Introduction to Supply Chain Management

Dr. Nitin Seth

Associate Professor,

IIFT, New Delhi

CHANGES TO WORLD ECONOMY

• Globalization

• Accelerated Pace of Change

• Transition to Market Driven

• Rapid Growth of Knowledge based service sector

• Change in demographic profile

What is Operations Management?

What is Operations Management?Management of day-to-day activities of a company

Commonly, Operations is separated into two broad groups:– Production Ops: manufactured goods

– Service Ops: immaterial; transfer of information, non-substantive

Production OperationsExamples of industries involved in Production Ops:• Autos/Airlines• Computer chips• Print• Electronics• Furniture

Examples of jobs in Production Ops:• Plant management• Materials planning• Supply chain• Logistics• Process improvement• Consulting

Service Operations

Examples of industries involved in Service Ops:• Banking• Credit cards• Investment management• Call centers• Cable/Utilities• Airline

Examples of jobs in Service Ops:• Call center manager• Backroom at bank• Load balancing at airline• Queuing line management

Terminology: Goods verses services

Goods Services Product tangible Intangible

Resale yes no

Inventory yes no

Quality easier harder

Customer Interaction

Can be low high

Transportability yes no

Location Wherever you want Where the customer wants it

Automation Standardized yes Standardized yes

Manufacturing and Service Operations

• Manufacturing organization = produces physical goods

• Service organization = produces non-physical outputs that require customer involvement and cannot be stored in inventory.

A Supply Chain

Suppliers CustomersOperations

Logistics Logistics

Information Information

Supply Chain Model

THE SUPPLY CHAIN

Supply chain is network of various business entities and processes linking Suppliers, Operations and Customers

Suppliers Operations Customers

Objective is to optimize the over all performance of the entire network

Need For Managing Supply Chain

• Gaining competitiveness

• Pressures from Privatization & Globalization

• Changing customer demands

• Knowledgeable Customers

Changing scenario in Manufacturing

Past Days

• Small Product Variations

• High Volume and Long Production Runs

• Unconnected islands of technology thereby making improvement a difficult task to achieve

• Profit through improving returns on assts.

Present Days

• Large Product Variations

• Low Volume and Short Production runs

• Continuous improvement in Cellular Manufacturing

• Profits through elimination of Waste , reducing Inventory and maximum Value addition.

The Transformation Process

Inputs

Customers/or materials

Transformation

Process

Transformation process

Outputs

Goods & Services

What is Productivity?Defined

Productivity is a common measure on how well resources are being used. In the broadest sense, it can be defined as the following ratio:

OutputsInputs

Examples of Productivity Measurement

1. Partial measure (single factor)

Output / Labor, Output / Capital

2. Multi-factor measure

Output

Capital + Labor

3. Total measure

Output

All inputs

Examples of Partial Measures

Business Measure

Restaurant……………..Customers / labor hour

Retail Store…………….Sales / square foot

Chicken Farm…………..lb. Of meat / lb of feed

Utility Plant…………….Kw / ton of coal

Paper Mill………………tons of paper / cord of wood

Types of Decisions

1. Strategic or long-range decisions

2. Tactical or medium- range decisions

3. Operational planning and control or short-range decisions

Facilities Location• Critical Decision – long lasting impact on

financial, employment and distribution patterns.

• Factors affecting Location Decision-– Capital –Banking facilities , loans etc– Raw Material – Availability, suppliers– Labor – supply , skills , costs– Competition –– Economic aspects – Wages to staff, taxes profits– Non economic impacts- Ecological , environmental and

social.– Political Considerations

Facility Location

• Cost/benefit analysis for each location

• Sophisticated techniques can help

- Linear programming

- Payoff matrix

- Decision tree analysis.

Plant Location

Many factors may be employed for determining the proper location. Some of them are:

Nearness to ultimate consumers Nearness to suppliers Nearness to raw materials Proximity to major transportation facilities Availability of a trained labor force Room for growth and expansion

Lessons • Managing supply chain is treated as

strategic weapon.

• This era can be referred as a business war between “supply chains and supply chains” not between organizations and organizations

Production systems and supply chain forecasting

Dr. Nitin Seth

Associate Professor,

IIFT, New Delhi

Typical Production Systems

• Mass Production

• Batch Production

• Job Shop Production

Mass Production

Production processes based on product needs after the end units have been produced.

Suppliers only involved as necessary, but not in the production process.

Firm’s dependence on customers to buy the products and use the services that are produced rather than basing use on predetermined needs.

Mass Production

Interchangeability of parts

Simplicity of attaching them to each other

Interchangeable workers

Highly centralized organization

Specialized machine tools and high fixed costs

High production volumes

•Low cost to consumers

Job Shop Flexible to custom work

Promoting Job satisfaction

Limiting investments

Decentralized organization

General purpose machine tools

Disadvantages Highly skilled workforce

Low production volume

More complex production control

High cost to consumers

Facilities Layout• Layout decisions are concerned with

arrangement of production, support ,customer service.

• Determination of Layout– Type of Product

– Type of Production Processes

– Volume of Production

Types of Facility Layout

1. Process layout

2. Product layout

3. Fixed-position layout

Process Layout

Machines that perform the same function are grouped together in one location.

ReceivingDept.

Lathes Grinders HeatTreatment

MillingMachinesSaws

Plating andPainting Assembly Storage

A

Product A

B

C

Product B

Product Layout

Machines and tasks are arranged by the sequence of steps in the production of a single product.

Re

ceiv

ing

Sto

rag

e

Lathe Paint Assembly

Saw Lathe Paint Assembly

Saw Mill Grinder Plating

A

B

C

Product A

Product B

Product C

Fixed-Position Layout

The product remains in one location and the required tasks and equipment are brought to it.

Ship

Materials

Supplies

Machines

Labor

Equipment

Forecasting … Definition

• Forecasting is the art of predicting the future value of a random variable (i.e., a variable with more than one possible outcome).

Aim of Forecasting

• In short, forecasting aims to predict the future values of a random variable as accurately as possible.

• We usually prepare these forecasts using all (or any part of) the relevant information available when the forecast is being prepared.

Other Important Criteria for Evaluating Forecasts

• Forecasts need to be:

• timely;

• cost effective;

• consistent; and,

• comprehensible by decision makers.

Quantitative and Qualitative Forecasting Techniques

Quantitative Techniques

• Statistically based

• Predictions based on observations of historic data

• Extrapolative or Causative

Qualitative Techniques

• Judgemental, subjective

• Predictions based on conjecture about the future

Extrapolative

• Time Series Analysis

Causative

• Regression Techniques

• Expert Opinion and Delphi Techniques

• Scenario Planning and War Gaming

Delphi Technique

– A Delphi Manager is appointed to coordinate and facilitate the creation of a consensus forecast

– The experts provide their opinions anonymously to the Delphi Manager to avoid the social pitfalls of committees

• The manager also provides structured, anonymous feedback such as one expert’s forecast relative to the others, along with any justifications

– The process is repeated with experts either converging towards a consensus view, as they revise their opinions based on the feedback from other experts, or more than one possible outcome is identified

Expert Opinion• Strengths

– Good for answering one, specific, single-dimensioned question

– No historic or primary market research is required– Forecasts are generated by those best qualified to

provide them– No meetings are required

• Weaknesses– How does one select or even identify “experts”?– Once identified they are likely to be expensive!– The process is time consuming and the process itself

can introduce bias– Research shows that it is less successful for

producing complex forecasts involving multiple factors

Quantitative Techniques: Demand Behavior

• Trend– a gradual, long-term up or down movement of

demand• Random variations

– movements in demand that do not follow a pattern• Cycle

– an up-and-down repetitive movement in demand• Seasonal pattern

– an up-and-down repetitive movement in demand occurring periodically

Time(a) Trend

Time(d) Trend with seasonal pattern

Time(c) Seasonal pattern

Time(b) Cycle

Dem

and

Dem

and

Dem

and

Dem

and

Random movement

Forms of Forecast Movement

3-month Simple Moving Average

Jan 120Feb 90Mar 100Apr 75May 110June 50July 75Aug 130Sept 110Oct 90Nov -

ORDERSMONTH PER MONTH

MA3 =

3

i = 1 Di

3

=90 + 110 + 130

3

= 110 ordersfor Nov

–––

103.388.395.078.378.385.0

105.0110.0

MOVING AVERAGE

5-month Simple Moving Average

Jan 120Feb 90Mar 100Apr 75May 110June 50July 75Aug 130Sept 110Oct 90Nov -

ORDERSMONTH PER MONTH

MA5 =

5

i = 1 Di

5

=90 + 110 + 130+75+50

5

= 91 ordersfor Nov

–––––

99.085.082.088.095.091.0

MOVING AVERAGE

y = a + bx

wherea = interceptb = slope of the linex = time periody = forecast for demand for period x

Linear Trend Line

b =

a = y - b x

wheren = number of periods

x = = mean of the x values

y = = mean of the y values

xy - nxy

x2 - nx2

xnyn

Least Squares Examplex(PERIOD) y(DEMAND) xy x2

1 73 37 12 40 80 43 41 123 94 37 148 165 45 225 256 50 300 367 43 301 498 47 376 649 56 504 81

10 52 520 10011 55 605 12112 54 648 144

78 557 3867 650

x = = 6.5

y = = 46.42

b = = =1.72

a = y - bx= 46.42 - (1.72)(6.5) = 35.2

3867 - (12)(6.5)(46.42)650 - 12(6.5)2

xy - nxyx2 - nx2

781255712

Least Squares Example (cont.)

Linear trend line y = 35.2 + 1.72x

Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units

70 –

60 –

50 –

40 –

30 –

20 –

10 –

0 –

| | | | | | | | | | | | |1 2 3 4 5 6 7 8 9 10 11 12 13

Actual

Dem

and

Period

Linear trend line

Learning’s• Layout decisions are based on:

• a) Type of product

• b) Type of production systems and

• c) Volume of production.

• Supply chain forecasting helps in efficient and effective utilization of resources.

Aggregate Production Planning

Dr. Nitin Seth

Associate Professor,

IIFT, New Delhi

• Long-range plans– Product and service design

– Location / layout

– Long term capacity

• Intermediate plans (General levels)– Employment

– Output and inventories

– Subcontracting and backorders

• Short-range plans (Detailed plans)– Machine loading

– Job assignments

– Production lot size and order quantities

Overview of Planning Levels

Aggregate Plan

Aggregate Plan: A statement of a company’s production rates, workforce levels, and inventoryholding based on estimates of customer requirements and capacity limitations

Service Industry

• Staffing Plan

• Regarding staffs and labor related factors

Manufacturing Industry

• Production Plan

• Regarding production rates and inventory

Aggregate Production Planning (APP)

• Determines resource capacity to meet

demand

• For intermediate time horizon, 6-12 months

• Not feasible to build new facility

• May be feasible to hire/lay off workers,

overtime, or subcontract

• Adjusting capacity OR managing demand

Aggregate Plan – Managerial Inputs

Supplier capabilities Storage capacity Materials availability

Materials

Current machine capacities Plans for future capacities Workforce capacities Current staffing level

Operations

New products Product design changes Machine standards

EngineeringLabor-market conditions Training capacity

Human resources

Cost data Financial condition of firm

Accounting and financeAggregate

plan

Customer needs Demand forecasts Competition behavior

Distribution and marketing

Aggregate Plan – Outputs

Units or dollars

subcontracted

Size ofWorkforce and

Workforce Adjustment

Productionper month

(in units or $)

InventoryLevels

Aggregate plan

Units or dollarsOf Backlogs,

backorders , or stockout

Reactive Alternatives

ComplementaryProducts

Competitive Pricing

Aggressive Alternatives

Aggregate Planning Strategies• Proactive

– Alter demand to match capacity

• Reactive

– Alter capacity to match demand

• Mixed

– Some of eachBalancing demand and capacity over the entire planning horizon

• Pricing

• Promotion

• Back orders

• New demand

Demand Options

• Hire and layoff workers

• Overtime/slack time

• Part-time workers

• Inventories

• Subcontracting

Capacity Options

Chase Demand

Time

Units

Production

Demand

Chase Approach

• Advantages

– Investment in inventory is low

– Labor utilization in high (overtime)

• Disadvantages

– The cost of adjusting output rates and/or workforce levels

Level Production

Time

Production

Demand

Units

Level Approach

• Advantages

– Stable output rates and workforce

• Disadvantages

– Greater inventory costs

– Increased overtime and idle time

– Resource utilizations vary over time

Mixed Strategy

Time

Units

Production

Demand

Aggregate Planning Strategies

Possible Alternatives Possible AlternativesStrategy during Slack Season during Peak Season

1. Chase #1: vary workforce Layoffs Hiringlevel to match demand

2. Chase #2: vary output Layoffs, undertime, Hiring, overtime,rate to match demand vacations subcontracting

3. Level #1: constant No layoffs, building No hiring, depletingworkforce level anticipation inventory, anticipation inventory,

undertime, vacations overtime, subcontracting,backorders, stockouts

4. Level #2: constant Layoffs, building antici- Hiring, depleting antici-output rate pation inventory, pation inventory, over-

undertime, vacations time, subcontracting,backorders, stockouts

Aggregate Plan to Master Schedule

AggregatePlanning

Disaggregation

MasterSchedule

Disaggregating the Aggregate Plan

• Master schedule: The result of

disaggregating an aggregate plan; shows

quantity and timing of specific end items for a

scheduled horizon.

• Rough-cut capacity planning: Approximate

balancing of capacity and demand to test the

feasibility of a master schedule.

Disaggregating the Aggregate Plan

Lessons

• Aggregate production planning is a powerful tool for resources management

• Suitable aggregate production planning strategy for an organization depends on various organizational and environmental factors

Thank You