Supply Chain Management

Evolution of Supply
Chain Management
Objectives

z This session will cover:

- Resource requirement planning
- Dependent and independent demand
- Materials requirement planning (MRP)
- Benefits and drawbacks of MRP
- Enterprise resource planning (ERP)
- Just-in-time systems
- Push and pull systems
- Global supply chain management
Resource Requirement Planning

z The traditional approach to planning logistics is based on

resource requirement planning.
z This takes the logistic strategy and continually adds more
details to get capacity plans, aggregate plans, master
schedules and short-term schedules.
z The result is a set of timetables showing what all the
facilities, equipment, people and resources should do at
any time.
Independent Demand
z The conventional approach to planning assumes that
overall demand for a product is made up of individual
demands from many separate customers.
z These demands are independent of each other, so the
demand from one customer is not related to the demand
from another customer.
z If you are selling Nike shoes, the overall demand comes
from hundreds of separate customers, all independently
asking for a pair of shoes.
z This gives an independent demand
z Here, planning is done using resource requirement
planning (standard approach).
Dependent Demand

z In some situations, demands are not independent.

z One demand for a product is not independent of a
second demand for the product.
z When a manufacturer uses a number of components to
make a product, the demands for all components are
clearly related, since they all depend on the production
plan for the final product.
z This gives dependent demand.
z Here we use material requirement planning.
Materials requirement planning
(MRP)

z “Material requirement planning uses the master

schedule, along with other relevant information, to
plan the supply of materials. The master schedule
gives a time table for activities, typically for each
week”
(Walters, 2003)
Materials requirement planning
(MRP)

z An important difference between the two

approaches is the pattern of material stocks.
z With independent demand systems, stocks are
not related to production plans so they must be
high enough to cover any likely demand.
z These stocks decline during operations, but are
soon replaced.
Benefits of MRP

z Lower stock levels, with savings in capital,

space, warehousing, and so on
z Higher stock turnover
z Better customer service – with no delays caused
by shortages of materials
z More reliable and faster delivery times
z Less time spent on expediting and emergency
orders
z MRP schedules can be used for planning other
logistic activities
Benefits of MRP

z It can also give early warning of potential problems and

shortages. If the MRP schedules show that some
materials will arrive too late, the organization can speed
up deliveries or change the production plans.

z It improves the wider performance of the organization –

measured in terms of equipment utilization, productivity,
customer service, response to market conditions and so
on.
Disadvantages of MRP

z Reduced flexibility to deal with changes. Materials are

procured according to the specified master schedule and
hence cannot be altered
z Needs a lot of detailed and reliable information. Many
organisations simply do not record this information or is
not accurate enough
z Systems can become very complex. Accuracy is
particularly important, as large number of small stock
transactions can introduce errors
Disadvantages of MRP

z The order sizes suggested by MRP can be inefficient

z MRP may not recognise capacity and other constraints
z Can be expensive and time consuming to implement
MRP 2

z Capacity requirement planning extends the MRP

approach further into the organisation.
z We started by using MRP to schedule the delivery of
materials, and can now use it in capacity planning.
z Materials are only one resource, and organisations have
to schedule others, including people, equipment,
facilities, finances, transport, and so on.
z Surely we can use the same MRP approach to consider
these other resources. This thinking has led to major
extension of MRP into Manufacturing Resources
Planning, or MRP 2.
MRP 2

z “MRP 2 gives an integrated system for synchronising

all functions within an organisation. It connects
schedules for all functions and resources back to the
master schedule”
(Walters, 2003)
Working with other organisations

z Following the trend for integrating the supply

chain, we can extend the planning to other
organizations. This gives the basis of enterprise
resource planning (ERP) (Walters, 2003).
ERP

z Suppose a manufacturer’s MRP system finds that it

needs a delivery of 100 units of some material at the
beginning of June.
z It uses this information to schedule its purchases.
z EDI (Electronic data interchange) is a communication
software that can be used to link the MRP system to the
supplier’s system, so the supplier knows in advance
when it has to deliver this material, and it can start
scheduling operations to make sure that it is ready in
time.
z If second tier suppliers are linked to the MRP system of
the first tier supplier, they can also start their operations.
In this way, the message moves backward through the
supply chain, giving integrated planning (Walters, 2003).
ERP

z For ERP to be a success there needs to be unrestricted

flow of information between all members of the supply
chain.
z To facilitate this process, several e-business tools such
as EDI, EFT (Electronic Funds Transfer) and the internet
can be used.
z However situations might arise where it would be difficult
to ensure full trust between organizations, even when
they are prepared to form alliances.
z These systems also require complex systems and this
leads to other practical issues.
ERP

z Nevertheless, this approach has considerable

potential, and this is leading to the next stage of
the ‘virtual enterprise resource allocation’.
Just-in-time (JIT)

z Just-in-time (JIT) offers another way of planning activities

and resources in an organization.
z It’s based around organizing activities such that they
occur at exactly the time they are needed.
z the more closely we can match the supply of materials to
demand, the less stock we need to carry.
z If we can completely eliminate any mismatch, we need no
stock at all.
z This is the basis of just-in-time systems. JIT aims at
delivering materials directly to operations and virtually
eliminating stock (Walters, 2003).
JIT

z “Just-in-Time systems organize materials to arrive

just as they are needed. By coordinating supply and
demand, they eliminate stocks of raw materials and
work in progress”
(Walters, 2003)
JIT

z Examples of JIT systems:

z Replacing a lawnmower running on fuel with an
electric one
z Supermarkets owning a bakery in store to
produce a loaf of bread
Key Elements in JIT

z By now, it can be understood that JIT is not just a way of

minimizing stocks. By coordinating all activities, it
increases efficiency and eliminates waste.
z One of the problems with JIT is that it only works well in
certain types of organization. The most successful users
of JIT are large-scale assembly plants, which make
virtually identical products in a continuous process.
z In other words, JIT needs a stable environment where a
process makes a large number of standard product, at a
fixed rate, for a long time.
z This stable environment can reduce costs by using
specialised automation. Hence JIT works best wit high
volume, mass production.
JIT Operations - Push and Pull Systems

z How does JIT organize activities so that they

occur at just the time they are needed? It works
by ‘pulling’ materials through the process.

z JIT uses another approach to ‘pull’ work through

the process. When one operation finishes work
on a unit, it passes a message back to the
preceding operation to say that it needs another
unit to work on.
Extending Just-in-Time Along the Supply
Chain

z JIT forces suppliers to change the way they

work, with fast deliveries, perfect quality, small
batches, and complete reliability.
z Hence to facilitate this, they must adopt JIT
processes themselves. This leads to the idea of
an integrated supply chain.
z The second tier suppliers adopt JIT to support
first tier suppliers, and so on. This ensures that
the whole supply chain is working together with
the same aims and principles.
Extending Just-in-Time Along the Supply
Chain

z This extension of JIT along the supply chain is

known by a variety of names, including quick
response (QR), continuous replenishment
planning (CRP), and more commonly efficient
consumer response (ECR). (Walters, 2003)
ECR

z “Efficient consumer response pulls materials through tiers of

organizations in the supply chain.”
z With ECR, a message passes backwards through the supply
chain, and each organization co-operates in moving materials
forward. It uses JIT operations and link information systems so
that they can ‘pull’ materials through the supply chain.
z ECR extends the benefit of JIT to the whole supply chain. So it
brings lower stocks, better customer service, lower costs, more
responsive operations, improved space utilization, less
paperwork, and so on.
(Walters, 2003)
Enablers of ECR

ƒ It needs a practical method of control. With JIT, this came

with kanbans. With ECR, it came with EDI.
z ECR only really works when organizations and their
suppliers are working together in partnerships.
z Each organisation’s control system sends a message to
suppliers and signals the need for more materials using
an ‘electronic kanban’. Some systems go further and
hand over more responsibility to the supplier in vendor-
managed inventory.
ƒ Having a sophisticated signaling system is good.
However, there should be a smooth, continuous, and
uninterrupted flow of materials.
Summary

z The rapid changes in customer demands and service

expectation levels necessitates that the marketer must
carefully study every aspect of internal operations from
product conceptualization through to customer post-
purchase consumption.

z Firms are adopting the vision of zero-based time, which

has the ultimate goal of never keeping the customer
waiting. All this demands that JIT should be extended
across the entire supply chain from procurement,
production, distribution, and delivery cycle.
Summary

z With this view in mind, firms are focusing

attention on developing a fully integrated
Computer based information system as a
solution to achieving time and process
management efficiency.