SCM DEFINED

The supply chain is the network of organizations that are involved through upstream and down stream linkages, in different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.

Supply Chain may be defined as “flow of materials through procurement, manufacturing, distribution, sales & disposal”.

Dynamics of Material Flow

Supplier Plant RS Logistics Retailer

SCM FLOWS

MATERIAL

MONEY

INFORMATION

Procurement Manufacturing Distribution Customer

Supply Chain RelationshipSupply Chain Relationship

What is SCM ?What is SCM ?

BuyingBuying

SellingSelling

MakingMakingMovingMoving

Warehousing

Warehousing

SCM is a business network covering from buying, making, moving, warehousing to selling

Traditional SCM

SCM SCM Facilitate Specialization Facilitate Specialization

Intermediaries provide Exchange efficiencies Intermediaries provide Exchange efficiencies

Connectivity is King for product deliverywhen and where

IntermediariesIntermediaries

Customer Customer ProducerProducer

Cost

Reduced inventories

Reduced waste

Reduced total system costs Service

Establishment of a collaborative framework

Near real time information flow

Reduced variation and increased quality

Business growth opportunities

Preferred source for new opportunities

Expanded benefits to other customers

Supply Chain Benefits

The 3 Ts

Key IngredientsFor ImprovingSupply ChainEfficiencies

TimelinessVelocity

Acceleration

Trust

Collaboration

Empowerment

SharingInformation(eg. open schedules)

Accountability

Understanding the process

Transparency Ability to see the real situation

The Three Ts

Transactional Efficiency

Critical Data to improve:

Multiple handling

Transit damageProcess delays

Excess freight

DelaysEnd-to-end cycle-time

Warehouse fees Inventory turns

Yield

Late Deliveries

Perceived Value

Intrinsic Value

The Supply Chain “Iceberg”

Supply Chain Decisions

OPERATIONAL

TACTICAL

STRATEGIC

Procurement DistributionManufacturing Logistics

SCM FOCUS / LEARNINGS

• SERVICE COST• FLOW OF INFORMATION / MATERIAL AND CASH• INPUTS AND OUTPUTS

ELEMENTS OF SCM

• INVENTORY MANAGEMENT• WAREHOUSING• TRANSPORTATION

ShortageExcess

1. The stock of material lying with you for which payments are made but which are yet to be delivered to the customers and paid for by them.

2. Material stocked to meet the expected demand in the market.

3. An idle resource which locks the capital.

What is inventory

ShortageExcess

Why inventories are necessary

1. To satisfy the customer demands without time lag.

2. To cover time required for procurement of material.

3. To cater to fluctuations in demand.

4. Seasonal demand of products.

5. Production constraints of suppliers.

6. To retain supplier goodwill.

Inventory Exercise• WORK OUT INVENTORY NORMS BASED ON SERVICE

FREQUENCY, SALES AND DEMAND VARIABILITY & TRANSIT TIME VARIABILITY

• Consider sales qty. – 300 CLD’S per month, Demand variability – 20 %, Supply variability of + / - 2 Days & Service frequency of 1 / week

Costs Opportunity cost curve. Total costs A

Inventory + Service costs.

Low Service levels High I Interpretation:

At low service levels, costs due to lost opportunities are very high.

When service levels are raised, inventory + service costs increase marginally but costs due to lost opportunities come down drastically.

Enlarged view of portion marked at “A” is shown in the next graph for further explanation.

Service Level & Inv. Costs

Zone of Indifference

Zone of Perfection.

Zone ofImprovement

ENLARGED VIEW OF PORTION “A”

Explanation:

1. In ‘zone of improvement ’, as service level goes up by increasing stocks and incurring in extra expenditure for giving better service, the gains obtained due to better sales outweigh the costs incurred.

2. In ‘zone of indifference’, the gains and costs are more or less balanced.

3. In ‘zone of perfection’, as service levels are raised to near to 100%, the costs outweigh the gains but in modern competitive environment, this may become a necessity for survival

Scientific Replenishment System

The Use of Safety StockThe Use of Safety Stock

Inve

nto

ry o

n

Han

dIn

ven

tory

on

H

and

Stock out

Time

Stock out is avoided

Time

Safety Stock

ABC Analysis

• Based on principle of management by exception.

• Unit value is not a consideration. Analysis is based on

total consumption value of items in predetermined time span.

• Criticality/importance of item is not a consideration

• All the items are divided in three categories.

• Decisions are based on 80 : 20 rule.

ABC Analysis Exercise

•Classifying inventory according to some measure of importance and allocating control efforts accordingly.

–AA - very important–BB - mod. important–CC - least important

Annual valueof items

AA

BB

CC

High

Low

Few ManyNumber of Items

DECISION PARAMETERS FOR ABC ANALYSIS

• ADEQUACY OF STOCKS

• FREQUENCY OF STOCK CHECKING

• LOCATION IN WAREHOUSE

FSN AnalysisBased on speed of movement of material.

1. Some materials have regular and high volume demand and move

‘Fast’ (F),

2. some material have intermittent and unpredictable demand and

hence move ‘Slow’ (S)

3. and a few items have practically no takers and hence keep on lying

in stores for long period of time and categorized as ‘Non moving’

(N).

FAST MOVING SLOW MOVING NON MOVING

INVENTORY FOCUS / LEARNINGS

• What is Inventory and why do we need inventory ?

• How do we avoid non moving and slow moving inventory?

• How do we classify and analyze inventory?

ELEMENTS OF SCM

• INVENTORY MANAGEMENT

• WAREHOUSING• TRANSPORTATION

ELEMENTS OF WAREHOUSING

• LOCATION• LAYOUT• IDENTIFICATION• MATERIAL HANDLING

Layout principles

• Ease of receipts, storage and issues.

• Uninterrupted movement of material,

men and equipment.

• Optimum utilization of space.

• Ease of locating the material.

• Safety. & Security.

• Better supervision.

• Flexibility

• Building. : Preferably single storied,

enough height, proper lighting and

ventilation, protection against

hazards like fire and lightening.

1. Tagging.

2. Labeling.

3. Writing, painting,

engraving, stamping,

etching, color coding

on the part/case/box.

4. Bar coding.

Identification of Material

IMPROVED STORAGE SYSTEM

EXERCISE

Features of a good warehouse

1. Place for everything and everything in its

place.

2. FMFO – First Manufactured and First Out

principle.

3. Maintenance of prompt and correct

records.

4. Fast and courteous service to customers.

5. Minimum damages to the material.

6. Protection against pilferage.

7. Regular verification and inspection of

material.

8. Regular inventory taking and

reconciliation.

9. Maintaining inventory within specified

norms.

Learning's from the topic

1. How do we keep our warehouse in more orderly manner ?

( Understanding Location and layout of the

warehouse )

2. What activities we must do in the warehouse to ensure

proper identification & tracing of the material

3. How can we reduce our labour cost in the warehouse. What

mechanization we can do in our warehouse?

4. How can we ensure better material movement inside the

warehouse?

ELEMENTS OF SCM

• INVENTORY MANAGEMENT• WAREHOUSING

• TRANSPORTATION

Logistics Management

'Logistics is the process of strategically managing

the procurement, movement and storage of materials

(and related information flows) through the

organisation and its marketing channels

Objectives of Transport Management

1. Cost Optimization

2. Improved service

3. Transportation/logistics as a competitive

differentiator.

4. Time to market

CARRIER SELECTION

OUTSOURCING Vs. OWN VEHICLE

VEHICLE TYPE ( SIZE )

CUSTOMERS PER VEHICLE & TRIPS

PER VEHICLE( ROUTING )

Carrier Selection and Routing

• The practical meaning of the 4 C’s of selecting transportation services

1. Competition2. Cost3. Comparison4. Compromise

Sources Destinations

Your responsibility is to assist in defining

Right Product in the Right Quantity from the

Right Source to the Right Destination in the

Right Condition at the Right Time for the

Right Cost.

Transport Costs

Fixed cost Variable cost

Vehicle cost ( Depreciation )License feeInsurance costDriver salaryInterest costRoad taxAdministration Cost

Labour cost ( Laoding & Unloading )Fuel, Consumables & Oil cost

Factors Affecting Carrier DecisionCarrier makes investment to maximize return on assets.For this he has to consider following costs –

1. Vehicle-Related Cost : This is fixed cost in short term incurred for

purchasing or leasing the carrier.

2. Fixed Operating Cost : This includes any cost associated with

terminals, Road Tax, and labor.

3. Trip-Related Cost : This includes the price of labor and fuel incurred

for each trip independent of the quantity transported and depends on

the length and duration of the trip.

4. Quantity Related cost : This includes loading / Unloading cost and

part of fuel cost that varies with the quantity being transported.

5. Overhead cost : This includes, planning & scheduling cost, IT cost.

Routing & Scheduling In Transportation

This refers to the selection of customers to be visited by the particular vehicle and the sequence in which they will be visited.

For the companies to be successful, they have to do the routing and scheduling in such a way that they reduce the cost of transportation at the same time make the deliveries fast and meet the promised level of responsiveness to the customers.

To achieve this, the objective is to minimize cost by

Decreasing the number of vehicles, Reducing total distance traveled, Reducing total travel time & Reducing service failures ( delays )

Routing & Scheduling In Transportation

The objective of the supplier is to

• Pick the items needed and to load them on trucks for delivery

• Decide which vehicle will deliver to which customers & the route

that each truck will take.

• Ensure that no vehicle is overloaded at the same time try to load

all the vehicles fully.

• To do this, the technique that can be used is Savings Matrix

Method.

Identify The Savings Matrix - The trip RS

Cust X

RS

Means the visit starts at RS & goes to Customer X & returns to RS

The savings ( X, Y ) is the distance saved if the trips

RS RS

Cust X Cust Y

RS RS

Are combined to make a single trip RS

Cust X

Cust Y

RS

This saving is calculated by following formula

S ( X, Y ) = Dist ( RS, X) + Dist ( RS, Y ) – Dist (X, Y)

Assign Customers to Vehicles or RoutesSelect the route with highest savings and combine the 2 routes if the total load is less than the permitted load. Keep combining this way to get the route plan.

Sequence Customers within RoutesThe goal here is to minimize the distance each vehicle must travel. The procedure for this is as follows:

Farthest Insert : Given, a vehicle trip for each customer, evaluate the minimum increase in length if this customer is inserted at a suitable point in the trip and insert the customer with the largest minimum increase to obtain the new trip.

Nearest Insert : Given, a vehicle trip for each customer, evaluate the minimum increase in length if this customer is inserted at a suitable point in the trip and insert the customer with the smallest minimum increase to obtain the new trip.

Routing & Scheduling Exercise

Learnings & Assignments

1. Is selection of vehicle critical for the business? How to select a vehicle

for transportation?

2. How to decide sequence for delivery of goods to the retailers?

3. Is Outsourcing of transport vehicles more beneficial for us or Having

own vehicles more beneficial for us?

SCM Key Performance Measures

FMFO Deliveries during the month FMFO Adherence % ge = ---------------------------------------------------------- Total deliveries made during the month.

Orders Delivered On Time & FullCommitment % ge ( OTIF ) = ----------------------------------------------------- Orders Received in a month

Transport cost + Labour Cost + storage costSCM COST / TN = --------------------------------------------------------------------- Total sales

• Product Attributes

• Planning

• Request ForQuotation

• Availability• Purchase Order• Order Confirmation

• Call-Off• Order Status• Inventory Status

• ProductQuality

• Usage• InventoryChange

• ProductPerformance

• Delivery Message

• Goods Receipt• Invoice

• Credit/Debit Note• Business Acknowledgement

• Information Request• Complaint• Complaint Request

Plan Make Deliver Source Utility

SCM Process categorized according to the Supply-Chain Council’s, Supply-Chain Operations Reference (SCOR) model

Supply Chain Model Foundation

Bullwhip Effect

Factors contributing to the Bullwhip Effect:

• Forecast Errors • Lead Time Variability • Batch Ordering • Price Fluctuations • Product Promotions • Inflated Orders

Methods intended to reduce uncertainty, variability, and lead time:

• Vendor Managed Inventory (VMI) • Just In Time replenishment (JIT) • Strategic partnership

Bullwhip Effect

Bullwhip Effect

Causes of Bullwhip Effect

• Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered)

• Order Batching (to realise logistic Economies of scale + Reducing order processing costs)

• Price Fluctuations (resulting in over-reactions)

• Supply Rationing (Proportionate rationing; unrestricted order acceptance + free return policy)

Counter-Measures for BWE

• Avoid multiple demand forecasts– Order based on ultimate customer

demand– Use EDI+POS+VMI– Choose a good forecasting method (PLC

has a major say)– Move from decentralized DM to

centralized planning (visibility+control is better)

– Remove layers in channel if possible

• Eg: HP, Apple, IBM, P&G/Walmart

Counter-Measures for BWE

• Break order batchesIncrease frequency of ordering (OP costs reduced by EDI)Resort to standardization to minmize OP costsUse 3PL to make small batch replenishments economicalAggregate across retail outlets to utilize FTL EoSReduce safety stocks by cutting lead times

Eg: 3PL using Fedex, P&GStabilize pricesEDLP (P&G)Special purchase contracts

• Eliminate shortage gamingAllocate based on past sales (Sun)Share capacity and information (HP, Motorola)Limit flexibility wrt time (HP, Seagate)