Basics of Supply Chain Management

Session 1
Introduction to Supply Chain
Management
Course Objectives
Provide a review of supply chain
management from a manufacturing,
planning and control perspective

Provide a basis for further study leading to
APICS CPIM certification
2
Key Resources
BSCM Participant Guide
CPIM Exam Content Manual
APICS Dictionary
3
Basics of Supply Chain
Management
Introduction
to Supply
Chain
Management
Aggregate
Inventory
Management
Demand
Management
Item Inventory
Management
Capacity
Management
and Production
Activity
Control
Theory of
Constraints
and Review
Activity
Material
Requirements
Planning
Lean/JIT and
Quality
Systems
Master
Planning
Purchasing
and Physical
Distribution
1. 2. 3. 4. 5.
6. 7. 8. 9. 10.
4
Introduction
to Supply
Chain
Management
Manufacturing companies see one of their primary activities as transforming ideas and materials into
products and services. They have to interact with suppliers of raw materials or components, and with
customers who might either distribute, resell, or consume their products. Several topics will be introduced
in this section:
Creating value and wealth
Choices manufactures make in order to compete
Role of manufacturing in the supply chain
Manufacturing planning and control systems
Impact of technology and new productivity improvement systems and philosophies
Topics will be introduced in this section and explored further in the next nine sessions.
1.
Basics of Supply Chain
Management
5
Introduction to Manufacturing
Explain the significance of the United Nations (UN) Global Compact.
Describe the components of the manufacturing business model.
Describe the impact of four significant aspects of the business environment on
manufacturing.
Manufacturing Environments and Process
Choices
Explain five manufacturing environments and their determinants.
Explain the differences among the three process choices.
The Manufacturing Supply Chain
Differentiate between internal and external supply chains.
Differentiate between traditional and cross-functional supply chains.
Explain common supply chain conflicts and how to resolve them.
Explain the relationship between strategic, tactical, and operational performance
measures.
Explain the role of materials management.

Learning Objectives
6
Manufacturing Planning and Control
Identify five objectives of manufacturing.
Describe the concepts of priority and capacity.
Present an overview of the manufacturing planning and control (MPC)
hierarchy.
Describe the four steps in the evolution of MRP to ERP.

Learning Objectives (cont.)
7
Introduction to Manufacturing
Session 1
8
Product
Adding value creates wealth
Value to the customer
Raw material
Role of Manufacturing
9
Voluntary strategic policy initiative for
businesses

Alignment of business operations with
principles in four areas:
- human rights
- labor practices
- environment
- anti-corruption

Adoption of UN Global Compact Management
Model

Voluntary initiatives: - instill a culture of leadership & innovation in pursuit of responsible behavior
- move corporate responsibility from concept to fact
- give voice to peoples concerns securing a positive place in society for the firm
The UN Global Compact is a strategic policy initiative for businesses that are
committed to aligning their operations and strategies with ten universally accepted
principles in the areas of human rights, labour, environment and anti-corruption. By
doing so, business, as a primary driver of globalization, can help ensure that
markets, commerce, technology and finance advance in ways that benefit
economies and societies everywhere.
Provides detailed guidelines for incorporating the ten principles in business strategies and operations.
Source: United Nations Global Compact: Corporate Sustainability in the World Economy, February 2011
United Nations Global Compact
10
Ten Principles
1 Support and protect internationally proclaimed human rights.
2 Ensure non-complicity in human rights abuses.
Human
rights
3 Uphold freedom of association and right to collective bargaining.
4 Eliminate forced and compulsory labor.
5 Abolish child labor.
6 Eliminate discrimination in employment and occupation.
Labor
practices
7 Support a cautionary approach to environmental challenges.
8 Promote greater environmental responsibility.
9 Encourage the development and diffusion of environmentally
friendly technologies.
Environment
10 Work against corruption in all of its forms including
extortion and bribery.
Anti-corruption
Member firms agree to embrace, support and enact the following principles.
Source: United Nations Global Compact: Corporate Sustainability in the World Economy, February 2011
11
UN Global Compact Management Model
Commit
Leadership commitment to mainstream Global
Compact principles.
Assess
Assess risks, opportunities, and
impacts.
Define
Define goals, strategies, and
policies.
Implement
Implement strategies and policies across
the company and value chain.
Measure
Measure and monitor impacts
and progress toward goals.
Communicate
Communicate progress and
strategies; engage stakeholders.
Source: United Nations Global Compact Management Model: Framework for Implementation, June 2010
12
Manufacturing Business Model
Defining products and customers
Designing products and processes
Managing material flow
Providing customer service and support

All aspects of the business model should support the goal of making a
profit and competing effectively both now and into the future.
We will look at each of these in more detail.
13
Customers and Products
Types of customers
Industrial
Consumer
Institutional
Government
Market segmentation
Sales channels
Market share/profitability
Product Definition Customer Definition
Choice of production environment
(ETO, MTO, ATO, MTS)
Choice of manufacturing process
(Project, intermittent, repetitive flow, continuous flow)
Product
Design
Positioning
Breadth of product line
Price
Quality
Brand name or generic
Design
Packaging
Returns policy
Important strategic decision what to sell to who?
14
Designing Products and Processes designed
to:
Meets
Customer
Needs
Be Cost
Effective
Provide
Quality
Provide
Efficiency
DESIGN
Most
important
characteristic
WHY?
To ensure a
profit.
Must be
addressed in
design
phase.
Including
efficiency in
distribution &
transportation
.
15



Material
Acquisition
Manufacturing
Distribution
Procurement of materials driven by
Demand Plans and MRP
Manage flow to and from (reverse Logistics) Customers
Returnable packaging such as Totes,
Recycling packaging such as drums or pallets
Remanufacturing (green concept)
Includes both outbound & inbound
(e.g Reverse Logistics)
Execute Efficiently to
eliminate waste and time
Schedule Production when
necessary to meet Demand
Must balance service-costs-
inventory
Managing Material Flow
16
Providing Customer
Service/Support
Understanding and meeting customer wants
and needs
Two-way communication
Working with customers to solve problems
17
Global Environment
Global competition

Economic, government, and
regulatory influences

Customer expectations

Corporate social responsibility


I want
More!
Global recession has brought much attention to these things.
For example, currency protectionism, environmental
regulations, etc..
Both sustainability (responsible use of
resources) and social behaviors.
18
Customer Expectations
Characteristics that provide value to the customer
Price
Quality
Delivery
Pre- and post-sale service
Flexibility (product and volume)
Environmentally friendly is becoming more important.
A primary driver for standard, commodity products but not for specialty products (e.g. IPOD vs. other MP3
Players)
Assumed in most cases today not often a significant difference maker.
For example, FedEx, UPS, DHL, etc..
Dell Computers, Specialty Chemicals, etc.. supplier helps with design and services after sale.
For example ease in changing product design to meet changing demands (e.g. IPOD from keypad to
touch screen). Ease of increasing volumes as demand increases.
19
Customer Expectations (cont.)
Order qualifiers
Competitive characteristics that a firms products
must exhibit in order to be considered by
customers


Order winners
Competitive characteristics that cause
customers to choose a firms products and
services
20
Manufacturing Environments and
Process Choices
Session 1
21
Manufacturing Environments
Engineer-to-order
Make-to-order
Assemble-to-order (Finish-to-Order)
Make-to-stock
Mass customization

Customized solutions unique to the customer who is involved in the design.
Production begins after receipt of customer order. Product may be sold to multiple customers and
repeat orders may be received..
Intermediates or sub-assemblies are stocked and final product is configured to order.
Customer orders are filled from existing stocks.
High volume products with large variety. For example, having it your way at Burger King or specifying
a customer computer at Dell.
Green manufacturing including re-use, disassembly & re-manufacturing
are future trends.
22
Determinants of Manufacturing
Environments
Influences
Lead time expectations

Product design input from customers

Product volume and variety

Product life cycle

We will look at each of these in more detail.
23
Lead Time and Manufacturing
Environments
Design Purchase Manufacture Ship
Inventory Manufacture Ship
Manufacture Inventory Ship
MTS Delivery
Lead Time
Manufacture Assemble Ship Inventory
ETO Delivery Lead Time
MTO Delivery Lead Time
ATO Delivery Lead Time
Assemble
Assemble
Assemble
Engineer-to-
Order
Make-to-Order
Make-to-Stock
Assemble-to-
Order
Note: Mass customization would have shorter lead times and higher volumes than MTO.
24
Volume/Variety Relationships
Product Volume
P
r
o
d
u
c
t

V
a
r
i
e
t
y

High Low
High
Engineer-to-Order
Make-to-Order
Assemble-to-Order
Make-to-Stock
Mass
Customization
For example, having
the burger or
Starbucks your way.
Fast pace, High Variety & High
Volume
e.g. Bridges, Buildings, Custom Homes, Custom
Chemical Solutions, etc..
e.g. Specialty Chemicals, Specialized Equipment, etc..
e.g. Autos, Furniture, Bulk-to-Pkg,
etc..
e.g. Groceries, Hardware, Sporting Goods,
Commodity Chemicals, etc
The manufacturing strategy must be effectively aligned with the Volume-Variety approach.
25
Product Life Cycle
Introduction Growth Maturity Decline Phase-out
Units
sold
Time
Cost of
producing and
promoting
product is high.
Unit Cost
decreases;
Competition
Increases.
Competing
products exist;
may stay in this
stage (e.g. milk)
Cost reductions
and new
products are
focus.
Sales & Production
discontinued; after-
sale service
outsourced.
Products travel through life-cycle at different speeds (e.g. Commodity Chemicals vs. Specialty Chemicals
26
ETO
MTO
ATO
MTS
MC
Introduction Growth Maturity Decline Phase-out
Units
sold
Time
May develop
prototype and
use pilot plant
approach at this
stage.
All but ETO are used in these
two stages. Align with
Volume-Variance
Change to order
on demand to
reduce risks.
Make-to-Order
Only; Plan to
take off market.
Product Life Cycle and Manufacturing
Environments
27
Choice of Processes and Layouts
Intermittent
Flow
Repetitive/Line
Continuous
Project
Lot or Batch Production flowing through work stations at
different intervals (e.g. Pigments & Dyes, Machine Parts, etc..)
Auto assembly lines and Campaign Wheel production in
chemicals (e.g. Dispersions) are examples. High
production volumes.
Very high production volumes with fixed routings. For example
steel, gasoline and bulk chemicals (e.g. Basic Intermediates,
Capro, MDI, etc).
Used to produce buildings, planes, bridges, etc.. . Often the
product is made at one site.
28
Intermittent Manufacturing
Source: Arnold et al., Introduction to Materials Management, 6
th
ed.
Reprinted by Permission of Pearson Education
Product
moves
through a
series of work
stations
Different
products go
through
different work
stations
Use for
relatively low
volume
products

29
Intermittent Manufacturing Characteristics
Intermittent lot/batch production
Work moves only to required stations
Many different parts processed at workstations
General-purpose machinery
Relatively easy to change product or volume
Complex and expensive production and inventory control
High WIP inventory levels; long lead time
Step 1
Step 2
Wait
Wait
Step 3
30
Intermittent Manufacturing Layout
Intermittent manufacturing layout is called process
layout
Also called functional or job shop layout
Equipment and operations grouped together by
functional specialty
Similar types of skills and equipment in each
department
Volume not high enough to justify assembly line
Multiple products are run through the same process layout.
Machines are often grouped together by function (e.g. saws, lathes, blenders, dryers, etc..)
31
Flow Manufacturing
Workstations are in the sequence needed to make
the product
Work flows at a nearly constant rate
Little work-in-process inventory
Blender Reactor Dryer - Packager
For example: one car every two minutes or 100 Kgs per minute
Usually no work-in-process storage only inventory that is in production line.
32
Flow Manufacturing Characteristics
Layout is called product layout
Fixed routings and dedicated machinery
Capital intensive
Two types of flow: repetitive/line and continuous
Repetitive = discrete units
Continuous = not discrete (liquids)
Limited range of similar products
High product volumes

The machines are designed to yield a given product (e.g. steel, oil, cars, bulk chemicals, etc..)
Cost is usually in billions of dollars or euros.
Very costly to start & stop production; Need high utilization to justify capital expenditure.
Auto assembly line is most common example. One car every two minutes.
Uses heating, cooling, mixing, chemicals, etc.. In a flow line to produce bulk chemicals, steel, gasoline, etc..
The technology is tied to the product produced.
For example an oil refinery or auto assembly line.
33
Advantages of Product Layout
Little work-in-process inventory

Short throughput and manufacturing lead
times

Lower unit cost
Product flows through the reactor line or repetitive assembly line without building
up inventory in process.
High output rate is the norm. For example, an auto assembly line for Repetitive or an
oil refinery for Continuous Flow.
Due to high throughput, low labor costs, and low inventory investment.
34
Used for large, complex projects
Project remains in one location for assembly
Site layout
Avoids cost of moving the product
For more on Project Management go to: PMI.org
Project Manufacturing (Fixed Position)
35
Product Process
Capital cost
Flexibility
Annual setup cost
Run cost
Work-in-process inventory
Production and inventory control costs
Lead time


Problem 1.1
Continuous,
Repetitive
Intermittent,
Batch
Product Layout vs. Process Layout
36
Product Process
Capital cost
Flexibility
Annual setup cost
Run cost
Work-in-process inventory
Production and inventory control costs
Lead time


Problem 1.1 Solution
Product Layout vs. Process Layout
Continuous,
Repetitive Flows
Intermittent,
Batch
37
The Manufacturing
Supply Chain
Session 1
38
Supply chain: The global network used to
deliver products and services from raw
materials to end customers through an
engineered flow of information, physical
distribution, and cash.

Supply chain management: The design,
planning, execution, control, and monitoring of
supply chain activities with the objective of
creating net value , building a competitive
infrastructure, leveraging world-wide logistics,
synchronizing supply with demand and
measuring performance globally.
APICS Dictionary
Supply Chain Management Definitions
39
Basic Supply Chain: External
Manufacturer Suppliers Distributors Retailers
Consumers
Dominant flow of goods and services
Dominant flow of demand and design information
Dominant flow of cash
External supply chain from a manufacturers perspective
Returns and reverse logistics
40
Conventional Internal Supply Chain View
Functional View- Working in Silos
Raw Materials
Customers
Purchasing Production Distribution
Lowest purchase
price
Inventory buffers
High utilization %
Long runs minimize
changeovers
Low unit costs
Safety stocks
Full truckload
quantities
Best shipping rate
Safety stocks
Internal supply chains include these three functions who may or may not work well together and focus on the
overall results. For example, Purchasing might buy at the lowest price without consideration for the quality of
the product or the delivery performance of the vendor. A goal of Supply Chain Management is to ensure highest
overall value add to the firm.
41
Cross-Functional Supply Chain View
Develop
Products
and
Services
Manage
Procurement
Produce
Products
Supply chain processes
The value chain consists of the value-adding processes that enable a
company to take its products from conception to market
The internal supply chain is a subset of the value chain
Support processes are important but are not considered primary value
chain processes
Manage Customer Orders and Reverse Logistics
Manage
Distribution
Perform
Marketing
and Sales
Manage Finance
Manage Human Resources
Key support processes:
Focus is on the process not the organizational
function. KPIs must focus on overall results.
P2P SC Plng OTC
42
Conflicts in Traditional Supply Systems
Finance Marketing Operations
Inventory investment
Traditional
Objective
Customer service
Production efficiency
Increase profit and
cash flow, reduce
investment
Increase revenue/
satisfy customers
Reduce
manufacturing cost
8 2 5
9 3 6
7 1 4
43
Balanced Scorecard
Balanced to show KPIs from the
customer perspective
business process perspective
financial perspective
innovation and learning perspective.
44
Balanced Scorecard
Innovative
Perspective
Financial
Perspective
Internal
Perspective



Customer
Perspective
Contribution Margin
Cash Flow
Operating Result
Return on Assets
Days Sales Outstanding
Value-Added Productivity
Promise vs. Request Date
Promise vs. Delivery Date
Request vs. Order Date
Order vs. Delivery Date
Actual vs. Plan Ship Date
Ship vs. Order Quantity
Trends in performance
Rates of improvement
Learn new processes
Learn new technologies
Share knowledge

Forecast vs. Actual Sales
Actual vs. Plan Production
Inventory Velocity
Non-Optimal Shipments
Distribution Expenses
Flexibility & response time
Source: The Balanced Scorecard by Norton & Kaplan
45
Performance Measures
Key Performance Indicators
Strategic
Tactical
Operational
EBIT
after
COC
Inventory
Forecast Accuracy
On-Time Delivery
SC Costs
Daily Yield Performance
Cycle Count Accuracy
Actual vs. Scheduled
Production
46
Manufacturing Planning
and Control (MPC)
Session 1
47
Objectives of Manufacturing

The right products
Of the right quality
In the right quantities
At the right time
At minimum cost (right price)

Dont Forget! The business must make a profit!

48
Why Plan?
To satisfy customer demand and ensure the
availability of resources
Material
Capacity
Demand Resources
Raw Matls., Intermediates, FGs, Merchandise
Machines, People, Money, etc..
Sets the priorities
Scheduling & Capacity
Management
49
These are questions of priority and capacity.
A Good Planning and Control System
What must
we get
and
when?
Demand Planning
Work Centers
BOMs
Routings
Inventory Status
Production &
Purchasing
Schedules
50
Manufacturing Planning and Control
Order
Sequencing
Input/Output
Control
Master Scheduling
Capacity
Requirements
Planning (CRP)
Sales & Operations
Planning
Business Planning
Master Planning
Resource
Planning (RP)
Rough-Cut
Capacity Planning
(RCCP)
P
r
i
o
r
i
t
y

P
l
a
n
n
i
n
g

E
x
e
c
u
t
i
o
n

C
a
p
a
c
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y

P
l
a
n
n
i
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E
x
e
c
u
t
i
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n

Material
Requirements
Planning (MRP)
Production Activity
Control (PAC)
Demand
Management
Feedback used to
adjust plans
Validates the
Plan or
Schedule
Plans &
Schedules
Production
51
From MRP to ERP
Session 1
52
Evolution from MRP to ERP
MRP
MRP
Closed
Loop
MRP II ERP
MRP Processor
Closed-Loop Feedback
Best Practice Processes
Common Database
Sales and Operations
Planning
Total Cross-Functional
Software Process Integration
1960s 1970s 1980s 1990s
53
Basics of Supply Chain Management
Session 1