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Title: Supply Chain Management


1
  • Supply Chain Management

2
Supply Chain Management
  • First appearance Financial Times
  • Importance -
  • ? Inventory 14 of GDP
  • ? GDP 12 trillion
  • ? Warehousing/Trans 9 of GDP
  • ? Rule of Thumb - 12 increase in sales to 1
    savings in Supply Chain
  • 1982 Peter Drucker last frontier
  • Supply Chain problems can cause 11 drop in
    stock price
  • Customer perception of company

3
SCOR
Reference www.supply-chain.org
4
Supply Chain
  • All activities associated with the flow and
    transformation of goods and services from raw
    materials to the end user, the customer
  • A sequence of business activities from suppliers
    through customers that provide the products,
    services, and information to achieve customer
    satisfaction

5
Supply Chain
  • The global network used to deliver products and
    services from raw materials to end customers
    through an engineered flow of information,
    physical distribution, and cash.
  • APICS Dictionary, 10th ed.

6
Supply Chain Management
  • Synchronization of activities required to achieve
    maximum competitive benefits
  • Coordination, cooperation, and communication
  • Rapid flow of information
  • Vertical integration

7
Supply Chain Uncertainty
  • Forecasting, lead times, batch ordering, price
    fluctuations, and inflated orders contribute to
    variability
  • Inventory is a form of insurance
  • Distorted information is one of the main causes
    of uncertainty Bullwhip effect

8
Information in the Supply Chain
  • Centralized coordination of information flows
  • Integration of transportation, distribution,
    ordering, and production
  • Direct access to domestic and global
    transportation and distribution channels
  • Locating and tracking the movement of every item
    in the supply chain - RFID

9
Information in the Supply Chain
  • Consolidation of purchasing from all suppliers
  • Intercompany and intracompany information access
  • Electronic Data Interchange
  • Data acquisition at the point of origin and point
    of sale
  • Instantaneous updating of inventory levels
  • Visibility

10
Electronic Business
In Theory
  • Replacement of physical processes with electronic
    ones
  • Cost and price reductions
  • Reduction or elimination of intermediaries
  • Shortening transaction times for ordering and
    delivery
  • Wider presence and increased visibility

11
Electronic Business
  • Greater choices and more information for
    customers
  • Improved service
  • Collection and analysis of customer data and
    preferences
  • Virtual companies with lower prices
  • Leveling the playing field for smaller companies
  • Gain global access to markets customers

12
Electronic Data Interchange
  • Computer-to-computer exchange of business
    documents in a standard format
  • Quick access, better customer service, less
    paperwork, better communication, increased
    productivity, improved tracing and expediting,
    improves billing and cost efficiency

13
Bar Codes
  • Computer readable codes attached to items flowing
    through the supply chain
  • Generates point-of-sale data which is useful for
    determining sales trends, ordering, production
    scheduling, and deliver plans

14
IT Issues
  • Increased benefits and sophistication come with
    increased costs
  • Efficient web sites do not necessarily mean the
    rest of the supply chain will be as efficient
  • Security problems are very real camera phones,
    cell phones, thumb drives
  • Collaboration and trust are important elements
    that may be new to business relationships

15
Suppliers
  • Purchased materials account for about half of
    manufacturing costs
  • Materials, parts, and service must be delivered
    on time, of high quality, and low cost
  • Suppliers should be integrated into their
    customers supply chains
  • Partnerships should be established
  • On-demand delivery (JIT) is a frequent
    requirement - what is JIT and does it work?

16
Sourcing
  • Relationship between customers and suppliers
    focuses on collaboration and cooperation
  • Outsourcing has become a long-term strategic
    decision
  • Organizations focus on core competencies
  • Single-sourcing is increasingly a part of
    supplier relations

How does single source differ from sole source?
17
E-Procurement
  • Business-to-business commerce conducted on the
    Internet
  • Benefits include lower transaction costs, lower
    prices, reduce clerical labor costs, and faster
    ordering and delivery times
  • Currently used more for indirect goods
  • E-Marketplaces service industry-specific
    companies and suppliers

18
Distribution
  • The actual movement of products and materials
    between locations
  • Handling of materials and products at receiving
    docks, storing products, packaging, and shipping
  • Often called logistics
  • Driving force today is speed
  • Particularly important for Internet dot-coms

19
Distribution Centers and Warehousing
  • DCs are some of the largest business facilities
    in the United States
  • Trend is for more frequent orders in smaller
    quantities
  • Flow-through facilities and automated material
    handling
  • Final assembly and product configuration
    (postponement) may be done at the DC

20
Warehouse Management Systems
  • Highly automated systems
  • A good system will control item slotting, pick
    lists, packing, and shipping
  • Most newer systems include transportation
    management (load management/configuration), order
    management, yard management, labor management,
    warehouse optimization

21
Vendor-Managed Inventory
  • Not a new concept same process used by bread
    deliveries to stores for decades
  • Reduces need for warehousing
  • Increased speed, reduced errors, and improved
    service
  • Onus is on the supplier to keep the shelves full
    or assembly lines running
  • variation of JIT
  • ProctorGamble - Wal-Mart
  • DLA moving from a manager of supplies to a
    manager of suppliers
  • Direct Vendor Deliveries loss of visibility

22
Collaborative Distribution and Outsourcing
  • Collaborative planning, forecasting, and
    replenishment (CPFR) started by Nabisco
  • Allows suppliers to know what is really needed
    and when
  • Electronic-based exchange of data and information
  • Significant decrease in inventory levels and more
    efficient logistics - maybe not!
  • Companies work together for benefit of all of the
    supply chain

23
Transportation
  • Common methods are railroads, trucking, water,
    air, intermodal, package carriers, and pipelines

24
Railroads
  • 150,000 miles in US
  • Low cost, high-volume
  • Improving flexibility
  • intermodal service
  • double stacking

Complaints slow, inflexible, large
loads Advantages large/bulky loads, intermodal
25
Award-Winning Service Recognition
United Parcel Service 99.5 failure free, damage
free and on-time rating from United Parcel
Service every year since 1995
26
Trucking
  • Most used mode in US -75 of total freight (not
    total weight)
  • Flexible, small loads
  • Consolidation, Internet load match sites
  • Single sourcing reduces number of trucking firms
    serving a company
  • Truck load (TL) vs. Less Than Truck Load (LTL)

27
Air
  • Rapidly growing segment of transportation
    industry
  • Lightweight, small items
  • Quick, reliable, expensive (relatively expensive
    depending on costs of not getting item there)
  • Major airlines and US Postal Service, UPS, FedEx,
    DHL

28
Package Carriers
  • FedEx, UPS, US Postal Service, DHL
  • Significant growth driven by e-businesses and
    the move to smaller shipments and consumer desire
    to have it NOW
  • Use several modes of transportation
  • Expensive - relative!!
  • Fast and reliable - relative!!
  • Innovative use of technologies in some cases
  • Online tracking some better than others

29
Intermodal
  • Combination of several modes of transportation
  • Most common are truck/rail/truck and
    truck/water/rail/truck
  • Enabled by the use of containers the
    development of the 20 and 40 foot containers
    significantly changed the face of shipping
  • 2 of all US cargo via intermodal

30
Water
  • One of oldest means of transport
  • Low-cost, high-volume, slow (relative)
  • Security - sheer volume - millions of containers
    annually
  • Bulky, heavy and/or large items
  • Standardized shipping containers improve service
  • The most common form of international shipping

31
Pipelines
  • Primarily for oil refined oil products
  • Slurry lines carry coal or kaolin
  • High initial capital investment
  • Low operating costs
  • Can cross difficult terrain

32
Global Supply Chain
  • Free trade global opportunities
  • Nations form trading groups
  • No tariffs or duties
  • Freely transport goods across borders
  • Security!!

33
Global Supply Chain Problems
  • National and regional differences
  • Customs, business practices, and regulations
  • Foreign markets are not homogeneous
  • Quality can be a major issue

34
Security
  • 10 million containers annually
  • Customs-Trade Partnership Against Terrorism
    (C-TPAT)
  • Port Security SAFE Ports Act Scanning of all
    Containers
  • Cost - 2 billion closing of major port
  • 66 of all goods into US comes through 20 major
    ports
  • 44 through LA/Long Beach
  • Cost of attack on major port estimated at 20
    Billion

35
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39
Chapter 11
  • Forecasting

40
Forecasting Survey
  • How far into the future do you typically project
    when trying to forecast the health of your
    industry? ? less than 4 months 3 ? 4-6
    months 12 ? 7-12 months 28 ? gt 12
    months 57

Fortune Council survey, Nov 2005
41
Indices to forecast health of industry
  • Consumer price index 51
  • Consumer Confidence index 44
  • Durable goods orders 20
  • Gross Domestic Product 35
  • Manufacturing and trade inventories and
    sales 27
  • Price of oil/barrel 34
  • Strength of US 46
  • Unemployment rate 53
  • Interest rates/fed funds 59

Fortune Council survey, Nov 2005
42
Forecasting Importance
  • Improving customer demand forecasting and sharing
    the information downstream will allow more
    efficient scheduling and inventory management
  • Boeing, 1997 2.6 billion write down due to raw
    material shortages, internal and supplier parts
    shortages Wall Street Journal, Oct 23, 1987

43
Forecasting Importance
  • Second Quarter sales at US Surgical Corporation
    decline 25, resulting in a 22 mil
    lossattributed to larger than anticipated
    inventories on shelves of hospitals. US Surgical
    Quarterly, Jul 1993
  • IBM sells out new Aetna PC shortage may cost
    millions in potential revenue. Wall Street
    Journal, Oct 7, 1994

44
Principles of Forecasting
  • Forecasts are usually wrong
  • every forecast should include an estimate of
    error
  • Forecasts are more accurate for families or
    groups
  • Forecasts are more accurate for nearer periods.

45
Important Factors to Improve Forecasting
  • Record Data in the same terms as needed in the
    forecast production data for production
    forecasts time periods
  • Record circumstances related to the data
  • Record the demand separately for different
    customer groups

46
Forecast Techniques
  • Extrinsic Techniques projections based on
    indicators that relate to products examples
  • Intrinsic historical data used to forecast
    (most common)

47
Forecasting
  • Forecasting errors can increase the total cost of
    ownership for a product - inventory carrying
    costs
  • - obsolete inventory - lack of sufficient
    inventory - quality of products due to
    accepting marginal products to prevent
    stockout

48
Forecasting
  • Essential for smooth operations of business
    organizations
  • Estimates of the occurrence, timing, or magnitude
    of uncertain future events
  • Costs of forecasting excess labor excess
    materials expediting costs lost revenues

49
Forecasting
  • Predicting future events
  • Usually demand behavior over a time frame
  • Qualitative methods
  • Based on subjective methods
  • Quantitative methods
  • Based on mathematical formulas

50
Impact of Just-in-Timeon Forecasting
  • Just in time as a inventory method
  • Just in time as a Continuous process improvement
    program
  • Just in time - one on the shelf
  • Usage factors
  • Single order vs. Case order

51
Strategic Role of Forecasting
  • Focus on supply chain management
  • Short term role of product demand
  • Long term role of new products, processes, and
    technologies
  • Focus on Total Quality Management
  • Satisfy customer demand
  • Uninterrupted product flow with no defective
    items
  • Necessary for strategic planning

52
Strategic Role of Forecasting
  • Focus on supply chain management
  • Short term role of product demand
  • Long term role of new products, processes, and
    technologies
  • Focus on Total Quality Management
  • Satisfy customer demand
  • Uninterrupted product flow with no defective
    items
  • Necessary for strategic planning

53
Total Quality Management
  • Management approach to long term success through
    customer satisfaction
  • Total Quality Control - process of creating and
    producing quality goods and services that meet
    the expectations of the customer
  • quality - conformance to requirements or fitness
    for use

54
Trumpet of Doom
  • As forecast horizon increases, so does the
    forecasting error (i.e., accuracy decreases)
    shorten horizon by shortening of cycles or flow
    times
  • Law of Large Numbers as volume increases,
    relative variability decreases forecasting
    error is smaller goal forecast at aggregate
    levels collaborate standardize parts
  • Volume and activity increase at end of reporting
    periods Krispy Kreme

55
Components of Forecasting Demand
  • Time Frame
  • Short-range, medium-range, long-range
  • Demand Behavior
  • Trends, cycles, seasonal patterns, random

56
Time Frame
  • Short-range to medium-range
  • Daily, weekly monthly forecasts of sales data
  • Up to 2 years into the future
  • Long-range
  • Strategic planning of goals, products, markets
  • Planning beyond 2 years into the future

57
Demand Behavior
  • Trend
  • gradual, long-term up or down movement
  • Cycle
  • up down movement repeating over long time frame
  • Seasonal pattern
  • periodic oscillation in demand which repeats
  • Random movements follow no pattern

58
Forms of Forecast Movement
Figure 8.1
59
Forecasting Methods
  • Time series
  • Regression or causal modeling
  • Qualitative methods
  • Management judgment, expertise, opinion
  • Use management, marketing, purchasing,
    engineering
  • Delphi method
  • Solicit forecasts from experts

60
Forecasting Process
Figure 8.2
61
Time Series Methods
  • Statistical methods using historical data
  • Moving average
  • Exponential smoothing
  • Linear trend line
  • Assume patterns will repeat
  • Naive forecasts
  • Forecast data from last period

62
Moving Average
  • Average several periods of data
  • Dampen, smooth out changes
  • Use when demand is stable with no trend or
    seasonal pattern
  • stock market analysis - trend analysis

63
Moving Average
  • Average several periods of data
  • Dampen, smooth out changes
  • Use when demand is stable with no trend or
    seasonal pattern

Sum of Demand In n Periods n
64
Simple Moving Average
Example 8.1
65
Simple Moving Average
DaugDsepDoct
MAnov
110 orders for Nov
Example 8.1
66
Simple Moving Average
Example 8.1
67
Simple Moving Average
91 orders for Nov
Example 8.1
68
Simple Moving Average
Example 8.1
69
Smoothing Effects
Figure 8.2
70
Smoothing Effects
Figure 8.2
71
Smoothing Effects
Figure 8.2
72
Smoothing Effects
Figure 8.2
73
Weighted Moving Average
  • Adjusts moving average method to more closely
    reflect data fluctuations

74
Weighted Moving Average
  • Adjusts moving average method to more closely
    reflect data fluctuations

75
Weighted Moving Average Example
Example 8.2
76
Weighted Moving Average Example
3 Month 110 5 month 91
77
Exponential Smoothing
  • Averaging method
  • Weights most recent data more strongly
  • Reacts more to recent changes
  • Widely used, accurate method

78
Exponential Smoothing
Ft 1 ??Dt (1 - ?)Ft where Ft 1 forecast
for next period Dt actual demand for present
period Ft previously determined forecast for
present period ?? weighting factor, smoothing
constant
  • Averaging method
  • Weights most recent data more strongly
  • Reacts more to recent changes
  • Widely used, accurate method

79
Forecast for Next Period
  • Forecast (weighting factor)x(actual demand for
    period)(1-weighting factor)x(previously
    determined forecast for present period)

0 gt ? lt 1
Lesser reaction to recent demand
Greater reaction to recent demand
80
Exponential Smoothing
81
Exponential Smoothing
Example 8.3
82
Exponential Smoothing
Example 8.3
83
Linear Trend Line
y a bx where a intercept (at period
0) b slope of the line x the time
period y forecast for demand for period x
84
Seasonal Adjustments
  • Repetitive increase/ decrease in demand
  • Use seasonal factor to adjust forecast

85
Seasonal Adjustments
  • Repetitive increase/ decrease in demand
  • Use seasonal factor to adjust forecast

demand for period/sum of demand
86
Seasonal Adjustment
87
Seasonal Adjustment
88
Seasonal Adjustment
89
Seasonal Adjustment
Forecast for 1st qtr 2002
Forecast for 2002 using simple 3 year moving ave
90
Forecast Accuracy
  • Find a method which minimizes error
  • Error Actual - Forecast
  • Mean Absolute Deviation (MAD)

91
Mean Absolute Deviation (MAD)
where t the period number Dt demand
in period t Ft the forecast for period t
n the total number of periods ???? the
absolute value
92
MAD Example
93
MAD Example
94
MAD Example
95
Mean Absolute Deviation
96
Forecast Control
  • Reasons for out-of-control forecasts
  • Change in trend
  • Appearance of cycle
  • Weather changes
  • Promotions
  • Competition
  • Politics

97
Tracking Signal
  • Tracking Signal establishes control limits -
    usually /- 3 MAD
  • The greater the tracking signal the more the
    demand exceeds the forecast
  • Sum(Demand-Forecast)/Mean Absolute Deviation
  • Sometimes called Running Sum of Forecasting Error

98
Tracking Signal
  • Compute each period
  • Compare to control limits
  • Forecast is in control if within limits

Use control limits of /- 2 to /- 5 MAD
99
Tracking Signal Values
100
Tracking Signal Values
101
Tracking Signal Values
102
Tracking Signal Plot
103
Tracking Signal Plot
104
Tracking Signal Plot
105
Forecasting
  • Long Term location, capacity, new product
    design
  • Short Term production, inventory control, labor
    levels, cost controls

Questions?
106
Next Week
  • Chap 6
  • Chapter 12
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