Supply Chain

Management
Learning Objectives
You should be able to:
• Explain the terms supply chain and logistics
• Name the key aspects of supply chain management
• List, and briefly explain, current trends in supply chain
management Outline the benefits and risks related to
outsourcing
• Explain what the main supply chain risks are, and what businesses can do to minimize those
risks Describe some of the complexities related to global supply chains
• Briefly describe the ethical issues in supply chains and the key steps companies can take to avoid
ethical problems
• Describe the three concerns of small businesses related to the supply chain and suggest ways to
manage
• Discuss procurement in terms of the purchasing interfaces, the purchasing cycle, ethics, and
centralizedthose concerns
• List several strategic, tactical, and operational responsibilities related to managing the supply chain
versus decentralized decision making
• Briefly describe the key aspects of supplier management
• Discuss the logistics aspects of supply chain management, including RFID
technology Discuss the issues involved in managing returns
• Describe some of the challenges in creating an effective supply chain and some of the trade-offs
involved
Supply Chain
• Supply Chain:
• the sequence of organizations - their facilities, functions,
and activities - that are involved in producing and
delivering a product or service
• Logistics:
• the part of a supply chain involved with the forward and
reverse flow of goods, services, cash, and information.
Typical Supply Chains

1-129
Facilities
• The sequence of the supply chain begins with basic suppliers and extends all the
way to the final customer
• Warehouses
• Factories
• Processing centers
• Distribution centers
• Retail outlets
• Offices
Functions and Activities
• Supply chain functions and activities
• Forecasting
• Purchasing
• Inventory management
• Information management
• Quality assurance
• Scheduling
• Production and delivery
• Customer service
Supply Chain Management
• Supply Chain Management (SCM)
• The strategic coordination of business functions within a business
organization and throughout its supply chain for the purpose of integrating
supply and demand management

LO 15.2
SCM Managers
• SCM Managers
• People at various levels of the organization who are responsible for managing supply and
demand both within and across business organizations.
• Involved with planning and coordinating activities
• Sourcing and procurement of materials and services
• Transformation activities
• Logistics
Key Aspects of SCM
• The goal of SCM is to match supply to demand as effectively and efficiently as
possible
• Key issues:
1. Determining appropriate levels of outsourcing
2. Managing procurement
3. Managing suppliers
4. Managing customer relationships
5. Being able to quickly identify problems and respond to them
Flow Management
• Three types of flow management
• Product and service flow
• Involves movement of goods and services from suppliers to customers as well as
handling customer service needs and product returns
• Information flow
• Involves sharing forecasts and sales data, transmitting orders, tracking shipments, and
updating order status
• Financial flow
• involves credit terms, payments, and consignment and title ownership arrangements
Supply Chain Risks
• Supply Chain Risks
• Supply chain disruption
• Natural disasters
• Supplier problems
• Quality Issues
• Another form of disruption that may disrupt supplies and lead to product recalls, liability
claims, and negative publicity
• Loss of control of sensitive information
• If suppliers divulge sensitive information to competitors, it can weaken a firm’s
competitive position
Risk Management
• Risk management
• Involves identifying risks, assessing their likelihood of occurring and their
potential impact and then developing strategies for addressing those risks.
• Strategies for addressing risk include:
• Risk avoidance
• Risk reduction
• Risk sharing
• Key elements of successful risk management include:
• Know your suppliers
• Provide supply chain visibility
• Develop event-response capability
Procurement
• The purchasing department is responsible for obtaining the materials,
parts, and supplies and services needed to produce a product or
provide a service.
• The goal of procurement
• Develop and implement purchasing plans for products and services that
support operations strategies
Purchasing Interfaces

1-139
The Purchasing Cycle
• The main steps:
1. Purchasing receives the requisition
2. Purchasing selects a supplier
3. Purchasing places the order with a vendor
4. Monitoring orders
5. Receiving orders
 Supplier Management
• Choosing suppliers
• Supplier audits
• Supplier certification
• Supplier relationship management
• Supplier partnerships
• CPFR (collaborative planning, forecasting, and replenishment)
• Strategic partnering

1-141
Supplier Relationship Management
• Type of relationship is often governed by the duration of the trading relationship
• Short-term
• Oftentimes involves competitive bidding
• Minimal interaction
• Medium-term
• Often involves an ongoing relationship
• Long-term
• Often involves greater cooperation that evolves into a partnership
Incoming and Outgoing Shipments
• Traffic management
• Overseeing the shipment of incoming and outgoing goods
• Handles schedules and decisions on shipping method and times, taking into account:
• Costs of shipping alternatives
• Government regulations
• Needs of the organization
• Shipping delays or disruptions
Tracking Goods: RFID
• Radio frequency identification (RFID)
• A technology that uses radio waves to identify objects, such as goods in supply chains
• Similar to barcodes but
• Are able to convey much more information
• Do not require line-of-sight for reading
• Do not need to be read one at a time
• Has the ability to:
• Increase supply chain visibility
• Improve inventory management
• Improve quality control
• Enhance relationships with suppliers and customers
 3-PL
• Third-party logistics (3-PL)
• The outsourcing of logistics management
• Includes
• Warehousing and distribution
• Potential benefits include taking advantage of:
• The specialists’ knowledge
• Their well-developed information system
• Their ability to obtain more favorable shipping rates

1-145
Managing Returns
• Reverse Logistics
• The process of transporting returned items
• Products are returned to companies or third party handlers for a variety of
reasons and in a variety of conditions
• Elements of return management
• Gatekeeping
• Screening returned goods to prevent incorrect acceptance of goods
• Avoidance
• Finding ways to minimize the number of items that are returned
Creating an Effective Supply Chain
• It begins with strategic sourcing
• Analyzing the procurement process to lower costs by reducing waste and non-value-added
activities, increase profits, reduce risks, and improve supplier performance
• There must be
• Trust
• Effective communication
• Information velocity
• Supply chain visibility
• Event management capability
• Performance metrics
 Challenges
• Barriers to integration of organizations
• Getting top management on board
• Dealing with trade-offs
• Small businesses
• Variability and uncertainty
• Response time

1-148
 FLOWS in Supply Chain

Supplier Manufacturer Distributor Customer

 Broad Issues in Supply Chain

Strategic Tactical Operational

Inventory policies
Design of the Supply Production policies Quality Control
Chain Purchasing policies PPC
Transportation policies

Transportation
Network Design policies Heuristic Approach
Quality policies
 Supply Chain Decision Making
4 +1 Dimension

Location Decisions

Production Decisions

Inventory Decisions

Transportation Decision

Information Decision
 Bull Whip effect

Tier 2 Supplier Tier 1 Supplier Manufacturer Distributor Customer

 Causes of Bull Whip effect

The more
• The number of layers
• The delay
• The rate of change

The greater the fluctuations

Each layer
• updates its forecast in varying patterns
• Places orders at different times
• Price fluctuations
• Rationing of supply
How do we avoid these effects?
 Planning and Inventory
Getting help from reducing Lead Times
• External Lead Time
• Internal Lead Time

Getting Enabled through IT solutions

• Externally
• Internally

Building Business Intelligence

• Idea of a product file
• Collation of customer buy data

Manufacturing planning systems (JIT)

 Designing effective supply chains.

• Continuous replenishment programme

• Capture Point of Sale

• Invest in Supply Chain partnership programme

• Integrate Material planning and control systems with ERP

• Develop robust inventory control mechanism

Session 2: Learning Objectives
Yo u s h o u l d b e a b l e t o :

LO 3.1 List features common to all forecasts

LO 3.2 Explain why forecasts are generally wrong
LO 3.3 List elements of a good forecast
LO 3.4 Outline the steps in the forecasting process
LO 3.5 Summarize forecast errors and use summaries to make decisions
LO 3.6 Describe four qualitative forecasting techniques
LO 3.7 Use a naïve method to make a forecast
LO 3.8 Prepare a moving average forecast
LO 3.9 Prepare a weighted-average forecast
LO 3.10 Prepare an exponential smoothing forecast
LO 3.11 Prepare a linear trend forecast
LO 3.12 Prepare a trend-adjusted exponential smoothing forecast
LO 3.13 Compute and use seasonal relatives
LO 3.14 Compute and use regression and correlation coefficients
LO 3.15 Construct control charts and use them to monitor forecast errors
LO 3.16 Describe the key factors and trade-offs to consider when choosing a forecasting technique
 TIME SERIES FORECASTING
Time Period (Quarter) Demand (Dt)
II,2014 8000
III,2014 13000
IV,2014 23000
I,2015 34000
II,2015 10000
III,2015 18000
IV,2015 23000
I,2016 38000
II,2016 12000
III,2016 13000
IV,2016 32000
I,2017 41000
 Forecast

•Forecast– a statement about the future value of a variable of interest

• We make forecasts about such things as weather, demand, and resource
availability
• Forecasts are important to making informed decisions

1-48
 Two I m p o r ta nt A s p e c t s o f Fo re ca st s

•Expected level of demand

• The level of demand may be a function of some structural variation such as trend
or seasonal variation
•Accuracy
• Related to the potential size of forecast error

1-49
Forecast Uses

• Plan the system

• Generally involves long-range plans related to:
• Types of products and services to offer
• Facility and equipment levels
• Facility location
• Plan the use of the system
• Generally involves short- and medium-range plans related to:
• Inventory management
• Wor k forc e l eve l s
• Purchasing
• Production
• Budgeting
• Scheduling
Features Common to All Forecasts

1. Techniques assume some underlying causal system that existed in the past will
persist into the future
2. Forecasts are not perfect
3. Forecasts for groups of items are more accurate than those for individual items
4. Forecast accuracy decreases as the forecasting horizon increases

LO 3.1
 Forecasts are not Perfect

•Forecasts are not perfect:

• Because random variation is always present, there will always be some residual
error, even if all other factors have been accounted for.

LO 3.2 1-52
Elements of a Good Forecast

The forecast
• should be timely
• should be accurate
• should be reliable
• should be expressed in
• meaningful units
• should be in writing
• technique should be simple to understand and use
should be cost-effective

LO 3.3
Steps in the Forecasting Process

1. Determine the purpose of the forecast

2. Establish a time horizon
3. Obtain, clean, and analyze appropriate data
4. Select a forecasting technique
5. Make the forecast
6. Monitor the forecast errors

LO 3.4
 Forecast Accuracy and Control

•Allowances should be made for forecast errors

• It is important to provide an indication of the extent to which the forecast might
deviate from the value of the variable that actually occurs
•Forecast errors should be monitored
• Error = Actual – Forecast
• If errors fall beyond acceptable bounds, corrective action may be necessary

LO 3.5 1-55
Forecast Accuracy Metrics

Ƹ Actual -Forecast
t t MAD weights all errors evenly
MAD=
n

Ƹ( Actualt -Forecastt ) 2 MSE weights errors according to their

MSE= squared values
n-1

Actualt -Forecast t
Ƹ x ´100
Actualt MAPE weights errors according to
MAPE= relative error
n

LO 3.5
 Forecast Error Calculation
Actual Forecast
(A-F)
Period (A) (F) Error |Error| Error2 [|Error|/Actual]x100

1 107 11 0 -3 3 9 2.80%

2 125 121 4 4 16 3.20%

3 11 5 11 2 3 3 9 2.61%

4 11 8 120 -2 2 4 1.69%

5 108 109 1 1 1 0.93%

Sum 13 39 11 . 2 3 %

n=5 n-1 = 4 n=5

MAD MSE MAPE

= 2.6 = 9.75 = 2.25%

LO 3.5
Forecasting Approaches

• Qualitative Forecasting
• Qualitative techniques permit the inclusion of soft information such as:
• Human factors
• Personal opinions
• Hunches
• These factors are difficult, or impossible, to quantify
• Quantitative Forecasting
• These techniques rely on hard data
• Quantitative techniques involve either the projection of historical data or the development of
associative methods that attempt to use causal variables to make a forecast

LO 3.6
 Qualitative Forecasts
•Forecasts that use subjective inputs such as opinions from consumer surveys,
sales staff, managers, executives, and experts
• Executive opinions
• a small group of upper-level managers may meet and collectively develop a forecast
• Sales force opinions
• members of the sales or customer service staff can be good sources of information due to their
direct contact with customers and may be aware of plans customers may be considering for the
future
• Consumer surveys
• since consumers ultimately determine demand, it makes sense to solicit input from them
• consumer surveys typically represent a sampleof consumer opinions
• Other approaches
• managers may solicit 0pinions from other managers or staff people or outside experts to help with
developing a forecast.
• the Delphi method is an iterative process intended to achieve a consensus

LO 3.6 1-59
 Time-Series Forecasts
•Forecasts that project patterns identified in recent time-series
observations
• Time-series- a time-ordered sequence of observations taken at regular time
intervals
•Assume that future values of the time-series can be estimated from past
values of the time-series

1-60
Time-Series Behaviors
•Tr e n d
•Seasonality
•Cycles
•Irregular variations
•Random variation
Tr e n d s a n d S e a s o n a l i t y

• Trend
• A long-term upward or downward movement in data
• Population shifts
• Changing income

• Seasonality
• Short-term, fairly regular variations related to the calendar or time of day
• Restaurants, service call centers, and theaters all experience seasonal demand
Cycles and Variations
• Cycle
• Wavelike variations lasting more than one year
• These are often related to a variety of economic, political, or even agricultural conditions
• Irregular variation
• Due to unusual circumstances that do not reflect typical behavior
• Labor strike
• Weather event

• Random Variation
• Residual variation that remains after all other behaviors have been accounted for
Time-Series Forecasting - Naïve Forecast

•Naïve Forecast
• Uses a single previous value of a time series as the basis for a forecast
• The forecast for a time period is equal to the previous time period’s value
• Can be used with
• a stable time series
• seasonal variations
• trend

LO 3.7
Time-Series Forecasting - Averaging

•These techniques work best when a series tends to vary about an

average
• Averaging techniques smooth variations in the data
• They can handle step changes or gradual changes in the level of a series
• Te c h n i q u e s
1. Moving average
2. Weighted moving average
3. Exponential smoothing

LO 3.8
 Moving Average
•Te c h n i q u e t h a t a v e r a g e s a n u m b e r o f t h e m o s t r e c e n t a c t u a l v a l u e s i n

generating a forecast n

Ƹ A- t i A + ... + A +A
i=1 t-n t-2 t-1
Ft = MA n= =
n n
where
Ft = Forecast for time period t
MA = n period moving average
A n= Actual value in period t-i
t-i n= Number of periods in the moving average

LO 3.8
Moving Average
•As new data become available, the forecast is updated by adding the
newest value and dropping the oldest and then re-computing the
average
•The number of data points included in the average determines the
model’s sensitivity
• Fewer data points used-- more responsive
• More data points used-- less responsive

LO 3.8
 Weighted Moving Average

•The most recent values in a time series are given more weight in
computing a forecast
• The choice of weights, w, is somewhat arbitrary and involves some trial and
error
Ft = w(A)
t t + w t- 1 (At- 1) + ... + w
t- n (At- n )
where
wt = weight for period t, t-w1 = weight for period t-1, etc.
A = the ac tu al value for period t, A = the ac tu al value for period t-1, etc.
t t- 1

LO 3.9
 Exponential Smoothing

•A weighted averaging method that is based on the previous forecast

plus a percentage of the forecast error

Ft = F t- 1 +α (At-1 - Ft-1 )
where
Ft = Forecast for period t
F = Forecast for the previous period
t-1
α = Smoothing constant
A = Actual demand or sales from the prev io us period
t-1

LO 3.10
 Linear Trend
•A simple data plot can reveal the existence and nature of a trend
•Linear trend equation

Ft = a + bt
where
Ft = Forecast for period t
a = Value of F at t = 0
t
b = Slope of the line
t = Specified number of time periods from t = 0

LO 3.11 1-70
Estimating slope and intercept
•Slope and intercept can be estimated from historical data
nåty -åtåy
b= 2
nåt -
2
( å)t
a=
å y -båt
or y -bt
n
where
n = Number of periods
y = Value of the time series

LO 3.11
 Tr e n d -Adjusted Exponential Smoothing

•The trend adjusted forecast consists of two components

• Smoothed error
• Tr e n d f a c t o r

TAF t +1 = St +Tt
where
St = Previous forecast plus smoothed error
T = Current trend estimate
t

LO 3.12 1-72
 Tr e n d -Adjusted Exponential Smoothing

•Alpha and beta are smoothing constants

•Tr e n d -adjusted exponential smoothing has the ability to respond to
changes in trend

TAFt +1 = St +Tt
St = TAFt +a(At -TAF t)
t- 1 + b(TAF
Tt = T t
-TAFt- 1-T )t- 1

LO 3.12 1-73
Te c h n i q u e s f o r S e a s o n a l i t y

•Seasonality – regularly repeating movements in series values that can

be tied to recurring events
• Expressed in terms of the amount that actual values deviate from the average
value of a series
• Models of seasonality
• Additive
• Seasonality is expressed as a quantity that gets added to or subtracted from the
time-series average in order to incorporate seasonality
• Multiplicative
• Seasonality is expressed as a percentage of the average (or trend) amount which is
then used to multiply the value of a series in order to incorporate seasonality

LO 3.13
 Seasonal Relatives
• Seasonal relatives
• The seasonal percentage used in the multiplicative seasonally adjusted forecasting model
• Using seasonal relatives
• To deseasonalize data
• Done in order to get a clearer picture of the nonseasonal (e.g., trend) components of the
data series
• Divide each data point by its seasonal relative
• To incorporate seasonality in a forecast
1. Obtain trend estimates for desired periods using a trend equation
2. Add seasonality by multiplying these trend estimates by the corresponding seasonal
relative

LO 3.13
Associative Forecasting Techniques

•Associative techniques are based on the development of an

equation that summarizes the effects of predictor variables
•Predictor variables - variables that can be used to predict values of the
variable of interest
• Home values may be related to such factors as home and property size, location, number
of bedrooms, and number of bathrooms

LO 3.14
Simple Linear Regression
•Regression - a technique for fitting a line to a set of data points
• Simple linear regression - the simplest form of regression that involves a
linear relationship between two variables
• The object of simple linear regression is to obtain an equation of a straight line that
minimizes the sum of squared vertical deviations from the line (i.e., the least squares
criterion)

LO 3.14
 Least Squares Line
yc = a+ bx
where
y = Predicted (dependent) variable
c
x= Predictor (independent) variable
b= Slope of the line
a= Value of y when x= 0 (i.e., the he ig ht of the line at the y intercept)
an d
c

) (
( )( )
b= nåxy
(
- å)x åy
2 ( )2
nåx - åx

a= åy-båx or y-bx
n
where
n= Number of pa ired ob se rv ations
LO 3.14
 Correlation Coefficient
• Correlation, r
• A measure of the strength and direction of relationship between two variables
• Ranges between -1.00 and +1.00
( ) ( )( )
nåxy - åx åy
r=
( ) ( )2 ( 2 ) ( )2
n åx - åx n åy - åy
2

• r,2square of the correlation coefficient

• A measure of the percentage of variability in the values of ythat is “explained” by the
independent variable
• Ranges between 0 and 1.00

LO 3.14
 Simple Linear Regression Assumptions

1. Va r i a t i o n s a ro u n d t h e l i n e a re ra n d o m
2. Deviations around the average value (the line) should be normally
distributed
3. Predictions are made only within the range of observed values

LO 3.14 1-80
Issues to consider:
•Always plot the line to verify that a linear relationship is appropriate
•The data may be time-dependent.
• If they are
• use analysis of time series
• use time as an independent variable in a multiple regression analysis
•A small correlation may indicate that other variables are important

LO 3.14
Monitoring the Forecast
• Tra c k i n g fo r e c a s t e r r o rs a n d a n a l y z i n g t h e m c a n p r o v i d e u s e f u l i n s i g h t i n t o w h e t h e r

forecasts are performing satisfactorily

• Sources of forecast errors:
• The model may be inadequate due to
a. omission of an important variable
b. a change or shift in the variable the model cannot handle
c. the appearance of a new variable
• Irregular variations may have occurred
• Random variation
• Control charts are useful for identifying the presence of non-random error in forecasts
• Tra c k i n g s i g n a l s c a n b e u s e d t o d e t e c t fo r e c a s t b i a s

LO 3.15
 Control Chart Construction

1. Compute the MSE.

2. Estimate of standard deviation of the distribution of errors

s= MSE
3. UCL : 0 + z MSE

4. LCL : 0 -z MSE
where z= Number of standard deviations from the mean
LO 3.15
 Choosing a Forecasting Technique

•Factors to consider
• Cost
• Accuracy
• Availability of historical data
• Availability of forecasting software
• Time needed to gather and analyze data and prepare a forecast
• Forecast horizon

LO 3.16 1-84
 Operations Strategy
• The better forecasts are, the more able organizations will be to take advantage of
future opportunities and reduce potential risks
• A worthwhile strategy is to work to improve short-term forecasts
• Accurate up-to-date information can have a significant effect on forecast accuracy:
• Prices
• Demand
• Other important variables
• Reduce the time horizon forecasts have to cover
• Sharing forecasts or demand data through the
supply chain can improve forecast quality