Introduction to Supply Chain Management Study Guide

Module 7: Introduction to Supply Chain Management ● Bullwhip effect: In the supply chain world, the end customers have the whip handle and they create a little movement in the demand which travels up the supply chain in increasing fashion. As we move away from the customer, we can see bigger movements. On average, there are six to seven inventory points between the end customer and raw material supplier (as shown below in figure 1). Everyone tries to protect themselves from stock-out situations and missed customer orders, by keeping extra inventory to hedge against variability in the supply chain. Hence, huge buffers of inventories up to six months can exist between the end customer and raw material supplier. This bullwhip effect ultimately causes the upstream manufacturers to have increased uncertainty which results in lower forecast accuracies leading to higher inventories. ● Why is the bullwhip effect bad? As the whip moves away from the source, i.e. the customer, reverberations increase and the waves grow bigger and bigger causing excess inventory, quality control issues and other inefficiencies. Forecasting accuracy decreases as we move upstream along the supply chain. ● The bullwhip effect is caused by demand forecast updating, order batching, price fluctuation, and rationing and gaming. ● Eight Supply Chain Management Process: ○ 1. Customer relationship management ○ 2. Customer service management ○ 3. Demand management ○ 4. Order fulfillment ○ 5. Manufacturing flow management: the ability to make a wide variety of products in a timely manner at the lowest possible cost is a reflection of this process ○ 6. Supplier relationship management ○ 7. Product development and commercialization ○ 8. Returns management Textbook Readings Chapter 14 of OCSM (from before) Discussion Post assignments from this week— 1.) While logistics management focuses on short-term goals such as getting freight from point A to B in the most cost-efficient way possible, supply chain management focuses on broader longterm goals such as achieving customer satisfaction and maximizing profit in the long run. Looking specifically at the case and observing the work done by Penske, they looked to solve Ford’s issue of having many moving parts to various locations around Europe by observing specifically the cross-doc transportation points. By testing for specific outbound and inbound logistics flow for specific countries in Europe, Penske looked to increase the speed of customer service time and decrease costs for the arrival of spare parts to distribution centers. In contrast, supply chain management as demonstrated in the case can be looked as the long-term results caused by the various adjustments recommended made such as the reduction of Ford’s overall carbon footprint, reduced transportation costs, and overall optimization of the network. Thus, while operations focus in on the specific phases of procurement, operations, and distribution, supply chain management observes the process of information and material to and from the manufacturing and service processes of the firm overall. 3.) Optimization in supply chain management can be defined as the process of achieving the most efficient and effective processes to minimize operating costs and maximize profit for a given company. In supply chain management and in the case of the Ford example, this can be illustrated by minimizing customer wait time and achieving cost effectiveness. Penske’s network integrator is a constantly self-improving system designed to make improvements to the Ford process after every market test. For example, looking to answer questions such as “should we move cargo from cologne or from a different location,” the network integrator system is looking to create the most efficient system for the supply chain. Some examples of changes made by the network integrator system could be that the destination and service location become the same or that volume levels are leveraged from one location to another. All in all, Ford is a large company with several moving parts that have 175,000 spare parts delivered to 2,450 suppliers across 900 dealers through Europe. With a large supply chain process such as this, optimization looks to reduce all transportation costs and ensure spare parts arrive in the highest quality of service to its customers. The company that I have selected to research for this discussion is Frito-Lay, a sector of PepsiCo. The supply chain operations of a Frito-Lay chips product such as Doritos, Cheetos, or Fritos begin as raw materials and purchased finished goods which are then transferred to a plant before going to a warehouse. Upon arrival to the warehouse, the products are then ready for distribution to sales locations where route sales transfer them to retail stores. At Frito-Lay, estimated numbers are given each week which are known as the target “sales plan” that the sales team is looking to hit. These sales plans vary from region to region; for example, a sales representative in the Northbrook zone in IL may be trying to hit a specific amount for the week with the stores they represent (Walmart, Marianos, etc.) However, estimated sales plans are not always hit and the warehouse or retail store may end up having “unsaleables” or inventory that is unable to be sold since the product expires. When this occurs, Frito-Lay has to pay the amount of “unsaleables” back to the retail stores as a part of the agreement they have. Moreover, demand fluctuates for the company based on holidays, COVID-19, and other unforeseeable events. The first supply chain management process I would like to discuss which Frito-Lay specifically focuses on is customer relationship management such as building strong relationships with store owners. Since Frito-Lay owns the entire supply chain starting at the plants up until the point of sales at retail stores, they have a large capacity for optimizing the process. For example, the company focuses on “direct service delivery” meaning they deliver the product first-hand to the retail stores which is one way they look to build these relationships with store owners. When considering factors such as maximizing profitability for the company, sales representatives come into the stores where they can explain how a new Frito-Lay display by the registers, for example, will sell out thus increasing the stores market share in the community. This “direct service delivery” process can combat the bullwhip effect because store managers and Frito-Lay work directly to ensure that sale goals are hit and to determine what amount of inventory to order in next. Since there is a large amount of person-to-person interaction, store owners feel a closer relationship with Frito-Lay and will thus order as recommended by the sales representatives and profits made. Moreover, sales representatives can guide store managers to determine the amount they order by using past year’s forecasted data which can further help reduce the bullwhip effect. The second supply management process I would like to discuss is returns management which is defined as the process by which activities associated with returns and returns avoidance is managed across the firm and supply chain. Since Frito-Lay is a food-based product company, the products have the potential of expiring or going bad at any point of the supply chain process. Thus, it is vital that as the products move from raw materials to retail stores, that the product is able to sell in the time period that is allowed for the food. Thus, it is important for Frito-Lay to avoid inaccurate forecasts that can over or under sell the products to stores and try to hit plan as much as possible to avoid the bull-whip effect. A great example of when this could occur is this past March where demand for Frito-Lay products were greater since consumers preferred to eat more at home due to COVID. Frito-Lay had to read the market demand quickly to increase their products in the supply chain before leveling it out again. Moreover, the other issue is decreased demand, but too much product: when this occurs, Frito-Lay has to return the retail store’s money as a part of their company promise to them. In order to optimize the supply chain process and avoid the bullwhip effect, it is important that Frito-Lay representatives attempt to hit the forecasted sales plans and order the right amount as much as possible. Module 8: Inventory Management Inventory Management—Lecture Videos ● Inventory: the stock of any item or resource used in organization ○ Includes raw materials, finished products, component parts, supplies and workin-process ○ Manufacturing inventory: refers to items that contribute to or become part of a firm’s products ○ Inventory= pile of money sitting in a company; ■ Cash flow is most important ○ Inventory can be visualized as stacks of money sitting on forklifts, on shelves and trucks and planes while in transit ■ Largest asset on a balance sheet at any given time ■ Can be difficult to convert back into cash ■ Good idea to try to get your inventory down as far as possible ● Avg cost of inventory is 30-35% of its value ○ Purpose of Inventory: ■ To maintain independence of operations ■ To take advantage of economic purchase order size ■ To allow flexibility in production scheduling time ■ To provide a safeguard for variation in raw material delivery time ■ To meet variation in product demand ○ Independent Demand: demands for various items are unrelated to each other ○ Dependent Demand: the need for any one item is a direct result of the need for some other item ○ The inventory system ■ The set of policies and controls the monitor levels of inventory ● Determines what levels should be maintained, when stock should be replenished, and how large orders should be ○ Inventory control: defines how often inventory levels are reviewed to determine when and how much should be ordered ■ Perpetual review ● Continuously monitors inventory levels to determine inventory replenishment needs ■ Periodic review ● Monitors inventory status of an item at regular intervals such as weekly or monthly ● A lot less important for a company ● Does not call for significant request for information technology ■ Inventory accuracy ● Refers to how well the inventory records agree with physical count ■ Cycle counting: ● A physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year ○ Inventory costs: ■ Setup Costs: costs for arranging specific equipment setups, and so on ■ Ordering Costs: costs of placing an order ■ Holding (or carrying) costs: cost for storage, insurance, handling, and so on; pay insurance on the goods being stored in inventory ■ Shortage costs: costs of running out ○ Fixed Order Quantity Model ■ Perpetual review: continuously monitors inventory levels to determine inventory replenishment needs ■ Used when we want to maintain an item in stock; a certain number of units must be ordered for items to be able to restock ■ Economic Order Quantity Model (EOQ): used to determine the amount that balances the cost of ordering with the cost of maintaining average inventory ● Fees are higher when company has to hold inventory in a location that is owned by another entity ● EOQ: When holding and ordering costs are balanced. The interaction point should always be very close if not exact ● EOQ Process: wait state —> Demand Occurring —> Review Inventory —> Reorder Point (has the reorder point been met) —> *if no, go back to the wait state, if yes —> EOQ Assumptions of EOQ: demand is constant and consumption for product will be constant ● At point R, we want to order new products; we want to have enough products between time ordered and received; gap from R and T2= average lead time demand ● EOQ/2= average inventory Economic Order Quantity Model Variables ● ● ● ● ● ● TC= Total annual cost D= Annual demand C= Cost per unit EOQ= Order quantity S= Cost of placing on an order (setup cost) H= Annual cost of holding/storing one unit in inventory ● Safety stock: additional inventory in addition to demand ○ Common ways companies make sure to have certain weeks of supply on hand ○ Have products during unexpected times of increased demand Fixed-Time Period Model ● Periodic review which monitors inventory status of an item at regular intervals such as weekly or monthly ● Less expensive than perpetual models Assignment 9— 1. Inventory is defined as the stock of any item or resource used in an organization. a. Answer: True 2. An inventory system is a set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be. a. Answer: True 3. The fixed-order-quantity inventory model is more appropriate for important items such as critical repair parts because there is closer monitoring and, therefore, quicker response to a potential stock out. a. Answer: True 4. The fixed-order-quantity inventory model requires more time to maintain because every addition or withdrawal is logged. a. Answer: True 5. Safety stock can be defined as the amount of inventory carried in addition to the expected demand. a. Answer: True 6. Which of the following is a fixed-order-quantity inventory model? a. Answer: Answer: Economic order quantity model 7. Which of the following is a fixed-time-period inventory model? a. Answer: Periodic system model 8. Which of the following is the set of all cost components that make up the fixed-order-quantity total annual cost (TC) function? a. Answer: Annual holding cost, annual ordering cost, annual purchasing cost 9. If annual demand is 50,000 units, the ordering cost is $25 per order, and the holding cost is $5 per unit per year, which of the following is the optimal order quantity using the fixed-orderquantity model? a. Answer: 707 10. Which of the following is not necessary to compute the order quantity using the fixed-timeperiod model with safety stock? a. Answer: Ordering cost 11. To support the manufacture of desktop computers for their customers, Dell needs to order all the parts that go into the computer, such as hard drives, motherboards, and memory modules. Obviously the demand for these items is driven by the production schedule for the computers. What is the term used to describe demand for these parts? a. Answer: Dependent demand 12. Which of the following is a perpetual system for inventory management? a. Answer: Fixed-order quantity 13. Which of the following is an assumption of the basic fixed-order-quantity inventory model? a. Answer: Price per unit of product is constant 14. The capability index (Cpk) calculates the percentage of items being produced within specifications. a. Answer: 15. The computation of a firm's inventory position is found by taking the inventory on hand and adding it to the on-order inventory, and then subtracting backordered inventory. a. Answer: 16. Chapter 20: Textbook Readings Chapter 20 of OCSM: Inventory Management ● Customer order decoupling point: a point which inventory is positioned to allow processes or entities in the supply chain to operate independently ● Selection of decoupling points is a strategic decision that determines customer lead times and can greatly impact inventory investment ● Realistically, a single decoupling point in a supply chain is unrealistic: there may be multiple points where buffering takes place. ● There is a trade-off where quicker response to customer demand comes at the expense of greater inventory investment; finished goods inventory is more expensive than raw material inventory The techniques described here are most appropriate when demand is difficult to predict with great precisions. We characterize demand by using probability distribution to make sure the risk associated with stockout is managed. ● The single period model: used when we are making a one time purchase of an item (purchasing shirts to sell at a sporting event) ● Fixed-order quality model: Used when we want to maintain an item “in-stock” and when we resupply the item, a certain number of units are ordered each time; inventory for these items are monitored until it gets down to a level where the risk of stocking out is great enough that the company is compelled to order ● Fixed-time period model: similar to the fixed-quantity order; it is used when the item is in stock and ready to use; ex. Item ordered every Friday morning Inventory: the stock of any item or resource used in an organization ● Inventory system= the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large order should be ● Manufacturing inventory (items that contribute to or become part of a firm’s product output): raw materials, finished products, component parts, supplies, and work-inprocess. ● Distribution: inventory classified as “in-transit” when it is moving into the system and “warehouse” which refers to inventory in a warehouse or distribution center ● Inventory analysis: ○ 1. When items should be ordered ○ 2. How large the order should be ● Purpose of Inventory/ Keeping supply of inventory: ○ 1. To maintain independence of operations ○ 2. To meet variation in product demand ○ 3. To allow flexibility in production scheduling ○ 4. To provide a safeguard for variation in raw material delivery time ■ In case material ordered from a vendor is delayed or there is a problem with shipping time, or a shortage of material at the vendor’s backlog ○ 5. To take advantage of economic purchase order size ○ 6. Many other domain specific reasons ● Inventory Costs: ○ 1. Holding (or carrying) costs: costs for storage facilities, handling, insurance, breakage, depreciation, pilferage, taxes, ○ 2. Setup (or production change) costs ○ 3. Ordering costs: costs that refer to the managerial and clerical costs to prepare the purchase or production order ○ 4. Shortage costs: when the stock of an item is depleted, an order for the stock must wait to be replenished Independent vs. Dependent Demand: Independent demand— ● Demand for various items are unrelated to one another Dependent demand— ● Direct need for one item is a direct result of the need for some other item Ex. Demand for cars: ● Demand for making cars (number of wheels, etc.) is dependent ● Demand for cars is independent Safety stock: ● The amount of inventory carried in addition to the expected demand ●