Demand/Supply Chain Management

Ravi Kanniganti

 Have you ever wondered how products appears on the store shelves?
Where were the products designed? Where was the core product assembled or manufactured? How did it get shipped from the factory to store? How many distribution centers it went thorough before it got on store shelf? How many parties were involved in making that happen? Who planned for the item to be on the store shelf? What are the systems that helped the product to move to the store shelf? What is the base cost of the product ex-factory vs. final cost at the store?

Supply chains are complex networks that span the world

Global SC Managers

Suppliers

Wholesale Distributors Logistics Providers Traditional Manufacturers

Consumers Supplier Exchanges Logistics Exchanges Customer Exchanges

Virtual Manufacturers Contract Manufacturers

Information Flow Logistics Providers Materials Flow

Page 3

Supply chain management has evolved significantly in the last 40 years

High
TOYOTA UPS DELL CEMEX

CEMEX

1990-2000+

Supply Chain Complexity

TOYOTA UPS

CISCO DELL
1980-1990s

Enterprise to Enterprise and Value Networked

XEROX

GM
1880-1980s

Integrated Approach

Functional or Departmental

Low
Page 4

Supply Chain Integration

High

 Supply Chain that orients itself to customer pull. Incorporation of Market Orientation. Demand chain begins with customers, then funnels through any resellers, distributors, and any other channels (Multi-Channel Demands).

Demand Chain
Marketing Sales Service

Supply Chain
Purchasing Manufacturing Distribution

Value Chain

Beyond Definitions
Demand chain n. 1. your customers. 2. your customers customers. 3. the network of direct and indirect marketing, sales, and service professionals that provide you with the capability to get, keep, and grow profitable customer relationships better, faster, and bigger. Supply chain n. 1. your suppliers. 2. your suppliers suppliers. 3. the complicated network of direct and indirect manufacturing and distribution professionals that provide you with the capability to design, manufacture, and deliver your products better, faster, and cheaper.
The idea is to balance the Demand and Supply efficiently and effectively to make profits for the firm.

Demand Management
Art and science of managing forecasted demand.
Demand has to be controlled as in the case of demand for constrained resources such as water, energy etc. Policies have to be framed to reduce demand for social security benefits, unemployment benefits etc Demand has to be forecasted right and fulfilled in the case of manufacturing firms. Demand has to be created for new products or services. Educating customer about new product and services.

Supply chain strategies

Indian Car Market 1970s Vs 2010

1970s DC Driven Supply Chain was OK 2010 Demand Driven Supply Chain is needed

Laws of Demand and Supply

The four basic laws of supply and demand are If demand increases and supply remains unchanged then higher equilibrium price and quantity. If demand decreases and supply remains the same then lower equilibrium price and quantity. If supply increases and demand remains unchanged then lower equilibrium price and higher quantity. If supply decreases and demand remains the same then higher price and lower quantity.

 Supply Chain Planning is the process of Anticipating market demand (Forecasting) Positioning enterprise resources to meet demand (Master Planning) Fulfilling demand as it is realized (Order Management) Delivering and handling returns

Supply Chain planning can be: Strategic (Do we need to build more plants? If so where, what capacity, what product line?) Tactical (What to produce in next 69 months, What regions to focus on?)

Example of Supply chain:

Timber Company

Paper Manufacturer

Tenneco Packaging Supplies to stores Wal-mart W/H

Received RM Receives Packaging Manufactures detergent P&G

Stocks its shelves

Wal-mart Store

Needs detergent

Customer

Supplies to DC-FG and W/H Chemical Manufacturer

Plastic Producer

3rd party DC

Supplies to stores

Objective of Supply Chain Management is to have

The right products

The right quantity

The right moment

At minimal cost

Flexibility

Delivery reliability

Delivery time/ lead time

Inventory level

Supply chain management (SCM) involves Product flow, Information flow and Finances flow both within and among companies
Customer
Product flow Returns Finances flow Payment Information flow Product, pricing, availability info

Wal-Mart
Payment Sales data, Replenishment Order
Pricing Info, Delivery Schedule

W/H or DC

Pricing info Shipping information, Invoices Purchase order

Payment

RM supplier

Manufacturer (P&G)

Strategy and Issues During a Products Life

Introduction
Best period to increase market share R&D product engineering critical

Growth
Practical to change price or quality image Strengthen niche

Maturity
Poor time to change image, price, or quality Competitive costs become critical Defend market position

Decline
Cost control critical

Company Strategy/Issues

Drive-thru restaurants

Fax machines

Sales
Blu Ray HDTV Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality

DVDs
Internet

3 1/2 Floppy disks Station wagons

OM Strategy/Issues

Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focused Enhance distribution

Standardization Less rapid product changes - more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting

Little product differentiation Cost minimization Over capacity in the industry Prune line to eliminate items not returning good margin Reduce capacity

Typical Supply Chain Challenges

Challenge
Manufacturing Industry: Long lead times Managing the liability of excess and obsolete inventory spread across many outsourced partners Transmission of frequent demand changes and the inability to lock in the supply with frozen demand windows Retail Industry: Include customer in supply chain planning Manage product life cycle Promotional planning, seasonal products planning Determining cost effective supply channels

Challenges

Solution
Global visibility and rapid response capabilities in order to manage changes in demand Integrate with partners systems

Integrated planning that starts at the stores, create demand forecast and replenishment plans at the store level Each supply chain partner creates their own replenishment plan and shares with other partners Increased visibility of future orders gives time to select cost effective channels

Five basic components of Supply Chain

This is the strategic portion of SCM, a strategy for managing all the resources that go toward meeting customer demand

Plan Source

Schedule Production activities, testing, packaging, prepare for delivery, measure quality , production out put & workers productivity

This part is referred to as logistics. Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments.

Make
Choose supplier Set up pricing, delivery & payment process, Receive shipments, verify them, manage inventory, transfer them to mfg facilities, authorize supplier payment

Deliver

Create a network for receiving defective and excess products back from customers and supporting customers who have problems with delivered products.

Return

Firms Supply Network encompasses

our suppliers supplier to our customers customer

Plan
Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source

Suppliers Supplier

Supplier

Firm

Customer

Customers Customer

Supply Chain Planning

Demand Planning Supply Planning Inventory Planning Financial Planning Manufacturing Planning

Plan

Source

Make

Deliver

Return

Phased Evolution of Supply Chain Planning

The supply chain evolution by Maha Muzumdar and Narayan Balachardan APICS Oct. 2001

Phase-1: Functional or Departmental

Phase-2: Integrated

Phase-3: Value Networked

Supply Chain Planning

Done

in functional

Shift

silos Ineffective due to limited information visibility and standardization across the enterprise

to a business process focus Increase in effectiveness due to standardization of information across the enterprise Integrated supply chain planning

Collaborative

planning Extension of the planning process beyond the enterprise to include contract manufacturers, key customers and suppliers

Page 21

Phase 1: Local planning and local optimization

Requests

Adjusted Forecast

Master Plan

Material Requirements

Customers & Market

Suppliers

Demand Planning

Master Planning

SIC/ Manf.

Managing Customer Expectations

Schedule Changes

Schedule Changes

Supply Constraints

It is a constant challenge keeping demand and supply in balance. Planning is easy, replanning is the challenge!

Page 22

Phase 1: Functional Silos, limited visibility Capacity & Material Planning Order Promising
Late Promise

daily

Order Modification

weekly
Global Shortage

Forecasting

Forecast Change

Master Planning

weekly
Page 23

monthly

Phase-2: Integrated, Limited collaboration Order Promising

ATP Alert

ATP Allocation
daily

Late Promise Order Modification

weekly

Forecasting

Forecast Change

Master Planning
Global Shortage

weekly
Page 24

monthly

Phase-3: Value Networked, Collaborative Planning

Suppliers

Firm
Capacity Problems

Customers

Supply constraints

Unexpected Order
Page 25

Integrated Supply Chain Planning

Orderable items Requirements Adjusted Forecast Market Information Demand Planning Constrained Plan

Supply Constraints Buy item Requirements Manf A

Suppliers

Orders
Customers & Market

Master Planning

Suppliers

Manf B

Order Promise

Order Promising Available To Promise Orderable items Commits

Manf C Buy item Commits

Suppliers

Capacity Constraints Page 26

Strategic Supply Chain Planning

Big Picture View
Capacity:
Maximum equipment available or planned to have available

Roadmap: Balancing
Factories/Technologies/Products

Investment:
All Mfg building and equipment require capital purchase authorizations against roadmap, Includes affordability analysis

Decision Process:
Designed to make specific decisions Strategic, Mfg, Capacity, Factory, Technology and Product

Tactical Supply Chain Planning

Balance marketing requirements (demand) with manufacturing capabilities (supply) to ensure customers have the right product at the right time every time.
Focus on tactical and mid-range (0 to 12 months) Optimize capacity, materials and workforce Drive quality into supply network solutions Responsible for:

What to build Where to build it When to build it

Demand Chain Players and their view of Demand

Marketing and Sales -Sales Revenue Customers -- Cost Channel Partners Margins & Discounts Production & Logistics Unit Volumes and Item level mix Product Management Market share, Product mix Financial Org Sales Revenue & Profit Margins

Demand Management
Plan Demand

Influence Demand

Demand Management

Communicate Demand

Fulfill Demand

Prioritize Demand

In Demand Driven organizations , demand information enlightens decisions and drive activities in the organization.

Demand Driven Market Oriented Organizations All decisions start with customer.
Quality is defined by Customers The best ideas come from customers Customer knowledge is a valuable asset and channel members are value-adding partners

Shelf-Centric or Supply Centric Organization We will sell whoever will buy

Quality is compliance to internal standards Customers dont know what they want Customer data is a control mechanism and channels are conduits

Customer loyalty is a key to profitability No sacred cows cannibalize yourself Learn from past mistakes
Market research is decision insurance Paranoia about competition is healthy We know more than our competition

New accounts are what matters Protect the existing revenue stream Avoid mistakes
Market research is a justification tool We can live with our competitors If competition does it, it must be good

How can you reach you end customer?

Tapping the Distribution Channel

Local dealers, who are long-established members of their communities, can get closer to customer that a global company cannot on its own. Dealers can serve as problem-solvers and as a source for market information and intelligence. They can provide value added services before and after the sale. Relationship should be much beyond the traditional contract based dealerships. Distribution channel management is the second most important factor in success after brand management based on study by Agrawal (2003). Distributors can add value in Logistics function, communication function and facilitating function (Credit services, Risk taking)

Role of Channel Members

Product Flow Title/Ownership Flow Negotiation Flow Information flow Promotion flow Risk Flow Payment Flow Service Flow (DIWA Demonstration, Installation, Warranty and after sales service) Move to Buying agent for the consumer as opposed to Selling agent for the manufacturer.

Reasons for poor channel partnerships

Lack of knowledge about the channel and/or its partners. Lack of tools to effectively manage, monitor and measure the channel partners. Lack of effective communication to and from the channel partners. Lack of information to support decisions and develop a channel strategy.

Some Examples
Automobile Sector:
Of 5000 odd car and two wheeler dealers, barely 20% of them are making money. Profits only from selling accessories and its service station. With cut throat competition, dealers are fighting each other with greater discounts at cost of profits. Margins dropped from 4% to 2%. Over 30% of current dealers expected to close shop and switch to other business.

FMCG Sector:
Dealers have to fall in line Increase field force Hold more stock No Credit lines

Durable Sector:
Dealerships are increasing at rate of 8-10/month. Dealer gets dumped when they dont meet sales targets short-term relationships.

Source: Partnering Channel Relationships by Agrawal D.K, Agrawal, D.P and D. Singh (2003)

How can one move from zone of fear and distrust to area of trust and long-term relationship?

By considering these points and making a change

Relationships based on trust. Focus on long-term relationships. Think Win-Win Reasonable return on investments. Good Product Quality and Availability. Superior logistics and service. Prompt Information Sharing Training of channel partners

Demand Forecasting

Fable on Forecasting
It was October and the Indians on a remote reservation asked their new Chief if the coming winter was going to be cold or mild. Since he was a Chief in a modern society he had never been taught the old secrets. When he looked at the sky he couldn't tell what the winter was going to be like. Nevertheless, to be on the safe side he told his tribe that the winter was indeed going to be cold and that the members of the village should collect firewood to be prepared. But being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked, "Is the coming winter going to be cold?" "It looks like this winter is going to be quite cold" the meteorologist at the weather service responded. So the Chief went back to his people and told them to collect even more firewood in order to be prepared. A week later he called the National Weather Service again. "Does it still look like it is going to be a very cold winter?" "Yes," the man at National Weather Service again replied, "it's going to be a very cold winter." The Chief again went back to his people and ordered them to collect every scrap of firewood they could find.

Two weeks later the Chief called the National Weather Service again. "Are you absolutely sure that the winter is going to be very cold?" "Absolutely," the man replied. "It's looking more and more like it is going to be one of the coldest winters ever."
"How can you be so sure?" the Chief asked. The weatherman replied, "The Indians are collecting firewood like crazy."

Demand Forecasting
Demand Forecast should be result of planned marketing efforts.

Sales

Historical Data Business Plan

Marketing

Demand can be influenced by marketing and sales activities of the organization and/or channel partners.
A consensus demand should be arrived at and communicated throughout the organization for realizing (fulfilling) the demand. Demand forecast is not constrained by supply and capacity at this stage. This is unconstrained demand.

Economy

Demand

Customer

Sales

Customer Plans Individual Sales Plan Territory plans Incentive Plans

Marketing

Marketing plans Channel Plans Promotion Plans Pricing Plans Monitor Economic indicators Competitive Analysis New Product Development Product Launch Product Exit Product Life Cycle Brand and Category plans Analysis of competitor product features and tactics

Product and Brand Management

Characteristics of Forecasting
Forecast are always wrong and thus include both the expected value and a measure of forecast error. Long-term forecasts are usually less accurate than short-term forecasts. Aggregate forecasts are usually more accurate than disaggregate forecasts. In general further the supply chain a company is from consumer, the greater is distortion of information and hence less accurate forecast. (Bull Whip Effect).

Demand Types
Lumpy Vs Regular Demand Derived Vs Independent Demand

Factors
Past Demand Lead time of the product Planned advertisement or marketing efforts State of the economy Planned price discounts Actions that competitors have taken

Forecasting Methods
Qualitative: By experts and rely on human judgment. Time Series: Based on historical data and assumption is future is reflective of the past.
Level, Trend and Seasonal factors are important

Casual: Forecasting by correlating the external or internal factors. Simulation: Imitate consumer choices and what-if analysis.

Popular Forecasting Techniques

Delphi Market Research and Focus Groups Panel Consensus Sales Force estimates Visionary Forecasts Historical Analogy Moving Average Exponential Smoothing Higher weight for recent data Regression Model Leading Indicators Neural networks Collaborative forecasting

Casual Method: Regression

Y = a + bX Y = dependent variable (Door Knobs) X = independent variable (New house starts) a = Y-intercept of the line b = slope of the line Objective is to find a and b Please see Forecast.xlsx for detailed forecasting techniques.

Sourcing
Purchasing or procurement is the process by which companies acquire raw materials, components, products, services and other resources from suppliers Make or Buy decision Outsourcing Core product and competency
Example sourcing from China..
http://www.infosysblogs.com/supply-chain/2010/10/sourcing_from_china_part1_tes.html#more

Plan

Source

Make

Deliver

Return

Merchandising
In the broadest sense, merchandising is any practice which contributes to the sale of products to a retail consumer. merchandising is the practice of making products in retail outlets available to consumers, primarily by stocking shelves and displays Purchasers Vs Buyers Those who buy finished goods, such as clothes or furniture, are called buyers. Those who buy the parts and materials that help make goods are called purchasing agents or purchasers.

Benefits of effective sourcing

Better economies of scale if orders can be aggregated. Efficient process and systems in procurement can significantly reduce cost of procurement. Design collaboration can results in products that easier to manufacture and distribute. Sharing forecast information and partnering with supplier will result in lower inventories and stock-outs. Appropriate supplier contracts can allow for sharing of the risk, resulting in higher profits for both suppliers and the buyer. Auctions if appropriately used can lower cost of procurement.

Sourcing Processes

Plan Purchases

Plan Contracting

RFQ/RFP

Select Sellers

Contract Administration

Supplier Scoring

Plan Purchases
Is the process of documenting project purchasing decisions, specifying the approach, and identifying potential sellers (PMBOK). Includes consideration of the risks involved with each make-or-buy decision, and reviewing the type of contract planned to be used with respect to mitigating risks, sometimes transferring risks to the seller.
What types of contracts will be used? If independent estimates are needed as evaluation criteria, who will prepare them and when? Will procurement be handled by procurement function or project team? How will multiple providers be managed? Do we have standard procurement documents for use and from where? How can various risks be mitigated?

Contract Types - Risk distribution between Seller and Buyer

Plan Contracting
Planning the process, rules and procedures for getting information (e.g., bids, quotes, offers) from prospective contractors / sellers and applying the previously defined selection criteria, and selecting one or more sellers qualified to perform the work and acceptable as seller (s)
Bidders conferences. Proposal evaluation techniques. Independent Estimates. Expert judgment. Advertising. Internet search. Procurement negotiations.

Supplier scoring and assessment

Replenishment lead time On-time performance Supplier flexibility Supply quality Inbound/outbound transportation cose Pricing terms Information coordination capability Design collaboration capability Exchange rates, taxes and duties Supplier variability

Auctions
Sealed-bid first price auctions. Contract awarded to lowest bidder.
In English auctions, the auctioneer starts with a price and suppliers can make bids as long as each successive bid is lower than pervious bid. The supplier with last (lowest) bid receives the contract. In Dutch auctions, the auctioneer starts with a low price and then raises slowly until one of the suppliers agrees to the contract at that price.

Sharing risks to increase profits

In order to avoid cost excess inventory cost, retailer may decide to be conservative and order less. What can supplier to do mitigate this?
Buyback guarantee (encourages retailers to increase the level of the product availability but increase information distortion in the supply chain) Revenue-sharing Quantity flexibility (Retailers can change order quantities within the accepted range. There is no information distortion) Quantity discounts Design Collaboration

Contract Administration
Procurement performance reviews: Inspections and audits:
Sampling techniques

Performance reporting:
Provides management with information about how effectively the seller is achieving the contractual objectives.

Payment systems:
Payments to the seller are typically processed by the accounts payable system of the buyer after certification of satisfactory work by an authorized person on the project team.

Claims and disputes administration: Records management system:

To manage contract and procurement documentation and records.

Make
Schedule Production activities, testing, packaging, prepare for delivery, measure quality , production out put & workers productivity. Traditional Manufacturing Vs Contract Manufacturing

Plan

Source

Make

Deliver

Return

Deliver
This part is referred to as logistics. Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments.

Plan

Source

Make

Deliver

Return

Supply Chain Execution

Supply Chain Execution

Execution of supply chain plan made in the previous step of tactical supply chain planning. Getting goods through the supply chain and into the hands of the customers. Is more tactical and operational in nature. Less tolerant to data inaccuracies. Deals with Warehouses, Transportation/shipping, customs and invoicing.

Traditional Manufacturers Suppliers Logistics Providers Raw material Warehouses Finished Goods DCs Logistics Providers Consumers

Contract Manufacturers

Business Logistics

Physical Supply In bound Logistics

Physical Distribution Out bound Logistics

Sources of Supply

Plants/Operations

Customers

Transportation Inventory Maintenance Warehousing Yard Management Materials Handling

Logistics Activities in a Firms Immediate Supply Chain
Adopted from Business Logistics /SCM by Ronald & Sameer

Indian Logistics Current Scenario

Higher logistics spend as percentage of GDP can be attributed to the overall inefficiency in logistics operations, multiple tax structures, inadequate infrastructure and unorganized nature of the industry in India. US 9% India 13% Europe 10%
Source World Bank Report on trade logistics 2007

Objectives of Business Logistics

Return on Logistics Assets (ROLA) ROLA = (Contribution to revenue logistics operating costs)
Logistics Assets

Inventory Strategy
Customer Service Goals

Transport Strategy

Location Strategy

Triangle of Logistics Decision Making

Inventory Cost Vs Transport Cost

Inventory cost including storage and In-transit decreases as we move from slow mode of transport to fast mode of transport. (Ship/Rail to Air Shipments) Transportation costs increases as we move from slow mode of transport to fast mode of transport. There is a point at which the total cost would be lowest and this is the sweet spot that a firm need to operate. Other logistics tradeoff:
Improved customer service Vs Logistics costs Increasing number of warehouses in a logistics system

Product Variations
Consumer Products Vs Industrial Products Weight Bulk Ratio: The ratio of product weight to bulk (volume) is important as it determines logistics costs.
High weight-bulk ratio items: Rolled steel, canned food. Low weight-bulk ration items: Cotton, potato chips, lamp shaded. As product density increases, both storage and transportation costs decline as percentage of the sales price.

Value- Weight Ratio

Low value-weight ratio items: Coal, Iron ore, Bauxite has low storage but movement costs. High value-weight ratio items: Electronic equipment, Jeweler, Music instruments has higher storage costs and lower transport costs.

FOB Pricing

F.O.B = Free on board location at which the price is effective. F.o.b factory means price at factory. F.o.b destination means price quoted at customers place. Terms of Sale:
f.o.b origin, Freight collect. f.o.b origin, Freight Pre-paid f.o.b origin, Freight Pre-paid and charged back F.o.b destination, Freight collect

Transport Modes
Rail: Long Hauler and slow mover of raw materials and low-valued manufactured products (food, paper and wood products).
In India Freight segment accounts for two thirds of revenue for the railways.

Truck: Trucks transport semi-finished and finished products. Trucks offer contract services in addition to be general carriers. Trucks offer fast and dependable delivery for LTL shipments. Road freight is growing in India compared to rail freight.
Terminal and line-haul expenses. Terminal expenses which include pick-up, delivery, handling, billing and collecting are 15-20% of the total cost.

Air: Air transportation cost is almost two times the trucking cost and 16 times more expensive than rail. Perfect for high-value, perishable or emergency items especially over long distances. Lot of action in India on this front. DHL, Fed-Ex, UPS, Deccan360 and lot of others entering this space as Indian airports are being modernized.

Water: Bulk items and higher-valued commodities in containers.

Ganga between Allahabad and Haldia (1620 KM), the Sadiya-Dhubru stretch of Bramhaputra (891 KM) and some in Kerala are declared as National Waterways.

Pipeline: Crude Oil and refined petroleum products. Iron ore used to be transported as slurry from Kudremukh to Mangalore Port. The 1469 KM long Hazira-Bijaipur-Jagdishpur (HBJ) pipeline network is the most noteworthy pipeline in India that carries natural gas. Reliance is doing lot of work in Godavari basin in A.P

Performance Characters
Mode Cost Time Variability Loss and Damage 5 4 2

Rail Truck Water

3 4 1

3 2 5

4 3 5

Pipe Air

2 5

4 1

2 1

1 3

1 = best and 5 = worst

Bill of Lading
Legal contract between shipper and the carrier.
It serves as a receipt of goods by carrier. It certifies that goods described are the once transported. It serves as contract of carriage and associated terms and conditions. Documentary evidence of title. May not contain freight charges. Charges are referred in freight bill.

Vehicle Routing
Separate and Single Origin and Destination Points.
Shortest route method Nodes are connecting points between links and links are costs (distance, times or combination of both) Mapquest/Google Maps can solve this for non-commercial use. PC*Miler and IntelliRoute are examples of commercial software products for finding desirable routes.

Multiple Origin and Destination Points: Linear programming algorithm known as the transportation method is frequently used.

Poor Routing Paths Cross

Good Routing No Paths Cross

Weak Clustering

Better Clustering Clustering Stops by Day of the Week

Principles
Load trucks with stop volumes that are in close proximity to each other. Stops on different days should be arranged to produce tight clusters Build routes beginning with the farthest stop from the depot. The sequence of stops on a truck route should from a teardrop pattern. (No Crossing) The most efficient routes are built using the largest vehicles available. Pickups should be mixed into delivery routes rather than assigned to the end of the routes. Narrow stop time window restrictions should be avoided.

Supply Chain Players

Carrier: A firm which transports goods or people via land, sea or air. Shipper: The firm or person who needs to have material shipped, e.g., a manufacturer. Vendor: The manufacturer or distributor of an item or product line. Supplier: 1) A provider of goods or services. 2) A seller with whom the buyer does business, as opposed to vendor which is a generic term referring to all sellers in the marketplace. Retailer: A business that sells goods or commodities in small quantities directly to final consumers. Examples include Wal-Mart, Best Buy, and Safeway, but also include the many smaller independent stores. Wholesaler/ Distributor: A business that does not manufacture its own products, but purchases and resells these products. Such a business usually maintains a finished goods inventory. (eg S.P. Richards) Distribution Center (DC): The warehouse facility which holds inventory from manufacturing pending distribution to the appropriate stores. Consolidator/ Agent : An enterprise that provides services to group shipments, orders, and/or goods to facilitate movement. Hub: A central facility through which all shipments pass in a transportation system, Transportation hub is a location where traffic is exchanged across several modes of transport. Some transportation hubs also allow transport to be exchanged between the same kind of transport mode. 3PLs: They are third party companies that handle containers/shipments/freight transport for the company.

Traditional Manufacturers Suppliers Logistics Providers

Raw material Warehouses Finished Goods DCs Logistics Providers Retailers/Customers

Contract Manufacturers

Outside the Warehouse

Transport Management Systems (TMS)

Transportation management systems are the software solutions that facilitate:
Procurement of transportation services Short-term planning and optimization of transportation activities, assets and resources Execution of transportation plans.

They address all modes of transportation:

Ocean Air Rail Full truckload (TL), Less-than-truckload (LTL), parcel, and private fleet.

They also manage the flow of transportation-related information, documents, and money. TMS also include performance management and collaboration capabilities

TMS Process Flow

Typical TMS systems features
Rate Management
Vendor Portal Plan

Solicit and evaluate carrier bids

Capture information on all shipments ready to ship

Optimize transportation plans Resource selection, carrier communication, Fleet Asset Management
Appointment scheduling and yard management Monitor shipments through to completion Transportation finance (audit, payment and claims)

Execute

Schedule

Monitor
Reconcile

Container
A Container (or Isotainers) is a freight transport cargo object made using ISO standards that can be loaded and sealed intact onto container ships, railroad cars, planes, and trucks.

LTL
Less than Truck Load

FTL / TL / FCL
Full Truck Load Truck Load Full Container Load

Cross Dock

A transit shipment facility in which incoming shipments are sorted, consolidated with other shipments and transferred directly onto outgoing transport implements without intermediate storage or order picking.

A Trailer
These carry customer orders, especially high-volume ones, for delivery to the store.

Special Trailers at a cross dock

Inside a Cross Dock

Warehousing Basics
A Warehouse is a building used for the storage and re-distribution of goods.
Inventory Storage Types Pallet Storage Case Storage Unit Storage

Material Handling Equipment Lift Trucks Racking Dock Equipment Conveyor Systems Automated Material Handling Equipment.
Key Warehouse Processes Receiving Putaway Picking Packing Shipping Replenishment Cycle Counting

Please refer to http://inventoryops.com/warehouse_management_systems.htm to learn more about WMS basics.

Types of Warehouses
Commodity warehouses Bulk storage warehouses Temperature controlled warehouses Household goods warehouses General merchandise warehouses Miniwarehouse Custom bonded warehouse Repair parts distribution center Catalog fulfillment center 3PL warehouse

Business Decisions
Build or Lease Site selection Size of the facility Manual or Automated Layout of the warehouse (Retail Vs Non Retail Flow) Reverse logistics processing

Warehouse Terms
Receiving: Update inventory into the WMS, typically against a purchase order Putaway: Transfer inventory from the receiving dock to a storage location Picking: Transfer inventory from a storage location into a tote Packing: Transfer inventory from a storage location or tote into a shipping carton Shipping: Update inventory from the WMS against a pick ticket Replenishment: Transfer inventory from a bulk storage location to a forward pick location Cycle Count: Count storage location inventory to compare against WMS Pallet Storage: Storage location designed for full pallets Carton Rack: Storage location designed for full cases Bin Storage: Storage location designed for small pieces RF: Radio Frequency, typically referring to a hand-held scanning device

Warehouse Management Systems (WMS)

The primary purpose of a WMS is to control the movement and storage of materials within an operation and process the associated transactions. Warehouse Management Systems:
Improves warehouse facility layout Increases inventory accuracy Increases order fulfillment and accuracy Calculates item velocity to ensure inventory is optimally located Provides picking, packing and replenishment tools Increases billing accuracy and boosts profitability Identifies hidden costs of doing business

WM Overview - Warehouse Layout

Inside a Warehouse

A Pallet

. and a Pallet Jack

LPN / Case /Carton

License Plate Number

Four Buckets of Inventory

LICENSE PLATE (LPN)
ACTIVE/CASE PICK

Inbound Receipts & Reserve Storage TRANSITIONAL

Unit and Full Case Pick

CARTON

Value Added Services

Outbound Containers

Locations
Reserve locations are huge locations to stock the goods for shipping out. The Reserve locations are generally above the CASE PICK/ACTIVE locations, made easier to replenish. (Pick 115 units) There are separate locations also dedicated for reserve storage, if required.

Reserve Locations (Above) Active Locations (Side) Locations can be dedicated or random

CASE / CARTON
CASES Boxes/packages coming into Warehouse CARTONS boxes that are shipped out of the Warehouse

Empty CARTON before packing

SKU Barcode

RFID smart label

Radio Frequency IDentification

Inside a Warehouse

Inside a Warehouse

Cycle Count
Cycle Count: Physically counting the inventory and see the variance between inventory in books Vs physically Discrepancy is result of shrinkage
Damage Theft Mistakes by employees Inventory in wring location/lost

Automation
Pick to light Put to light Unit sorter Conveyors Value added service

Supply Chain of Services Sector

Supply chain management is the management of information, processes, capacity, service performance and funds from the earliest supplier to the ultimate customer.
The term "service performance" was chosen rather than just "services" or "service delivery." Making sure that you get what you believe you contracted for is a true test of effective supply chain management of services.

Capacity is a services supply chain replacement for inventory in that it allows a supply chain to increase its level of production to respond to customer demands. The services supply chain will include responsiveness, efficiency, and control.

Understanding and managing the services supply chain. Journal of Supply Chain Management. Publication Date: 22-SEP-04

Supply Chain of Services Sector

Human labor is a significant element of the total value delivered in services.
Human performance is unique regardless of training and background. which makes precise management and control of many services difficult. The human element of services is one of the factors that makes services procurement difficult.

Historically, "service level agreements" and "statements of work" have not been as precise and finely tuned as specifications for manufactured goods.

Service Processes

Process of identifying demand, sharing information, establishing expectations through a service level agreement or statement of work, and clearly defining the scope of the work, the skills required of service providers, and feedback on the performance Capacity and Skills Management

Service Processes
Demand management in the professional services sector focuses on how to meet, and in many cases how to generate, customer demand similar to manufacturing sector. Customer Relationship Management. Customer relationship management (CRM) entails developing a good understanding of what the customer needs as well as focusing efforts on meeting those needs (Srivastiva and Shervani 1999; Bitner 1995). It includes customer segmentation and requires monitoring the relationship for customer satisfaction to ensure that the customer's needs are met, and changing behaviors as needed to better meet these needs (Zeithaml and Bitner 2003). The key measurement in this area is customer profitability.

Service Processes
Supplier Relationship Management. From the buyer's standpoint, the process of procuring professional services should always begin with the identification and specification of a need, just as in the case of the purchase of goods. Ideally, once the needs are clarified, potential suppliers should be identified and qualified. Service delivery management: Service delivery management is about making promises to the customer, enabling service providers (internal or external) to meet those promises, and meeting the promises (Zeithaml and Bitner 2003; Bitner 1995).

Services Vs Product

Inventory What is inventory in services Forecasting error Profit Margins Variability high in services Let us discuss IT services delivery and its supply chain

Examples of SCM Optimization in Services Sector

Hospitals:
The increased bed capacity led to higher turnover, greater profits, and increased customer satisfaction. These people will work closely with the physicians to improve relations between departments and will ultimately take over their inventory responsibility (DeJohn, 1998). This frees clinical staff time for patient care. The outcome is improved customer satisfaction (DeJohn, 1998).

Professional sector in the auditing, accounting, and financial consulting. Airline Industry Big-five (Andersen, Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers). Currently the multinational accounting and auditing firms are using supply chain management between the headquarters and its branches. Comfort Taxi in Singapore, which adopted the GPS (Global Positioning Systems) dispatch system to overcome information asymmetry by changing the push-pull boundary of transportation service for achieving speed-to market purpose.

Supply Chain Metrics

SCOR defines five generic performance attributes and then suggests appropriate metrics for each attribute. Different companies will choose different metrics as KPIs, depending on the nature of the industry, the supply chain, and the performance that the company seeks to monitor and improve.

What is Reference Process Model?

A Process Model Contains:

Standard descriptions of management process A framework of relationships among the standard process Standard metrics to measure process performance Management practices that produce best-in-class performance Standard alignment to features and functionality

Bench Marking

Best Practices

Capture AS IS state of the process and derive the desired TO BE future state

Quantify the operational performance of similar companies and establish internal targets based on the best-inclass results

Characterize the management practices and software solutions that results in bestin-class performance.

Includes all the Three (BPR, Bench Marking and Best Practices

SCOR

BPR

SCOR Level 1 Metrics

SCOR : Three Levels of Process Details

Level

#
1

Description

Schematic Plan Source Return

Make

Comments Level 1 defines the scope and content for the Supply chain Operations Reference-model. Here basis of competition performance targets are set.

Top Level (Process Types)

Deliver Return

Configuration Level (Process Categories)

A companys supply chain can be configuredto-order at Level 2 from the core process categories. Companies implement their operations strategy through the configuration they choose for their supply chain. Level 3 defines a companys ability to compete successfully in its chosen markets, and consists of: Process element definitions Process element information inputs, and outputs Process performance metrics Best practices, where applicable System capabilities required to support best practices Systems/tools

Process Element Level (Decompose Processes)

P1.1
Identify, Prioritize, and Aggregate Supply-Chain Requirements

Companies fine tune their operations at level 3

P1.3
Balance Production Resources with Supply-Chain Requirements

P1.4
Establish and Communicate Supply-Chain Plans

P1.2
Identify, Assess, and Aggregate Supply-Chain Requirements

Not in Scope

Implementation Level (Decompose Process Elements)

SCOR Level 2
SCOR Level 1 Name Plan Level 2 Configurations Plan Source Plan Make Plan Deliver Plan Return

Source

Source Stocked Product Source Make-to-Order Product Source Engineer-to-Order Product

Make-to-Stock Make-to-Order Engineer-to-Order Deliver Stocked product Deliver Make to Order Product Deliver Engineered Product

Make

Deliver

Return

Return Defective Product Return MRO Product Return Excess Product

SCOR Level 3 Example

Process Element: Schedule Product Deliveries

Performance Attributes
Reliability

Metric
% Schedules Generated with Suppliers Lead Time. % Schedules Changed within Suppliers Lead Time.

Responsiveness Flexibility Cost

Average Release Cycle of Changes Average days per Schedule Change. Average Days per Engineering Change Product Management and Planning Costs as a % of Product Acquisition cost

SCORe Card

Balanced Score Card

Supply Chain Balance Score Card

The Supply Chain Balanced Scorecard tracks a limited number of key metrics. These metrics should be closely aligned to the companies strategic objectives. The measurements usually cover 4 areas: Financial - Example: The cost of manufacturing, warehousing, transportation etc. Customer - Example: Order Fill Rate, Backorder Levels, On-Time Delivery

Internal Business - Example: Adherence-To-Plan, Forecast Error

Training: Example: In house Training Hours, APICS Membership/ Certification
Obtained from http://www.supplychainmetric.com/

Cycle Time Metrics

Customer Order Promised Cycle Time: The anticipated or agreed upon cycle time of a Purchase Order. It is gap between the Purchase Order Creation Date and the Requested Delivery Date. This tells you the cycle time that you should expect (NOT the actual) Customer Order Actual Cycle Time: The average time it takes to actually fill a customers purchase order. This measure can be viewed on an Order or an Order Line level. The measure starts when the customers order is sent/received/entered. It is measured along its various steps of the order cycle. Through credit checks, pricing, warehouse picking and shipping. The measure ends at either the time of shipment or at the time of delivery to the customer (sometimes tracked by using an EDI #214). This "actual" cycle time should be compared to the "promised" cycle time.
Manufacturing Cycle Time: Measured from the Firm Planned Order until the final production is reported. It usually takes into account the original planned production quantity versus the actual production quantity. Example: X% of the planned quantity must be completed on a production run or the cycle time should not be considered. Purchase Order Cycle Time: Measured from the creation of the PO to the receipt at your location (Distribution Center, Hub etc). One of the keys here is not not have your RDD (Requested Delivery Date) exceed the agreed to lead time. If it does, it may artificially inflate your Lead Time. Additionally, any in-between points available will add value to the metric. Example: Creation of the PO, Shipment from the Vendor, Receipt at the DC. This will tell you the manufacturing time vs the transit time.
Obtained from http://www.supplychainmetric.com/

Fill Rate Metrics

Line Count Fill Rate: The amount of order lines shipped on the initial shipment versus the amount of lines ordered. This measure may or may not take into consideration the requested delivery date (see On Time Delivery) example- ABC Company orders 10 products (one order line each) on its Purchase Order #1234. The manufacturer ships out 7 line items on March 1 and the remaining 3 items on March 10. The Fill Rate for this Purchase Order is 70%. It is calculated once the initial shipment takes place. Calculation: Number of Order Lines Shipped on the Initial Order* / Total Number of Order Lines Ordered (7/10 = 70%)
SKU Fill Rate: The number of SKU's (Stock Keeping Units) ordered and shipped is taken into consideration. Above, we consider each Order Line to have an equal value (1 ). Here, we count the SKU's per Order Line. example: If on Line 1, the order was for 30 skus of product "AB" and on line 2, they ordered 10 skus of item "AC". If Line 1 ships on April 1 and line 2 on April 20, the the SKU Fill Rate is 75% Calculation: Number of SKUs Shipped on the Initial Shipment / Total Number of SKUs Ordered (30/40 = 75%). Case Fill Rate: The amount of cases shipped on the initial shipment versus the amount of cases ordered. example- ABC Company orders 6 products that total 200 cases. The manufacturer ships out 140 cases on 3/1/01 and the remaining 60 cases on 3/10/01. The Fill Rate for this Purchase Order is 70%. It is calculated once the initial shipment takes place. The number of Order Lines is not considered in this calculation. This Fill Rate measure gives "weight" to the order lines that are shipped out. Calculation: Number of Cases Shipped on the Initial Order / Total Number of Cases Ordered . (140/200 = 70%) Value Fill Rate: Same as above, except the order line value is used instead of cases. Calculation: Value of Order Lines Shipped on the Initial Order / Total Value of the Order ($400/$500 = 80%)
Obtained from http://www.supplychainmetric.com/

Financial Inventory Metrics

GMROI (Gross Margin Return on Inventory) GMROI = (Unit Selling Price of an Item - Unit Inventory Value of an Item) X Annual Demand for the item Average Inventory Value of the product. Inventory Carrying Rate: This can best be explained by the example below.... 1. Add up your annual Inventory Costs: Example: $800k = Storage $400k = Handling $600k = Obsolescence $800k = Damage $600k = Administrative $200k = Loss (pilferage etc) $3,400k Total 2. Divide the Inventory Costs by the Average Inventory Value: Example: $3,400k / $34,000k = 10% 3. Add up your: 9% = Opportunity Cost of Capital (the return you could reasonably expect if you used the money elsewhere) 4% = Insurance 6% = Taxes 19% 4. Add your percentages: 10% + 19% = 29% Your Inventory Carrying Rate = 29%
Obtained from http://www.supplychainmetric.com/

Inventory Turn and Perfect Order Metrics

Inventory Turns (Inventory Turnover): The number of times that a companies inventory cycles or turns over per year. It is one of the most commonly used Supply Chain Metrics.
Calculation: A frequently used method is to divide the Annual Cost of Sales by the Average Inventory Level. Example: Cost of Sales = $36,000,000. Average Inventory = $6,000,000. $36,000,000 / $6,000,000 = 6 Inventory Turns

Perfect Order Measure

Order Entry Accuracy: 99.95% Correct (5 errors per 10,000 order lines) Warehouse Pick Accuracy: 99.2% Delivered on Time: 96% Shipped without Damage: 99% Invoiced Correctly: 99.8% Therefore, the Perfect Order Measure is 99.95% * 99.2% * 96% * 99% * 99.8% = 94.04%

Obtained from http://www.supplychainmetric.com/

Transportation Metrics
Freight cost per unit shipped: Calculated by dividing total freight costs by number of units shipped per period. Useful in businesses where units of measure are standard (e.g., pounds). Can also be calculated by mode (barge, rail, ocean, truckload, less-thantruckload, small package, air freight, intermodal, etc.).
Outbound freight costs as percentage of net sales: Calculated by dividing outbound freight costs by net sales. Most accounting systems can separate "freight in" and "freight out." Percentage can vary with sales mix, but is an excellent indicator of the transportation financial performance.

Inbound freight costs as percentage of purchases. Calculated by dividing inbound freight costs by purchase dollars. It is important to understand the underlying detail. The measurement can vary widely, depending on whether raw materials are purchased on a delivered, prepaid, or collect basis.
Transit time: Measured by the number of days (or hours) from the time a shipment leaves your facility to the time it arrives at the customer's location. Often measured against a standard transit time quoted by the carrier for each traffic lane. Unless you are integrated into your customers' systems, you will have to rely on freight carriers to report their own performance. This is often an important component of lead-time. Transit times can vary substantially, based on freight mode and carrier systems.

Obtained from http://www.supplychainmetric.com/

Leading Supply Chain Product Firms

Manhattan Associates SAP Oracle JDA (i2 is part of this family now) Red Prairie

Challenges in SCM implementations

SCM implementation challenges can be grouped under four categories:

Business Process challenges Project Management challenges System Integration challenges Change management, personnel and support challenges

Review Does IT Matter HBR Discussion

Page 132

References

APICS Dictionary Supply Chain Excellence by Peter Bolstorff, Robert Rosenbaum. Balance score card by Robert Kaplan and David Norton. Supply Chain Management by Sunil Chopra, Peter Meindl, and D.V. Kalra. Demand Chain Management by D.K. Agrawal, D.P Agrawal and Deepali Singh. http://www.supplychainmetric.com www2.isye.gatech.edu/~lfm/8851/SCOR.ppt Surveying the TMS Landscape ARC Advisory Group Report -2007

Thank you
Ravi Kanniganti rkanniganti@gmail.com