scm mis inv supply

SUPPLY CHAIN

INFORMATION SYSTEM

Prof Dr Prem

Chapter Objectives

Be able to: Explain why information flows are a necessary part of any supply chain.

Describe in detail how supply chain information needs vary according to the organizational level and the direction of the linkages (upstream or downstream).

Describe and differentiate among ERP, DSS, CRM, SRM, and logistics applications.

Describe what business process management (BPM) tools and cloud computing

are and how they might impact future operations and supply chain activities.

Information System

Information system – A set of interrelated

components that collect (or retrieve),

process, store, and distribute information

to support decision making, coordination,

and control in an organization.

Supply Chain

Organizational Levels

Execution and transaction processing

Routine decision making

Tactical planning

Strategic decision making

Supply Chain Information Needs

A Map of Supply Chain Information Systems

Supply Chain Information Systems

Customer Relationship Management (CRM) – Planning

and control activities and information systems that

link a firm with its downstream customers.

Market analysis, sell process, order management,

call/service center management

Supplier Relationship Management (SRM) – Planning

and control activities and information systems that

link a firm with is upstream suppliers.

Design collaboration, sourcing decisions, negotiations, buy

process, supply collaboration


Internal Supply Chain Management –

Information flows between higher and

lower levels of planning and control

systems within an organization.

Supply Chain Information Flows


Enterprise Resource Planning (ERP) systems–

Large, integrated, computer-based business

transaction processing and reporting systems.

ERP systems pull together all of the classic business functions

such as accounting, finance, sales, and operations into a

single, tightly integrated package that uses a common

database.

Traditional strengths in routine decision making and in

execution and transaction processing.

Captures data to support higher-level decision support systems

(DSS).

ERP Systems

ERP Systems

Integrating ERP Systems with

Legacy and Best-in-class Applications

Supply Chain

Information Systems

Decision support systems (DSS) - Computer-

based information systems that allow users

to analyze, manipulate, and present data in

a manner that aids higher-level decision

making

Supply Chain

Information Systems

Network Design Applications – Logistics

information systems that address such long-

term strategic questions as facility location

and sizing and transportation networks.

Often using simulation and optimization

modeling

Supply Chain

Information Systems

Warehouse and transportation planning systems

Allocating “fixed” logistics capacity in the best possible

way given business requirements

Warehouse management and transportation

execution systems

Initiating and controlling the movement of materials

between supply chain partners

Supply Chain Trends

The emergence of sophisticated business

process management (BPM) tools

Cloud computing

BPM Tools Business process modeling tools – Software tools that aid

business teams in the analysis, modeling, and redesign of

business processes. Harmon, © 2007 Morgan Kaufmann

Graphically design processes, simulate the performance of new

processes, develop cost estimates.

Business process management systems (BPMS) products–

Software tools that allow analysts to model processes and

then automate the execution of the process at run time. Harmon, © 2007 Morgan Kaufmann

Develop process maps, define business rules, carry out future

business activity.

Cloud Computing

Cloud computing – A model for enabling

ubiquitous, convenient, on-demand network

access to a shared pool of configurable computing

resources that can be rapidly provisioned and

released with minimal management effort or

service provider interaction.

Cloud Computing

Cloud Model

On-demand self-service

Broad network access

Resource pooling

Rapid elasticity

Measured service

Cloud Computing

Benefits

Makes it easier for firms to outsource key portions of

business process information flows to outside firms.

Allows individual or computer systems to upload and

retrieve information through a wide range of devices

virtually anywhere.

Makes supply chain information flows faster, more

flexible, and cheaper than ever.

Impact of Information Technology

on Supply Chain Management

Visibility – Allows managers to “see” the physical

and monetary flows in the supply chain and better

manage them.

Mirroring – Replaces certain physical processes

with virtual ones.

Creation of new customer relationships – Taking

raw information and organizing, selecting,

synthesizing, and distributing it in a manner that

creates whole new sources of value.

SUPPLY MANAGEMENT

Prof Dr Prem

Chapter Objectives

Be able to: Identify and describe the various steps of the strategic sourcing process.

Perform and interpret the results of a simple spend analysis.

Use portfolio analysis to identify the appropriate sourcing strategy for a particular good or service.

Describe the rationale for outsourcing and discuss when it is appropriate.

Perform a simple total cost analysis.

Show how multicriteria decision models can be used to evaluate suppliers and interpret the results.

Understand when negotiations should be used and the purpose of contracts.

Describe the major steps of the procure-to-pay cycle.

Discuss some of the longer-term trends in supply management and why they are important.

Supply Management

Supply Management – The broad set of activities

carried out by organizations to analyze sourcing

opportunities, develop sourcing strategies, select

suppliers, and carry out all the activities required

to procure goods and services.

Why is

Supply Management critical?

Global Sourcing

Competition against global competitors and

their supply chains.

Advances in information systems have helped.

Why is


Financial Impact

Cost of goods sold – The purchased cost of goods from

outside suppliers.

Merchandise inventory – A balance sheet item that

shows the amount a company paid for the inventory it

has on hand at a particular point in time.

Profit margin – The ratio of earnings to sales for a given

time period.

Return on assets (ROA) – A measure of financial

performance defined as Earnings/Total Assets

Profit Leverage

3% purchasing reduction in COGS

Earnings and Expenses Current Reflecting Savings

Sales $65,786 $65,786

COGS $45,725 $44,353

Pretax earnings $4,629 $6,001

Selected Balance Sheet Items

Merchandise inventory $7,596 $7,368

Total assets $17,213 $16,985

Pretax earnings

increase by $1372

(30%)

ROA increases from

26.9% to 35.3%

Why is


Performance Impact

Purchased goods can have a major effect on

other dimensions such as quality and delivery

performance.

The Strategic Sourcing Process

Assess Opportunities

Spend Analysis – The application of

quantitative techniques to purchasing data

in an effort to better understand spending

patterns and identify opportunities for

improvement.

Profile Internally and Externally

Two approaches to creating profiles:

Category profile – An approach to understand all

aspects of a particular sourcing category that could

ultimately have an impact on the sourcing strategy.

Industry Analysis – An approach to provide a more

detailed understanding of the characteristics of the

external supply base.

Develop the Sourcing Strategy

The Make-or-Buy Decision

A high-level, often strategic, decision regarding which

products or services will be provided internally and

which will be provided by external supply chain

partners.

Insourcing – The use of resources within the firm to provide

products or services.

Outsourcing – The use of supply chain partners to provide

products or services.


Advantages and Disadvantages of

Insourcing and Outsourcing


Factors that affect the decision

to Insource or Outsource.


Total cost analysis – A process by which a firm

seeks to identify and quantify all of the major

costs associated with various sourcing options.

Direct costs – Costs tied directly to the level of

operations or supply chain activities.

Indirect costs – Costs that are not tied directly to the

level of operations or supply chain activity.


Insourcing and Outsourcing Costs


Portfolio analysis – A structured approach used by

decision makers to develop a sourcing strategy for

a product or service, based on the value potential

and the relative complexity or risk represented by

a sourcing opportunity.


Portfolio Analysis

The Routine Quadrant – Readily available products or services

(small % of total).

Electronic Data Interchange

The Leverage Quadrant – Standardized and readily available

products or services (large % of total).

Preferred suppliers

The Bottleneck Quadrant – Unique or complex products or

services supplied by few suppliers.

The Critical Quadrant - Unique or complex products or services

supplied by few suppliers, representing large % of total.


Bottleneck

Critical

Routine

Leverage

Value Potential

High

Complexity or

Risk Impact

High

Low

Low

Portfolio Analysis


Single sourcing – The buying firm depends on a single

company for all or nearly all of an item or service.

Multiple sourcing – The buying firm shares its business

across multiple suppliers.

Cross sourcing – Using a single supplier for a certain part

or service and another supplier with the same capabilities

for a similar part.

Dual sourcing – Using two suppliers for the same

purchased product or service.

Screen Suppliers and

Create Selection Criteria

Criteria to evaluate suppliers

Process and design capabilities

Management capability

Financial condition and cost structure

Longer-term relationship potential

Conduct Supplier Selection

Weighted-point evaluation system – An evaluation system

to evaluate potential suppliers, track supplier’s

performance over time, and rank current suppliers.

Method

Assign weights to performance dimensions.

Rate the performance of each supplier with

regard to each dimension.

Calculate the total score.

Negotiate and Implement

Agreements

Competitive bidding – A request for bids from suppliers with

whom a buyer is willing to do business.

Request for quotation – A formal request for the suppliers to prepare

bids, based on the terms and conditions set by the buyer.

Description by market grade/industry standard

Description by brand

Description by specification

Description by performance characteristics


Agreements

Negotiating – A more costly, interactive approach to final supplier

selection.

Negotiation is used best when:

The item is a new or technically complex item with only

vague specifications.

The purchase requires agreement about a wide range of

performance factors.

The buyer requires the supplier to participate in the

development efforts.

The supplier cannot determine risks and costs without

additional input from the buyer.


Agreements

Contracting – The process of creating a detailed

purchasing contract to formalize the buyer-

supplier relationship.

Fixed-price contract – Stated price does not change.

Cost-based contract – Price of the good or service is

tied to the cost of some other key input or economic

factor.

The Procure-to-Pay Cycle

Ordering

Purchase order – A document that authorizes a supplier to deliver a

product or service and includes the terms and conditions of the

sale.

Follow-up and expediting

Receipt and inspection

Statement of work (scope of work) – Terms and conditions for a

purchased service.

Settlement and payment

May be paid through Electric Funds Transfer (EFT)

Records maintenance

Trends in Supply Management

Sustainable Supply

Becoming more conscious of the importance of being

environmentally friendly and using environmental

performance in selecting suppliers.

Ensuring compliance with regulations.

Reducing packaging, promoting recycling, reducing

costs.

Trends in Supply Management

Supply Chain Disruptions

Caused by natural disasters, economic/political

events.

Cause a big threat to revenue streams.

Increased risk due to outsourcing to global

suppliers.

Inventory Management

Prof Dr Prem

Chapter Objectives

Be able to: Describe the various roles of inventory, including the different types of inventory and inventory drivers.

Distinguish between independent demand and dependent demand inventory.

Calculate the restocking level for a periodic review system.

Calculate the economic order quantity (EOQ) and reorder point (ROP) for a continuous review system.

Determine the best order quantity when volume discounts are available.

Calculate the target service level and target stocking point for a single-period inventory system.

Describe how inventory decisions affect other areas of the supply chain. In particular, describe the bullwhip effect, inventory positioning issues, and the impacts of transportation, packaging, and material handling considerations.

Inventory Management

Inventory – Those stocks or items used to support

production (raw materials and work-in-process

items), supporting activities (maintenance, repair,

and operating supplies) and customer service

(finished goods and spare parts).

Inventory Types

Cycle stock

Safety stock

Anticipation inventory

Hedge inventory

Transportation inventory

Smoothing inventory

Types of Inventory

Cycle stock – Components or products that are

received in bulk by a downstream partner,

gradually used up, and then replenished again in

bulk by an upstream partner.

Safety stock – Extra inventory that a company

holds to protect itself against uncertainties in

either demand or replenishment time.

Types of Inventory

Anticipation inventory – Inventory that is held in

anticipation of customer demand.

Hedge inventory – A form of inventory buildup to

buffer against some event that may not happen.

Types of Inventory

Transportation inventory – Inventory that is

moving from one link in the supply chain to

another.

Smoothing inventory – Inventory that is used to

smooth out differences between upstream

production levels and downstream demand.

Inventory Drivers Inventory drivers – Business conditions that force companies to hold inventory.

Independent vs. Dependent

Demand Inventory

Independent demand inventory – Inventory items

whose demand levels are beyond a company’s

complete control.

Dependent demand inventory – Inventory items

whose demand levels are tied directly to a

company’s planned production of another item.

Independent vs. Dependent

Demand Inventory

Example:

Independent demand:

Kitchen table – Need 500 tables five weeks from now

Dependent demand:

Kitchen table legs – Need 4 per table or 2,000 legs

Calculation of dependent demand (Chapter 12)

Inventory Control Systems

Periodic Review System – An inventory system that

is used to manage independent demand inventory

where the inventory level for an item is checked

at regular intervals and restocked to some

predetermined level.

Continuous Review System – An inventory system

used to manage independent demand inventory

where the inventory level for an item is

constantly monitored and when the reorder point

is reached, an order is released.

Periodic Review System

Calculating the order quantity (Q)

Q = R-I

where

R = restocking level

I = inventory level at the time of review.

Periodic Review System

Calculating the restocking level (R)

Calculating Service Level

Service Level – A term used to indicate the amount

of demand to be met under conditions of demand

and supply uncertainty. Assumes that the demand during the reorder period and the order lead time is

normally distributed.

Continuous Review System

Key features:

Inventory levels are monitored constantly, and a

replenishment order is issued only when the reorder

point is reached.

The size of a replenishment order is typically based on

the trade-off between holding costs and ordering costs.

The reorder point is based on both demand and supply

considerations, as well as on how much safety stock

managers want to hold.


Assumptions:

Constant demand and lead time

Holding and Ordering cost known and fixed

Price of each unit is fixed.


When the demand rate and lead time are constant:

Reorder point = demand x lead time

R = dL

Economic Order Quantity

Economic Order Quantity (EOQ) – The order

quantity that minimizes annual holding and

ordering costs for an item.

Holding costs (H)– The cost to hold a single unit in

inventory for a year.

Ordering costs (S) – The cost of placing an order

regardless of the order quantity.

Total Yearly Inventory Costs

Total holding and ordering costs for the year

= Total yearly holding cost + Total yearly ordering cost =

Yearly holding cost = average inventory x holding cost

Yearly ordering cost = number of orders per year x fixed ordering cost

Comparing Ordering Costs to EOQ

Example

Annual demand (D) = 4,000

Annual holding cost (H) = $15

Ordering cost (S) = $50/order

Order quantity (Q) = 1,000 fans

Example

Calculate the EOQ and use that value as the order

quantity to see if the cost is lower and calculate the

total yearly inventory cost.

Cost Savings:

Reorder Points and Safety Stock

When demand rate (d) and lead time (L) are constant:

When demand rate (d) and lead time (L) or both varies:

The impact of varying

demand rates and lead time

Causes of Variability

The variability of demand

The variability of lead time

The average length of lead time

The desired service level

Safety Stock

Safety stock:

= z x standard deviation of demand during the reorder

period

=

Reorder Point

Reorder Point =

Example

Example

Calculate Safety Stock:

Calculate Reorder Point:

Quantity Discounts

Quantity Discounts – Price reductions for ordering larger quantities.

Quantity Discounts

Two-step process:

1. Calculate the EOQ. If the EOQ represents a

quantity that can be purchased for the lowest

price, stop – we have found the lowest cost

order quantity. Otherwise, go to Step 2.

2. Compare total holding, ordering, and item

costs at the EOQ quantity with total costs at

each price break above the EOQ. There is no

reason to look at quantities below the EOQ, as

these would result in higher holding and

ordering costs, as well as higher item costs.

Single-Period Inventory System

When excess inventory cannot be held in the

future, firms must weigh the cost of being short

against the cost of holding excess units.

Examples:

Fresh fish, magazines, newspapers, Christmas trees


Single-period inventory system – A system used when

demand occurs in only a single point in time.

Goals:

Determine a target service level (SLT) that strikes the best balance

between shortage costs and excess costs.

Use the target service level to determine the target stocking point

(TS) for the item.


Target service level – The service level at which

the expected cost of a shortage equals the

expected cost of having excess units.

Target stocking point – The stocking point at

which the expected cost of a shortage equals the

expected cost of having excess units.

Target Service Level

OR

Target Service Level

The target service level (SLT) is the p value at which

holds true

Target Stocking Point

Inventory in the Supply Chain

Bullwhip Effect

An extreme change in the supply position upstream in a supply

chain generated by a small change in demand downstream in the

supply chain.

Inventory Positioning

Cost and value increases and flexibility decreases down the supply

chain.

Transportation, Packaging, Material Handling

Physical size and quantity of lot, how it is packaged, material

handling equipment needed, and disposal of packaging are all

factors in choosing appropriate supplier and distribution process.

© 2010 APICS Dictionary

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