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Kashif

Shafiq

SUPPLY CHAIN MANAGEMENT


WHAT IS A SUPPLY CHAIN
• A supply chain consists of all parties involved, directly or indirectly,
in fulfilling a customer request.
A supply chain is dynamic and involves the constant flow of

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information, product, and funds between different stages.
• The customer is an integral part of the supply chain.
STAGES OF A DETERGENT SUPPLY CHAIN

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 Information

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 Product

 Funds
OBJECTIVE OF A SUPPLY CHAIN

• The objective of every supply chain should be to maximize the


overall value generated, the value of a supply chain generates is the

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difference between what the final product is worth to the customer
and the costs the supply chain incurs in fulfilling the customers
request.
WHAT IS SUPPLY CHAIN MANAGEMENT
 “It starts with customer and it ends with customer ,It
requires looking at your business as one continuous
process”

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 “It is about the management of relationships across
complex networks of companies that whilst legally
independent are in reality interdependent”

 Supply chain management therefore includes management


of many key business aspects such as transportation ,
material control, manufacture and distribution from
suppliers until the end customer.
LOGISTICS
Logistics can be defined as apart of supply chain . While logistics
activities are only concerned about the management of material and
information flow from supply points to demand points , the supply
chain is wider in scope as it involves managing and coordinating the
tasks of whole chain.
IMPORTANCE OF EFFECTIVE SUPPLY CHAIN
MANAGEMENT

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BOOST CUSTOMER SERVICE
• Right Product Assortment and Quantity

• Right Stock Location

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• Right Delivery Time

• Right After Sale Support


IMPROVE FINANCIAL POSITION
• Increases Profit Leverage

• Decreases Fixed Assets

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• Increases Cash Flow
REDUCE OPERATING COSTS
• Decreases Purchasing Cost

• Decreases Production Cost

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• Decreases Total Supply Chain Cost
ENSURE HUMAN SURVIVAL
• SCM Protects Humans from Climate Extremes

• SCM Improves Human Healthcare

• SCM Helps Sustains Human Life


IMPROVE QUALITY OF LIFE
• Foundation for Economic Growth

• Improves Standard of Living

• Opportunity to Decrease Energy Use

• Opportunity to Decrease Pollution

• Job Creation
PROTECT CULTURAL FREEDOM &
DEVELOPMENT
• Defending Human Freedom

• Protects Delivery of Necessities


PROCESS VIEWS OF A SUPPLY CHAIN

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• Cycle view

• Push/Pull View
CYCLE VIEW OF SUPPLY CHAIN PROCESSES

• The processes in a supply chain are divided into a series of cycles,


each performed at the interface between two successive stages of a

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supply chain.
• a cycle view of the supply chain clearly defines the processes
involved and the owners of each process.
SUPPLY CHAIN PROCESS CYCLES
Customer Order
Cycle Retailer

Replenishment Distributor

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Cycle

Manufacturer
Manufacturing
Cycle

Supplie
Procurement r
Cycle
PUSH/PULL VIEWS OF SUPPLY CHAIN
PROCESSES
• The processes in a supply chain are divided into two categories
depending on whether they are executed in response to a customer
order or in anticipation of customer orders. Pull processes are

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initiated by a customer order, whereas push processes are initiated
and performed in anticipation of customer orders.
EFFICIENT VS RESPONSIVE SUPPLY CHAINS
Efficient supply chains Responsive supply
chains
Efficient supply chains Responsive supply
chains
DECISION PHASES IN SUPPLY CHAIN
DECISION PHASES IN A SUPPLY CHAIN

• Successful supply chain management requires many


decisions relating to the flow of information, product and
funds. Each decisions should be made to raise the supply

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chain Surplus.
TYPES OF DECISION PHASES
• Supply chain Strategy or Design
• Supply Chain Planning

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• Supply Chain Operations
SUPPLY CHAIN STRATEGY OR DESIGN
• During this phase, given the marketing and pricing plans for a
product, a company decides how to structure the supply chain over
the next several years.

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• It decides what the chain’s configurations will be, how resource will
be allocated and what processes each stage will perform.
SUPPLY CHAIN PLANNING
 Strategic decisions made by companies includes;
 whether to outsource or perform a supply chain function in
house.

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 location and capacities of production and warehousing facilities.
 Product to be manufactured or stored at various locations.
 Modes of transportation
 Types of information system to be utilized.
SUPPLY CHAIN PLANNING
• During this phase, time frame considered is a quarter to year.
Therefore, supply Cain’s determined in the strategic phase is fixed.
• This configuration establishes constraint within which planning must
be done.

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• The goal of planning is to maximize the supply chain surplus that can
be generated over the planning horizon given the constraints
established during the strategic or design phase.
• Companies start the planning phase with a forecast for the coming
year of demand in different markets.
SUPPLY CHAIN PLANNING CONTD.
 It includes;
 Making decisions
 Subcontracting of manufacturing

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 Inventory policies to be followed
 Timing and size of marketing
 Price of promotions
SUPPLY CHAIN OPERATIONS
• The time horizon here is weekly or daily.
• During this phase, companies makes decisions regarding individual
customer order.

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DRIVERS OF SUPPLY CHAIN PERFORMANCE
 1. Facilities:
 Are the actual physical locations in the supply chain network
where product is stored, assembled, or fabricated the two major

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types of facilities are production sites and storage sites. decisions
regarding the role, location, capacity and flexibility of facilities
have a significant impact on the supply chains performance.
• For instance, an auto parts distributor striving for responsiveness
could have many warehousing facilities located close to customers
even though this practice reduces efficiency. alternatively, a high

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efficiency distributor would have fewer warehouses to increase
efficiency despite the fact that this practice will reduce
responsiveness.
 2. Inventory:
 Encompasses all raw materials, work in process, and finish goods
within a supply chain. changing inventory policies can

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dramatically alter the supply chains efficiency and
responsiveness. reducing inventory makes the retailer more
efficient but hurts its responsiveness.
 3. Transportation:
 Entails moving inventory from point to point in the supply chain.

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transportation can take the form of many combinations of modes
and routes, each with its own performance characteristics.
 Transportation choices have a large impact on supply chain
responsiveness and efficiency. for example, a mail order catalog
company can use a faster mode of transportation such as FedEx

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to ship products, thus making its supply chain more responsive,
but also less efficient given the high costs associated with using
FedEx. or the company can use slower but cheaper ground
transportation to ship the product, making the supply chain
efficient but limiting its responsiveness.
 4. Information:
• consists of data and analysis concerning facilities, inventory,

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transportation, costs, prices, and customers throughout the supply chain.
information is potentially the biggest driver of performance in the supply
chain because it directly affects each of the other drivers.
 5. Sourcing:
 Is the choice of who will perform a particular supply chain

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activity such as production, storage, transportation or the
management of information. the strategic level, these decisions
determine what functions a firm performs and what functions the
film outsources.
 Sourcing decisions affect both the responsiveness and efficiency
of a supply chain. after Motorola outsourced much of its

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production to contract manufacturers in China, it saw its
efficiency improve but its responsiveness suffer because of the
long distances. to make up for the drop in responsiveness,
Motorola started flying in some of its cell phones from China
even though this choice increased transportation cost.
 6. Pricing:
 Determines how much a firm will charge for goods and services

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that it makes available in the supply chain. Pricing affects the
behavior of the buyer of the good or service, thus affecting
supply chain performance.
 For example, if a transportation company varies its charges based
on the lead time provided by the customers, it is very likely that
customers who value efficiency will order early and customers

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who value responsiveness will be willing to wait and order just
before they need a product transported. Early orders are less
likely if prices do not vary with lead time.
WORLD CLASS SUPPLY
MANAGEMENT
WORLD CLASS SUPPLY MANAGEMENT
• The world class supply management philosophy reflects those
actions and values responsible for continuous improvement of the

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design, development, and management processes of an organization
supply system, with the objective of improving its profitability and
ensuring survival, as well as the profitability and survival of its
customers and suppliers.
WORLD CLASS SUPPLY MANAGEMENT
• The term world class recognizes that companies compete in an
existing or impending global environment.

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• As a philosophy ,World class supply management spans functional
boundaries and company borders.
• World Class supply management requires development and
management of institutional trust.
WORLD CLASS SUPPLY MANAGEMENT
• The philosophy of world class supply management requires changes
driven by the upper management to shift decision making process
from an internal department or single company focus to optimization

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of the supply chain.
• Through continuous improvement , world class supply management
is an ever moving target that focuses on supply chain process
improvement,
WORLD CLASS SUPPLY MANAGEMENT
• A world class supply management is not departmentally or internally
focused but concentrates on proactively improving process with the
long term goal of upgrading the competitive capability of the firm

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and the firm’s supply chain
SUPPLY MANAGEMENT AND THE BOTTOM
LINE
• Supply management must be a core competency based on its
overwhelming impact on the firm’s bottom line .

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• Supply management directly affects the two factors which control the
bottom-line: total costs and sales.
• Supply management has a major impact on a firm’s return on
investment
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FOUR PHASES OF SUPPLY MANAGEMENT
• Generation of Requirements

• Sourcing

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• Pricing

• Post-Award Activities
GENERATION OF REQUIREMENT

• The generation of requirement is a critical activity that results in the


identification of the optimal materials and services to purchase,

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together with the development of specifications and statements for
work describing these requirements.
SOURCING

• The objective of sourcing is the identification and selection of the


supplier whose costs, qualities, timeliness, dependability and service
best meet the firm’s needs.

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• The development of supply alliance is a sourcing activity.
PRICING

• The objective of pricing is the development of prices that


appropriately reward the supplier for its efforts and which
result in the lowest total costs of ownership for the

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customer firm
• Negotiations occur throughout the supply chain process
,their most significant role normally is during pricing
phase.
POST-AWARD ACTIVITIES
• The important activity ensures that the firm receives what
was ordered on time and at the price and quality specified.
Post award activities include supplier development,

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technical assistance, trouble shooting , the management of
the contract and the resulting relationships.
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FORECASTING
THE ROLE OF FORECASTING IN A SUPPLY CHAIN

• Demand forecasts form the basis of all supply chain


planning. All push processes in the supply chain are
performed in anticipation of customer demand, where as all
pull processes are performed in response to customer

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demand. For push processes, a manager must plan the level
of activity, be it production, transportation, or any other
planned activity. For pull processes, a manager must Plan
the level of available capacity and inventory but not the
actual amount to be executed. In both instances, the first
step a manager must take is to forecast what customer
demand will be.
• Mature products with stable demand, such as milk or
paper towels, are usually easiest to forecast. Forecasting
and the accompanying managerial decisions are extremely

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difficult when either the supply of raw materials or
the demand for the finished product is highly
unpredictable. Fashion goods and many high-tech products
are examples of items that are difficult to forecast.
• Good forecasting is very important in these cases because
the time window for sales is narrow. If a firm has over-or
under produced, it has little chance to recover. For a
product with stable demand, in contrast. The impact of a
forecasting error is less significant.
CHARACTERISTICS OF FORECASTS

• Forecasts are always wrong and should thus include both


the expected value of the forecast and a measure of forecast
error.

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• Long-term forecasts are usually less accurate than short-
term forecasts.
• Aggregate forecasts are usually more accurate than
disaggregate forecasts, as the tend to have a smaller
standard derivation of error relative to the mean.
• In general, the farther up the supply chain a company is (or
the farther it is from the consumer), the greater is the
distortion of information it receives.
FORECASTING METHODS AND TYPES
• Qualitative: Qualitative forecasting methods are primarily
subjective and rely on human judgment. They are most
appropriate when little historical data is available or when

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experts have market intelligence that may affect the
forecast. Such methods may also be necessary to forecast
demand several years into the future in a new industry.
• Time-series: Time-series forecasting methods use historical
demand to make a forecast. They are based on the
assumption that past demand history is a good indicator of
future demand. These methods are most appropriate when
the basic demand pattern does not vary significantly from
one year to be next. These are the simplest methods to
implement and can serve as a good starting point for a
demand forecast.
• Causal: Causal forecasting methods assume that the demand
forecast is highly correlated with certain factors in the
environment(the state of the economy, interest rates, etc.). Causal
forecasting methods find this correlation between demand and
environmental factors and use estimates of what environmental
factors will be to forecast future demand. For example. Product
pricing is strongly correlated with demand. Companies can thus use
causal methods to determine the impact of price promotions on
demand.

• Simulation: Simulation forecasting methods imitate the consumer


choices that give rise to demand to arrive at a forecast. using
simulation, a firm can combine time-series and causal methods to
answer such questions as: What will be the impact of a price
promotion? What will be the impact of a competitor a store nearby?
Airlines simulate customer buying behavior to forecast demand for
higher-fare seats when there are no seats available at the lower
fares.
BASIC APPROACH TO DEMAND FORECASTING

• Six-step approach helps an organization perform effective


forecasting

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• Understand the objective of forecasting

• Integrate demand planning and forecasting throughout the


supply chain

• Understand and identify customer segments


BASIC APPROACH TO DEMAND FORECASTING
CONTD.

• Identify the major factors that influence the demand


forecast

• Determine the appropriate forecasting techniques

• Establish performance and error measures for the forecast


ENTERPRISE RESOURCE PLANNING
SYSTEMS
MATERIALS REQUIREMENT PLANNING
• Materials requirement planning was the initial software
development in manufacturing information systems. MRP
systems use information from bills of material, master
production schedules, and on-hand inventories to compute

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time-phased planned order releases of dependent demand
items. MRP links the internal operations of an organization,
such as purchasing, production, inventory control and
material planning, to improve purchasing , production, and
delivery performance.
• MRP systems do not provide feedback information, nor do
they analyze the impact of changes in “production levels on
financial results. The development of closed-loop MRP was
a natural extension of the MRP system. It was an attempt
to further develop the MRP into a formal and explicit

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manufacturing planning and control system by adding
capacity requirements planning and feedback to describe
the progress of orders being manufactured. Today, the
originally developed MRP is a part of the closed-loop MRP
system.
MANUFACTURING RESOURCE PLANNING
• Manufacturing resource planning (MRP-II) was the next
development in MRP and was an out growth of the closed-
loop MRP system. Business and sales plans were
incorporated ,and a financial function was added to link

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financial management to operations, marketing and other
functional areas. The concept of manufacturing resource
planning was that the information system should link
internal operations to the financial function to provide
management with up-to-date data, including sales,
purchasing, production, inventory, and cash flow. It should
also be able to perform “what—if” analyses as internal and
conditions change.
THE DEVELOPMENT OF ENTERPRISE RESOURCE
PLANNING SYSTEMS

• While traditional or legacy MRP systems continue to be


used and modified to include other functional areas of an
organization, the emergence and growth of supply chain

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management, e-commerce, and global operations have
created the need to exchange information directly with
suppliers, Customers, and foreign branches of
organizations. the concept of the manufacturing
information system thus evolved to directly connect all
functional areas and operations of an organization and, in
some cases, its suppliers and customers via a common
software infrastructure and database. This type of
manufacturing information system is now commonly
referred to as ERP.
• The typical ERP system is an umbrella system that ties
together a variety of specialized systems, such as

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production and inventory planning, purchasing, logistic,
human resources, finance, accounting, customer
relationship management, and supplier relationship
management.
GENERIC ERP SYSTEM

Operation

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s
Sales
Engineerin and
g Marketin
Central g
Database Customer
Supplier and relationship
Relationship Servers Management
Finance
Management
Human and
resource Accountin
Head
s g
quarters
and
Branches
IMPLEMENTING ENTERPRISE RESOURCE
PLANNING SYSTEMS
• Implementing an ERP system has been proven to be a real
challenge for many companies. Two primary requirements of
successful implementation of ERP are computer support and
accurate, realistic inputs. Instead of complete implementation

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of the entire system at once, some firms choose to implement
only those application or modules that are absolutely critical to
operations at that time. Additional modules are then added in
a preplanned second phase. This ensures that the system can
be implemented as quickly as possible while minimizing
interruption of the existing system. However, many
implementations have still failed due to variety of reasons.
Some of the more common reasons for failed ERP
implementations follow:
• Lack of top management commitment: while management may be
willing to set aside sufficient funds to implement a new ERP system,
it may not take an active role in providing ongoing encouragement
during the implementation process. Often, this lead users to revert to
the old processes or systems because of their lack of knowledge and
interest to learn the capabilities of the new ERP system.

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• Lack of adequate resources: Implementing a new ERP system is a
long term commitment requiring substantial capital investment.
Although the cost has become more affordable due to the rapid advent
of computer technology, full implementation may still be out of reach
for many small organizations. In addition, small firms may not have
the necessary workforce and expertise to implement the complex
system.
• Lack of proper training: many employees may already be
familiar with their legacy MRP systems. Thus, when a new
ERP system is implemented, top management may assume
that users are already adequately prepared and
underestimate the training required to get the new system
up running. Lack of financial resources can also reduce the
amount of training available for its workforce.

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• Lack of communication: lack of communication within
an organization and/or between the firm and its ERP
software provider can also be a major hindrance for
successful implementation. Lack of communication usually
results in the wrong specifications and requirements being
implemented.
• Incompatible system environment: In certain cases,
the firm’s environment does not give ERP a distinct
advantage over other systems. For example, there is no
distinct advantage for a small family-owned used car dealer
in a small town to implement an expensive new ERP
system.
ADVANTAGES OF ENTERPRISE RESOURCE
PLANNING SYSTEMS
• The primary advantage of ERP over the legacy MRP system
is that ERP uses a single database and a common software
infrastructure to provide a broader scope and up-to-date

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information, enabling management to make better decisions
that can benefit the entire supply chain.
• ERP helps organizations reduce supply chain inventories
due to the added visibility throughout the entire supply
chain.
• ERP systems also help organizations to standardize
manufacturing processes.
• ERP enables an organization, especially a multi-business-
unit enterprise, to efficiently track employees’ time and
performance and to communicate with them via a
standardized method.
DISADVANTAGES OF ENTERPRISE RESOURCE
PLANNING SYSTEM
• A substantial capital investment is needed to implement
the system. considerable time and money must be set aside
to evaluate ERP software applications and their suppliers,
to purchase the necessary hardware and software, and then

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to train employees to operate the new system.


• The software is designed around a specific business model
based on specific business processes. Although business
processes are usually adopted based on best practices in

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the industry. The adopting firm must change its business
model and associated processes to fit the built-in business
model designed into the ERP system. Thus, the adopting
firm must restructure its processes to be compatible with
the new ERP system. This has resulted in a very unusual
situation where a software system determines the business
practices and processes a firm should implement, instead of
designing the software to support existing business
practices and processes.
ENTERPRISE RESOURCE PLANNING
SOFTWARE APPLICATIONS
• Although each ERP software provider configures its
products differently from its competitors, some
common modules of ERP systems are described here:

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• Accounting and finance: This module assists an
organization in maintaining financial control and
accountability. It tracks accounting and
financial information such as revenues, costs, assets,
liabilities, and other accounting and financial information
of the company.
• Customer relationship management: This module
provides the capability to manage customers. It enables
collaboration between the organization and its customers by
providing relevant, personalized, and up-to-date
information. it also enables customers to track sales orders.
• Human resource management: It assists an
organization to plan, develop, and control its human
resources. It allows the firm to deploy the right people

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to support its overall strategic goals and to plan the
optimal workforce levels based on production levels.
• Manufacturing: It schedules materials and tracks
production, capacity, and the flow of goods through the
manufacturing process. It may even include the capability
for quality planning, inspection, and certifications.

• Supplier relationship management: This module


provides the capability to manage all types of suppliers. It

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automates processes and enables the firm to more
effectively collaborate with all its suppliers corporate-wide.
It also monitors supplier performance and tracks delivery of
goods purchased.
• Supply chain management: This module handles the
planning, execution, and control of activities involved in a
supply chain. It assists the firm to strengthen its supply

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chain networks to improve delivery performance. It may
cover various logistics functions, including transportation,
warehousing, and inventory management. In this context,
supply chain management refers to logistics management
in which the focus is the distribution of finish goods. The
supply chain management module creates value by
allowing the user to optimize its internal and external
supply chains. Effective supply chain management
requires the organization to have comprehensive
management information systems to synchronize plans
with customers and suppliers, collaborate in real time,
execute plans, handle changes, and measure supply chain
performance.
ENTERPRISE RESOURCE PLANNING
SOFTWARE PROVIDERS
 Choosing an appropriate ERP software package can be a very
challenging task SAP, Oracle, PeopleSoft, J.D. Edwards, and
Baan are among the most popular ERP providers.

• SAP AG

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SAP AG, a German firm, is the world’s leading ERP software provider and
world’s third-largest software provider. Its flagship product is known as R/3.
more than 17,500 organizations in 120 countries have used its products-
including major multinational firms such as Baxter Healthcare, Chevron,
Colgate—Palmolive, Exxon, IBM, and Microsoft. Five former IBM system
engineers founded SAP in 1972. The company employs about 28,000 people in
more than fifty countries. It is headquartered in Walldorf; Germany, with
U.S. operations headquartered in Newtown Square, Pennsylvania. One of
SAP’s latest product offerings is the mySAP business suite, a family of
business solution, and an integration and application platform
 Oracle
 The Oracle Corporation” was founded in the late 1970s by Larry
Ellison, Bob Miner, and Ed Oates. The focus of the company has

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been to provide business applications that utilize relational databases
for storing information. Oracle technology is used in nearly every
industry around the world and in almost all Fortune 100 companies.
Today, Oracle continues to be the world’s leading supplier of
information management software. It is the world’s second largest
software company, after Microsoft. However, it is ranked behind
SAP in the sales of ERP applications. Oracle was one of the first
software companies to develop and deploy 100 percent Internet-
enabled enterprise software across its entire product line. Today,
Oracle serves over 13,000 customers running its applications.
 PeopleSoft
 PeopleSoft, Inc., headquartered in Pleasanton,
California, was founded by Dave Duffield and Ken

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Morris in 1987. The primary focus Of the Company has
been to build client/server business applications instead
of focusing on applications for the traditional mainframe
computers. PeopleSoft’s first product was a human
resources application on a client-server platform
introduced in 1988. Today, the company is a leader in
the human resources application market. PeopleSoft
serves customers around e globe, including Analog
Devices, corning, Cyber International, PepsiAmericas,
and Sprint.
 J. D. Edwards
 J. D. Edwards,” founded in 1977 by Jack Thompson, Dan Gregory,
and Ed McVaney, is headquartered in Denver, Colorado. It is one of

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the world’s leading developers of agile software solutions,
providing cutting-edge, collaborative technology that runs global
businesses and integrates processes across multiple systems and
supply chain partners. J. D. Edwards designs all of its software
solutions to be open, scalable, and flexible, so that they can be
integrated with software applications from other vendors. Their
business-to-business software applications enable users to engage in
collaborative commerce with their customers, supplies, and other
supply chain partners.
 Baan
 Baan was founded in 1978, with headquarter in the
Netherlands and a current work-force of approximately

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2,800 employees serving a worldwide customer base.
Baan designed its application based on a framework of
open, flexible, and easy-to-configure components that
allow individual applications to be configured to
different industry processes. Baan provides application
solutions to more than 15000 customer sites worldwide.
NEGOTIATION
• Negotiation is one of the most important as well as one of
the most interesting, and challenging aspects of supply
management.

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• Webster's dictionary defines negotiation broadly as
"conferring, discussing, or bargaining to reach agreement
in business transactions “ Herb Cohen describes
negotiation as a persuasive process in which people
ultimately attempt to reach a joint decision on matters of
common concern n situations in which there is initial
disagreement. Thus, a negotiation always requires both
shared interests and issues of conflict. In this context,
negotiation is a process of planning, reviewing. And
analyzing used by a buyer and a seller to reach acceptable
agreements compromises.
OBJECTIVES OF NEGOTIATION
 Several objectives are common to all procurement or sales
negotiations:
 To obtain the quality specified.

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 To obtain a fair and reasonable price.
 To get the supplier to perform the contract on time.
 ln addition, the following objectives frequently must be met:
 To exert some control over the manner in which the contract is
performed.
 To persuade the supplier to give maximum cooperation on to the
purchasing company.
 To develop a sound and continuing relationship with competent
suppliers.
 To create a long-term relationship with a highly qualified supplier.
WHEN TO NEGOTIATE

 When any of the five prerequisite criteria for competitive bidding are
absent
 when many variable Factors bear nor only on price but also on quality

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and service.
 when early supplier involvement is employed.
 When the business risks and costs involved cannot be accurately
predetermined.
 When a customer firm is contracting for a portion of the seller’s
production capacity, rather than for a product the seller has designed
and manufactured.
 When tooling and setup costs represent a large percentage of the
supplier’s total costs.
 When a long period of time is required to produce the items
purchased.
 When production is interrupted frequently because of numerous
change orders.
 When a thorough analysis is required to solve a difficult make-or-buy
decision.
 When the products of a specific supplier are desired to the exclusion of
others.
THE NEGOTIATION PROCESS
• The ultimate in purchasing value is possible only if design, production
operations, supply management, and marketing
are able to reconcile their differing views with respect to specifications
or the Statement of Work(SOW). The formal negotiation process

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consists of three major phases:
 Preparation,
 Face-to-face discussions, which result in agreement on all items and
conditions of a contract, or a decision not to enter into an agreement
with the potential supplier, and
 The debriefing, during which the negotiating team members review
both the preparation and face-to-face discussions for lessons learned.
FIVE POWERFUL PREPARATION ACTIVITIES
• The BATNA

• The Agenda

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• “Murder Boards” and Mock Negotiation

• Crib Sheets

• Drafts Agreements
CHARACTERISTICS OF A SUCCESSFUL
NEGOTIATOR
• Successful negotiators share four common attributes:
• All realize that specialized training and practice are required for an
individual to become an effective negotiator. Although some people have
stronger verbal aptitudes than others, no one is born with negotiating

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knowledge and skills.
• All habitually enter into negotiations with more demanding negotiating
objectives than their counterparts, and generally they achieve them.
• All are pragmatic and flexible in their capability to deal with different
negotiation techniques from "hardball“ to "collaborative."
• All are included, or are destined to become included, among an
organization's most highly valued professionals.
SPECIFICATIONS AND
STANDARDIZATION
SPECIFICATION & STANDARDIZATION
• Specification and Standardization are two related topic in the field of
supply management
• Specification form what is called purchase description

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PURPOSES OF SPECIFICATION
• Communicate to professionals in the supply management what to
buy.
Communicate to prospective suppliers what is required.

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• Establish the tangible goods to be provided.


• Establish the intangible service to be provided, such as warranty,
maintenance, and support.
• Establish the standards against which inspection, tests, and quality
checks are made.
• Balance specification goals of individual departments, relevant
suppliers, desire product or service performance and cost.
COLLABORATIVE DEVELOPMENT
• Development of specifications should be conducted as a
collaborative process whenever economically justified
Multiple goals are balanced simultaneously

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• The objective in collaboratively developing the specifications would


be to simultaneously achieve the quality, delivery and cost goals.
BALANCED SPECIFICATION

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Etc. Etc
Quality Goals Cost goals
Department Goals Company Goals
Company Goals Supplier Goals
CATEGORIES OF SPECIFICATIONS

• Simple Specification

• Complex Specification

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SIMPLE SPECIFICATION
• Simple specifications require less resources and time to develop than
complex specification
Little need for collaboration between functional areas or supply

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chain members
• Nothing other than the brand name ,model and package type and
warranty is needed
SIMPLE SPECIFICATIONS
 Six Categories
 Performance specifications

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 Function and Fit specifications
 Brand or Trade Names
 Samples
 Market Grades
 Qualified products
PERFORMANCE SPECIFICATIONS
• Instead of describing an item in terms of its design characteristics ,
Performance specification describe in words, and quantitatively
where possible what the item is required to do.

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• This type of description is used extensively in buying highly
technical military and space products
FUNCTION & FIT SPECIFICATION
• With this approach the design team describes the functions to be
performed and the way item is to fit into the larger system

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BRAND OR TRADE NAME
• The primary reason most manufacturers brand their products is to
obtain repeat sales
Many categories of brand items sell at notoriously high prices.

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Antiseptic and cleaning compound are common examples of such
items
SAMPLES
• Samples generally should be used only if other methods of
descriptions are not feasible

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MARKET GRADES
• Grading is a method of determining the quality of commodity
• E.g. 13 grades of Cotton ,each of which must be determined from an
examination of individual samples

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• Trade associations, commodity exchanges and government agencies
all expend great effort in establishing and policing usable grades
QUALIFIED PRODUCTS
• When advance qualification is indicated suppliers are prequalified by
a thorough review and test of the entire process by which they ensure
compliance with their specification.

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COMPLEX SPECIFICATION
• Complex or detailed specifications are descriptions that tell the seller
exactly what the buyer wants to purchase

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DIFFERENCE B/W SIMPLE & COMPLEX
SPECIFICATION

• A simple specification for buying ketchup might be “12 ounce plastic


bottle of Heinz tomato ketchup”.
• In contrast, Ketchup specifications become complex if the actual

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recipe is given with the ingredients and productions procedure.
• A complex specification often goes beyond the design of a product,
to include specification regarding methadology, Packaging, transport,
delivery, schedules,warranty and service
COMPLEX SPECIFICATION
• Commercial standards
• Design specifications
• Engineering drawings

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• Material and Method-of-Manufacture
COMMERCIAL STANDARD

• A complete description of the item standardize.


• Quality of materials and workmanship

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• Dimension and chemical composition
• A method for testing both materials and workmanship
COMMERCIAL STANDARD
• Commercial standards are applicable to raw materials, fabricated
materials, individual parts ,components and subassembly.
Commercial standard require periodic checking in addition to sight

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identification to assure firm that they are getting the quality specified
DESIGN SPECIFICATION
• A large number of buying firms prepare their own specifications. By
doing so, these firms broaden their field of competition.
All manufactures capable of making the item described in the firms

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specifications are potential supplier
ENGINEERING DRAWING
• Engineering drawings and prints are occasionally used along, but
more typically in conjunction with other physical purchase
description.

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• Ambiguity, sometimes present in this method of description can
produce costly repercussions
MATERIAL & METHOD OF MANUFACTURE
• This method is used prospective suppliers are instructed precisely as
to the specific materials to be used and how they are processed.
• Material and method of manufacture specifications are used

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extensively by the armed services and the Department of Energy
ORGANIZATIONAL APPROACHES
• Informal approach
• Supply Management coordinator approach

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• Early Supply Management Involvement
• Early Supplier Involvement
• Consensus Development approach
• Cross-Functional Team approach
INFORMAL APPROACH
• Emphasis at all times is placed on person to person communication
and cooperation between individual supply managers and designers.
A company- oriented, cost-conscious attitude is developed at the

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grass-roots level throughout the organization.
• Lack of formalization.
SUPPLY MANAGEMENT COORDINATOR
APPROACH
• One or more positions are created in the supply department for
individuals, frequently called material engineers, to serve in liaison
capacity with the design department.

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• Highly Structured approach of coordinator
• It is also very effective
CONSENSUS DEVELOPMENT APPROACH
• Consensus development calls for specifications to be agreed upon by
department managers.

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CROSS FUNCTIONAL TEAM APPROACH
• A specifications CFT is established, with representative (as
appropriate) from design engineering, production engineering,
supply management, marketing, operations(including production

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control), quality and standard
SUPPLY MANAGEMENT RESEARCH
• Supply management research and analysis should be conducted to
investigate the availability of commercial products able to meet need.

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COMMON SPECIFICATION PROBLEMS

• Lack of Clarity
• Limiting Competition

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• Unreasonable Tolerance
LACK OF CLARITY
• Specifications should be written in clear and unambiguous terms.

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LIMITING COMPETITION
• Several years ago ,fire chief wrote into the specifications for a new
fire truck the requirement that the supplier of the truck manufacturer
the truck’s 12 cylinder engine. This completely restricted competition

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since only one supplier of fire engines manufactured 12 cylinder
engines in its own plant. Had the fire chief specified what was
wanted in terms of performance characteristics, such as speed and
acceleration, competition would have been plentiful. This slanting
specification to one supplier’s product, thus reducing or precluding
competition.
UNREASONABLE TOLERANCES
• Specifying an unreasonable tolerance is another common
specification mistake.
• Regardless of the method used to describe specifications,

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only the minimum quality needed for the product to
perform the function intended should be specified.
UNREASONABLE TOLERANCES
• Over specifying and including restrictive features in purchase
descriptions caused delays and increases costs.
• This balancing act is accomplished by meeting the needs of the

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functional areas while setting off performance measures, such as
quality and delivery cost
STANDARDIZATION
• A uniform identification that is agreed on is called a Standard
• Standardization is treated in many companies and supply chain as a
philosophy for creating competitive advantage

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TYPES OF STANDARDIZATION
• Industrial Standardization

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• Managerial Standardization
TYPES OF STANDARDIZATION
• Industrial Standardization: It can be defined as the “process of
establishing agreements on uniform identification for definite
characteristics of quality design, performance, quantity, service.

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TYPES OF STANDARDIZATION
• Managerial Standardization: Managerial standardization deals with
such things as operating practical's, procedures, and systems

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BENEFITS OF STANDARDIZATION
• Enables mass production
• Enables customization
• Improves supplier coordination

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• Improves quality
• Enables simplification
• Enables delayed differentiation
• Lower inventories
SUPPLY CHAIN PERFORMANCE MANAGEMENT
IMPORTANCE OF SUPPLY CHAIN
PERFORMANCE MEASUREMENT
• In contemporary business, supply chain management is a key
strategic factor for increasing organizational effectiveness and for
achieving organizational goals such as improved competitiveness,

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better customer care, and increased profitably.
• It is important that strategic and tactical aspects of a supply chain are
well integrated so that the synchronization of demand and supply can
be ensured.
• Supply chain metrics should be aligned from the top level corporate
strategy to the front line tactical operations.

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• Strategic issues in supply chain would include redesigning of both
manufacturing facilities and distribution centers to achieve
optimization of sales and product innovations to meet customer
needs. Such strategic initiatives impact supply chain nodes and
improve competitive advantage usually through cost cutting ,cycle
time reduction or supplier relationships.
• Tactical or operations aspects in supply chain management include
the day to day management of the supply demand conditions. For

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example, the assessment of whether the inventory for a given order
is available or a demand can be met if the order is placed within
certain lead time could be an operational measure.
APPROACHES TO PERFORMANCE MEASURES

• Traditional

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• Contemporary
TRADITIONAL APPROACH
It is based on the following operational and financial issues:

• Productivity

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• Quality
• Customer service
• Cost factors
• Asset management
PRODUCTIVITY MEASURES
• Productivity is measured in ratio of output to input. The output can
be measured by way of the amount of revenue earned and the volume

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of goods produced. Inputs could be factors of production like man-
hours, number of persons employed, cost of labor and capital
employed.
• Some commonly used productivity measures in supply chain include
:
Units shipped per employee ( the efficiency of employees in the

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delivery of goods)
• Units of labor cost ( employee cost efficiency)
• Equipment downtime ( loss of time due to machinery breakdown or
the failure of a component)
• Space utilization ( measurement and control of capacity utilization)
• Order per sales person ( may reflect efficiency of sales personnel,
estimation of probability of order)
• Order entry efficiency ( the ability to capture a customer order
quicky and delight the customer on order capture)
QUALITY MEASURES
• The essential distinction between quality indicators and quality
measures is that quality measures take on numeric values while
quality indicators refer only to un quantified attributes of the supply

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chain function. For example, an improvement in shipping efficiency
which could be perceptional factor is a quality indicator while
shipping accuracy quantitatively reflected by a numeric value based
on wrong deliveries or returns is a quality measure. Some of the
commonly used quality measures in supply chain are as follows :
• Number of faultless notes invoiced ( by comparing them with previous
agreement, it can be determined whether a perfect delivery has taken place
or not)
• Order entry accuracy ( a wrong order entry triggers a whole range of
unwanted activities across the supply chain)

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• Picking/Shipping accuracy ( picking accuracy refers to the number of
orders that are picked accurately as per order fill requirement whereas
shipping accuracy is a measure of correct dispatches to the customer as per
the order)
• Number of customer returns ( important from the
perspective of customer acceptance of products and dispatch
efficiency)
• Damage frequency . Damages can occur while at
manufacture, warehousing, transportation and in delivery
process
• Number of credit claims ( surrogate indicator of lost sales)
• Information availability (information available for tracking
to the customer or any of the supply chain partners in the
system)
CUSTOMER SERVICE MEASURES
• Measures around availability, reliability, and operating parameters
towards customer needs are important to understand supply chain
effectiveness.

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• Order lead-time: the total order cycle time, which is also called
‘order lead time’, refers to the time that elapses between the receipt
of the customer’s order and the delivery of the goods.

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• The order entry mode: the order entry method determines the way
and the extent to which the customer specifications are converted
into useful information, and are passed down along the supply chain.
• The customer order path: the path that the orders traverse is yet
another important measure whereby the time spent in different
routes and non-value adding activities can be identified and suitable
steps can be taken to eliminate them.
• Delivery metrics: This refers to the flexibility of delivery systems to
meet particular customer needs.

• Key Delivery Metrics:

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 Item fill rate = Number of items delivered to customers / Number
of items ordered by customers
 Case fill rate = Number of cases delivered complete to customers /
Number of cases ordered by customers
 Value fill rate = Total pecuniary value delivered to complete to
customers / Total pecuniary value of customers orders
 Order fill rate = Number of orders delivered complete / Number
of customer orders
• Customer service and satisfaction metrics: The whole exercise
of applying the supply chain strategy could be costly and
futile, if supply chain metrics are not linked to customer

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satisfaction.
• The customer query time: The customer query time refers to
the time it takes for a firm to respond to a customer inquiry
with the required information.
• Measuring customer perception of service: This is done
primarily through direct interviews with customers what are
their needs? What is the service level they receive versus what
are their expectations? These are the questions firms should
ask the customers to improve their products/services, and to
increase their confidence in the firm’s supply chain.
COST MEASURES
 Inventory cost:

 In a supply chain, the total cost associated with inventory consists of the

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following:
 Opportunity cost consisting of warehousing, capital and storage.
 Cost associated with inventory as incoming stock level, work in progress.
 Service costs, consisting of cost associated with stock management and
insurance.
 Cost held up as finished goods in transit.
 Risk costs, consisting of cost associated with pilferage, deterioration, and
damage.
 Cost associated with scrap and rework.
 Cost associated with shortage of inventory, accounting for lost sales/lost
production.
COST MEASURES
 Total distribution cost:

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 A thorough understanding and a good performance evaluation of
total distribution costs are essential. A profile consisting of
various distribution cost elements should be developed so that
appropriate trade-offs can be applied as a basis for planning and
reassessment of distribution systems, and thus, the overall cost
effectiveness can be achieved. For example, an increase in the
number of depots and its effects on other distribution costs can
be estimated. Using economies of scale, the optimal number of
depots that corresponds to minimum total distribution cost can be
obtained.
The distribution cost would include:

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 Inbound cost to regional distribution center's and any stock point.
 Outbound cost from a distribution center to the next stage and
from every stage to the ultimate customer.
 Cost managing regional distribution center to the next stage and
from every stage to the ultimate customer.
 Stock holding cost, which inventory holding cost.
COST MEASURES
 Finance and logistics cost:

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 The financial performance of a supply chain can be assessed by
determining the total logistics cost. Since logistics cut across
functional boundaries, care must be taken during decision making as
the cost in one area affect the cost in other areas.
COST MEASURES
• Other cost measures are:

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 Cost of goods returned
 Wastages
 Lost sales
COST MEASURES
• Asset measure:

 Supply chain assets include plant, equipment and current assets such as

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accounts receivable and inventories. It is common that firms do their
best to make the most of capital assets they have deployed in business.

 Some key asset management measures:


 Inventory turnover = unites sold during a time period / Average units
inventory during the time period.
 Inventory turnover = Cost of goods sold during a time period / Average
inventory valued at selling price during the time period.
(If average inventory is valued at cost, then numerator must be a cost of
goods sold)
COST MEASURES
• Inventory levels and number of days supply: Average inventory /
Average sales per day:
Thus, days of supply is measured as the total inventory in the supply

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chain - which is inbound, at plant and all stocking locations in the
channel – and expressed as calendar days of sales available based on
recent sales activity (or forecasted rate of sales).
COST MEASURES
• Cash-to-cash cycle time:

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 The cash-to-cash cycle time calculates the time operating capital
(cash) is out of reach for use by your business. The speedier your
cash-to-cash cycle, the fewer days your cash in unavailable for
use in propelling your value stream. You can use this metric to
gauge whether you are operating “lean” with regard to cash.
Also, good performance on the cash-to-cash measurement has
been associated with improved earnings per share.
CALCULATING CASH TO CASH CYCLE TIME
• Cash to Cash =
• Days Cash is locked up as inventory
+ Days Cash is locked up in receivables

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– Days Cash free because business has not paid its bills
EXAMPLE
• 105 Day Cash to Cash Cycle =
 90 Days inventory + 45 Days Receivables – 30 Days Payables

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• If the company can collect the payments faster (online), hold less
inventory, and negotiate better (longer) payable terms it can reduce
the cash to cash time from 105 days to 30 days. This cash is
available 75 days sooner to support the supply chain.
• 30 Day Cash to Cash Cycle =
 45 Days inventory + 30 Days receivable – 45 Days payables
COST MEASURES
• Du Pont chart analysis:

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 This shows the relationship among key ratios to understand asset
performance measure. The original DuPont measure is as follows:
 Net income/capital employed = (Net income/Sales) x (Sales/Capital
employed)
 Where
 Net income/Capital employed is return on capital employed
 Net income/Sales is return on sales; and
 Sales/Capital employed is Asset turnover ratio
• This measure relates to sales efficiency, which is a function of price
and cost management, and asset efficiency, which relates sales as a
function of asset turnover, and both together determine the

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efficiency of capital employed. This financial measure has a
significant relevance to supply chain managers as quite a few
aspects are in their ambit of control.
• The later version of DuPont chart related return on Capital
employed, which is also referred as return on investment, to
financial leverage and cost of capital and measured value it can
create to stakeholders. It is important to note that operating drivers
of this measure include cost factors, responsiveness, receivables
management, sourcing, and asset utilization efficiency.
DRAWBACK OF TRADITIONAL MEASURES
• They are not linked to strategy.
• They have a silo approach.
Many companies have realized the importance of financial and non-

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financial performance measures. However, they have failed to
understand them in a balanced framework.
• Traditional metrics lack hierarchical approach.
CONTEMPORARY APPROACH
• Contemporary measures are based on frameworks and practices
driven largely by management accountant practice to bring more
comprehensiveness and better range of techniques for relating cause

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and effects decision situations. Such approach is more beneficial,
especially for reporting to top management and getting resources
allocated for achieving efficiency and effectiveness. Comprehensive
measures ensure multi-disciplinary approach to decision making in
supply chain domain.
• The contemporary approach involves the application of following
frameworks and tools from management accountant perspective:

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 Balanced score card
 Activity Based Management and costing
 Economic Value added
 Process driven metrics – SCOR framework
BALANCED SCORE CARD
• It is a strategic planning and management system that is used
extensively to align business activities to the vision and strategy of
the organization, improve internal and external factors, and monitor

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organization performance against strategic goals. Robert Kaplan of
Harvard business school and David Norton developed the balanced
scorecard as a performance measurement framework that combined
non-financial performance measures to traditional financial metrics
to give managers and executives a more ‘balanced’ view of
organizational performance. This can be applied for measuring
supply chain effectiveness as well.
BALANCED SCORE CARD

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BALANCED SCORE CARD

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ACTIVITY BASED MANAGEMENT AND
COSTING
• Activity based costing is a costing model that identifies activities in
an organization and assigns the cost of each activity resource to all
products and services according to the actual consumption by each

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product. It assigns indirect costs (overhead) into direct costs.
ACTIVITY BASED MANAGEMENT AND
COSTING

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ECONOMIC VALUE ADDED (EVA)
• It is an estimate of true economic profit after making corrective
adjustments to accounting provisions and charges on capital,
including deducting the opportunity cost of equity capital. EVA can

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be measured as Net Operating Profit After Taxes (or NOPAT) less the
money cost of capital. This can be applied to supply chain function
and assets.
SCOR FRAMEWORK
• The Supply Chain operations Reference Model (SCOR) is a process
reference model that has been developed and endorsed by the
Supply Chain Council as the cross-industry standard diagnostic tool

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for supply chain management. It is a process reference model for
supply chain management, spanning from the suppliers supplier to
the customers customer. The SCOR model has been developed to
describe the business activities associated with all phases of
satisfying a customer’s demand.
SCOR FRAMEWORK

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SOURCING
DISCOVERING POTENTIAL SUPPLIERS
• Supplier websites
• Supplier information files
Supplier Catalogs

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• Trade Registers and Directories


• Trade Journals
• Phone Directories
• Filing Of Mailing Pieces
DISCOVERING POTENTIAL SUPPLIERS
• Sales Personnel
• Trade Shows
Company Personnel

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• Other Supply Management Department.


• Professional Organization
EVALUATING POTENTIAL SUPPLIERS
• Supplier Surveys
• Financial Conditions Analysis
• Third Party Evaluators

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• Evaluation Conference
• Facility Visits
• Quality Capability Analysis
• Capacity Capability Analysis
EVALUATING POTENTIAL SUPPLIERS
• Management Capability Analysis
• Service Capability Analysis
• Flexibility Capability Analysis

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• Information Technology Capability Analysis
SELECTING SUPPLIERS
• Bidding versus Negotiation
• Pre requisites to Bidding
Conditions Demanding Negotiation.

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SINGLE VERSUS MULTIPLE SOURCING
• Lower total cost results from a much higher volume(economies of
scale)
• Quality consideration dictate

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• The buying firm obtains more influence-clout-with the supplier
• Lower costs are incurred to source, process, expedite and inspect.
SINGLE VERSUS MULTIPLE SOURCING
• The quality control and coordination required with just in time
manufacturing require a single source
• Significantly lower freight costs may result

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• Special tooling is required and the use of more than one supplier is
impractical or excessively costly.
DUAL OR MULTIPLE SOURCING
• To protect the buying firm during times of shortages, strikes, and
other emergencies.
• To maintain competitions and provide a backup source. To meet local

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or intent requirements for international manufacturing locations.
• To meet customer’s volume requirements.
• To avoid lethargy or complacency on the part of a single-source
supplier
DUAL OR MULTIPLE SOURCING
• When the customer is a small player in the market for a specific item.
• When the technology path is uncertain
In areas where suppliers tend to leapfrog each other technologically

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IMPORTANCE OF OUTSOURCING
 In the context of strategic supply chain
management
BENEFITS OF OUTSOURCING
1. Cost Savings
2. Focus on Core Business
3. Improved Quality
4. Customer Satisfaction
5. Operational Control
6. Staffing Flexibility
7. Continuity & Risk Management
8. Ease in starting new projects quickly
9. Accessibility to skilled expertise
10. Competitive edge
DISADVANTAGES OF OUTSOURCING
1. Loss Of Managerial Control
2. Hidden Costs
3. Threat to Security and Confidentiality
4. Quality Problems
5. Tied to the Financial Well-Being of Another Company
6. Bad Publicity and Ill-Will
MAJOR TASKS THAT ARE OUTSOURCED
CONSIDERATIONS WHEN SELECTING AN OUTSOURCING
DESTINATION

• Costs
• Culture and Language
• Talent Pool
• Time Zone/Geographical Location
• Technology Infrastructure
• IP Protection and Legal Maturity
• Geopolitical Risks
• Local Considerations
TOP 25 OUTSOURCING DESTINATIONS –
THOLONS - 2016
CRITERIA TO SELECT OUTSOURCING PARTNER
• Quality • Geographical Location
• Price • Reputation
• Delivery • Warranties and claim policies
• Service • Other Factors
• Technical Capability
• Financial Strength
BEST OUTSOURCING SERVICE PROVIDERS
[INTERNATIONAL ASSOCIATION OF OUTSOURCING
PROFESSIONALS (IOAP) - 2016]

 Accelya
 Accenture
 Aegis Limited
 AGS Health Private Ltd
 Ajuba International
 Alorica
 Altisource
 Aon Hewitt
 Auriga
 Bell Integrator
 Canon Business Process
 Services
 CBRE
TOP 10 REASONS WHY OUTSOURCING
FAILS
• Unclear objectives of • Unforeseen costs or rising costs
outsourcing • Over
• No concurrent change in management/micromanagement
workplace culture • Changing buyer needs
• Expectations are not set
correctly • Buyer behavior towards provider
• Lack of communication
• Transition processes need
improvement
• Inadequate risk analysis
PRICING
PRICE ANALYSIS
• A price analysis is defined as the examination of a seller’s price
proposal(bid) by comparison with reasonable price benchmarks,
without examination and evaluation of the separate elements of the
cost and profit making up price

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PRICE ANALYSIS
• Some form of price analysis is required for every purchase.
• The method and scope of analysis required are dictated by the dollar
amount and circumstances attending each specific purchase

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TOOLS OF PRICE ANALYSIS
• Analysis of competitive price proposals
• Comparison with regulated ,catalogue, or market prices
Use of web-based e-procurement

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• Comparison with historical prices


• Use of independent cost estimates
COMPETITIVE PRICE PROPOSALS
• When this approach is employed and the following additional
conditions are satisfied then the resulting low bid normally provides
a fair and reasonable price.

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• At least two qualified sources have responded to the solicitation.
• The proposals are responsive to the buying firm’s requirements
COMPETITIVE PRICE PROPOSALS
• The supplier competed independently for the award
• The supplier submitting the lowest offer does not have an unfair
advantage over its competitors

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• The lowest evaluated price is reasonable
COMPETITIVE PRICE PROPOSALS
• The supply manager can not apply this approach in a mechanical
manner. He or she clearly must use common sense and ensure that
the price is reasonable when compared with past prices, with
independent estimates, or with realistic rules of thumb

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REGULATED, CATALOGUE AND MARKET PRICES

• Prices Set By Law or Regulations

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• Catalog Price

• Market Price
PRICES SET BY LAW OR REGULATION
• When the price is set by law or regulations ,the supplier must identify
the regulating authority and specify the regulated prices
• No supplier may charge more or less than approved prices.

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CATALOG PRICE
• An established catalog price is a price that is included in a catalog, a
price list or some other form that is regularly maintained by the
supplier.

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MARKET PRICE
• A market price results from the interaction of many buyers and
sellers who are willing to trade at a given (market) price
• Eggs and lumber, for example, are priced based on market.

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INTERNET/E-COMMERCE II
• Advanced communications using the internet allow supply
management personnel to view up to date pricing, as well as
catalogs, specifications sheets, video presentations, and other
information's the seller has on a material, product, or service.

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• Since the internet does not have geographical constraints the
information is available worldwide
BUYING EXCHANGES
• It is often referred to as B-2B e-commerce, offers purchasing firms a
list of pre-approved sellers offering identical and/or similar products
or services, usually within specifications category, from which to

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choose Normally, prices or discounts from list prices are provided.
REVERSE AUCTIONS
• Identify materials, equipment's, or services required and request
carefully prequalified suppliers to submit bids.
• Potential suppliers are able to see prices submitted by their

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competitors and revise their bids until the pre established closing
time for the auction.
• Caution must be used when employing reverse auction since they
ignore the relationship dimension of the transaction.
TAILORED GLOBAL
• Tailored Global searches allow expanded internet search capabilities.
• Supply management professionals can investigate products or
services by simultaneously scanning all relevant public and private

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websites worldwide
• Obtaining the right price, quality, and delivery is becoming easier
and faster as the internet expands and more procurement specific
portals are developed.
HISTORICAL PRICES
• Price analysis may be performed by comparing a proposed price
with historical quotes or prices for the same or similar item.
• It is essential to determine that the basic price was fair and

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reasonable (as determined through price analysis) and is still a valid
standard against which to measure the offered price.
INDEPENDENT COST ESTIMATES
• When other techniques of price analysis cannot be utilized, the
supply manager may use an independent cost estimate as the basis
for comparison. He or she must determine that the estimate is fair
and reasonable.

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COST ANALYSIS
• Cost analysis is a review and an evaluation of actual or anticipated
costs. This analysis involves the application of experience,
knowledge, and judgment to data In an attempt to project reasonable

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estimated contract costs. Estimated costs serve as the basis for
buyer-seller negotiations to arrive at mutually agreeable contract
prices.
COSTS AFFECTING ELEMENTS
 Some of the most important elements are;

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• Capabilities of management
• Efficiency of labor
• Amount and quality of subcontracting
• Plant capacity and the continuity of output
AGGREGATE PLANNING
AGGREGATE PLANNING
 Aggregate planning are;

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 Part of a larger production planning system
 Decisions made at a product family (not SKU) level
 Disaggregation breaks the plan down into greater detail
 Disaggregation results in a master production schedule (MPS)
 The objective of aggregate planning is to meet forecasted
demand while minimizing cost over the planning horizon
 Required for aggregate Planning;

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 A logical overall unit for measuring sales and output
 A method for determining costs
 A forecast of demand for an intermediate planning period in
these aggregate terms
 A model that combines forecasts and costs so that scheduling
decisions can be made for the planning period
• Determine the quantity and timing of production for the intermediate
future (3 – 18 months)
Cost minimization is achieved by adjusting below entities;

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 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables
AGGREGATE PLANNING STRATEGIES
• Use inventories to absorb variations in demand
• Accommodate changes by varying workforce size
• Use part timers, overtime, or idle time to absorb changes

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• Use subcontractors and maintain a stable workforce
• Promotions or other factors to influence demand
AGGREGATE PLANNING METHODS
• Chase Strategy:
 Produce exactly what is demanded during the period in which it
is demanded

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• Level Strategy:
 Produce an amount equal to the average demand for all periods in
the planning horizon
• Hybrid Strategy:
 Various combinations of the above
CHASE STRATEGY
• Production rate is synchronized with demand by varying machine
capacity or hiring and laying-off workers as the demand rate varies
Expensive if cost of varying capacity is high

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• However, in practice, it is often difficult to vary capacity and


workforce on short notice
• Negative effect on workforce morale results in low levels of
inventory
• Should be used when inventory holding costs are high and cost of
changing capacity are low
LEVEL STRATEGY
• Shortages and surpluses result in fluctuations in inventory levels over
time
• Inventories that are built up in anticipation of future demand or
backlogs are carried over from high to low demand periods

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• Maintain stable machine capacity and workforce levels with a
constant output rate
• Better for worker morale
• Should be used when inventory holding and backlog costs are
relatively low
• Large inventories and backlogs may accumulate
SUPPLY CHAIN TERMS
SUPPLY CHAIN TERMS
• ABC Analysis – used to establish inventory management policies that
focus on few critical parts and not the many trivial ones.
• Backlog- All customer orders that have not shipped. Includes past due,

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current and future orders.
• Back orders- A past due order for an item with insufficient inventory or
some other problem.
• BOM (Bill of Material)- List of components, ingredients and materials
needed to make products.
• Bullwhip Effect- Fluctuation in an order increases as they move up the
supply chain
• Carrier – Party that moves or transports the product
SUPPLY CHAIN TERMS
• Chase Strategy- Production rate is synchronized with demand by
varying chine capacity or hiring and laying off workers as the demand
rate varies.

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• Correlated Storage Assignment- Products that are often requested
simultaneously by customer are stored closely with each other.
• Cross Docking-Materials are moved directly from receiving to shipping
and are not placed in storage in the warehouse.
• CRP (Continuous replenishment Program)- Inventory Management
practices in which the wholesaler or manufacturer replenishes a retailer,
based on POS data at the retailer or warehouse withdrawals.
• CSL (Cycle Service Level)- Desired probability of not running out of
stock in any one ordering cycle.
SUPPLY CHAIN TERMS
• Dedicated Storage Approach- Each storage locations is pre-allocated
to a specific products, even when some products are out of stock,
other products will not be allocated to these spaces.

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• DMAIC(Define-Measure-Analyze-Improve-Control)-Six Sigma
structured approach.
• EDI(Electronic data Interchange)-Computer to computer exchange
of routine business documents such as invoices, purchase orders,
payments, order status etc.
• Efficiency-Inverse relationship with responsiveness; increasing
responsiveness lowers efficiency because there is a cost to achieving
responsiveness.
SUPPLY CHAIN TERMS
• EOQ(Economic Order Quantity)-Lot size that minimizes total annual
inventory holding and ordering/Set up costs
• Facilities-Places where inventory is stored, assembled or fabricated;

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production sites and Storage sites
• Fishbone Diagram- It is also known as cause and effect diagram which
is simple graphical method for presenting a chain of causes and effects
and for sorting out causes and organizing relationship between
variables.
• Forecasting-The art and science of making projections about future
demand and conditions.
• Freight Forwarder-Person or company that organizes shipments for
individuals or other companies and may also act as a carrier.
SUPPLY CHAIN TERMS
• Incoterms(International Commercial Terms)-Series of pre-defined
commercial terms published by the international chambers of
commerce(ICC) widely used in international commercial

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transactions.
• Independent demand- Demand for any other product (end items for a
customer).
• Infrastructure owners and operator-Individuals responsible to ensure
monies are available for maintenance and expanding capacity of a
public as needed.
• Information-Data and analysis concerning facilities, inventory,
transportation and customers.
SUPPLY CHAIN
• Inventory-Raw TERMS
materials, Work in Process (WIP), Finished goods.

 Pressures for high inventories-Customer service, ordering cost,


transportation cost, labor and equipment utilization and quantity
discount.

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 Pressures for low inventories-cost of capital, storage and handling,
taxes, insurance and shrinkage.
 Cycle inventories-Average amount of inventory used to satisfy
demand between shipments.
 Anticipation Inventory-Inventory built up to counter predictable
variability in demand.
 Safety Inventory-Inventory held in case actual demand exceeds
forecasts or in case supply shortfalls occur.
SUPPLY C(HAIN
• Inventory TERMS
Continued)

 Performance Measures
 Inventory turns-The no of times inventory turns over in a tear. It’s
the ratio of the average inventory either the cost of goods sold or

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sales.

 Cash to Cash Cycle-High level metric that includes inventories,


account payables and receivables.

 Average inventory-The average amount of inventory carried. It


should be measured in units, days of demand and financial value.

 Fill Rate-The fraction of order/demand that were met on time


from inventory.
SUPPLY
•InventoryC HAIN TERMS
( Continued)

 Performance Measures:

 Seasonal Inventory-The amount of both cycle and safety inventory that is

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purchased solely due to seasonal changes in demand.

 Lead time-Time required to purchase, produce or assemble an item.

 Lean-Philosophy based on eliminating waste, which shortens the timeline


between the customer order and the delivery of a service or shipment of a
product.

 Seasonal Inventory-The amount of both cycle and safety inventory that is


purchased solely due to seasonal changes in demand.
SUPPLY CHAIN TERMS
• Level strategy-maintain stable machine capacity and workforce
levels with a constant output rate.
Make-or-buy—decision regarding the manufacture or purchase of

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item or service.
• Manufacturing facility layout strategy.
• Process focus –facilities are organized around specific activities or
processes.
• Repetitive focus—facilities often organized as assembly lines.
• Product focus—facilities are organized by products.
SUPPLY CHAIN
• Manufacturing TERMS
strategies:

 Make-to-order—producing products to customer specifications in


low volume.

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 Assemble-to-order—producing a wide variety of products from
relatively few assemblies and components after the customer orders
are received.
 Make-to-stock—holding items in stock for immediate delivery ,
thereby minimizing customer delivery times.
 Mass production—term for a line process that uses the make-to-stock
strategy.
SUPPLY CHAIN TERMS
• MPS (Master Production Schedule)—statement in terms of specific
products of what is to be produced and when.
• MRP (Material Requirement Planning)—computerized information

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system developed specifically to help manufacturers manage
dependent demand inventory and schedule replenishment orders.
• Order qualifiers—those characteristics that get potential customers to
consider buying your product and services.
• Order winners—those characteristics that persuade customers to
choose your products and services over your competitors.
Outsource—the purchase of an item or service.

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• Pareto chart—issues are categorized and then displayed on a chart in


descending order which helps to focus on causes which have the
greatest impact( follows the 80/20 rule which Pareto identified).
SUPPLY CHAIN TERMS
• PDCA (Plan ,Do, Check, Act)—approach to problem resolution
popularized by Deming but developed by Shewhart.
• PO( Purchase Order)—Commercial document making a legal offer
to buy products or services ,issued by a buyer to a seller, indicating
types, quantities, prices, and other terms and conditions.

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• Policy makers—individuals responsible for the prevention of abuse
of monopoly power , promote fair competition, and balance
environmental, energy, and social concerns in transportations.
• Pricing—the process by which a firm decides how much to charge
for its products or services.
• Push/Pull– Push production is based on forecast demand. Pull
production is based on actual or consumed demand.
SUPPLY
• SourcesC
ofHAIN TERMS
supply chain revenue—the customer.
• Sources of supply chain cost—flows of information, products, or
funds between stages of the supply chain.
• Sourcing—the set of business processes required to purchase goods

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and services.
• Strategy—the art of employing or devising plans toward a goal.
• Competitive strategy—the plan to utilize the products or services of
an organization to satisfy the demands or needs of customer or
customer segments.
• Products and Service Development Strategy—Specifies the new
products and / or services that company will attempt to develop.
SUPPLY CHAIN TERMS
• Strategy (continued)

 Marketing and Sales Strategy—Specifies how the market will be


divided and product positioned , prices, and promoted.
 Supply Chain Strategy—Specifies the nature of material

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procurements, transportation of materials, manufacture.
 Transportation—moving inventory from point to point in a supply
chain.
 Randomized storage approach- assigns the items randomly to the
storage locations without considering the products popularity and
interdependency.
• RCCP (Rough-Cut Capacity Planning)- Converts the master data
production schedule (MPS) into load requirements for critical
resources.
• Six Sigma- Quality improvement program, utilizing a structured

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approach(DMAIC) with a payback threshold established, usually
accomplished through a project team.
• Shipper-Party that requires the movement of the product between
two points in the supply chain.
SUPPLY CHAIN TERMS
• Scatter Diagram-Plot of the relationship between two numerical
variables.
• SKU( Stock Keeping unit)- No. or code used to identify each unique

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product or item for sale in a store or other business. It is a unique
identifier for each distinct product and services that can be
purchased.
• SPC (Statistical Process Control)-Displays the performance and the
over time variation of a process or some quality or productivity
indicator in a graphical fashion.

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