Chapter 11 - Supply Chain Management Vendor-managed inventory: an agreement where supplier discounts; To smooth seasonal demand or production; To
Supply chain describes how a sequence of organizations has access to and is responsible for maintaining the decouple operations; To hedge against price increases
(suppliers, manufacturers, distributors, and customers) is inventory level required by the customer. Types of Inventory: raw materials and purchased parts,
linked together in producing and delivering a product through Distribution Requirements Planning (push system) - is a partially completed items (WIP), finished goods or
collaboration and coordination to meet market demand. system for synchronizing replenishment schedules across the merchandise, spare parts, tools, and supplies.
The bullwhip effect (demand amplification) phenomenon in supply chain starting with forecasting demand at the end of Objective of Inventory Control: To achieve satisfactory
which the demand variability progressively increases for the chain and moving upward. levels of customer service while keeping inventory costs
companies upstream in the SC; increase uncertainty. within reasonable bounds.
Third Party Logistics – outsourcing and using companies
Supply Chain Activities that specialize in delivery, warehousing and transportation to • Inventory Turnover is the ratio of annual cost of goods
1. Strategic (Design) Activities satisfy logistics requirements. sold to average inventory management.
• Level of customer service (not understock)
Members of the SC determine the goals and competitive Reverse Logistics – backward flow of goods returned to
characteristics such as: Quality, Cost, Variety (Flexibility), the supply chain from their final destination (defective, – Fill rate = the percentage of demand being filled using the
Timeliness (Speed), Customer Service; Fill rate (i.e., unsold, or change in customer minds). Gatekeeping stock on hand
percentage of demand filled from stock on hand) • Costs of ordering and carrying inventory (not overstock)
(prevents incorrect acceptance of goods) and avoidance
Designing/Redesigning the products and the supply chain (prevents returns by dealing with their causes) – Inventory turnover = the ratio of average cost of goods sold
with respect to these goals and competitive characteristics Global Supply Chains to average inventory investment
Characteristics of Inventory Systems
2. Tactical (Planning)/Operational Activities
Production planning and control, including forecasting, Creating an Effective Supply Chain • Demand: May Be Known or Uncertain, May be Changing
purchasing, transportation of material, inventory control, Requirements of a successful supply chain or Unchanging in Time
• Lead Time: The amount of time that elapses from
warehousing, and scheduling of production and – Close relationships, trust, willingness to cooperate,
distribution/deliveries, movement of products agreement on common goals, alignment of incentives placement of the order until its arrival. Can assume known
(replenishment), and customer service. – Effective communication and coordination of activities or unknown.
• Review Time: Is system reviewed periodically or is
Where to hold inventory? General rules to consider: – Supply chain visibility (real time) and information sharing
1. Value of inventory increases as materials move down the – Event management capability system’s state known at all times (continuous review)?
supply chain toward the consumers (thus it becomes more – Performance metrics • Treatment of Excess Demand: Backorder all Excess
Steps: Develop strategic objectives and tactics; Integrate and Demand (customer is willing to wait), Lose all excess
valuable/responsive to consumer demand).
2. The nature of inventory becomes more specific (thus it coordinate internal activities; Coordinate with suppliers and demand, Backorder some and lose some
loses flexibility of use) as inventory moves down the supply customers; Coordinate planning and execution across the • Inventory that changes over time: perishability,
supply chain; Form strategic partnerships obsolescence
o Keeping inventory at the SC upstream (at higher tier
suppliers) is less costly and it allows flexibility to use Collaborative Planning, Forecasting, and Replenishment R EQUIREMENTS FOR EFFECTIVE INVENTORY M ANAGEMENT
inventory downstream, but could increase lead-times. – a process for communicating and agreeing on forecasts 1. Safely storing and using inventories through warehouse
management systems (software that controls the movement
Risk pooling: holding safety stocks in one central location between the manufacturer and the customer (distributor)
rather than in multiple locations. – Data exchanged electronically and storage of materials within a warehouse, and processes the
Delayed differentiation (postponement): Production of – Eliminates typical order processing associated transactions).
2. Tracking inventories and using inventory control models to
standard components and products, and adding – Planning: decide which product category, objectives, reliably forecast demand including indication of forecast error
differentiating features later in the process. e.g., salads. resources, information sharing, forecast horizon,
Logistics is the movement and warehousing of materials/ promotion, etc Periodic (physical) counting: order is placed for variable amount
after fixed passage of time. Perpetual (continual) tracking:
products and information, both within the production facility – Forecasting: buyer collect POS data, forecasts sales, constant amount ordered when inventory declines to a
and outside. shares with suppliers; supplier compares with capacity; predetermined level. Fixed order quantity/re-order point model:
resolve differences; create order forecasts when the amount on hand reaches a predetermined min. a fixed
Selecting a Transportation Mode – Replenishing: buyer generates order for next week; quantity is reordered. Two bin system: use of 2nd bin when first
Dependent on speed, reliability, and cost: boat, train, truck, supplier issues acknowledgement, executes delivery goes empty, reorder point. Bar code.
airplane. Speed vs. Cost? Speed = when customers are not Performance Metrics: quality, cost, variety/flexibility, 3. Forecasting demand and lead times and variability. Purchase
lead time: the time interval between ordering and receiving the
willing to wait. Balance transportation cost with inventory delivery, customer service. SC OPS Reference (SCOR)
holding costs. Consider differences in safety stock if required. Metrics: reliability, flexibility, expenses, assets/utilization. order. Point of sale (POS) systems.
4. Estimating inventory costs
5. Performing ABC classification or other classification system for
Purchasing inventory items:
Where H = annual holding cost, and d = duration (in days) GOAL: develop and implement purchasing plans for goods
Total delivery cost = transportation (freight) cost + in-transit hand services that support the business plan Classification % cumulative ADV % of SKUs
A (very important) 70 to 80 15 to 20
Responsibilities: cost of purchases, quality of purchases, B (moderately imp.) 10 to 25 (estimate) 20 to 35 (est.)
Example: Selecting a Transportation Mode timing of deliveries, forming partnerships. Interfaces:
Given: Cost of item = $1750, Holding cost = $700 per year, suppliers, marketing, operations, legal, accounting, data C (least important) 5 to 10 50 to 60
delivery alternative A cost $100 and takes 8 days, delivery processing, design, and receiving
alternative B cost $120 and takes 7 days. – Purchasing Cycle: Purchasing receives the requisition,
Solution: Selects a supplier, Order is placed, Monitor orders,
Receive orders, Payment of suppliers
Total delivery cost for A =
Value Analysis refers to the examination of the function of a
Total delivery cost for B = product in an effort to reduce its cost. Determining prices:
published price lists, competitive bidding, negotiation
Therefore choose delivery alternative A, since it is cheaper.
Centralized Purchasing: purchasing is handled by the
purchasing department. Decentralized Purchasing:
Example: Transportation Mode Considering Safety Stock individual departments or separate locations handle their own
Spend Analysis: involves collecting, cleansing, classifying,
and analyzing expenditure data with the purpose of reducing
procurement costs, improving efficiency, and monitoring
compliance with purchasing policies
• Ethics in Purchasing: Consider interests of organization; Be
receptive to competent counsel from colleagues; Buy without
prejudice; Strive for increased knowledge of materials and
processes; Participate in professional development programs;
Be honest and proper; Be prompt and courteous; Practice the
PMAC Professional Code of Ethics; Assist fellow purchasers;
Cooperate with the supply chain
Supplier Management and Partnership
Choosing suppliers: based on quality, flexibility, location,
price, reputation, lead time, other customers, service after
sale (supplier analysis)
Supplier Certification: detailed examination of the
policies, capabilities, and performance of the supplier
D ETERMINING THE E CONOMIC O RDER Q UANTITY
Supplier Relationships: relationship is related to the
length of a contract relationship Economic order quantity is the order size that minimizes
– Supplier Partnerships: Sharing information and ideas with total inventory control cost or holding and ordering inventory
suppliers could leading to improved competitiveness:
Warehousing – Used for consolidating shipments, Reduce cost of making the purchase, Reduce Basic EOQ
deconsolidating shipments, and cross-docking in addition to transportation costs, Reduce production costs, Reduce Assumptions: Demand is fixed. Shortages are not allowed.
Lead time is constant. Order quantity is fixed. No discounts.
regular storage of goods; cross docking: loading goods time to market, Reduce inventory costs, Improve product
arriving at a warehouse directly onto outbound trucks quality, Improve product design ( ) , where Q = order quantity,
Fast Delivery Methods (pull system)
units/order, and H = holding (carrying) cost/unit per year.
Quick Response: involves just in time replenishment Chapter 12 - Inventory Management
systems where orders are based on actual sales An Inventory is a stock of items (idle material or product) ( ) , where
Efficient consumer response: an expanded version of quick kept to meet future demand.
D = annual demand, and S = ordering cost per order.
response used in the grocery industry Purpose of Holding Inventory: To protect against stock-
outs; To take advantage of economic lot size ad quantity ( ) ( ) EXAMPLE (RETAILER’s POINT OF VIEW):
Optimal Order Quantity: √
Bikini Village is considering procuring swimwear for the upcoming
Spring / Summer season. Bikini Village can only order once in
The minimum TC is found by sub. Q for 0 in the TC formula. advance of the selling season. For a particular high-end item,
Bikini Village’s cost is $80 per unit. The full price to consumers is
$120 per unit. This particular item, uses the “it” color scheme for
the season and thus will be discounted once the sea