MGT 322 (NK)

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Chapter 6:
Supply chain planning and control

Slide 6.*

Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Slide 6.*

Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

  • The focal firm ‘game plan’ comprises a set of inter-linked modules ranging from ‘front end’ (demand management, resource planning, sales and operations planning and master production scheduling) to ‘engine’ (materials and capacity planning) to ‘back end’ (detailed planning and control of source– make–deliver processes). All are linked to the enterprise resource planning (ERP) database.

Slide 6.*

Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Figure 6.1 The focal firm ‘game plan’

(Source: From Manufacturing Planning and Control for Supply Chain Management, 5th Ed., McGraw-Hill (Vollman, T.E., Berry, W.L., Whybark, D.C. and Jacobs, F.R. 2005), reproduced with permission of the McGraw-Hill Companies.)

Demand management: collates demand from all sources – external (forecasts and orders), internal (other firms within the organisation) and spares. Such demand is called independent – that is, it is independent of the actions of the

focal firm.

Resource planning: pooling demand and passing it on to manufacturing must be moderated by capacity to deliver. Otherwise, a focal firm is at risk of being unable to fulfil marketing plans that do not take into account the realities

of what can be done. Again, this would mean that marketing plans are not actionable

Resource planning is concerned with manufacturing capacity in the longer term (output measure), and with machine and manpower loading (input measure) in the shorter term.

Sales order processing (SOP): is the module concerned with matching of demand management and resource planning. Therefore, it is crucial that compatible measures of demand and capacity are used. Sales and marketing must check with manufacturing that new enquiries can be made and delivered within requested lead times.

This may well require coordination across several manufacturing units in different countries. The aim of SOP is to maintain balance between demand and supply. Too much demand in terms of capacity, and manufacturing will be

under pressure to work overtime and to rush work through. Too little demand, and margins will be under pressure from under-utilised resources, layoffs and price cuts.

● Master production scheduling (MPS): is the disaggregated form of the SOP. Thismeans that the SOP is broken down from high level measures like productfamilies into the detail of skus by major production facility. The MPS is the link

between front end and engine of the MPC system. On the one hand, it receives SOP data about sales and forecasts. On the other hand, it feeds data back to SOP on orders and stock replenishment status so that customers and distribution

can be kept up to date. The MPS handles the detail of what is planned and what is happening.

● Material and capacity planning (engine room): from overall demand by sku it is next necessary to develop detailed plans by part number. For each part and subassembly, detailed plans show how many and when each must be made.

Like the ‘big picture’ front end logic, not only must a detailed material plan be devised, but it must also be moderated by capacity availability (resources) in each production centre. The logic behind this is called material requirements

planning (MRP). This takes MPS data, and explodes it into detailed plans by component and subassembly. Each of these plans must be checked and optimized against available capacity by means of the detailed capacity planning

module.

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Managing inventory in the supply chain

  • Planning and controlling factory output is but part of the challenge of managing material flow in the supply chain.
  • Upstream processes such as distribution and retail for both finished products and spare parts are subject to independent, random demand. Such demand is independent in that it is not affected by the actions of the focal firm .
  • Dependent demand, on the other hand, is fixed by the actions of the firm – such as order acceptance and determining forecasts.

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

  • ‘Economic’ batch sizes and order sizes
  • The question of how many parts to make at a time has traditionally been answered by reference to a longstanding concept called the ‘economic’ batch quantity (EBQ) formula.

  • Similar principles are used to determine how many parts at a time to order from suppliers in ‘economic’ order quantities (EOQs).

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

  • Both EBQ and EOQ assume that parts are used at a uniform rate (i.e. that demand is stable), and that another batch of parts should be made or ordered when stock falls below the re-order point.
  • (Figure 6.3)

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Periodic order quantity and target stock levels

  • Various methods have been adopted to overcome some of the deficiencies of EOQ models, which mean that a set order size is placed on a supplier whenever the inventory level falls below the re-order level. The effect upon suppliers is that although a regular amount is ordered
  • . An EOQ system finds it very difficult to cope if demand goes up or down rapidly.
  • If demand goes up rapidly, then an EOQ system would tend to make replenishments that lag the demand trend.

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Planning and control in retailing

  • Retailing is faced with planning and control challenges which are quite distinct from manufacturing:

. A retailer cannot generate sales without stock, and stock that is bought for sales that do not happen ‘constitutes a retailer’s nightmare’ (Varley, 2006).

  • Several stages of the internal supply chain must be coordinated – depots, back of store and front of store.
  • Retail profit margins in grocery are tighter (2–4 per cent) than for large, branded manufacturers (8–10 per cent).

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

continued

  • Demand can be affected by changes that are difficult to forecast,
  • ‘Best before’ and ‘use by’ dates for fresh produce increase obsolescence pressuresand inventory turns.
  • Reverse logistics is more complicated because product is being reversed from one point (the store) to a multitude of supply chains
  • (suppliers).

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Implications of poor coordination

  • One consequence of poor coordination within a supply network is amplification of changes in demand upstream. Amplification of demand changes has been called the bullwhip effect.

For example, a retailer may order only in full truck loads

from its suppliers. Instead of understanding the actual end-customer demand,

the suppliers see huge swings in orders that are essentially due to the retailer’s

desire to minimise transport costs. This has the unfortunate impact of increasing

manufacturing costs at the suppliers, because they are asked to make large quantities

at irregular time intervals. What may originally have been stable demand

through the till becomes heavily distorted.

Figure 6.7 shows an example of the bullwhip effect. Demand through the till is

relatively stable, but orders on the supplier are anything but stable! The original

range of variation has been amplified into something much worse. The only way

in which the manufacturer can respond is to hold stocks – and even those vary

enormously from one week to the next. Uncertainty about customer demand

leads to large up-and-down swings in the need for capacity and in inventory levels.

This effect ripples through the supply chain. Batching rules at the manufacturer

make things even worse for its own suppliers upstream. Lee et al. (1997) identify

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

four major causes of the bullwhip effect:

● updating of demand forecasts: resulting in changes to safety stock and stock in the pipeline;

● order batching: while retail customers may buy mostly on Saturdays, MPC systems may batch orders according to different timing rules;

● price fluctuations: promotions most often result in lumping of demand into peaks and troughs, when the ongoing pattern is stable;

● rationing and shortage gaming: when the latest games console is in short supply, retailers are rationed by manufacturers. Customers place

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Overcoming poor coordination in retail supply chains

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

  • Efficient consumer response (ECR)
  • ECR is designed to integrate and rationalize product assortment, promotion, new product development and replenishment across the supply chain.
  • It aims to fulfil the changing demands and requirements of the end-customer through effective collaboration across all supply chain members, in order to enhance the effectiveness of merchandising efforts, inventory flow and supply chain administration (PE International, 1997).

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

  • The main areas addressed under ECR initiatives are category management,
  • product replenishment and enabling technologies. These can be broken down
  • into 14 areas where individual as well as well-integrated improvements can be
  • made in order to enhance efficiency (see Figure 6.8).

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Slide 6.*

Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Category management

  • With an objective of preventing stockout situations and improving supplier retailer relations, category management aims to balance retailers’ product volume and variety objectives.

  • Among activities included in the category management process are the capture and utilisation of knowledge of the drivers behind consumer attitudes and choices.

By focusing on category management and measuring promotional efficiency,

ECR enables organisations to utilise their joint resources to reduce supply chain

inventory levels, streamline product flows, and use cross-dock options where appropriate.

Thus category management represents a focus on the development of

at least some of the following capabilities:

● account management;

● demand management;

● multifunctional selling teams;

● price list restructuring;

● effective and customised promotions.

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Collaborative planning, forecasting and replenishment (CPFR)

  • Collaborative planning, forecasting and replenishment (CPFR) is aimed at improving collaboration between buyer and supplier so that customer service is improved while inventory management is made more efficient. The trade-offbetween customer service and inventory is thereby altered (Oliveira and Barratt, 2001).

  • CPFR focuses on the process of forecasting supply and demand by
  • bringing various plans and projections from both the supplier and the customer into synchronisation.

CPFR requires extensive support in the form of internet-based

products, which can result in major changes to the key business processes. An academic

survey of the success of CPFR (Oliveira and Barratt, 2001) found a significant

correlation between companies with high information systems capabilities and the

success of CPFR projects. The firms with high levels of CPFR implementation use

information systems capable of providing timely, accurate, user-friendly and interfunctional

information in real time. Skjoett-Larsen et al. (2003) propose that CPFR

should be seen as a general approach to integrating supply chain processes, and not

as a rigid, step-by-step model as proposed by VICS. The electronic integration

aspects of collaborative planning are further reviewed in section 8.1.3

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Vendor-managed inventory (VMI)

  • Vendor-managed inventory (VMI), is an approach to inventory and order fulfilment whereby the supplier, not the customer, is responsible for managing and replenishing inventory.

How VMI works

The supplier tracks their customers’ product sales and inventory levels, sending

goods only when stocks run low. The decision to supply is taken by the supplier,

not the customer as is the case traditionally. The supplier takes this decision based

on the ability of the current level of inventory to satisfy prevailing market demand,

while factoring in the lead time to resupply. The smooth running of VMI

depends on a sound business system. It also requires effective teamwork between

the retailer and the manufacturer. In order for both parties to gain full benefit

from the system, appropriate performance measures need to be used. The top priority

measure is that of product availability at the retailer. It is in both parties’ interests

to maximise product availability, avoiding lost sales in the short term and

building customer buying habits in the long term. By emphasising the supplier’s

responsibility for maximising product availability, VMI aims to achieve this with

minimum inventories. In order to combine both of these apparently conflicting

goals, it is necessary to have access to real-time demand at the customer.

The most widely used technology for broadcasting demand data from the retailer

customer is electronic data interchange (EDI). This provides the means for

exchanging data from customer to suppliers in a standard format. Internet-based

applications using EDI protocols are increasingly popular, providing the same facility

at lower cost. Customer demand and inventory data are often processed

through software packages to automate the application of decision rules and

identify stock lines that need replenishmen

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Quick response (QR)

  • Quick response (QR) is an approach to meeting customer demand by supplying the right quantity, variety and quality at the right time to the right place at the right price.

There are two main differences between QR and a time-based approach to improvement. First,

there is an emphasis on using actual customer demand to pull products through

the distribution and manufacturing system. Second, there is extensive use of

information technology as the preferred way to achieve pull. These two issues are

explored in more detail below.

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Harrison and van Hoek, Logistics Management and Strategy: Competing Through the Supply Chain, 4th Edition, © Pearson Education Limited 2011

Questions to be discussed in tools

  • How is material flow planned and controlled in the supply chain?
  • How is it possible to improve coordination between retail and manufacturing processes?