Supply Chain Management

Macc. Business Core

Typical Supply Chain Demand Forecast

Distributor

Customer

Ship
Selling Entity

Ship
Warehouse

Change requirement Change due date Forecast error

Buffer between production and demand variation

Factory

Ship

Produce to forecast
Supplier

Ship
Produce to forecast Produce to order with lead time

Lean Enterprise
SUPPLIER FACTORY WAREHOUSE

SELLING ENTITY
Distributor

CUSTOMER

RATE-BASED PLANNING

Objective of Rate-Based Management

Balance demand variation against production, supply, and transportation responsiveness Create product flow across the supply chain by producing and moving the product at a steady rate at all stages in the supply chain.

Benefits of Improved Forecasts for the Supply Chain

Supply Planning
Reduced Safety Stock Requirements Stability of Plan (week to week, month to month)

Procurement
Reduced material costs due to elimination of short-term fluctuations Reduces impact of long lead time items

Manufacturing
Plant efficiencies Reduces lost output due to last minute schedule changes

Logistics
Cost of expedited transportation/deployment

Rate-Based vs. Conventional

Rate-Based Planning and Execution 1. Capacity accommodates demand variation 2. Forecast used for planning 3. Rates are established for end items and component parts. Build to rate. 4. Rates are broadcast throughout supply chain 5. Demand variation is critical to determining capacity bounds 6. Flexible capacity boundaries are planned as a function of lead time Conventional Planning and Execution Inventory accommodates demand variation Forecast used for execution (build ahead) No rates are established for end items or parts. Build to manufacturing orders Orders used to communicate requirements sequentially throughout the supply chain Demand variation unknown Flexible capacity boundaries are not established

Issues to be Addressed
How to level schedules in the face of variation in product demand How to balance demand variation with production, supply, and transportation resources. How to communicate production requirements to all key suppliers and transportation providers so that all parties operate assets efficiently.

How to Reduce Demand Variation

Reduce Promotional Activity Reduce Set Up Times Produce in Small Lots Postponement Strategies Variation Aggregation

Demand Variation Analysis

The demand pattern for Neon, Inc. flashlights is basically level (non-seasonal) with only a 5% annual growth rate. 1. Demand variation as seen by distributor/dealer. Actual Demand Data (Last 26 Weeks) by Channel
Model Distributor #1 Green Yellow Red Average 20.52 10.65 15.10 Std. Deviation 1.94 3.64 1.62 1.82 3.42 1.50

Dealer Network #2 Green 15.63 Yellow 5.99 Red 9.85 Distributor #3 Green Yellow Red

15.84 5.64 5.00

1.62 3.85 1.75

Standard Deviation
Standard Deviation (): a measure of the magnitude of variation around an average value. Xi = individual measurements of a population of measurements (e.g., weekly demand data). X = average value for a population of measurements. standard = deviation
n

X 5 4 6 3 4 22
22 X = 5 = 4.4

i =1

i - X) (X n

standard = deviation =

(5-4.4)2 + (4-4.4)2 + (6-4.4)2 + (3-4.4)2 + (4-4.4)2 5 0.36 + 0.16 + 2.56 + 1.96 + 0.16 5

1.04

= 1.02

Standard Deviation (Cont.)

If we assume the following: 1. Weekly demand data is stable over time (in control). 2. Weekly demand data forms a normal distribution.

X 1 68.26% 2 95.44% 3 99.73%

Combining Demand Across Customers, Products and Locations

In developing an inventory strategy it is necessary to understand variation of demand and of combined demands. For example: How much end item safety stock is required as protection against variation in demand? How much could the inventory be reduced if components were inventoried instead? How much flex capacity would be needed to achieve make-to -order capability? How much could the inventory be reduced by increasing commonality of components. What would be the impact of moving the inventory stored at regional distribution centers to the factory warehouse?

Demand Variation Analysis

2. Demand variation as seen at the factory warehouse.

Actual Demand Variation by Model (Last 10 Weeks)

Model Average % Mix Std. Dev.

Variation as a Percent of Demand

1 Std Dev 2 Std Dev 3 Std Dev

Green Yellow Red

51.99 22.28 29.95

49.9% 21.3% 28.8%

3.11 6.31

5.98 28.42

11.96 56.85

17.95 85.27

NOTE: Average Green Model = Dist. #1 + Dealer Network #2 + Dist. #3 = 20.52 + 15.63 + 15.84 = 51.99 STD Deviation Green Model * Complete the above table for the red model. = (Std Dev #1)2 + (Std Dev #2)2 + (Std Dev #3)2 = (1.94) 2 + (1.62) 2 + (1.82) 2 = 3.11

Demand Variation
We will use this information to: Construct planning bills of materials. Support demand funneling strategies. Support safety stock strategies.

Example Implications
The range of variation in demand for each of 100 individual items might be 50%, while the range of variation for the aggregate demand might be 5%. The former would determine inventory requirements in a make to stock environment. The later would determine inventory requirements in a configure to order environment. Variation of demand common components, as a percentage of the average demand, much smaller than the variation for individual end items. The demand for an item at one warehouse location has a standard deviation of 3. At a second warehouse the same item has a standard deviation 5of 4. If the 3 4 demand for the two warehouse were combined the standard deviation would be . Thus in the first case the safety stock required for three standard deviation protection would be 3*3+3*4= 21. In the second case the required safety stock is reduced to 3*5=15. The demand for end items varies 100%. Thus in a make to inventory environment a high level of safety stock is required. The aggregate demand may vary only 10%, indicative of the amount of flex capacity needed in a make to order environment.
2 2

Learning about Demand Variation

In order to establish rates, it is necessary to know the underlying demand for various commodities and products. The orders you receive may not reflect actual underlying demand. Why?

DEMAND PLANNING & PRODUCT TYPES

BTS
End Items Planning Level

CTO
End Items

Modules

Planning Level

Components Components

PRODUCT TYPES
PRODUCT TYPE Build-to-Stock (BTS) Build-to-Order (BTO) DEFINITION Built prior to demand with a standard bill of material. EXAMPLE Diet Coke

Built to demand Executive Jet requirements with standard Bill of Material. Built to demand with standard modules or components. Higher product variation than BTO. Built from drawings. Unique end products. Desk-top Computer

Configure-to-Order (CTO)

Engineer to Order (ETO)

Custom valve to a space station

Rate Based Scheduling

Weekly Schedule Flexibility
Full Schedule Plan At-Once

New BTO CTO ETO

Wk1

New BTO ETO

Wk2

MPS

New Orders

vs.

CTO Specials

ETO
Wk3

Wk1

Wk2

Wk3

Wk4

Hold for BTOs

CTO

Specials Ds

Customer Demand Profile

Lead Time

Demand
At-Once Order < lead-time

Order outside of lead-time

BTS-FG Kanban BTO/CTO

BTO ETO

Fast Response Product Strategy

In a BTS environment stock must be held for each SKU, however if items held for CTO execution then sum of variation of common components will be less than sum of the variation of the end-items. Achieve high end-product variation with much lower lead-time.

BTS

BTO/ CTO

ETO/ BTO

CTO

Product Response ProfilesDifferent Perspectives

Infinite Flexibility

Market
Product Response Profile

| 0 | 1 | 2 | 3 | 4 . . . . wks

Plant
| | | | | 0 1 2 3 4 . . . . wks | 0 | 1 | 2 | 3 | 4

No Changes Level Load

| 5 . . . . wks

Supplier
| 0 | 1 | 2 | 3 | 4

?
| 5

Some More Flexible Than Others

| 6 . . . . wks

Supply Response Profiles

A firms flexibility is limited by supplier capabilities. The objective is to increase flexibility.
Each supplier will have its own response profile. The response profile is NOT only leadtime. It is the ability to flex up or down for subsequent periods into the future. The objective is to drive the suppliers to achieve response profiles that allow us to meet our customers' demands/needs. Suppliers can achieve the desired response profile either by stocking material or having flexible internal capacities.

RAMP UP....
Time

RAMP DOWN.... QUANTITY

TODAY FUTURE

Improving Cycle: Align the Wheels

Production Wheel

Delivery Wheel

Demand Wheel
7 Day 3 Day

1 Day
Vol Lemon Lime

Vol Lemon Lime

Vol Lemon Lime

Reeve, 2002

I-B Wings

Conventional
Specific Tail Number I-C

S M R

Schedule
Materials Release

Metal Bond

M R P

M R P

M R P

M R P
I-C I-C I-D

M R P

I-E
I-E I-F I-E I-F

MR
I-E I-F I-E I-F

I-D
Parts committed to 48-Wk tail numbers I-D Missing! months before use Schedule I-E

S
M R P

I-G
M R P

Parts HPM

Sheet Metal Shop

I-F ASEA
Salt Treat

Ocean
Stretch Form

Composites

M R P

48-Week Cycle

I-H

Takt
Nose Middle

LEAN
Tail

Final Assembly

Schedule
Wings

Metal Bond Wing Cell

Supermarket

Flat Pattern Parts

Sheet Stock Kanban Board

Press Area
HPM ASEA

Thru - Kanban

Salt Treat

Stretch Form