Supply Chain Planning

Supply Chain Planning

Supply chain planning – management process

which optimizes the manufacturing and
delivery of goods from raw materials to
finished products, and from suppliers all the
way to customers,
• Also include returns, recycling, and reverse
logistics.
• Essentially, it’s a demand-driven balancing
act between shortage and surplus.
Planning Sequence
 Plan Levels

➢ Short-range plans (Detailed plans)

➢ Intermediate plans (General levels)
➢ Long-range plans
 Components of the
Supply Chain Planning Process
1. Demand Forecasting - helps businesses avoid
costly surplus and anticipate customer needs
to maximize profits.
2. Inventory management - allows you to meet
service level targets without carrying or
paying for more inventory than you actually
need. This helps in giving more precise
predictive recommendations.
 Components of the
Supply Chain Planning Process
3. Response and supply planning (Aggregate
Planning) - helps organizations meet their
operational challenges through data analytics .
This creates a business supply chain that is
more resilient, efficient, and adaptable.
4. Sales and operations planning (S&OP) - Sales
and operations planning offers you the
opportunity to make better decisions that are
informed by key supply chain drivers
 Components of the
Supply Chain Planning Process
5. Demand-driven replenishment (DDMRP) -
helps organizations become more agile and
adaptable without compromising the quality
of their product.
6. Supply chain monitoring - provides insights
that can improve every stage of your supply
chain and manufacturing process.
 Demand Forecasting
Forecasting is the art and science of predicting the
future events
➢ Demand Forecasting (DF) is a projection of past
information and/or experience into expectation of
demand in the future.
➢ DF is necessary for developing plans to make
deliveries in reasonable time and satisfy future
demand.
➢ Once a demand forecast is at hand, plans for
capacity and other resources could be established.
 Demand Forecasting

Components and Methods

Companies must identify the factors that influence
future demand and then ascertain the relationship
between these factors and future demand
• Past demand
• Lead time of product replenishment
• Planned advertising or marketing efforts
• Planned price discounts
• State of the economy
• Actions that competitors have taken
 Demand Forecasting
5 Important Points in Forecasting
1. Understand the objective of forecasting.
2. Integrate demand planning and forecasting
throughout the supply chain.
3. Identify the major factors that influence the
demand forecast.
4. Forecast at the appropriate level of aggregation.
5. Establish performance and error measures for
the forecast.
 Inventory Management
➢ Inventories - raw materials, work-in-
process products and finished goods
that are considered to be the portion of
a business's assets that are ready or will
be ready for sale.
➢ Inventory represents one of the most
important assets of a business.
 Inventory Management
➢ Part of SCM that plans, implements and controls the
efficient, effective, forward, and reverse flow and storage of
goods, services, and related information between the point
of origin and the point of consumption in order to meet
customer’s requirements
➢ Continuing process of planning, organizing and controlling
inventory that aims at minimizing the investment in
inventory while balancing supply and demand”
➢ Specifically, the process is a supervision of supply, storage
and accessibility of items in order to ensure an adequate
supply without excessive oversupply
 Inventory Management issues

• Maintenance policies
• Transportation Cost
• Holding Cost
• Ordering Cost
 Aggregate Planning
Aggregate Planning - process by which a
company determines levels of capacity,
production, subcontracting, inventory,
stockouts, and pricing over a specified time
horizon.
• goal is to maximize profit
• decisions made at a product family (not
SKU) level
• time frame of 3 to 18 months
• Determine use of its facilities
Aggregate Planning
 Sales and Operations Planning

The goal is to equip business decision

makers with the true insight of current
and future performance of the portfolio
so that the right portfolio choices can be
made on investments, execution course
correction, the balance of service, cash
performance and manufacturing
productivity
Sales and Operations Planning

The S&OP process includes

forecasting, demand and supply
planning, and executive review.
The goal is to coordinate sales
and operations planning across
business functions so they're all
on the same page. The exact
steps can vary depending on the
company, its products, and its
industry.
Role of Aggregate Planning in SC
 Responding to Predictable Variability
in a Supply Chain
➢ Predictable variability is change in demand
that can be Forecasted
➢ Can cause increased costs and decreased
responsiveness in the supply chain

Two broad options:

1. Manage supply using capacity, inventory,
subcontracting, and backlogs
2. Manage demand using short term price
discounts and promotions
 Sales and Operations Planning
➢ Managing Supply ➢ Managing Supply
Managing capacity Managing inventory
• Time flexibility from • Using common
workforce components across
• Use of seasonal
multiple products
workforce
• Use of dual facilities • Build inventory of high
specialized and flexible demand or predictable
• Use of subcontracting demand products
• Designing product
flexibility into
production processes
 Sales and Operations Planning
Managing Demand
With promotion, three factors lead to increased demand
• Market growth
• Stealing share
• Forward buying
Factors influencing timing of a promotion
• Impact of promotion on demand
• Cost of holding inventory
• Cost of changing the level of capacity
• Product margins
Sales and Operations Planning
Sales and Operations Planning
➢ Demand-driven replenishment (DDMRP)
- helps organizations become more agile
and adaptable without compromising
the quality of their product.
➢ Supply chain monitoring - provides
insights that can improve every stage of
your supply chain and manufacturing
process
Questions?
THANK YOU
Network Design in
Supply Chain
 Framework for
Supply Chain Decisions
➢ Maximize the overall profitability of the supply
chain network while providing customers with the
appropriate responsiveness
➢ Many trade offs during network design
➢ Network design models used
• to decide on locations and capacities
• to assign current demand to facilities and identify
transportation lanes
Distribution
Network
 Framework for
Supply Chain Decisions

➢ Each driver affects the balance between responsiveness and

efficiency and the resulting strategic fit.
 Distribution Network Design
in the Supply Chain
Distribution - refers to the steps taken to move and
store a product from the supplier stage to the
customer stage in a supply chain.

Drives profitability by directly affecting supply chain

cost and the customer value

Choice of distribution network can achieve supply

chain objectives from low cost to high responsiveness
 Factors Influencing
Distribution Network Design
➢ Distribution network performance evaluated along
two dimensions:
• Value provided to the customer
• Cost of meeting customer needs

➢ Evaluate the impact on customer service and cost for

different distribution network options
➢ Profitability of the delivery network determined by
revenue from met customer needs and network
costs
 Factors Influencing
Distribution Network Design

➢ Elements of customer service influenced by network structure:

⁻ Response time - Product variety
⁻ Product availability - Customer experience
⁻ Time to market - Order visibility
⁻ Returnability

➢ Supply chain costs affected by network structure:

⁻ Inventories -Transportation
⁻ -Facilities -Information
 Design Options for a
Distribution Network

Considerations for key decision on

distribution network choices from the
manufacturer to the end consumer:
a) Will product be delivered to the customer
location or picked up from a prearranged site?
b) Will product flow through an intermediary (or
intermediate location)?
 Design Options for a
Distribution Network
Six design options to be used.
1. Manufacturer storage with direct
shipping
2. Manufacturer storage with direct
shipping and in transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last mile delivery
5. Manufacturer/distributor storage with
customer pickup
6. Retail storage with customer pickup
Design Options for a
Distribution Network
Design Options for a
Distribution Network
 Design Options for a
Distribution Network

➢ Distribution networks that ship directly to the

customer are better suited for a large variety
of high value products that have low and
uncertain demand.

➢ These networks incur lower facility costs and

carry low levels of inventory but incur high
transportation cost and provide a slow
response time.
Design Options for a
Distribution Network
Design Options for a
Distribution Network
Design Options for a
Distribution Network
Design Options for a
Distribution Network
 Design Options for a
Distribution Network

➢ Distribution networks that carry local

inventory are suitable for products with high
demand, especially if transportation is a large
fraction of total cost.

➢ These networks incur higher facility and

inventory cost but lower transportation cost
and provide a faster response time.
 Performance of Channels

➢ Response time to customers

• Picking up physical products faster than other channels
• Online channel may be fastest for information goods

➢ Product variety
• Easier to offer larger selection remotely

➢ Product availability
• Aggregating inventory improves product availability

➢ Customer experience
• Channels have complementarity strengths

➢ Faster time to market

• Online/showrooms are quicker than retailing
 Performance of Channels
➢ Order Visibility
• Critical for showrooms or online
• Automatic in retail
➢ Returnability
• Easier with physical locations
• Proportion of returns likely to be higher when information
exchange is remote
➢ Direct Sales to Customers
• Manufacturers can use remote information exchange for direct
access to customers
➢ Efficient Funds Transfer
• Internet and smartphones
Global Supply Chain
Network
 Impact of Globalization on
Supply Chain Networks

➢ Opportunities to simultaneously increase

revenues and decrease costs
➢ Accompanied by significant additional risk and
uncertainty
➢ Difference between success and failure often the
ability to incorporate suitable risk mitigation into
supply chain design
➢ Uncertainty of demand and price drives the value
of building flexible production capacity
 Framework for
Global Site Location
Questions?
THANK YOU
Supply Chain
DECISIONS
 OBJECTIVE OF SCM

Supply chain management is concerned with the efficient

integration of suppliers, factories, warehouses and stores so that
merchandise is produced and distributed:
– In the right quantities
– To the right locations
– At the right time
In order to:
– Minimize total system cost and maximize the overall
value generated
– Satisfy market demand and customer service
requirements
– Face global competition
– Increase supply chain profitability
 Supply Chain Decisions

DESIGN PLANNING EXECUTION CONTROL MOITORING

 Supply Chain Decisions

➢ Ensure effective flow of goods and information

➢ Clusters of store near the distribution center.
➢ Collaboration with suppliers.
➢ Active efforts to steer customer at real time.
➢ Centralized manufacturing
➢ Worth of inventory.
➢ Manage cash flow
➢ Should be flexible.
 Framework for
Supply Chain Decisions

➢ Each driver affects the balance between responsiveness and

efficiency and the resulting strategic fit.
 Decision Phases in a
Supply Chain

1. Supply Chain Strategy or Design

• How to structure for next several years
• What is the chain configuration
• How resources allocated
• What process each stage will perform
• Outsourcing or In house functions
• Locations and capacities of production and
warehouses
• Mode of transportation
• Type of information system
 Decision Phases in a
Supply Chain

2. Supply Chain Planning

• For several months.
• Forecast for the coming year
• Analyses demand in different markets
Which market? Location?
• Sub - contracting
• Inventory policies Timing
• Price promotions
 Decision Phases in a
Supply Chain
3. Supply Chain Operations
• weekly or daily operation decisions
• Individual customer orders
• Allocation of inventory and production
• Set dates for activities
• Generate lists for warehouses
• Allocation of shipments
• Schedules of trucks.
NETWORK DESIGNS
 Role of Network Design
1. Facility role: What role should each
facility play? What processes are
performed at each facility?
2. Facility location: Where should facilities
be located?
3. Capacity allocation: How much capacity
should be allocated to each facility?
4. Market and supply allocation: What
markets should each facility serve? Which
supply sources should feed each facility
 Factors Influencing
Distribution Network Design
➢ Distribution network performance evaluated along
two dimensions:
• Value provided to the customer
• Cost of meeting customer needs

➢ Evaluate the impact on customer service and cost for

different distribution network options
➢ Profitability of the delivery network determined by
revenue from met customer needs and network
costs
 Factors Influencing
Distribution Network Design

➢ Elements of customer service influenced by network structure:

⁻ Response time - Product variety
⁻ Product availability - Customer experience
⁻ Time to market - Order visibility
⁻ Returnability

➢ Supply chain costs affected by network structure:

⁻ Inventories -Transportation
⁻ -Facilities -Information
 Design Options for a
Distribution Network

Considerations for key decision on

distribution network choices from the
manufacturer to the end consumer:
a) Will product be delivered to the customer
location or picked up from a prearranged site?
b) Will product flow through an intermediary (or
intermediate location)?
 Design Options for a
Distribution Network
Six design options to be used.
1. Manufacturer storage with direct
shipping
2. Manufacturer storage with direct
shipping and in transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last mile delivery
5. Manufacturer/distributor storage with
customer pickup
6. Retail storage with customer pickup
SUPPLY CHAIN PLANNING
 Supply Chain Planning

Supply chain planning – management process

which optimizes the manufacturing and
delivery of goods from raw materials to
finished products, and from suppliers all the
way to customers,
• Also include returns, recycling, and reverse
logistics.
• Essentially, it’s a demand-driven balancing
act between shortage and surplus.
Planning Sequence
 Plan Levels

➢ Short-range plans (Detailed plans)

➢ Intermediate plans (General levels)
➢ Long-range plans
 Components of the
Supply Chain Planning Process
1. Demand Forecasting - helps businesses avoid
costly surplus and anticipate customer needs
to maximize profits.
2. Inventory management - allows you to meet
service level targets without carrying or
paying for more inventory than you actually
need. This helps in giving more precise
predictive recommendations.
 Components of the
Supply Chain Planning Process
3. Response and supply planning (Aggregate
Planning) - helps organizations meet their
operational challenges through data analytics .
This creates a business supply chain that is
more resilient, efficient, and adaptable.
4. Sales and operations planning (S&OP) - Sales
and operations planning offers you the
opportunity to make better decisions that are
informed by key supply chain drivers
 Components of the
Supply Chain Planning Process
5. Demand-driven replenishment (DDMRP) -
helps organizations become more agile and
adaptable without compromising the quality
of their product.
6. Supply chain monitoring - provides insights
that can improve every stage of your supply
chain and manufacturing process.
 Demand Forecasting
Forecasting is the art and science of predicting the
future events
➢ Demand Forecasting (DF) is a projection of past
information and/or experience into expectation of
demand in the future.
➢ DF is necessary for developing plans to make
deliveries in reasonable time and satisfy future
demand.
➢ Once a demand forecast is at hand, plans for
capacity and other resources could be established.
 Demand Forecasting

Components and Methods

Companies must identify the factors that influence
future demand and then ascertain the relationship
between these factors and future demand
• Past demand
• Lead time of product replenishment
• Planned advertising or marketing efforts
• Planned price discounts
• State of the economy
• Actions that competitors have taken
 Demand Forecasting
5 Important Points in Forecasting
1. Understand the objective of forecasting.
2. Integrate demand planning and forecasting
throughout the supply chain.
3. Identify the major factors that influence the
demand forecast.
4. Forecast at the appropriate level of aggregation.
5. Establish performance and error measures for
the forecast.
 Inventory Management
➢ Inventories - raw materials, work-in-
process products and finished goods
that are considered to be the portion of
a business's assets that are ready or will
be ready for sale.
➢ Inventory represents one of the most
important assets of a business.
 Aggregate Planning
Aggregate Planning - process by which a
company determines levels of capacity,
production, subcontracting, inventory,
stockouts, and pricing over a specified time
horizon.
• goal is to maximize profit
• decisions made at a product family (not
SKU) level
• time frame of 3 to 18 months
• Determine use of its facilities
Aggregate Planning
 Sales and Operations Planning

The goal is to equip business decision

makers with the true insight of current
and future performance of the portfolio
so that the right portfolio choices can be
made on investments, execution course
correction, the balance of service, cash
performance and manufacturing
productivity
Sales and Operations Planning

The S&OP process includes

forecasting, demand and supply
planning, and executive review.
The goal is to coordinate sales
and operations planning across
business functions so they're all
on the same page. The exact
steps can vary depending on the
company, its products, and its
industry.
Role of Aggregate Planning in SC
SALES OPERATIONS
 Responding to Predictable Variability
in a Supply Chain
➢ Predictable variability is change in demand
that can be Forecasted
➢ Can cause increased costs and decreased
responsiveness in the supply chain

Two broad options:

1. Manage supply using capacity, inventory,
subcontracting, and backlogs
2. Manage demand using short term price
discounts and promotions
 Sales and Operations Planning
➢ Managing Supply ➢ Managing Supply
Managing capacity Managing inventory
• Time flexibility from • Using common
workforce components across
• Use of seasonal
multiple products
workforce
• Use of dual facilities • Build inventory of high
specialized and flexible demand or predictable
• Use of subcontracting demand products
• Designing product
flexibility into
production processes
 Sales and Operations Planning
Managing Demand
With promotion, three factors lead to increased demand
• Market growth
• Stealing share
• Forward buying
Factors influencing timing of a promotion
• Impact of promotion on demand
• Cost of holding inventory
• Cost of changing the level of capacity
• Product margins
Sales and Operations
Sales and Operations
➢ Demand-driven replenishment (DDMRP)
- helps organizations become more agile
and adaptable without compromising
the quality of their product.
➢ Supply chain monitoring - provides
insights that can improve every stage of
your supply chain and manufacturing
process
Questions?
THANK YOU
 Procurement and
Sourcing Processes
Week 7 – October 1 and 3, 2024
 Cycle View of
2 Supply Chain Processes
Given the 5 stages of a Supply Chain, all processes can be
broken down into the following four (4) process cycles namely:
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
➢ Each cycle occurs at the interface between two successive stages of the
supply chain.
➢ Not every supply chain will have all four cycles clearly separated.
 Purchasing

Purchasing or Procurement - the process by

which companies acquire raw materials,
components, products, services, or other
resources from suppliers to execute their
operations .
➢ responsible for obtaining the materials,
parts, and supplies and services needed to
produce a product or provide a service
 Purchasing
Purchasing cycle:
Series of steps that begin with a request
for purchase and end with notification of
shipment received in satisfactory
condition.
 Purchasing Cycle
 Requisition received
 Supplier selected

 Order is placed

 Monitor orders

 Receive orders

Value analysis: Examination of the function

of purchased parts and materials in an effort
to reduce cost and/or improve performance
 Goal of Purchasing

“ Develop and implement purchasing plans

for products and services that support
operations strategies ”
 Duties of Purchasing

➢ Identifyingsources of supply
➢ Negotiating contracts

➢ Maintaining a database of suppliers

➢ Obtaining goods and services

➢ Managing supplies
 Centralized vs
Decentralized Purchasing
Centralized Decentralized
purchasing purchasing
➢ Purchasing is ➢ Individual
handled by one departments or
special department separate locations
handle their own
purchasing
requirements
Purchasing Interfaces
 Suppliers Management

➢ Choosing suppliers
➢ Evaluating sources of supply

➢ Supplier audits

➢ Supplier certification

➢ Supplier relationships

➢ Supplier partnerships
 Sourcing

Sourcing - entire
set of business
processes
required to
purchase goods
and services
 Factors in Choosing a Supplier
➢ Quality and quality assurance
➢ Flexibility
➢ Location
➢ Price
➢ Product or service changes
➢ Reputation and financial stability
➢ Lead times and on-time delivery
➢ Other accounts
 Evaluating Sources of Supply

Vendor analysis - evaluating the sources

of supply in terms of:
• Price
• Quality
• Services
• Location
• Inventory policy
• Flexibility
Supplier as a Partner
 Supplier Partnerships
➢ Ideas from suppliers could lead to improved
competitiveness;
➢ Reduce cost of making the purchase
➢ Reduce transportation costs
➢ Reduce production costs
➢ Improve product quality
➢ Improve product design
➢ Reduce time to market
➢ Improve customer satisfaction
➢ Reduce inventory costs
➢ Introduce new products or services
 Critical Issues

➢ Strategic importance
 Cost
 Quality
 Agility
 Customer service
 Competitive advantage
 Critical Issues
➢ Technology management
 Benefits
 Risks
➢ Purchasing function
 Increased outsourcing
 Increased conversion to lean
production
 Just-in-time deliveries
 Globalization
 Outsourcing

Outsourcing - the strategic use of outside

resources to perform activities traditionally
handled by internal staff and resources,”

Outsourcing questions:
1. Will the third party increase the supply chain surplus
relative to performing the activity in-house?
2. To what extent do risks grow upon outsourcing?
3. Are there strategic reasons to outsource?
Outsourcing
 Why do companies Outsource
▪ Reduces administrative ▪ Avoid major investments
burdens ▪ Handle overflow situation
▪ Focus on strategic areas ▪ Improve flexibility
▪ Reduce costs ▪ Improve ratios
▪ Focus on core functions ▪ Jump on to bandwagon
▪ Acquire new skills ▪ Enhance credibility
▪ Acquire better ▪ Maintain old functions
management
▪ Improve performance
▪ Assist a fast growth
situation ▪ Begin a strategic initiative
▪ Avoid labor problems
▪ Focus on strategy
Range of Outsourcing Activities in SCM
 Concerns about
Outsourcing in SCM

➢ Fear of losing control

➢ Lack of confidence
➢ Lack of outsourcing education
➢ Management philosophy and tradition
 Benefits Of
Effective Sourcing Decision
➢ Performing higher quality at lower lost
➢ Achieving better economic scale
➢ Reducing cost of purchasing
➢ Design collaboration
➢ Co ordination of supplier
➢ Achieving lower purchase price
Questions?
THANK YOU
 Inventory
Management

Week 8 – October 10, 2024

 INVENTORY

Inventory - A physical resource that an

organization holds in stock with the
intent of selling it or transforming it into
a more valuable state. It encompasses
all the raw materials, component parts,
supplies, work in process, and finished
goods within a supply chain
 INVENTORY

Supplier Manufacturer Distributor Retailer Consumer

• Goods in-transit
• Raw materials / parts
• Work-in process • Finished goods
• Finished goods

Inventories are held in various stages of Supply Chain

 Purposes of Inventory

➢ To maintain independence of operations.

➢ To meet variation in product demand.
➢ To allow flexibility in production scheduling.
➢ To provide a safeguard for variation in raw
material delivery time.
➢ To take advantage of economic purchase-
order size.
 Role of Inventory
in Supply Chain

Understocking : Demand
exceeds amount available -
Lost margin and future sales Overstocking : Amount available
exceeds demand - Liquidation,
Obsolescence, Holding

Matching Supply and

Demand
 Role of Inventory
in Supply Chain
Overall Trade Off
➢ Increasing inventory generally makes the supply
chain more responsive
➢ A higher level of inventory facilitates a reduction
in production and transportation costs
➢ Inventory holding costs increase
 Inventory Management

➢ Process of planning, controlling, and

optimizing inventory levels to meet
customer demand, minimize costs, and
increase efficiency.
 Inventory Management

➢ Focuses on activities such as purchasing,

storing, tracking, and managing inventory
to ensure that stock levels are sufficient
➢ It allows you to meet service level targets
without carrying or paying for more
inventory than you actually need.
 Benefits of Inventory
Management

➢ Improve customer service

➢ Reduce inventory investment
➢ Increase the profitability of business
➢ Increase productivity
➢ Inventory is insurance
 COMPONENTS OF
INVENTORY DECISIONS

Basic decisions to make regarding the creation

and holding of inventory:
1. Cycle Inventory - amount of inventory needed
to satisfy demand for the product in the period
between shipment or purchases of the product .
2. Safety Inventory - inventory that is held as a
buffer against uncertainty. If demand
forecasting could be done with perfect accuracy,
then the only inventory that would be needed
would be cycle inventory.
 COMPONENTS OF
INVENTORY DECISIONS

3. Seasonal Inventory - inventory that is built up

in anticipation of predictable increases in
demand that occur at certain times of the year.
4. Level of Product Availability - the fraction of
demand that is served on time from product
held in inventory
 INVENTORY DECISIONS

➢ The major inventory related decisions include

identifying the batch size, the safety inventory,
the seasonal inventory, and the level of product
availability.
➢ Increasing the safety inventory and level of
product availability increases responsiveness but
hurts efficiency.
 INVENTORY DECISIONS

➢ Increasing
the batch size and seasonal inventory
increases holding costs but may decrease
production, transportation, and purchasing costs.
➢ Overall trade-off: Responsiveness ( to customer
needs ) versus efficiency of supply chain
• more inventory: greater responsiveness but greater
cost
• less inventory: lower cost but lower responsiveness
 Techniques in Inventory

Manual Count Method Identifying and removing broken items

Method
Cycle Counting a physical inventory-taking technique in which
inventory is counted on a frequent basis rather
than once or twice a year. (e.g. class A in
particular)
Periodic Methods Less upfront costs
Perpetual Methods most up to date information
LIFO Ideal for heavy products and producer of
homogenous products
FIFO Ideal for products that have expiration dates and
with relatively short demand cycles
 all costs associated with ordering
Ordering
inventory, correcting mistakes,
Cost determining when/how much to order
costs of downtime and lost efficiency
Setup
when a machine is changed to produce
Cost different kinds of inventory

Holding cost of keeping inventory until it is

Cost used or sold

Stockout costs when a company runs out of

Costs a product
Cost Curve
 a system of formulas that helps determine
EOQ - Economic how much and how often inventory should
Order Quantity be ordered.

a system in which component parts arrive

JIT - Just-in-Time
from suppliers just as they are needed at
Inventory each stage of production

a production and inventory system that, from

MRP – Materials beg. to end, precisely determines the
Requirement Planning production schedule, batch sizes, and
inventories needed to complete final products
EOQ Model
 Inventory System

Inventory System - 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
 Characteristics of
inventory systems
➢ Demand
• Constant Vs. Variable
➢ Lead time
• External order: time between
placement of an order until
arrival of goods
• Internal production: amount
of time required to produce a
batch of items
 Characteristics of
inventory systems
➢ Replenishment
• How does the order arrive? uniform over time,
instantaneous batches
➢ Review time
• Continuous review: inventory level is known at all times
• Periodic review: inventory level is known only discrete
points in time
➢ Excess demand
• Back ordering: excess is satisfied in the future
• Lost sales: excess demand is lost
➢ Changing inventory
• Inventory may change over time: limited shelf life
(perishable good –food), obsolescence (e.g. automotive
parts)
 Design of Inventory
Mgmt. Systems
Macro Issues
➢ Need for Finished Goods Inventories ◦
• Need to satisfy internal or external customers? ◦ Can someone else
in the value chain carry the inventory?
➢ Ownership of Inventories - proper accountability to minimize losses
➢ Specific Contents of Inventories - knowing your inventory - visibility
➢ Locations of Inventories - Placing inventory at the right place for quick
order
➢ Tracking - Locating where your inventory is to eliminate uncertainty
and timely delivery

Micro Issues •
➢ Order Quantity Economic Order Quantity
➢ Order Timing
➢ Reorder Point
Questions?
THANK YOU
EXAMPLE Demand for the desktop computer at
Best buy is 1,000 units per month. Best Buy
incurs a fixed order placement, transportation
and receiving cost of $ 4,000 each time an
order is placed . Each computer costs Best Buy
$ 500 and the retailer has a holding cost of 20
percent. Evaluate the number of computers
that the store manager should order in each
replenishment lot
BULLWHIP EFFECT
 The Bullwhip Effect
An observed phenomenon in forecast
driven distribution channels. It refers
to larger and larger swing in inventory
in response to changes in customer
demand, as one looks at firms further
back in the supply chain of the
product.
 The Bullwhip Effect
➢ The concept first appeared in Jay Forrester's
Industrial Dynamics (1961) and thus it is also
known as the Forrester effect.
➢ Since the oscillating
demand magnification
upstream of a supply chain
is reminiscent of a cracking
whip, it became known as
the bullwhip effect
 Disrupted Supply Chain

As demand increases, the distributor decides to

accommodate the forecasted demand and increase
inventory to buffer against unforeseen problems in
demand. Each step along the supply chain increases
their inventory to accommodate demand fluctuations.
The top of the supply chain receives the harshest
impact of the whip effect
Demand Fluctuations
Demand Fluctuations
 Impact of Bullwhip Effect
• Excess Inventory
• Unnecessary costs
• Insufficient or excess capacities
• Expedited transportation S Poor customer
service
• Poor forecast accuracy
• Poor quality
• Lengthened and inaccurate lead time
• Loss of sales
 Causes of Bullwhip Effect
➢ Because customer demand is rarely perfectly stable,
businesses must forecast demand to properly position
inventory and other resources.
➢ Forecasts are based on statistics, and they are rarely
perfectly accurate.
➢ Because forecast errors are given, companies often
carry an inventory buffer called "safety stock”
➢ Moving up the supply chain from end-consumer to
raw materials supplier, each supply chain participant
has greater observed variation in demand and thus
greater need for safety stock.
 How to cope up with
Bullwhip Effect
➢ Improve communication along the supply
chain
➢ Aligning goals and incentives
➢ Improving information accuracy
➢ Improving operational performance
➢ Designing pricing strategies to stabilize
orders
➢ Building strategic partnerships and trust
Questions?
THANK YOU