10.1 - cdn.upgrad.com

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Now that we're done with demand planning place, let us move on to the next part, supply planning. But before we

move to the supply planning, let us understand what have we done of the forecast that we did. So, actually speaking,

this leads to the concept of the SNOP process which I talked and referred earlier. SNOP is the sales and operations

planning.

Now on one side for sales, when we talked about the forecast for which we are doing the demand planning, the other

side it is operations. Now a combination of both the thing is driven by the demand planning team in an organization.

So, what happens that this demand planning team is giving a forecast feed to the organization. Thereafter,

understanding whatever constraints are there in the organization in terms of production, manpower, capacity and so

many other things, the production plan is thrown back to the demand planning team in this SNOP process.

Thereafter, the management takes the final call of what will be the expected actuals for future while reviewing the

past also. So, this is SNOP process which is driven by the demand planning team is the key point where the actual

Transcription

10.1.3


regular production handled about and also the innovations and the NPDs are also talked about. And the organization

decides to prioritize, it is the tradeoff actually meeting that is happening between the team.

So, demand planning team is actually gathering data from the market also. So, one we said forecasting, but to have

this right forecasting in the SNOP process, we are not sure that this forecasting is actually also going correct or not. So,

what is happening is, say for example, the organization has many units which are the sales units. Now these sales units

are projecting certain values and their numbers.

So, what happens, on one side you're using the forecasting techniques, and on the other side you're using the numbers

given by the sales team and it is the role of the demand planner to evaluate both and then come to a number which

was expected to be the achieved number after consensus by the various stakeholders, including the operational

efficiencies that could be brought into it at the SNOP meeting.

Let us now look at the supply planning horizons, the S&OP process that you have already read about and understood,

and how these horizons in supply planning help bring resolutions to some real time and life issues.

If we were to look at the three planning horizons that sequentially makeup the supply planning process, they can be

stated as under.


1. The strategic horizon, which typically is from 18 month outward, and it looks mainly at factory expansions,

capacity increases or decreases, off-take policies that you may want to look at, new products that you may

want to introduce in the market or new processes for the existing products.

2. The tactical horizon, which ranges between the fourth month and loosely between the 12 to 18 months, so

basically between the 4 and 12 month or in some cases 4 to 18 months, which basically look at the modification

of an existing process that's already within the factory.

Do you want to increase your capability to produce by going through a contract manufacturing or offtake policy,

additional recruitments, enhancing the existing operations, etc.

3. And third, which is in the immediate present, the operational horizon, which starts from the current period,

to let's say, a third month or a fourth month of operation, where you look mainly at the anticipated and

prepared flexibility as you meet the immediate demands in the marketplace, the number of teams that you

have, the temporary staff that you may need to take, and shift operations if you would want to go along with

the seasonality of a product or demand.

In a little more detail, the sequencing of activities for the monthly sales and operation or S&OP process talks of the

interfaces which are stacked as columns in the sheet that you see below between various people and functions across

periodic but fixed timeframes which is stacked along as month and date on the Y axis.

So, if you see, the interfaces between the various functions and the individual team members ranges right from a CEO

or an MD or a strategic business unit head if the organization is really large, and each SBU or strategic business unit

conducts its own S&OP process.

The logistics head, the factory personnel or the factory and the production head, the supply chain personnel, the sales

and marketing team, so each one of these have their own activities cut out which are put and shared in the graph or

diagram below.

The entire thing of the activity, which is called the sales and operations plan meeting is chaired by the SBU or the CEO.

And the dates are fixed for the S&OP to roll out in the current month on a specified date. Here, it is said as 8th of the

month.


One would need to work backward to say that by the 15th of the previous month, I have my demand plan. By the 18th

or 20th, I complete my capacity plan. By the 20th or the 25th, I complete a pre S&OP meeting, and by the 20th or the

25th, I have an SOP meeting to enable rollout my entire activity for the immediate 3 to 4 months in the operational

horizon. This activity keeps on happening month after month, and therefore, it's termed the process of sales and

operation planning.

Let us now go over an issue that currently grapples an industry, a food industry at that. Visualize the problem

statement and put on your thinking caps for a probable solution.

There is a ready to eat food manufacturer and the attributes of this company is it runs on a B2B or a business to

business as opposed to a business to customer model. 60% of its manufacture is exported and the remaining 40% are

sold in the domestic markets. The equipments in the factory run at 90% capacity utilization.

The sales of finished goods happen instantaneously, which means that the inventory turnover ratio is pretty high.

What do they see now looming in the horizon? Demand for both export and domestic markets are on the uptick and

far exceed supply capability necessitating them to refuse orders in the current situation.


What then should the company be doing from a sales and operations planning, and a supply planning horizon, a

demand and supply perspective, what should they be doing now? Think over it. What would you as a supply head, a

distribution head or even an SBU head who were to take decisions? Think and do over the entire supply horizon.

Let's now look at what's at stake if the incremental demand were to be ignored. One, it's an opportunity loss in

increasing revenue and profitability. What message is the company sending out in the marketplace? There is a loss of

trust and faith from the customer side, both on the domestic and exports front.

As a consequence of which there is a slow erosion of market share as competition start gathering in. The competition

starts looking at the company as one who does not want to get out of its comfort zone, lacks flexibility and is risk

averse. All of which goes on to say that I would like to remain in the status quo and not want to change.

So, what would you, given that you have an understanding and a basic grasp of the supply planning process want to

do? What are the suggestions that you would like to make to the management? Would you be in the status quo and

remain constant or would you like to evolve?

So, if one were to go over the S&OP horizon, the strategic horizon of 18 months and beyond, the tactical horizon of 4

to 8, 12 or 18 months, and the operational horizon of up to 4 months.


How would one go about entire process? Its firstly to internally agree on what's at stake and the opportunity loss in

revenue, profitability and market share. And maybe the survival of the company is also at stake. So, what could the

probable approach be, and one that could be had over, as a solution over the three horizons.

So, from a strategic horizon perspective, plan for capacity building of critical production and backing equipment to roll

out more, which is what is required in the marketplace. Simultaneously, working on enhanced raw and packing

materials on the upstream along with the transportation contracts to ensure that there is continuous movement in

the entire ecosystem of source, produce and ship.

From the tactical horizon perspective, work with the research and development team, the quality team and the

production team to identify, qualify and source incremental demand through either an offtake process or contract

manufacturing. Why? Because the equipment’s that you want to get putting on the strategic horizon in picture or in

perspective, are long lead time equipment, which you may not get in the immediate 4 to 12 or 18 months.

From the operational horizon point of view, you work to see if the equipment efficiency can now be increased from

the 90% that they're working at, to more than 100%, if not 100% at least. So, that would give you an incremental bump

in actual supply.

You ensure pre-emptive maintenance so that there is practically nil downtime for all the equipment. And enhance

productivity through additional manpower to increase throughput of material within the entire system to ensure that

the supply gets continuously increased.

In short, what you are seeing and looking at is to work internally with all the stakeholders through the horizons that

you already know of, to ensure capacity building as an exercise, addresses demand, and is an ongoing process in the

complete ecosystem.

Now, once we have talked about the SNOP meeting, now let's get into the next scenario. So, to understand it better,

let us bring back our soft drink here. Now that we have estimated the demand for our favorite beverage, it is time to

plan its production. Otherwise, how will you fulfill the demand? Hence, it begins with something called as aggregate

planning.


Aggregate planning is a process by which an organization determines ideal levels of capacity, production or whether

to do a production or to get into subcontracting, its own inventories, stockouts and even pricing over a specified time

horizon.

The goal of aggregate planning is to satisfy demand while maximizing profit. Aggregate planning as the name suggests,

solves problems involving aggregate decisions rather than stock keeping units, level decisions.


As an example, consider how a soft drink supply chain uses aggregate planning to maximize profit. Many types of soft

drinks face seasonal demand that ripples up from the customers to retailers, to distributors, and finally to the

manufacturers. Many types of soft drinks have demand peaks in the summer season when temperature rise to

scorching levels, and in the festival season when parties or wedding season is around the corner.

Now, building a plant with the capacity to meet demand in the summers and festive season on an as needed basis is

too costly because of the high cost of plant capacity. On the other side of the supply chain, soft drinks often require

trucks and storage that may be in shop supply. The beverage manufacturer must deal with these constraints and

maximize profits around them. To deal with these potential problems. Software makers use aggregate planning to

determine production levels and inventory levels that they should build up in these lower months for sale in the

summer and festive seasons.

When demand is greater than the plant's capacity, by taking into account inputs from throughout the supply chain,

aggregate planning allows the plant and the supply chain to maximize profit, not just hold on. For example, when there

are flavors not clear. In such a situation, a beverage manufacturer may end up producing a common product like water.

In such a situation, if there is enough shelf life of the finished goods, they may produce water when they have

additional capacity so that in the peak months when they're running out of capacities, these stocks which they have

pre-produced come of use.


So, now when you have an idea what aggregate planning means, let us find out what the planning process actually

entails in a supply planning. So, the main task of an aggregate planner is to identify and plan for several operational

factors over a specified time horizon. In such a manner, that costs are minimized and profits are maximized.

In a typical manufacturing setup, aggregate planners will need to consider several factors like:

• What is the production rate, which refers to the number of units to be manufactured per unit time, which

could be per week or per month?

• Another factor is workforce, which is the number of person hours required or the man hours required per unit

of production.

• Aggregate planners also need to plan for machine capacity levels, which is the number of units of machine

capacity needed for production over the planning horizon. Also, it would remain the run sizes that happen

across. Now, they also need to factor it over time by calculating the amount of production plan to be

completed in overtime.

• Aggregate planners also have to plan for subcontracting, which is the number of units to be planned to be

subcontracted over the planning horizons. The aggregate plan for example, when we are talking about

subcontracting, it could be a scenario that, okay, my plant has a limited capacity, I would subcontract a product

like water to our subcontracting company, while I will keep something which is related to the concentrate part

with myself, that's an example. This is the same example will also be given for other product lines.


• The aggregate plan also needs to consider the backlog, which is basically the demand not satisfied during the

period in which it arises, but carries over to the future periods. Now why could that happen? Well, one

possibility is that it is happening due to capacity not being available. The other possibility is that the raw

materials arrive late. So, there could be a backlog but there is a demand for the product which is temporarily

handled either through the stocks in the complete system which is with the distributor, which is then the

inventory shrinking or it could be a scenario where the customer is ready to wait for the product.

• Now another important factor that aggregate planners need to consider is the inventory on hand, which is the

amount of inventory that the company currently holds and accordingly plan for the inventory.

For the purpose of aggregate planning and aggregate planner requires different types of information. Dependency on

the industry, this information could include a demand forecast for each time period in a planning horizon extending

over multiple periods, the T periods.

The production costs, the labor costs, which would include dollar per hour costs for regular time or rupee per hour

cost for regular time and also understand the overtime cost. Now for example, if a company's actually working on a

two shift scenario and it needs to actually use its capacity for some small peaks in order, in that situation, it might

decide to have an overtime scenario where you are trading off between a two shift scenario versus a three shifts

scenario and preferring to pay some overtime.


Now, similarly, the cost of subcontracting production needs to be considered. It is calculated on a rupee per unit or a

rupee per hour basis. Aggregate planners also require information pertaining to the cost of changing capacities,

specifically the cost of hiring or laying off workforce.

Now while carrying out aggregate planning, the planners need to consider some constraints as well. What could these

constraints be? For example, there could be some limits on overtime. There could be limits on layoff, so today if you

have kept people, tomorrow it may be a problem to actually lay them off. Similarly, there could be limits on capital

available.

There could be limits on absolute products. It could be limits on stockouts and backlogs. There could be constraints

from the suppliers maybe that they are capacity clubbed. There could be constraints, there could be environmental

factors also. There could be a situation where, there could be also statutory requirements.

For example, a beverage manufacturer may also face a situation where there could be a government capping on the

water being released for them. Now that is another factor that may need for you to either reduce your production

from there, or if the demand has to be met, then shifting your production to a different plant. So, in the real world,

getting the correct estimates for all the data inputs becomes a challenge as not everything is measured accurately

everywhere. Obviously, it is human errors pertain and also biases pertain into it.


So, each geography and business environment pose a different set of challenges, which can drastically change these

assumptions. So, for aggregate planning, companies need to find the right balance between three major type of costs.

What are the three major types of costs?

1. One is the capacity costs, which is including regular and overtime cost and the cost of subcontracting.

2. The second is the inventory costs.

3. The third is the cost of backlog or lost sales due to delay. Either ways.

Now, these are essentially three district strategies for aggregate planning to achieve a balance between these costs.

These strategies involve tradeoffs among capital investment, workforce, work hours, inventory, backlog or lost sales.

Ultimately, most strategies that aggregate planners actually use are a combination of these four and are referred to

as tailored strategies.

Let's look at these four strategies briefly:

1. The first one is Chase strategy. Here you plan your machine and workforce capacity based purely on demand

for a particular period. It is a type of lean strategy in which production is planned only based on the demand,

so you are chasing the demand. So, producers are actually chasing a demand in a manner that their complete


strategy is dependent on the same. Challenges are faced here and are unanticipated costs especially arising

out of human resource planning, and labor union related issues and other associated costs. Here, capacity

becomes the lever as the workforce keeps changing.

2. What is the second? The second aggregate planning strategy is the capacity strategy. Here, the workforce is

kept stable but machine utilization varies using an overtime and a flexible schedule. Here, utilization becomes

the lever.

3. Now the third strategy that is a level strategy. Companies opting for this strategy maintain a steady level of

workforce and capacity with the constant with stable output. Any shortage or surplus is mitigated by changing

the inventory levels in the pipeline. Here, inventory becomes the lever as the other factors are constant. So, if

for example, if you've kept 10 days inventory, you may come down to a two days inventory. So, inventory is

becoming a lever by utilizing that eight days of inventory to mitigate the higher demand that has come over.

4. Fourth, and last but not the least is the hybrid strategy, which talks about combination of using a mix of cheese

and the level strategies. Now even the company using these strategies to maintain a balance between

inventory, workforce and capacity. And that's how a hybrid strategy is formed.

In order to manage capacity such that it meets the predictable variability in demand, firms use a combination of

approaches. Let's look at a few of these approaches.

The first one is time flexibility from workforce. Under this approach, a firm tries to manage the capacity better by

leveraging the time flexibility or the workforce in order to meet the variability in demand. Also, in many cases,

manufacturing plants do not operate continuously and are left ideal for certain periodicities or portions of the day or

week, which means that the plants maintain spare capacity.

For example, many plants do not operate in three shifts. This gives the firms the flexibility to use the existing workforce

to work overtime during peak demand periods so that they can match the demand. Also, the duration of over time

can be varied to match the fluctuation in demand. Such a system allows production to match demand more closely.

Service industries like telemarketing centers and banks make use of part time workers to match supply and demand

better.


Another approach to meet the predictable variability in demand is the use of seasonal workforce. Here, a firm uses a

temporary or seasonal workforce during the peak season to increase capacity in order to satisfy the demand.

A good example of this is the tourism industry where a base of full-time employees exists and temporary workers are

hired only for the peak season. Another example is a Japanese company Toyota, which regularly uses seasonal

workforce to match supply and demand better. But this approach, however, may be difficult to sustain if the labor

market is tight and there are unions around.


Another method could be that firms could also be making use of subcontracting. Now what happens in subcontracting?

Under this approach, a firm maintains a stable level of internal production and sub-contracts only the peak production

in order to match the demand. With the subcontractor responsible for handling the peaks, the company's able to

operate only on a relatively inflexible but low-cost facility where production rates are kept relatively constant except

for the variation arising from the use of overtime.

Firms usually seek to subcontracted scenarios during the peaks to facilitate those areas and for the facilities that are

more flexible. Here, it is important for the subcontractor to be able to provide flexibility to the manufacturers at a

lower cost by pooling the fluctuations in demand across multiple manufacturer. It is something like there is a

manufacturer who is producing for a Whirlpool and Samsung, and so many other companies together to meet the

same demand for the washing machines, for example.

Thus, to be sustainable, a subcontractor capacity should have volume flexibility, which refers to the fluctuating demand

from a manufacturer as well as variety flexibility, which refers to the demand from several manufacturers.

For example, most power generation companies do not have the capacity to meet the electricity demand on peak

days. They usually rely on suppliers and subcontractors who have excess supply, which allows them to maintain a

stable level of supply at a lower cost.


Now how would you be managing capacity? Now, firms can manage supply using the dual facilities approach also.

Under this approach, a firm opts for a combination of specialized as well as flexible facilities to meet the demand.

What are specialized facilities? Specialized facilities are those that efficiently produce a relatively stable level of output

of a particular product at a lower cost.

On the other hand, flexible facilities produce a wide variety and volume of products. However, the cost involved here

is higher. Let's take the example of PC component manufacturer. They might have specialized facilities for

manufacturing each unique type of circuit board at a relatively steady rate, and they might also have a flexible facility

for manufacturing all type of circuit boards to accommodate the demand fluctuations.

Now, similarly, firms can also manage supply better by incorporating product flexibility in their production process. In

such cases, a firm has a flexible production line that can be easily tweaked to vary the production rate to match

demand.

Here, based on the demand, a firm can easily change its production system. For companies using this approach, if the

demand variation across product line is complimentary, that is, when one goes up, the other tends to go down. Then

that capacity for each line can be varied by moving the workforce from one line to another. But this also requires a

workforce that is multitask, multi-skilled, and easily adaptable so that they are easily able to pick up, to go and move

from one product to the other product. And they're able to pick up the new task on different machines.

Companies can also achieve production flexibility if the machinery is flexible and can be used for producing a variety

of product, which means that on the same machine you're producing one flavor of one salted chip and you're also able

to produce another corn chip. So, if the same machine, you're able to produce potato chips as well as corn chips, you're

talking about a machine which is flexible in producing both type of products.

But this approach is effective only if the company witnesses a relatively stable demand across all product lines. Why?

Firms that manufacture products with seasonal demand mainly try to exploit this approach by maintaining a portfolio

of products whose peak demand seasons are distributed evenly over the year. A classic example here could be a

lawnmower. Now, who also makes snow blowers to maintain a steady demand for its product factory throughout the

year.


In the service industry, an example could be strategy consulting firms who often offer a balanced product portfolio

with growth strategies emphasized when the economic times are good and cost-cutting projects emphasize when

times are bad. That's part of the consulting team’s scenario.

Another example is of an E-Commerce companies, wherein there are festive saves which happens. So typically, during

Diwali season there are lot of sales and the demand peaks. Now to meet this demand there will be a requirement of

lot of last Mile delivery agent who deliver to the customer. But if you have these agents only for that limited period it

becomes prohibitively costly. So, the way it is managed is that that during this festive season, there rely on alternate

delivery models like outsourcing it to contractors or working with local Kirana retail shops which are the local shops

that you have in your neighborhood. They also double up as delivery agents. So that is how if you know demand which

is going to be peaking in a particular phase, you can effectively plan for the supply.

Now let’s try and understand where Aggregate Planning can go wrong and what are the few things that we need to

take care of while doing aggregate planning. So, the first thing is that, there is tendency in a supply chain to think in

silos. So, for example, procurement team would try to reduce its procurement cost; whereas the manufacturing team

would like to reduce its manufacturing cost and logistics team would try to reduce the logistics cost. So, everybody is

working on their local optimisation rather than thinking of end-to-end supply chain optimisation. This should be

avoided.

So for example if Maruti is working with lot of vendor, it works on a just in time basis. Which means that whatever is

required for Maruti for its daily production is supplied by vendor on a real time basis. Now if Maruti is going to have a

plant shutdown and that information doesn't go to the vendor then it can lead to a disruption of supply chain for the

vendor. So this should not happen and somebody should look at end to end supply chain at an aggregate level.

Second thing is that the forecast should be flexible. Because forecasts are always wrong. So for example, there is a

FMCG company which is selling two SKU’s. One is half kg and other is 1 kg. It is very difficult to predict whether

customer is good to buy 1 Kg or half kg. So the supply chain should be flexible enough to cater to the shift in demand

and at the last moment also if they want to change the SKU from half kg to 1 kg, that flexibility should be there in the

supply chain.

So this is done by a concept known as delayed differentiation. which companies uses wherein they try to delay the

differentiation at the last leg, as last as possible towards the customer which means that you have packed a product


into half kg and 1 kg at the manufacturing plant or you could have also packed it near to the customer into a packaging

plant. So if the manufacturing plant is lets say in Maharashtra and the customer is in Odisha, I will probably put a

packaging plant is Odisha, so that based on the demand in Odisha I will convert it into half kg for 1 kg. So that concept

is known as delayed differentiation.

The third thing that needs to be taken care is that in lot of scenarios new datapoints emerge. And your Supply chain

should be capable enough to cater to that change in the demand or data points that come in. So for example if there

is a fitness tracker which is being sold by a company and the company starts of with saying that hey, my customer base

is mostly the youth and the people who are fitness conscious but it realises that once it launched the fitness tracker, a

lot of this youth are also buying this fitness tracker for their parent because they want their parents also to become

healthy.

So which means that there is an entire different customer base which has emerged. So these kinds of new data point

should be incorporated into the demand. Sao that you don't miss out on catering to a particular demand.

So having understood how to plan the demand or forecast the demand and also plan the supply, let’s try and

understand that how companies manage their capacities because ultimately to meet the demand once you have the

supply, you need to have the capacity to meet the demand. So let’s an example of an E-Commerce company and how

it handles the festive sale. So in a festive sale which generally happens during Diwali the demand peaks almost 3X,

which means that you have 300% three than a normal day. Now it is estimated that to meet this demand, eCommerce

company create almost one and a half lakh temporary jobs just to meet the demand.

While this is the employment generated by eCommerce company, there are indirect jobs of almost six and a half lakh

that gets created. So, a huge ramp up in capacity is required not only in terms of manpower but processing capacity.

And let's try and understand how that is done. So this additional manpower, which is required, it is arranged through

different methods.


So, first is to use contracted manpower. So, manpower is contracted for a period of two to three months and they help

in meeting those demand. Also, the manpower, which is already on roll, there are leavers like overtime which is done

and incentives which are given to the manpower to deliver more. So, once you give them the incentives, or you give

them extra money for delivery, they end up delivering more and giving more throughput.

Also, eCommerce companies are moving towards using the capacity which is available in the ecosystem, like tying up

with Kirana stores or the retail stores which are there in the neighborhood and outsourcing it to a third-party logistics

partners who can help them give the capacity only for that festive season.

And when demand goes up by 3X, you need extra space from what you had during a normal day. So, this space is

arranged by taking temporary processing space available in the market as well as again, tying up with a 3PL partners

and outsource partners to give them capacity just for the festive season.

Now when we have understood supply planning. Let's get into the next step, which is intro to material requirement

planning and bills of materials.

Some food for thought, before we move onto the next module, let's ponder a little more over how a beverage reaches

us. As we've already discussed, it depends on an organization finding the right strategic fit. An organization may choose

to have direct control over any and all parts of the supply chain -> resource, make, move, cycle. Based on this, the

scope of operations under direct impact may vary and so will the delivery lead times.


Let's proceed with the assumption of an organization that controls each node of its supply chain. We will begin with

source in the next module, and understanding of material requirement planning and bill of material hence is a

prerequisite.

On a broader basis, the planning cycle goes as follows.

o First of all, the strategic direction of the company, which is a strategic business plan. o This is followed by

annual operating plan, which is getting into your, between medium term to long-term planning. o So, the

annual operating plans makes me further for the mid-term forecast followed by the short-term forecast.

o The short-term forecast, which is based on qualitative and quantitative methodologies, is used to create an

aligned demand plan.

o Which is further based on inputs coming from the direct distributors, the CFAs, consolidated at a level of

regions based on organization structure and servicing pattern.

Now, once this aggregation of the demand is done at the national level, this gets into the SNOP. Do you remember

what was the SNOP? The sales and operating plan. That is generally a monthly meeting. This monthly meeting is talking

about what is on a rolling basis, the capacities of the organization.

Now this is further aligned as the demand plan. This gets converted to an aggregate supply plan, which is based on the

interface of plants and warehouses, that shall be supporting the demand plans.


Now just understand, suppose we have four regions in the country. Okay. North, East, West, and South. At the same

time, we have seven plants in the company. Now, they may not necessarily be all located on a region to region direct

correlation. It can happen that only seven plants are located in two different regions. Hence, it may happen a plant

located in Calcutta, maybe actually servicing the East of the India as well as the Southern part of the India, depending

on the complete transportation and other costs involved.

Hence, the demand plan is different from the supply plan. So, this demand plan feeds into the production plant-based

master production schedule. So, as the name suggests, master production schedule is on a bigger level, this is often

referred in short form as MPS, yielding the next level of the detail.

Now until this point of time when we are talking about the master production schedule, we are talking in the

terminology of finished goods and the units of measurement. The MPS is then the input to master requirement

planning, often referred as MRP. Now the MRP and FG units, which is now using the bill of materials in the ERBs, which

is often a SAP-MRP gets exploded in the required raw materials and packaging materials, and their quantity

requirements, which triggers the sourcing cycle, which we'll discuss in the next module.

Now here it is important to understand the concept of dependent demand, and independent demand or requirement.

Let’s take an example of a Maruti Swift VXI model. Assuming the requirement of cars on an all-India basis for the month

of April, 2020 is 3000 cars. Then this is an independent demand, generally called as the finished goods. On the other

hand, when this moves through the complete planning cycle, reaching the MPS and explodes as a bill of materials

comprising of various parts and components. Then each of them is a dependent requirement or a demand, the raw

material, and component demand.

For example, for 3000 independent requirements of cars or the independent demand of cars, there is a dependent

requirement of 12,000 tires, 3000 engines, 3000 steering wheels and so on. Until the last screw and bolt level, assuming

100% yield, which is normally not the case. And hence, some additional quantities are ordered assuming line rejections,

etc. Now when we talk of demand and production facilities, we are talking about the facilities to make those particular

finished goods.

So, now after we have understood this, we are going to get into the module two which will talk about sourcing followed

by other aspects. Stay tuned.


Let us know see the inter relationship, cost and affect between demand and supply management, as it goes about

addressing logistics and supply chain indicators. Demand and supply to start with are two sides of a coin. One cannot

exist without the other. For supply to happen, there must be a demand in the system.

Demand is usually generated through a process called forecast, which considers amongst others sales in a region or a

district, historical sales data, campaigns or discounts that are run, seasonality, etc.

Supply on the other hand through manufacturing in the upstream looks at capacity planning, machine availability, raw

and packing material availability. And in the downstream at logistics, transportation and storage, before that specific

demand is fulfilled.


Demand and supply planning is typically done through a process called the sales and operations planning, SNOP or

snop in short. In the subsequent slide, I would like you to focus on the linkage between demand, which is from the

marketplace, and supply, which is either from a manufacturing plant or stocks inside a warehouse, to get a sense of

the dependency between the two.

In this real time example of supply and demand management in a cement manufacturing organization, we will go over

the likely implications that one way of demand fulfilment has over another, on the logistics parameters of total landed

cost. We'll come to what it constitutes off in a short while. Hidden costs that are there in the system, inventory holding

costs and inventory turnover and impact on storage space.


What is total logistics cost and what does it comprise of? Total logistics cost is also sometimes called total landed cost

or total delivered cost. It's the amount of money it takes for a company to manufacture and deliver a product or its

components.

Its components are:

1. One, total manufacturing cost, which is the cost of production.

2. The non-manufacturing expense, which is termed the administrative and developmental costs associated with

the purchase of materials, engineering design, etc.

3. And the finished product logistics costs, which are incurred from the entry of finished products, which are sold

in pallets or unit loads to either a distribution chain or to the depot or directly to the customer.


What is the objective of the exercise in the cement manufacturing organization that we set about to do? While

ensuring the demand is met on time and in full, at all points in time, there is a need to ensure that the overall logistics

cost both apparent, which is tangible and hidden, which is non tangible are always under control.

So, these included amongst others, the total landed or total delivered cost that we spoke about earlier, the hidden

costs, we'll talk about demurrage charges and wharfage charges here.

Let me introduce the concept. Here of movement by rail includes these two concepts of demurrage and wharfage

because railways being a public sector organization, let's, it's rack or the number of vegans that constitute the entire

train load to be stationary at a point only for a certain or finite number of time.


Similarly, the good shed or the location where the rack reaches, you can keep the material on the wharf using it as a

temporary storage area, only for a certain period of time. If one were to cross these periods in time, the racks incur,

what is called a penalty in terms of demurrage and the storage, the temporary storage on the wharf in the station

incur what it's called a wharfage charge.

So, the hidden costs include these demurrage and wharfage charges as well as damages, include inventory holding

costs as a consequence of pushing more supply, much in excess to that of demand and the lower inventory turnover

that could create obsolescence or lumpiness in a product.

Remember cement is a fine-grained particle, and the impact that it has on a storage space as the inventory goes and

hits a spike and then depletes.


What are the deliverables that were to be had in doing this project? The deliverables are twofold.

o One, to ensure that demand is met on time and in full every single time.

o Second, to ensure that the overall logistics cost both apparent and hidden or tangible and non-tangible are

always under control.

We spoke about how and what are the constituents and just for the sake of repetition, these are the total landed cost,

the hidden costs of demurrage and wharfage at the rail heads, the damages that entail when you transport one full

rack load, which has approximately 2,600 tons of carrying capacity. The inventory holding costs because supply now

far exceeds demand, the lower inventory turnover as a consequence of stocking, much more than what is actually

required, and the impact on storage space, because you have to now make room for 2,600 tons, as opposed to let's

say 200 or 400 tons of material.

In its current situation, as far as sourcing was concerned, material movement is between two plants in couth of Tamil

Nadu to all the 14 districts in Kerala, some of which have rail heads. And therefore, the moment either by road or by

rail.

Demand for the subsequent or the next month of sales consolidate a demand at state level. And in this case for Kerala,

by district and sub-districts is sent to supply chain by the 25th of the current month.


So, for month and plus one, in month M which is the current month by the 25th, a consolidated demand broken down

by district and sub-district is presented. Supply chain then consolidates all state's requirements. And in this specific

case, we are talking of Kerala, uses an optimization tool to load either of the two manufacturing locations.

Logistics then starts its planning activities. Plant logistics plans both modes of surface transport shipment, road as well

as rail. It informs state logistics that's within Kerala of the split that it intends to send between road and rail, depending

on the capability and capacity of equipment, which is either the rack or the trucks available. It coordinates with the

railways for racks and transporters for trucks.


So, quickly going through the current slide, which captures the demand for a specific period of time on a month, we

see that 105,000 metric tons are split as 85% to be transported by road, and 15% by rail within the 14 districts of

Kerala.

So, what did the current situation in logistics entailed here. All was surface transported, road transport had twelve

transporters in all. Racks are indented through railways. Shipments are made directly from a factory, which caused

waiting time at each factory for containerization or for blocks setup to be loaded onto trucks or onto the racks.

Road dispatches go directly to the depots in subdistricts based on demand. It is from point to point. Rack moments

however happened to good sheds, which are in the districts where they are available. From the good sheds, the

material is handled and transported to the depots in those sub districts. Dependency on labour in good sheds is of key

importance as these are unionized.


As we spoke earlier, a rack takes 2,600 tons, whereas a truck carries 24 tons. The lead time from indent to order

fulfilment, road takes two days at most, whereas a rail right from indent to order fulfilment takes four days.

The problem statement can be summarized as such. From a supply side, the factory is indifferent to the mode of

dispatch. They would want a quicker evacuation to enable more stocks to be manufactured and stocked. Rack helps

them as it evacuates 2,600 metric tons in one shot. Truck evacuates just 24 metric tons, which is a hundred times

lower than what rack is capable of.

From a receiver's point of view, at the demand generating location, the total landed cost is higher for a rack as

compared to road moment. There is always an excess supply made when rack is sent implying that there are stock

spikes and then depletion over a large period before demand gets regenerated again.


There are lots of hidden costs in rake management. We spoke about that, demurrage charges, wharfage charges,

damages, costs because of higher inventory, storage, additional handling and redistribution or transportation costs.

So, all in all, there is a lot of advantage that can be had if we were in a position to convert the rack moments also to

road moments.

So, what alternatives are there to be had? One, why can we not plan and execute all fulfilment only by road? The

solution sounded simple because all it required was to contract more transporters with sufficient fleet. The single

largest compelling factor that wanted us to tackle this problem is that of delivered cost.


So, cost comparison between the road and rail movement for all locations in Kerala was done. And here is a sample

for three such locations. If you see the bottom line, the potential to save by moving through road for Trivandrum, is

25% lower than if it were done by Rail. For Ernakulam, 11% lower than if it were to be done by rail. And for Thrissur,

15% lower as opposed to a rail movement.

Which led us to proposing a solution that consisted of converting 100% to road movement as tangible cost saving in

total delivered cost far outweighs the supply push. Intangible costs that can be had, or that can be obviated or done

away with are avoidance of damages when transporting by rack.

Double handling charges that are given avoiding pilferages, avoiding costs due to retaining and increased storage space

because of rail movements, and also the inability for railways to give racks during food grain moments as perishables

take precedence over every other movement. Added to that also was a lead time reduction from indent placement to

order fulfilment in the road movement, as opposed to the rack movement.


So, what was achieved on an overall basis? The choice of mode of transport used to fulfil demand, given a constant

supply, road clearly ticked all parameters over rail. Road was agile and responsive as a supply chain indicator because

it reduced the lead time by approximately 25%, and lowered on an average, the total delivered cost by approximately

10%.

It helped gain customer satisfaction by ensuring 100% of the demand met on time and in full, and also in ensuring that

at all points in time, you do not get stale or lumpy material. The ease of handling material without damages, excess

material, wasteful expenditure in demurrage and wharfage, excess inventory was also tackled by using road as the

choice of transport.

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