
The overall vision and mission of the company and the company goals.
Strategic planning and objectives.
Organizational structure.
Crisis management/ contingency planning.
Strategic control and monitoring of overall operations.
Successful EIS are easy to use, flexible and customizable and use the latest
technological innovations.
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DEFINITION:
EIS is a decision support system especially made for senior level
executives.
DATA WAREHOUSING


1. If operational data is kept in the database of the ERP system, it
can create a lot of problems.

2. As time passes, the amount of data will increase and this will
affect the performance of the ERP system.

3. However once the operational use of the data is over, it should
be removed from the operational databases.

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IMPORTANCE OF DATA WAREHOUSING

The primary concept of the data warehousing is that
the data stored for the business analysis can be
accessed most effectively by separating it from the
data in operational systems.
The most important reason for separating data for
business analysis, from the operational data, has
always been the potential performance degradation
on the operational system that can result from the
analysis processes.
High performance and quick response time is almost
universally critical for operational system.
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DATA MINING
DEFINITION
Data mining is the process of identifying valid, novel,
potentially useful and ultimately comprehensible
information from databases that is used to make
crucial business decisions.

The main reason for needing automated computer
systems for intelligent data analysis is the enormous
volume of existing and newly appearing data that
require processing.

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The amount of data accumulated each day by various businesses,
scientific and governmental organizations around the world is
daunting.

Research organizations, academic institutions and commercial
organizations create and store huge amounts of data each day.

It becomes impossible for human analysts to cope with such
overwhelming amounts of data.

Two other problems that surface when human analysts process
data are:

i. The inadequacy of the human brain when searching for
complex multi-factorial dependencies in the data.

ii. The lack of objectiveness in analyzing the data
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ADVANTAGES

A human expert is always a hostage of the previous
experience of the investigating other system.
Sometimes this helps, sometimes this hurts, but it is
almost impossible to get rid of this fact.
While data mining does not eliminate human
participation in solving the task completely, it
significantly simplifies the job and allows an analyst,
who is not a professional in statistics and
programming to manage the process of extracting
knowledge from data.
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ON-LINE ANALYTICAL PROCESSING (OLAP)
Fast : means that the system is targeted to deliver most responses to
users within about 5 seconds, with the simplest analysis not taking
more than one second and very few taking more than 20 seconds.
Analysis: means that the system can cope with any business logic and
statistical analysis that is relevant for the application and the user,
and keep it easy enough for the target user.
Shared: means that the system implements all the security
requirements for confidentiality and if multiple write access is
needed, concurrent update locking at an appropriate level.
Multi-dimensional: means that the system must provide a multi-
dimensional conceptual view of the data, including full support for
hierarchies and multiple hierarchies.
Information: is refined data that is accurate, timely and relevant to
the user.
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DEFINITION
OLAP can be defined i Fast Analysis of Shared Multi-dimensional Information.

Importance

OLAP technology is being used in an increasingly wide range
of applications.
The most common are sales and marketing analysis, financial
reporting and consolidation and budgeting and planning.
OLAP is being used for applications such as product
profitability and pricing analysis; activity based coating;
manpower planning and quality analysis or for that matter
any management system that requires a flexible, top down
view of an organization.
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SUPPLY CHAIN MANAGEMENT(SCM)
1. Supply chains exist in both service and manufacturing
organizations, although the complexity of the chain may vary
greatly from industry to industry and firm to firm.
2. Traditionally, marketing, distribution, planning, manufacturing
and the purchasing organizations along the supply chain operated
independently.
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DEFINITION:
A supply chain is a network of facilities and distribution
options that performs the function of procurement of materials,
transformation of these materials into intermediate and
finished products and the distribution of these finished
products to the customers.

3. These organizations have their own objectives which
are often conflicting.

4. There is a need for a mechanism through which these
different functions can be integrated together.

5. Supply chain management is a strategy through which
such integration can be achieved.
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PRODUCT LIFE CYCLE
MANAGEMENT(PLM)
PRODUCT LIFE CYCLE PHASES
PRODUCTION DEVELOPMENT
MARKET INTRODUCTION
GROWTH, MATURITY,DELINE
ADV
REDUCE TIME TO MARKET
OPTIMALLY DEPLOY ENGG(CAD)
REDUCE PRODUCTT DEVELOPMENT COST
Get product design change quickly
Customer relationship management
Method and technologies used by companies
to manage their clients
Corporate level strategy
CRM packages(include policies, process,
employee training,marketing)
Track customer interest and requirement
Geographical information systems(GIS)
Computer based mapping and analyzing
Integrated and common database
Use individuals and any organization like
What is a Data Warehouse?
A single, complete and consistent store of data
obtained from a variety of different sources
made available to end users in a what they can
understand and use in a business context.


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What are the users saying...
Data should be integrated across the enterprise
Summary data has a real value to the
organization
Historical data holds the key to understanding
data over time
What-if capabilities are required
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What is Data Warehousing?
A process of transforming
data into information and
making it available to users
in a timely enough manner
to make a difference

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Data
Information
Evolution
60s: Batch reports
hard to find and analyze information
inflexible and expensive, reprogram every new request
70s: Terminal-based DSS and EIS (executive information
systems)
still inflexible, not integrated with desktop tools
80s: Desktop data access and analysis tools
query tools, spreadsheets, GUIs
easier to use, but only access operational databases
90s: Data warehousing with integrated OLAP engines and
tools
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Application Areas
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Industry Application
Finance Credit Card Analysis
Insurance Claims, Fraud Analysis
Telecommunication Call record analysis
Transport Logistics management
Consumer goods promotion analysis
Data Service providers Value added data
Utilities Power usage analysis
Application-Orientation vs. Subject-
Orientation
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Application-Orientation
Operational
Database
Loans
Credit
Card
Trust
Savings
Subject-Orientation
Data
Warehouse
Customer
Vendor
Product
Activity
OLTP vs. Data Warehouse
OLTP systems are tuned for known transactions and
workloads while workload is not known a priori in a
data warehouse
Special data organization, access methods and
implementation methods are needed to support data
warehouse queries (typically multidimensional
queries)
e.g., average amount spent on phone calls between 9AM-
5PM in Pune during the month of December

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OLTP vs Data Warehouse
OLTP
Application Oriented
Used to run business
Detailed data
Current up to date
Isolated Data
Repetitive access
Clerical User
Warehouse (DSS)
Subject Oriented
Used to analyze business
Summarized and refined
Snapshot data
Integrated Data
Ad-hoc access
Knowledge User (Manager)
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OLTP vs Data Warehouse
OLTP
Performance Sensitive
Few Records accessed at a
time (tens)

Read/Update Access

No data redundancy
Database Size 100MB -100
GB
Data Warehouse
Performance relaxed
Large volumes accessed at a
time(millions)
Mostly Read (Batch Update)
Redundancy present
Database Size 100 GB -
few terabytes
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OLTP vs Data Warehouse
OLTP
Transaction throughput
is the performance
metric
Thousands of users
Managed in entirety

Data Warehouse
Query throughput is the
performance metric
Hundreds of users
Managed by subsets
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The ETL Process
Capture
Scrub or data cleansing
Transform
Load and Index
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ETL = Extract, transform, and load
Steps in data reconciliation
Static extract = capturing a
snapshot of the source data at a
point in time
Incremental extract = capturing
changes that have occurred since
the last static extract
Capture = extractobtaining a
snapshot of a chosen subset of the
source data for loading into the data
warehouse
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Steps in data reconciliation (continued)
Scrub = cleanseuses pattern
recognition and AI techniques to
upgrade data quality
Fixing errors: misspellings,
erroneous dates, incorrect field
usage, mismatched addresses,
missing data, duplicate data,
inconsistencies
Also: decoding, reformatting, time
stamping, conversion, key
generation, merging, error
detection/logging, locating missing
data
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Steps in data reconciliation (continued)
Transform = convert data from
format of operational system to
format of data warehouse
Record-level:
Selection data partitioning
Joining data combining
Aggregation data summarization
Field-level:
single-field from one field to one
field
multi-field from many fields to one,
or one field to many
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Steps in data reconciliation (continued)
Load/Index= place transformed data
into the warehouse and create
indexes
Refresh mode: bulk rewriting of
target data at periodic intervals
Update mode: only changes in
source data are written to data
warehouse
Data Transformation
Data transformation is the component of data
reconciliation that converts data from the format
of the source operational systems to the format
of enterprise data warehouse.
Data transformation consists of a variety of
different functions:
record-level functions,
field-level functions and
more complex transformation.
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Definition
Data Warehouse:
A subject-oriented, integrated, time-variant, non-
updatable collection of data used in support of
management decision-making processes
Subject-oriented: e.g. customers, patients, students,
products
Integrated: Consistent naming conventions, formats,
encoding structures; from multiple data sources
Time-variant: Can study trends and changes
No updatable: Read-only, periodically refreshed
Data Warehousing:
The process of constructing and using a data
warehouse

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Data WarehouseSubject-Oriented
- Organized around major subjects, such as customer,
product, sales.
- Focusing on the modeling and analysis of data for
decision makers, not on daily operations or
transaction processing.
- Provide a simple and concise view around particular
subject issues by excluding data that are not useful in
the decision support process.
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Data Warehouse - Integrated
Constructed by integrating multiple,
heterogeneous data sources
relational databases, flat files, on-line transaction
records
Data cleaning and data integration techniques are
applied.
Ensure consistency in naming conventions, encoding
structures, attribute measures, etc. among different
data sources
E.g., Hotel price: currency, tax, breakfast covered, etc.
When data is moved to the warehouse, it is converted.
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Data Warehouse -Time Variant
The time horizon for the data warehouse is
significantly longer than that of operational
systems.
Operational database: current value data.
Data warehouse data: provide information from a
historical perspective (e.g., past 5-10 years)
Every key structure in the data warehouse
Contains an element of time, explicitly or implicitly
But the key of operational data may or may not contain
time element.
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Data Warehouse - Non Updatable
A physically separate store of data
transformed from the operational
environment.
Operational update of data does not occur in
the data warehouse environment.
Does not require transaction processing, recovery,
and concurrency control mechanisms.
Requires only two operations in data accessing:
initial loading of data and access of data.
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Need for Data Warehousing
Integrated, company-wide view of high-quality
information (from disparate databases)
Separation of operational and informational systems and
data (for improved performance)
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Table 11-1: comparison of operational and informational systems
Primary goal of DW
Functions of integration and transformation
Reformatting, recalculation
Adding time elements
Identifying default values
Supplying logic to choose between multiple
data source
Summarizing, tallying and merging data from
multiple source
Advantage of Data Warehouse
More cost effective decision making
Better enterprise intelligence
Enhanced customer service
Business reengineering
Information system reengineering
Obstacles of successful DW projects
Complex extract, transformation and load
characteristics
Source Vs Target
data transformation
Transaction based loading
Immense volumes of daily data
Load methodology( control and audit)
Data warehouse recovery
Datawarehouse validations

Mistakes to avoid in DW
Starting the project without right sponsorship
and top management
Setting expectation
Promotion the values of DW
Loading the warehouse
Believing the DW
Choosing the DW manager
Focusing on traditional internal records
Mistakes to avoid in DW
Delivering data with overlapping and
confusing definitions
Believing the performance ,capacity and
scalability promise
Believing that once the datawarehouse is up
and running until your problems are finished
Use of a DW
Standard report and queries
Queries against summarized data
Data mining
Interface with other datawarehouses
Why Mine Data? Commercial
Viewpoint
Lots of data is being collected and warehoused
Web data, e-commerce
purchases at department/grocery stores
Bank/Credit Card transactions
Computers have become cheaper and more
powerful
Competitive Pressure is Strong Provide better,
customized services for an edge
Why Mine Data? Scientific Viewpoint
Data collected and stored at enormous speeds
(GB/hour)
remote sensors on a satellite
telescopes scanning the skies
microarrays generating gene expression data
scientific simulations generating terabytes of data
Traditional techniques infeasible for raw data
Data mining may help scientists
in classifying and segmenting data
in Hypothesis Formation

What is Data Mining?
Many Definitions
Non-trivial extraction of implicit, previously
unknown and potentially useful information
from data
Exploration & analysis, by automatic or semi-
automatic means, of large quantities of data
in order to discover
meaningful patterns

What is (not) Data Mining?
Look up phone number in phone directory
Query a Web search engine for information
about Amazon
What is Data Mining?
Certain names are more prevalent in certain US
locations
Group together similar documents returned by
search engine according to
their context
Origins of Data Mining
Draws ideas from machine learning/AI, pattern
recognition, statistics, and database systems
Traditional Techniques may be unsuitable due
to
Enormity of data
High dimensionality of data
Heterogeneous,
distributed nature of data

3 Steps Data Mining Process
Stage 1: Exploration. This stage usually starts with
data preparation which may involve cleaning data,
data transformations, selecting subsets of records
Stage 2: Model building and validation. This stage
involves considering various models and choosing the
best one based on their predictive performance
Stage 3: Deployment. That final stage involves using
the model selected as best in the previous stage and
applying it to new data in order to generate
predictions or estimates of the expected outcome

Verification Versus Discovery
In the past, decision support activities were
primarily based on the concept of verification.
This required a great deal of prior knowledge
on the decision-makers part in order to verify
a suspected relationship.
With the advance of technology, the concept
of verification began to turn into discovery.


Verification Versus Discovery
Define the business problem and obtain the
data to study it.
Use data mining software to model the
problem.
Mine the data to search for patterns of
interest.
Review the mining results and refine them
by respecifying the model.
Once validated, make the model available to
other users of the DW.

Data Mining Tasks
Prediction Methods
Use some variables to predict unknown or
future values of other variables.
Description Methods
Find human-interpretable patterns that
describe the data.
Data Mining Tasks
Classification [Predictive]
Clustering [Descriptive]
Association Rule Discovery [Descriptive]
Sequential Pattern Discovery [Descriptive]
Regression [Predictive]
Deviation Detection [Predictive]

Some of the tools used for data mining
are:
Artificial neural networks - Non-linear predictive models that learn
through training and resemble biological neural networks in structure.
Decision trees - Tree-shaped structures that represent sets of decisions.
These decisions generate rules for the classification of a dataset.
Rule induction - The extraction of useful if-then rules from data based on
statistical significance.
Genetic algorithms - Optimization techniques based on the concepts of
genetic combination, mutation, and natural selection.

Nearest neighbor - A classification technique that classifies each record
based on the records most similar to it in an historical database.
Case based reasoning
Non-linear regression methods

Reasons for the growing popularity of
Data Mining

Growing Data Volume
Limitations of Human Analysis
Low Cost of Machine Learning



ADVANTAGES OF DATA MINING
Automated prediction of trends and
behaviors
Automated discovery of previously unknown
pattern
Database can larger both depth and breath
ADVANTAGES OF DATA MINING
Marking/Retailing: Data mining can aid direct
marketers by providing them with useful and
accurate trends about their customers
purchasing behavior.
Banking/Crediting: Data mining can assist
financial institutions in areas such as credit
reporting and loan information.
ADVANTAGES OF DATA MINING Cont
Law enforcement: Data mining can aid law enforcers
in identifying criminal suspects as well as
apprehending these criminals by examining trends in
location, crime type, habit, and other patterns of
behaviors.
Researchers: Data mining can assist researchers by
speeding up their data analyzing process; thus,
allowing them more time to work on other
projects.
DISADVANTAGES OF DATA MINING
Privacy Issues: For example, according to
Washing Post, in 1998, CVS had sold their
patients prescription purchases to a different
company
American Express also sold their customers
credit card purchases to another company.
DISADVANTAGES OF DATA MINING
Cont
Security issues: Although companies have a lot of personal
information about us available online, they do not have
sufficient security systems in place to protect that
information.
Misuse of information: Some of the company will answer
your phone based on your purchase history. If you have spent
a lot of money or buying
a lot of product from one company, your call will be answered
really soon. So you should not think that your call is really
being answer in the order in which it was receive.
Sample Data Mining Plan: Example
Bank concerned about attrition for its Demand Deposit Accounts
identify customers likely to leave, with sufficient warning of impending
attrition to allow for some intervention (signature for impending attrition?)
Hypothesis testing
transaction data may be insufficient
explore ideas about why customers might leave, and how to identify
e.g. Regular bi-weekly direct deposit ceases: new job and no longer using direct
deposits
got married and spouse used another bank: reduction in balance and number if
transactions, last-name change request
Data requirements
Careful attention to data generated by internal decisions:
bank started charging for debit card transactions that were free
bank turned down loan or credit increase request
Is the data available?
Preparing data for analysis
Exploratory analysis of data
queries, OLAP, hypothesis testing
association rules
Knowledge Discovery plan
classes of customers rather than an overall signature of attrition?
Deviation from normal behavior indicating attrition potential

Preparing data for analysis
data organized over time-windows
demographic profiles
Clustering
unsupervised
models for different clusters
Example:improving direct mail
responses
Direct mailing for home equity line of credit
(HELOC)
prospects are existing demand deposit account
(DDA) customers
use info. on lifetime value of existing customers to
derive model to predict customers likely to be the
most profitable long-term prospects




DDA
customers
(~250K cases)
HELOC
customers
~ 40K cases
Example
Data
DDA history of loan balances over 3,6,9,12,18 months,
returned checks
demographic data (age, income, length of residence, etc.),
both internal and external
property data sourced externally (home purchase price,
loan-to-value ratio, etc.)
credit worthiness data
response to previous mailings
120 variables selected
less than half the DDAs had history records; missing fields;
(45 K cases remaining for use -- prospects database)
exclude variables like sex, race, age (legal restrictions)
Neural network (radial basis function) model for value
prediction
Example
Training data
randomly sample from prospects database;
weighted to include more responders than present
in actual data
Validation
rank on likelihood of response
consider top and bottom 10% -- use visualization,
decision tree to understand rationale for obtained
classification
Testing
sample from prospects database; unweighted with
normal proportion of responders and non-
responders
gains (lift) chart
Example: Lift analysis
Decile
Number
of
Customers
Number
of
Responses
Decile
Response
Rate
Cum
Response
Rate
Cum
Response
Lift
top 4,617 865 18.7% 18.7% 411
2 4,617 382 8.3% 13.5% 296
3 4,617 290 6.3% 11.1% 244
4 4,617 128 2.8% 9.0% 198
5 4,617 97 2.1% 7.6% 167
6 4,617 81 1.8% 6.7% 146
7 4,617 79 1.7% 5.9% 130
8 4,617 72 1.6% 5.4% 118
9 4,617 67 1.5% 5.0% 109
bottom 4,617 43 0.9% 4.6% 100
TOTAL 46,170 2,104 4.6%
Online Analytical Processing (OLAP)
OLAP designates a category of
applications and technologies that allow the
collection, storage, manipulation and
reproduction of multidimensional data, with
the goal of analysis.
The process of converting raw data into
business information through
multidimensional analysis



What and Why OLAP?

OLAP is the term that describes a technology that uses multi-
dimensional view of aggregate data to provide quick access to
strategic information for the purposes of advanced analysis.
OLAP enables users to gain a deeper understanding and
knowledge about various aspects of their corporate data through
fast, consistent, interactive access to a variety of possible views
of data.
While OLAP systems can easily answer who? and what?
questions, it is easier ability to answer what if? and why? type
questions that distinguishes them from general-purpose query
tools.
The types of analysis available from OLAP range from basic
navigation and browsing (referred to as slicing and dicing) , to
calculations, to more complex analysis such as time series and
complex modeling.
OLAP, by Dr. Khalil 119
OLAP
Supports management-critical tasks through
analytical investigation of complex data associations
captured in data warehouses:

Consolidation is the aggregation or roll-up of
data.
Drill-down allows the user to see data in selective
increasing levels of detail.
Slicing and Dicing enables the user to examine
data from different viewpoints often performed
along a time axis to depict trends and patterns.
OLTP (on-line transaction processing)
Major task of traditional relational DBMS
Day-to-day operations: purchasing, inventory, banking, manufacturing,
payroll, registration, accounting, etc.
OLAP (on-line analytical processing)
Major task of data warehouse system
Data analysis and decision making
Distinct features (OLTP vs. OLAP):
User and system orientation: customer vs. market
Data contents: current, detailed vs. historical, consolidated
Database design: ER + application vs. star + subject
View: current, local vs. evolutionary, integrated
Access patterns: update vs. read-only but complex queries

OLTP vs. OLAP
OLTP OLAP
users clerk, IT professional knowledge worker
function day to day operations decision support
DB design application-oriented subject-oriented
data current, up-to-date
detailed, flat relational
isolated
historical,
summarized, multidimensional
integrated, consolidated
usage repetitive ad-hoc
access read/write
index/hash on prim. key
lots of scans
unit of work short, simple transaction complex query
# records accessed tens millions
#users thousands hundreds
DB size 100MB-GB 100GB-TB
metric transaction throughput query throughput, response


122
February 18, 2014 123
Data Warehouse: A Multi-Tiered Architecture
Data
Warehouse
Extract
Transform
Load
Refresh
OLAP Engine
Analysis
Query
Reports
Data mining
Monitor
&
Integrator
Metadata
Data Sources
Front-End Tools
Serve
Data Marts
Operational
DBs
Other
sources
Data Storage
OLAP Server
OLAP Applications
Finance: Budgeting, activity-based costing,
financial performance analysis, and financial
modeling.
Sales: Sales analysis and sales forecasting.
Marketing: Market research analysis, sales
forecasting, promotions analysis, customer
analysis, and market/customer segmentation.
Manufacturing: planning and defect analysis.
Production
OLAP, by Dr. Khalil 124
Features of OLAP
Multi-dimensional views of data
Calculation-intensive capabilities
Time intelligence


Representation of Multi-Dimensional Data
OLAP database servers use multi-dimensional structures to store
data and relationships between data.
Multi-dimensional structures are best-visualized as cubes of
data, and cubes within cubes of data. Each side of a cube is a
dimension.
OLAP, by Dr. Khalil 126
Representation of Multi-Dimensional Data
Multi-dimensional databases are a compact and easy-to-understand way of
visualizing and manipulating data elements that have many inter-
relationships.
The cube can be expanded to include another dimension, for example, the
number of sales staff in each city.
The response time of a multi-dimensional query depends on how many cells
have to be added on-the-fly.
As the number of dimensions increases, the number of cubes cells increases
exponentially.

OLAP, by Dr. Khalil 127
Representation of Multi-Dimensional Data
Multi-dimensional OLAP supports common analytical
operations, such as:
Consolidation: involves the aggregation of data such as
roll-ups or complex expressions involving interrelated
data. Foe example, branch offices can be rolled up to
cities and rolled up to countries.
Drill-Down: is the reverse of consolidation and involves
displaying the detailed data that comprises the
consolidated data.
Slicing and dicing: refers to the ability to look at the data
from different viewpoints. Slicing and dicing is often
performed along a time axis in order to analyze trends
and find patterns.

OLAP, by Dr. Khalil 128
OLAP Benefits
Increased productivity of business end-users, IT developers,
and consequently the entire organization.
Reduced backlog of applications development for IT staff by
making end-users self-sufficient enough to make their own
schema changes and build their own models.
Retention of organizational control over the integrity of
corporate data as OLAP applications are dependent on data
warehouses and OLTP systems to refresh their source data
level.
Reduced query drag and network traffic on OLTP systems or
on the data warehouse.
Improved potential revenue and profitability by enabling
the organization to respond more quickly to market
demands.
OLAP, by Dr. Khalil 129
OLAP Tools - Features
In 1993, E.F. Codd formulated twelve rules as the basis for
selecting OLAP tools:
Multi-dimensional conceptual view
Transparency
Accessibility
Consistent reporting performance
Client-server architecture
Generic dimensionality
Dynamic sparse matrix handling
Multi-user support
Unrestricted cross-dimensional operations
Intuitive data manipulation
Flexible reporting
Unlimited dimensions and aggregation levels

OLAP, by Dr. Khalil 130
Types OLAP
Multidimensional
Relational
Hybrid
Desktop OLAP
Real-Time OLAP
Web-based OLAP


Multi-dimensional OLAP (MOLAP)
MOLAP tools use specialized data structures and multi-dimensional database
management systems (MDDBMS) to organize, navigate, and analyze data.
To enhance query performance the data is typically aggregated and stored according to
predicted usage.
MOLAP data structures use array technology and efficient storage techniques that
minimize the disk space requirements through sparse data management.
The development issues associated with MOLAP:
Only a limited amount of data can be efficiently stored and analyzed.
Navigation and analysis of data are limited because the data is designed according
to previously determined requirements.
MOLAP products require a different set of skills and tools to build and maintain the
database.
OLAP, by Dr. Khalil 132
Advantages of MOLAP

Fast query performance due to optimized storage,
multidimensional indexing and caching.
Smaller on-disk size of data compared to data stored in
relational database due to compression techniques.
Automated computation of higher level aggregates of the
data.
It is very compact for low dimension data sets.
Array models provide natural indexing.
Effective data extraction achieved through the pre-
structuring of aggregated data.

Disadvantages of MOLAP

Within some MOLAP Solutions the processing step (data
load) can be quite lengthy, especially on large data
volumes. This is usually remedied by doing only
incremental processing, i.e., processing only the data
which have changed (usually new data) instead of
reprocessing the entire data set.
MOLAP tools traditionally have difficulty querying models
with dimensions with very high cardinality (i.e., millions
of members).

cont
Some MOLAP products have difficulty updating and
querying models with more than ten dimensions. This
limit differs depending on the complexity and cardinality
of the dimensions in question. It also depends on the
number of facts or measures stored. Other MOLAP
products can handle hundreds of dimensions.
Some MOLAP methodologies introduce data redundancy.

Relational OLAP
ROLAP works directly with relational databases. The base
data and the dimension tables are stored as relational
tables and new tables are created to hold the aggregated
information.

ROLAP tools do not use pre-calculated data cubes.

ROLAP also has the ability to drill down to the lowest
level of detail in the database.
Relational OLAP (ROLAP)
ROLAP is the fastest-growing type of OLAP tools.
ROLAP supports RDBMS products through the use of a metadata layer, thus
avoiding the requirement to create a static multi-dimensional data structure.
This facilitates the creation of multiple multi-dimensional views of the two-
dimensional relation.
To improve performance, some ROLAP products have enhanced SQL engines
to support the complexity of multi-dimensional analysis, while others
recommend, or require, the use of highly denormalized database designs such
as the star schema.
OLAP, by Dr. Khalil 137
cont
The development issues associated with ROLAP
technology:
Performance problems associated with the processing
of complex queries that require multiple passes
through the relational data.
Development of middleware to facilitate the
development of multi-dimensional applications.
Development of an option to create persistent multi-
dimensional structures, together with facilities o assist
in the administration of these structures.

Advantages of ROLAP
ROLAP is considered to be more scalable in handling
large data volumes, especially models with dimensions
with very high cardinality (i.e., millions of members).
With a variety of data loading tools available, and the
ability to fine tune the ETL code to the particular data
model, load times are generally much shorter than with
the automated MOLAP loads.
The data are stored in a standard relational database and
can be accessed by any SQL reporting tool (the tool does
not have to be an OLAP tool).

cont
ROLAP tools are better at handling non-aggregatable facts
(e.g., textual descriptions). MOLAP tools tend to suffer from
slow performance when querying these elements.
By decoupling the data storage from the multi-dimensional
model, it is possible to successfully model data that would not
otherwise fit into a strict dimensional model.
The ROLAP approach can leverage database authorization
controls such as row-level security, whereby the query results
are filtered depending on preset criteria applied, for example,
to a given user or group of users (SQL WHERE clause).

Disadvantages of ROLAP

There is a consensus in the industry that ROLAP tools have
slower performance than MOLAP tools. However, see the
discussion below about ROLAP performance.
The loading of aggregate tables must be managed by custom
ETL code. The ROLAP tools do not help with this task. This
means additional development time and more code to
support.
When the step of creating aggregate tables is skipped, the
query performance then suffers because the larger detailed
tables must be queried. This can be partially remedied by
adding additional aggregate tables, however it is still not
practical to create aggregate tables for all combinations of
dimensions/attributes.
cont
ROLAP relies on the general purpose database for querying and
caching, and therefore several special techniques employed by
MOLAP tools are not available (such as special hierarchical
indexing). However, modern ROLAP tools take advantage of
latest improvements in SQL language such as CUBE and ROLLUP
operators, DB2 Cube Views, as well as other SQL OLAP
extensions. These SQL improvements can mitigate the benefits
of the MOLAP tools.
Since ROLAP tools rely on SQL for all of the computations, they
are not suitable when the model is heavy on calculations which
don't translate well into SQL. Examples of such models include
budgeting, allocations, financial reporting and other scenarios.


Hybrid OLAP (HOLAP)
HOLAP tools provide limited analysis capability, either directly
against RDBMS products, or by using an intermediate MOLAP
server.
HOLAP tools deliver selected data directly from DBMS or via
MOLAP server to the desktop (or local server) in the form of data
cube, where it is stored, analyzed, and maintained locally is the
fastest-growing type of OLAP tools.
OLAP, by Dr. Khalil 143
cont
The issues associated with HOLAP tools:
The architecture results in significant data
redundancy and may cause problems for networks
that support many users.
Ability of each user to build a custom data cube
may cause a lack of data consistency among users.
Only a limited amount of data can be efficiently
maintained.

Hybrid

There is no clear agreement across the industry as to
what constitutes "Hybrid OLAP", except that a database
will divide data between relational and specialized
storage.

HOLAP addresses the shortcomings of MOLAP and
ROLAP by combining the capabilities of both approaches.
HOLAP tools can utilize both pre-calculated cubes and
relational data sources

Desktop OLAP (DOLAP)
DOLAP tools store the
OLAP data in client-based
files and support multi-
dimensional processing
using a client multi-
dimensional engine.
DOLAP requires that
relatively small extracts of
data are held on client
machines. This data may
be distributed in advance
or on demand (possibly
through the Web).
OLAP, by Dr. Khalil 146
cont
The administration of a DOLAP database is typically
performed by a central server or processing routine that
prepares data cubes or sets of data for each user.
The development issues associated with DOLAP are as
follows:
Provision of appropriate security controls to support
all parts of the DOLAP environment.
Reduction in the effort involved in deploying and
maintaining the DOLAP tools.
Current trends are towards thin client machines.

RTOLAP - Real Time OLAP

A Real Time OLAP Server will calculate the
values on the fly, when they are required. The
essential characteristic of RTOLAP system is in
holding all the data in RAM.
Comparison

Some MOLAP implementations are prone to database
explosion, a phenomenon causing vast amounts of
storage space to be used by MOLAP databases when
certain common conditions are met: high number of
dimensions, pre-calculated results and sparse
multidimensional data.
MOLAP generally delivers better performance due to
specialized indexing and storage optimizations. MOLAP
also needs less storage space compared to ROLAP
because the specialized storage typically includes
compression techniques.
[15]

ROLAP is generally more scalable. However, large volume
pre-processing is difficult to implement efficiently so it is
frequently skipped. ROLAP query performance can
therefore suffer tremendously.
Since ROLAP relies more on the database to perform
calculations, it has more limitations in the specialized
functions it can use.
HOLAP encompasses a range of solutions that attempt to
mix the best of ROLAP and MOLAP. It can generally pre-
process swiftly, scale well, and offer good function
support.


OLAP Server Architectures
Relational OLAP (ROLAP)
Use relational or extended-relational DBMS to store and manage
warehouse data and OLAP middle ware
Include optimization of DBMS backend, implementation of aggregation
navigation logic, and additional tools and services
Greater scalability
Multidimensional OLAP (MOLAP)
Sparse array-based multidimensional storage engine
Fast indexing to pre-computed summarized data
Hybrid OLAP (HOLAP) (e.g., Microsoft SQLServer)
Flexibility, e.g., low level: relational, high-level: array
Specialized SQL servers (e.g., Redbricks)
Specialized support for SQL queries over star/snowflake schemas
February 18, 2014 Data Mining: Concepts and Techniques 151
What is a Supply Chain?
A supply chain is the system of organizations,
people, activities, information and resources
involved in moving a product or service from
supplier to customer.
Supply chain activities transform raw materials
and components into a finished product that
is delivered to the end customer.



Supplier Manufacturer
Distributor Retailer Customers
What is Supply Chain Management
(SCM) ?
SCM is a set of approaches utilized to efficiently
integrate suppliers, manufacturers, warehouses,
and stores, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to
minimize systemwide costs while satisfying
service level requirements.
Major segments of the Enterprise Application
industry

Enterprise Application


ERP SCM


SCP
SCE

SCPSupply Chain Planning
SCESupply Chain Execution
Origins of Supply Chain Management
1950s & 1960s
U.S. manufacturers focused on mass production techniques as
their principal cost reduction and productivity improvement
strategies
1960s-1970s
Introduction of new computer technology lead to
development of Materials Requirements Planning (MRP) and
Manufacturing Resource Planning (MRPII) to coordinate
inventory management and improve internal communication
Origins of Supply Chain Management
(Cont.)
1980s & 1990s
Intense global competition led U.S.
manufacturers to adopt
Supply Chain Management along with
Just-In-Time (JIT),
Total Quality Management (TQM), and
Business Process Reengineering (BPR) practices
Origins of Supply Chain Management Cont.
2000s and Beyond
Industrial buyers will rely more on third-party
service providers (3PLs) to improve purchasing and
supply management

Wholesalers/retailers will focus on transportation
and logistics more & refer to these as quick
response, service response logistics, and integrated
logistics
157
The Foundations of Supply Chain
Management



Supply
Management
Supplier management, supplier evaluation,
supplier certification, strategic partnerships
Operations
Demand management, MRP, ERP, inventory
visibility, JIT , TQM ( Six Sigma)
Distribution
Transportation management, customer
relationship management, distribution network,
perfect order fulfillment, global supply chains,
service response logistics
Integration Process integration, performance measurement
158
Important Elements of Supply Chain
Management (Cont.)
Operations Trends:

Demand management- match
demand to available capacity
Linking buyers & suppliers via MRP
and ERP systems
Use JIT to improve the pull of
materials to reduce inventory levels
Employ TQM to improve quality
compliance among suppliers

159
Important Elements of Supply Chain
Management (Cont.)
Distribution Trends:
Transportation management- tradeoff decisions
between cost & timing of delivery/customer
service via trucks, rail, water & air
Customer relationship management- strategies
to ensure deliveries, resolve complaints, improve
communications, & determine service
requirements
160
Important Elements of Supply Chain
Management (Cont.)
Integration Trends:
Supply Chain Process Integration- when supply
chain participants work for common goals.
Requires intra-firm functional integration. Based
on efforts to change attitudes & adversarial
relationships
Supply Chain Performance Measurement- Crucial
for firms to know if procedures are working
2009 South-Western, a
division of Cengage
Learning
161
Current Trends in Supply Chain Management
Expanding the Supply Chain
U.S. firms are expanding partnerships and building
facilities in foreign markets
The expansion involves:
breadth- foreign manufacturing, office & retail sites,
foreign suppliers & customers
depth- second and third tier suppliers & customers
2009 South-Western, a
division of Cengage
Learning
162
Current Trends in Supply Chain
Management (Cont.)
Increasing Supply Chain Responsiveness
Firms will increasingly need to be more flexible
and responsive to customer needs
Supply chains will need to benchmark industry
performance and meet and improve on a
continuous basis
Responsiveness improvement will come from more
effective and faster product & service delivery
systems
163
Current Trends in Supply Chain
Management (Cont.)
The Greening of Supply Chains
- Producing, packaging, moving, storing, delivering
and other supply chain activities can be harmful
to the environment
Supply chains will work harder to reduce
environmental degradation
Large majority (75%) of U.S. consumers influenced
by a firms environmental friendliness reputation
Recycling and conservation are a growing
alternative in response to high cost of natural
resources
164
Current Trends in Supply Chain Management-
Cont.
Reducing Supply Chain Costs
Cost reduction achieved through:
Reduced purchasing costs
Reducing waste
Reducing excess inventory, and
Reducing non-value added activities
Continuous Improvement through
Benchmarking- improve over competitors performance
Trial & error
Increased knowledge of supply chain processes
165
Sharing data electronically-Adv
Lower inventories
Lower financing cost
Shorter receivable cycles
Faster response to market change
Greater satisfaction and loyalty among
customers
Greater profitability
Customer sales

Production




Distribution


Customer
relationship
Pushsell from
inventory stock
Goal of even and
stable production


Mass approach


Dealer-owned
E-Automotive
E-automotive Supply Chain
Pullbuild-to-order

Focus on customer
demand, respond with
supply chain flexibility
Fast, reliable, and
customized to get cars
to specific customer
location
Shared by dealers and
manufacturers
Automotive
Past
Supply Chain
Processes
Managing
uncertainty

Procurement



Product
design
Large car
inventory at
dealers
Batch-oriented;
dealers order
based on
allocations
Complex
products dont
match customer
needs
E-Automotive
E-automotive Supply Chain (cont.)
Small inventories with
shared information and
strategically placed parts
inventories
Orders made in real time
based on available-to-
promise information
Simplified products based on
better information about
what customers want
Automotive
Past
Supply
Chain
Processes
Adv of SCM
Supply chain planning and collaboration
Supply chain execution
Supply chain visibility design and analytics
Business benefits
Business Benefits of SCM
Faster response to changes in supply and
demand
Increased customer satisfactions
Compliance with regulatory requirements
Improved cash flow
Higher margins
Greater synchronization with business
priorities
Value vs. Supply Chain
Value chain
every step from raw materials to the eventual end user
ultimate goal is delivery of maximum value to the end user
Supply chain
activities that get raw materials and subassemblies into
manufacturing operation
Terms are used interchangeably
Supply Chain Management Important
Why is supply chain management so important?
To gain efficiencies from procurement, distribution and logistics
To make outsourcing more efficient
To reduce transportation costs of inventories
To meet competitive pressures from shorter development times,
more new products, and demand for more customization
To meet the challenge of globalization and longer supply chains
To meet the new challenges from e-commerce
To manage the complexities of supply chains
To manage the inventories needed across the supply chain


Supply Chain Management

Why is supply chain management difficult?
Different organizations in the supply chain may have different,
conflicting objectives
Manufacturers: long run production, high quality, high productivity, low
production cost
Distributors: low inventory, reduced transportation costs, quick
replenishment capability
Customers: shorter order lead time, high in-stock inventory, large variety
of products, low prices
Supply chains are dynamic - they evolve and change over time
Supply Chain Management - Issues
Strategic, tactical and operating issues
Strategic - long term and dealing with supply chain design
Determining the number, location and capacity of facilities
Make or buy decisions
Forming strategic alliances
Tactical - intermediate term
Determining inventory levels
Quality-related decisions
Logistics decisions
Operating - near term
Production planning and control decisions
Goods and service delivery scheduling
Some make or buy decisions
Supply Chain Management - Issues
Key issues in supply chain management include
Distribution network configuration
How many warehouses do we need?
Where should these warehouses be located?
What should the production levels be at each of our plants?
What should the transportation flows be between plants and
warehouses?
Inventory control
Why are we holding inventory? Uncertainty in customer demand?
Uncertainty in the supply process? Some other reason?
If the problem is uncertainty, how can we reduce it?
How good is our forecasting method?
Supply Chain Management
Distribution strategies
Direct shipping to customers?
Classical distribution in which inventory is held in warehouses and then
shipped as needed?
Cross-docking in which transshipment points are used to take stock from
suppliers deliveries and immediately distribute to point of usage?
Supply chain integration and strategic partnering
Should information be shared with supply chain partners?
What information should be shared?
With what partners should information be shared?
What are the benefits to be gained?
Supply Chain Management
Product design
Should products be redesigned to reduce logistics costs?
Should products be redesigned to reduce lead times?
Would delayed differentiation be helpful?
Information technology and decision-support systems
What data should be shared (transferred)
How should the data be analyzed and used?
What infrastructure is needed between supply chain members?
Should e-commerce play a role?
Customer value
How is customer value created by the supply chain?
What determines customer value? How do we measure it?
How is information technology used to enhance customer value in the
supply chain?
Supply Chain Management
How can you assess how well your supply chain is
performing?
The SCOR model - Supply Chain Operations Reference Model -
developed by the Supply Chain Council (http://www.supply-
chain.org/) can be used to assess performance
SCOR model metrics include:
On-time delivery performance
Lead time for order fulfillment
Fill rate - proportion of demand met from on-hand inventory
Supply chain management cost
Warranty cost as a percentage of revenue
Total inventory days of supply
Net asset turns
Supply Chain Management
Creating an effective supply chain
Develop strategic objectives and tactics
Integrate and coordinate activities in the internal portion of the supply
chain
Coordinate activities with suppliers and customers
Coordinate planning and execution across the supply chain
Consider forming strategic partnerships
SCM - Inventory Management Issues
Manufacturers would like to produce in large lot sizes
because it is more cost effective to do so. The problem,
however, is that producing in large lots does not allow for
flexibility in terms of product mix.
Retailers find benefits in ordering large lots such as quantity
discounts and more than enough safety stock.
The downside is that ordering/producing large lots can result
in large inventories of products that are currently not in
demand while being out of stock for items that are in
demand.

SCM - Inventory Management Issues
Ordering/producing in large lots can also increase the safety
stock of suppliers and its corresponding carrying cost. It can
also create whats called the bullwhip effect.
The bullwhip effect is the phenomenon of orders and
inventories getting progressively larger (more variable)
moving backwards through the supply chain. This is
illustrated graphically on the next slide.
SCM - Inventory Management Issues
Some of the causes of variability that leads to the bullwhip
effect includes:
Demand forecasting Many firms use the min-max inventory policy.
This means that when the inventory level falls to the reorder point
(min) an order is placed to bring the level back to the max , or the
order-up-to-level. As more data are observed, estimates of the mean
and standard deviation of customer demand are updated. This leads
to changes in the safety stock and order-up-to level, and hence, the
order quantity. This leads to variability.
Lead time As lead time increases, safety stocks are increased, and
order quantities are increased. More variability.
SCM - Inventory Management Issues
Batch ordering. Many firms use batch ordering such as with a min-
max inventory policy. Their suppliers then see a large order followed
by periods of no orders followed by another large order. This pattern
is repeated such that suppliers see a highly variable pattern of orders.
Price fluctuation. If prices to retailers fluctuate, then they may try to
stock up when prices are lower, again leading to variability.
Inflated orders. When retailers expect that a product will be in short
supply, they will tend to inflate orders to insure that they will have
ample supply to meet customer demand. When the shortage period
comes to an end, the retailer goes back to the smaller orders, thus
causing more variability.


SCM - Inventory Management Issues
Methods for coping with the bullwhip effect include:
Reducing uncertainty. This can be accomplished by centralizing
demand information.
Reducing variability. This can be accomplished by using a technique
made popular by WalMart and then Home Depot called everyday low
pricing (EDLP). EDLP eliminates promotions as well as the shifts in
demand that accompany them.
Reducing lead time. Order times can be reduced by using EDI
(electronic data interchange).
Strategic partnerships. The use of strategic partnerships can change
how information is shared and how inventory is managed within the
supply chain. These will be discussed later.
SCM - Inventory Management Issues
Other helpful techniques for improving inventory
management include:
Cross-docking. This involves unloading goods arriving from a supplier
and immediately loading these goods onto outbound trucks bound for
various retailer locations. This eliminates storage at the retailers
inbound warehouse, cuts the lead time, and has been used very
successfully by WalMart and Xerox among others.
Delayed differentiation. This involves adding differentiating features
to standard products late in the process. For example, Bennetton
decided to make all of their wool sweaters in undyed yarn and then
dye the sweaters when they had more accurate demand data.
Another term for delayed differentiation is postponement.
SCM - Inventory Management Issues
Direct shipping. This allows a firm to ship directly to customers rather
than through retailers. This approach eliminates steps in the supply
chain and reduces lead time. Reducing one or more steps in the
supply chain is known as disintermediation. Companies such as Dell
use this approach.
Supply Chain Management - Example
Say we get an order from a European retailer to produce
10,000 garments. For this customer we might decide to buy
yarn from a Korean producer but have it woven and dyed in
Taiwan. So we pick the yarn and ship it to Taiwan. The
Japanese have the best zippers so we go to YKK, a big
Japanese zipper manufacturer, and we order the right zippers
from their Chinese plants. the best place to make the
garments is Thailand. So we ship everything there. the
customer needs quick delivery, we may divide the order across
five factories in Thailand. Effectively, we are customizing the
value chain to best meet the customers needs. (Interview of
Victor Fung of Li & Fung in HBR, Sept-Oct 1998.)