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20183_1222458_CHAPTER2.pptxChapter 2
Supply Chain Operations: Planning and Sourcing
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To achieve a high-level of understanding, SCOR developed a simplified model for supply chain operations. There are 4 categories:
PLAN
SOURCE
MAKE
DELIVER
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Visual view of the 4 categories
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Demand Forecasting and Planning (Plan)
Supply chain management decisions are based on forecasts that define which products will be required, how much of the product, and when will they be needed
All forecasts deal with four major variables, which are combined to determine what market conditions will be favorable:
SUPPLY
DEMAND
PRODUCT CHARACTERISTICS
COMPETITIVE ENVIRONMENT
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SUPPLY is determined by the number of producers of a product and by the lead times that are tied-in with a product
The more producers of a product, the shorter the lead times, the more predictable the variable is
Supply chain forecasts must cover a time period that encompasses the combined lead times of all components that are used in the development of the final product
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DEMAND refers to the overall market demand for the group of related products or services
Many products have a seasonal demand pattern (ex. Flip flops are in more demand in the summer)
Markets with little historical data and lots of variability are most difficult for demand forecasting
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PRODUCT CHARACTERISTICS include features of a product that influences a customer
Forecasts for mature products (ex. I-Phone) can cover longer timeframes than forecasts for products that are developed quickly
It is important to determine of a product will steal demand away from another product-Can you name a product?
Can a product be substituted? Can we use a product drive to complement the use of a related product?
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COMPETITIVE ENVIRONMENT refers to the actions of a company and its competitors
Questions to consider:
What is the market share of a company?
What is the trend in an individual company’s market share?
Is the market share growing or shrinking?
What is the market share trend of the competitors?
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There are 4 basic forecasting methods defined by Chopra and Meindl:
Qualitative
Causal
Time Series
Simulation
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QUALITATIVE METHODS rely on the person’s intuition or subjective opinions about a market
People can forecast using production adoption curves that they feel reflects what will happen in the market
CASUAL METHODS of forecasting assume demand is strongly related to particular environmental or market factors
A strong casual relationship can exist between price and demand
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TIME SERIES methods are the most common used in forecasting
They are based on the assumption that historical of demand are a good indicator of future demand
Forecasting software can be used for the techniques of time series
SIMMULATION methods uses combinations of casual and time series methods to start the behavior of consumers under different circumstances
This method can be used to answer questions based on what will happen to revenue prices on a line of products ar lowered or a competitor/competing product opens up a store nearby
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Aggregate planning is used when demand forecasts are already created, then create a plan for the company to meet expected demand
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There are 3 basic approaches to take in developing an aggregate plan:
Amount of production capacity
Level of utilization of the production capacity
Amount of inventory to carry
There are 3 other approaches combined with the one above:
Use of production capacity to match demand
Utilizing varying levels of total capacity to match demand
Use inventory and blocklogs to match demand
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Relationship of cost structure to pricing
Question to consider:
Is it better to do price promotion during peak periods to increase revenue or during low periods to cover costs?
This question cannot be answered which is contingent on the company’s cost structure
Some companies run promotions to further stimulate demand
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Inventory management (plan) is a set of techniques that are used to manage inventory levels within different companies in a supply chain
The aim is to reduce costs of inventory as much as possible while maintaining the service levels that customers require
Inventory management operation in a company or an entire supply chain comprise of a blend of activities related to three types of inventory (cycle, seasonal, & safety)
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CYCLE inventory is the buildup of inventory in the supply chain due to production and stocking of inventory is done in lot sizes larger than continuous demand for the product
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Economic order quantity(EOQ) refers to a given the cost structure of a company, there is an order quantity that is most cost-effective amount to purchase at a time
See EOQ problem
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SEASONAL INVENTORY occurs when a company or a supply chain with a fixed amount of production capacity decides to produce more to anticipate future demand
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SAFETY inventory is necessary to compensate for uncertainty in the market/supply chain
A rule of thumb, the higher the uncertainty, the higher the level of safety stock that is required
Safety inventory for an item can be defined as the amount of inventory on hand for an item when the next replenishment EOQ lot arrives
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Procurement (source)
The purchasing manager job is to beat potential suppliers on price and then buy the products from the lowest-cost supplier that could be found
There are 5 main activities that are incorporated in a procurement function:
-Purchasing
-Consumption Management
-Vendor Selection
-Contract Negotiation
-Contract Manager
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PURCHASING requires routine activities related to issuing purchase orders for needed products
There are two types of products that company buys:
Direct or storage materials, needed to produce products that company sells to its consumers
Indirect or maintenance, repair, and operations (MRO) products that a company consumes as a part of a daily operations
One of the greatest challenges of the purchasing activity is to see to it that this is data communication happens in a timely manner without error
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CONSUMPTION MANAGEMENT refers to the understanding of how much of what categories of products are being brought across the entire company as well as by each operating unit
Expected levels of consumption for different products at a various locations of a company should be set and then compared to the actual consumption on a daily basis
Consumption below expectations may signify an opportunity that should be exploited or may also reflect inaccurate expectations
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VENDOR SELECTION is an ongoing process to define the procurement capabilities needed to support the company’s business plan and its operating model
The value of product quality, service levels, just-in-time delivery, and technical support is predicated by the business plan and the company’s operating model
The general rule is if a company seeks to narrow down a number of suppliers it does business with
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CONTRACT NEGOTIATION involves the negotiation of contracts with individual vendors on the preferred vendor list
The most complex negotiations involve direct purchase of materials that meet specified quality requirements
Performance targets must be specified and penalties and other fees defined when performance benchmarks are not met
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Credit and collects is the sourcing process that a company uses to retrieve its money
The collections operation is what actually bring in the money that the company has earned
Good credit management attempts to fulfill customer demand for products and also minimize the amount of money tied up in receivables
Supply chains that a company participates in are often selected based on the credit decisions/record
Credit and collections can be broken down into 3 categories
Set Credit Policy
Implement Credit and Collections Practices
Manage Credit Risk
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CREDIT POLICY is established by senior managers (Controller, CFO, CEO, treasurer)
The company’s receivables must be reviewed first
Criteria is needed to define the different kinds of customers and payment terms that will be offered
IMPLEMENT CREDIT AND COLLECTION PRACTICES are need to enforce the credit policies of the company
Credit analysis is beneficial and proactive for customers to pay off their loan at the specified time
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Collections is ongoing maintenance of each customer’s account payable status
If customers have past-due accounts, they are contacted. Also new payment terms and schedules can be negotiated
Payments can come in the form of money orders, check, and electronic funds
Cash is not a viable method to send in for payment
For VIP customers with large individual sales, people in the credit area work with others in the company to structure special deals for a single customer
The above bullet, in short, increases the value of the company to such a customer and can be a signficant part of securing new business
