Certification Exam

Preparation Courseware

International
Supply Chain
Education Alliance
 Course
Contents

1. Supply chain management essentials

2. Strategic planning in the supply chain
3. Supply chain risk management
4. Business processes and metrics
5. Logistics - Transport in the supply chain
6. Logistics - Distribution networks
7. Logistics - Inventory management
8. Bullwhip effect
9. Introduction to Sales and Operations Planning (S&OP) / Integrated Business
Planning (IBP)
10. Products and services management
11. Demand management
12. Supply management
13. Consensus, prioritization and strategic planning integration
14. Supply Chain Relationships
15. Customer Relationship Management
16. Supplier Relationship Management
17. Supply chain collaboration tools
18. Information systems and digital supply chain
19. Lean Six Sigma
20. Theory of Constraints (TOC)
21. Demand-driven supply chain (DDSC) framework
22. Introduction to Demand Driven Material Requirement Planning - DDMRP
23. Financial key performance indicators
24. Leadership and change management
25. Introduction to project management
26. Sustainable supply chain management

Updated: 2021
 Welcome to the workshop
Thank you for joining us!

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About ISCEA

l The International Supply Chain Education Alliance (ISCEA) was the first
organization certifying supply chain professionals around the globe, and
it remains the worldwide authoritative resource for supply chain career
development with thousands of certificate holders commanding top-tier
salaries.
l ISCEA was established in 2003 in Cleveland, Ohio, USA to fill the need of
high impact training for supply chain professionals.
l ISCEA conducts supply chain educational workshops, exams, exhibitions,
networking events, and award receptions Worldwide.
l ISCEA instructors are University Professors and/or Industry experts with
many years of experience.

l ISCEA's mission is to provide total supply chain knowledge to

manufacturing and service industry professionals through Education,
Certification and Recognition.

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 CSCM workshop agenda

l 1. Supply chain management essentials

l 2. Strategic planning in the supply chain
l 3. Supply chain risk management
l 4. Business processes and metrics
l 5. Logistics - Transport in the supply chain
l 6. Logistics - Distribution networks
l 7. Logistics - Inventory management
l 8. Bullwhip effect
l 9. Introduction to Sales and Operations Planning (S&OP) / Integrated
Business Planning (IBP)
l 10. Products and services management
l 11. Demand management
l 12. Supply management
l 13. Consensus, prioritization and strategic planning integration

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CSCM workshop agenda

l 14. Supply Chain Relationships

l 15. Customer Relationship Management
l 16. Supplier Relationship Management
l 17. Supply chain collaboration tools
l 18. Information systems and digital supply chain
l 19. Lean Six Sigma
l 20. Theory of Constraints (TOC)
l 21. Demand-driven supply chain (DDSC) framework
l 22. Introduction to Demand Driven Material Requirement Planning -
DDMRP
l 23. Financial key performance indicators
l 24. Leadership and change management
l 25. Introduction to project management
l 26. Sustainable supply chain management

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 About the CSCM Certification Exam

l Online exam with 200 Multiple Choice Questions and a 240-minute time
limit.
l 70% is the official passing score.
l The question bank and order is randomized for each certification exam.
l After the exam has been initiated, the candidate must complete the
exam in the same session.
l ISCEA's iProctor will be actively monitoring to ensure the candidate
does not have any questions or technical issues and to monitor the
candidate’s use of the internet.
l During the exam, the only approved use of the internet is for the exam
itself. Candidates are prohibited from opening additional browsers.
l The use of secondary electronic devices by the certification candidate
such as cell phones, tablets, and desktop/laptop computers is strictly
prohibited; however, calculators not on these devices are allowed.

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1. Supply chain management

essentials

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 Supply Chain

l All parties involved, directly or indirectly, in fulfilling a customer request.

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Supply Network

Manufacturers Retailers
Suppliers Distributors Customers

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 Value Chain

l A set of activities that a firm operating in a specific industry performs in

order to deliver a valuable product or service for the market.
Michael Porter, 1985

Firm Infrastructure

Marg
Support Human Resources Management

in
Activities Tecnology Development
Procurement

Marg
Inbound Outbound Sales and
Operations Service

in
Logistics Logistics Marketing

Primary Activities

Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. EEUU, Free Press

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Value Network

l A web of relationships that generates economic value and other benefits

through complex dynamic exchanges between two or more individuals,
groups or organizations.
Michael Porter, 1985

Firm Value
Supplier Value Chain Channel Value Buyer Value
Chain Chains Chain

Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. EEUU, Free Press

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 Supply Chain Management Evolution

l Supply chain management is the process of planning, executing and

controlling the operations of the supply chain in order to satisfy the
needs of the customer as efficiently as possible.
Keith Oliver, 1982

l Supply Chain Management is the management of relationships in the network of

organizations, from end customers through original suppliers, using key cross-
functional business processes to create value for customers and other
stakeholders.
The Global Supply Chain Forum, 2014

Laseter, T. & Oliver, K. (2003) When Will Supply Chain Management Grow Up?, Strategy + Business, Issue 32, originally
published by Booz & Company

Lambert, D. Editor (2014) Supply Chain Management: Processes, Partnerships, Performance. 4th Ed. Supply Chain
Management Institute, Ponte Vedra Beach, FL

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Business processes in the supply chain

l A Business process is a series of steps performed by a group of

stakeholders to achieve a concrete goal.
l Business processes have inputs and outputs, and their performance
can be measured through metrics.

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 Business Process Management (BPM)

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Traditional functional-oriented firm

l Functional silos: Each department focuses on its own goals and

objectives.
l Value flow is constrained by silos’ barriers.

Sales Logistics Purchases Production

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 Most key business processes are Inter-functional

Sales Logistics Purchases Production

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Business processes in the supply chain

Own organization
Suppliers

Customers
Production

Sales
Service
Procurement

Logistics

Marketing

Supply Chain Management

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 Pull and Push Processes

l Pull processes
l Reactive – Based on placed orders
l Push processes
l Speculative – Based on forecasts

Push processes Pull processes

Executed after customer
Executed before customer places order
places order

Time
Customer
places
order

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Pull and Push Processes

Order
fulfilling
strategies
More forecast
relevance

Make-to-Stock Push Pull

Assembly-to-Order
Configure-to-Order Push Pull

Make-to-Order Push Pull

Engineer-to-Order
Pull
Less forecast
relevance

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 The Supply Chain Flows

Information Capacity, promotion plans, delivery schedules

Materials Raw materials, intermediate products, finished goods
Finance Credits, consignment, payment terms, invoices

Information Sales, orders, inventory status, quality, promotion results

Materials Returns, repairs, servicing, recycling
Finance Payments, consignment

“SCM engages the management of flows between and among stages in a

supply chain to minimize total cost”. Chopra, S & Meindl, P (2016) Supply Chain Management:
Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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References & Suggested Additional Reading

l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy,

Planning, and Operation. 6th edn, Pearson Education, Essex, NE.
l Lambert, D. Editor (2014) Supply Chain Management: Processes,
Partnerships, Performance. 4th Ed. Supply Chain Management
Institute, Ponte Vedra Beach, FL
l Laseter, T. & Oliver, K. (2003) When Will Supply Chain Management
Grow Up?, Strategy + Business, Issue 32, originally published by Booz
& Company
l Porter, M. (1980). Competitive Strategy: Techniques for Analyzing
Industries and Competitors. EEUU, Free Press

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 2. Strategic planning in the supply
chain

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Supply chain management decision levels in

Uncertainties and predetermined processes and factors

Operational Tactical Strategic

decisions decisions decisions

Uncertainties

Predetermined

Forecasts Scenarios
Time

Based on both:
Postma, T.J.B.M. & Liebl, F. 2005. How to improve scenario analysis as a strategic management tool? Technological Forecasting and Social Change
Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Supply chain management decision levels

Strategic decisions • Define the supply chain structure

• Have a long-term impact that lasts for
several years
• Support strategic objectives
• Must consider market uncertainty
Tactical decisions • In the framework of strategic
decisions
• Cover a time period of a few months
to a year
• Based on demand forecasts
• Should consider demand and supply
uncertainty
Operational decisions • Focus on the ongoing day-to-day
activities of an organization
• Fixed supply chain configuration
• Certain operating policies
• Reduced uncertainty

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Decision making models

Hard model Soft model

Structured information Un-structured information

Quantitative analysis Qualitative analysis

Objective Subject

Requires human contribution

Can be automated
(vision / debate)

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 Decision making models

Model Usage Spectrum

Human
Hard interaction Soft
models Routine
models
usage

Decision Support for Systems Provide

automation routine research and elements for
decisions improvement debate

Pidd, Michael. (2010). Why modelling and model use matter. JORS. 61. 14-24. 10.1057/jors.2009.141.

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Decision making models

Hard models Soft models

Strategic

for
i l able
a
Tactical n av ing
r m atio n-mak
Info ecisio
D
Operational

Structured Semi - structured Unstructured

Ward, David. (2009). Needs seeded strategies. Journal of Applied Economic Sciences. 4.

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 Competitive strategy: Business environment 5 forces model

Threat of
potential
entrants

Bargaining Rivalry among Bargaining

power of industry power of
suppliers competitors customers

Threat of
substitute
products or
services

Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. EEUU, Free Press

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3 strategies for competitiveness

Strategic advantage

Uniqueness
perceived by Lowest price
customers

Industrywide Product or service

Cost leadership
differentiation
Strategic target

Niche /
particular Focus
segment

Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. EEUU, Free Press

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 Competitive strategy and supply chain strategy

Competitive Supply chain

strategy strategy

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Aligning competitive and supply chain strategies

High capacity Low external Strategic fit

Supply chain strategy

to satisfy the alignment

customer

Low capacity
to satisfy the Flying blind Low internal
customer alignment

Competitive
Low understanding High understanding strategy
of customer needs of customer needs

Fisher, M.L. (1997) What Is the Right Supply Chain for Your Product? A Simple Framework Can Help You Figure
out the Answer. Harvard Business Review, 75, 105-116.

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 Supply chain responsiveness

Order size

Order quantity

Lead time

Supply chain Changing

Service levels
responsiveness customer needs

Target price

Product variety

Product innovation

Chopra, S & Meindl, P 2016, Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Relationship between responsiveness and cost

Increasing responsiveness at
$ a cost
• Manufacturing capacity in
Cost
excess
• Maintain inventory of finished
goods or/and components
• Fast modes of transportation
to reduce lead times
• Flexible suppliers
• Etc.

Responsiveness
0% 25% 50% 75% 100%

Given the trade-off between cost and responsiveness, a key strategic choice
for any supply chain is the level of responsiveness it seeks to provide.
Keeping in mind that to increase responsiveness, there are additional costs
that lower efficiency.
Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Is profit proportional to responsiveness?

Profit margin

Sales
Costs

Responsiveness
0% 25% 50% 75% 100%

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Relationship between responsiveness and cost

l In today's business environment with growing competition and changing demands of

customers, in order to remain competitive (A) a supply chain must become both more
efficient (B) and more responsive (C).
l Becoming more efficient requires costs reduction (D). But on the other hand, becoming
more responsive without changing key business processes will increase costs (D’).

B
D
Become more
Reduce costs
efficient
A
Remain Conflict
competitive
C
D’
Become more
Increase costs
responsive

l To overcome this conflict, firms need to continuously improve their processes.

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 Different products require different supply chains

Feature Functional product Innovative product

Cost of lost sales Low High
Obsolescence risk Low High
Forecast accuracy High Low
Product variety Low High
Lifecycle Long Short
Required supply chain Efficient Responsive

Fisher, M.L. (1997) What Is the Right Supply Chain for Your Product? A Simple Framework Can Help You Figure
out the Answer. Harvard Business Review, 75, 105-116.

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Strategic fit with a complex product portfolio

l Different products have different demand uncertainty

l Tailoring the supply chain is essential to achieving strategic fit when

supplying a wide variety of customers with many products through
different channels.

l A supply chain that contains a responsive solution to handle new

products and other low-volume products and a low-cost solution to
handle successful high-volume products.

l Variety must be limited to what truly adds value to the customer.

l This often requires the continual elimination of older products.

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Product life cycle
l A product’s demand changes throughout the life cycle
l Supply chain strategy must also change
l During sales growth: uncertain demand, high margins (time is important),
maintain product availability is the priority. Cost is secondary
l During Maturity: Predictable demand, low margins, cost is extremely relevant

Investment Harvest Decline

Sales End of life

Product Sales growth Maturity
drop cycle
develop
Sales / Profits

ment

e
nu
Market withdrawal

ve
Re

Market launch
Remaining after-sales
service
t
ofi
Pr

Time

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Items or issues which may require changes in supply chain

strategy over time

l Increased variety

l Decreased life cycles

l Customer requirements

l Fragmentation of the chain ownership

l More competitors

l Difficulty adapting and executing new strategies

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Models used for strategic planning

Balanced
Scorecard

Soft Systems
Decision trees Methodology–

Strategic
SSM

planning
Strategic
Options
Strategic Development
maps
and Analysis
– SODA

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Balanced Scorecard (Kaplan & Norton)

2 CUSTOMERS
What customer
needs must we
meet to be
successful?
1
3

FINANCIAL Vision INTERN

What financial and PROCESSES
objectives must we strategy In which processes
achieve to be should we be
successful? excellent?

LEARNING
How should our
organization learn and
innovate to achieve its
objectives?
4
Kaplan, R. (1996). The Balanced Scorecard: Translating Strategy into Action. EEUU: Harvard Business Review Press

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 Soft Systems Methodology - SSM

Activities in the real supply chain

Reorganize and improve

supply chain processes

Define supply chain

processes

Monitor supply chain

processes

Define supply chain

metrics

Based on: Checkland, P. (1999). Systems thinking, systems practice. Chichester: John Wiley.

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Cognitive maps / SODA (Strategic Options Development and

Analysis)
Reduced SC net profit
Effect

Replensihment orders are Stock outs are common

(typically 1-2 times per week) SC
adjusted daily to minimize
Operating
wastage threat
expenses is high

Inventory buffer available

to the retailer is shorter Capacity buffering is
Daily retail sales Higher RM/WIP required across the SC
and significantly less tan a Wastage
vary significantly
week
across the week

RM and WIP The supply chain

Supply lead time The product inventory is has multiple levels
incorporates a Forward has a shor life ordered to forecast
Load Element (1.5 days) (< 7 days)
A proactive capacity
buffer is negociated
(annualised hours)
Buffering mechanisms are
Demand fluctuations can necessary to manage the
be smoothed over time demand V&U The forward load buffer is not
sufficient to accommodate
the demand V&U
There is a commitment to
Daily orders from retailer fluctuate provide on time, in full,
unpredictably (+/- 50% is common) delivery (fines apply)

Cause
Notes: V&U: variation and uncertainty; SC: supply chain

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 Strategic maps

Improve Stakeholder Value

Financial Increase Increase

Maximize ROA Reduce costs
Perspective turnover profitability

Customer
Quality Speed Price
Perspective

Internal
Process Processes focused on
Perspective Create innovation increasing perceived Operative efficiency
value

Learning and
Employee
Growth Technology Corporate culture
competencies
Perspective

Kaplan, R. & Norton, D. (2004). Strategy Maps, Converting intangible assets into tangible outcomes. USA: Harvard Business School Publishing

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Decision Trees
Period 2
l A decision tree is a graphic device used to evaluate different
scenarios under uncertainty.
D=144
Period 1 p=$1.45
0.25 D=144
0.25 p=$1.19
D=120
p=$1.32
0.25 D=96
0.25 p=$1.45
0.25
Period 0 D=144
0.25 D=120 p=$0.97
p=$1. 08
D=100 D=96
p=$1.20 0.25 p=$1.19
D=80 D=96
p=$1.32 p=$0.97

0.25 D=64
D=80 p=$1.45
p=$1.08 D=64
p=$1.19
D=64
p=$0.97

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 References & Suggested Additional Reading

l Checkland, P. (1999). Systems thinking, systems practice. Chichester: John Wiley.

l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and
Operation. 6th edn, Pearson Education, Essex, NE.
l Fisher, M.L. (1997) What Is the Right Supply Chain for Your Product? A Simple
Framework Can Help You Figure out the Answer. Harvard Business Review, 75, 105-116.
l Kaplan, R. & Norton, D. (1996). The Balanced Scorecard: Translating Strategy into Action.
USA: Harvard Business Review Press
l Kaplan, R. & Norton, D. (2004). Strategy Maps, Converting intangible assets into tangible
outcomes. USA: Harvard Business School Publishing
l Pidd, Michael. (2010). Why modelling and model use matter. JORS. 61. 14-24.
10.1057/jors.2009.141.
l Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and
Competitors. EEUU, Free Press
l Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior
Performance. EEUU, Free Press
l Ward, David. (2009). Needs seeded strategies. Journal of Applied Economic Sciences. 4.

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3. Supply chain risk management

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 Risk assessment

Changes that may or

may not occur

Harm
Managers
balance
Uncertainty Risk potential
harm and
benefits

Benefits

Based on: Watters, D. (2007). Supply chain risk management - Vulnerability and Resilience in Logistics. EEUU. Kogan Page

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Changes involving risk in supply chain

New product launch

Entering or retiring form a market

Demand driven
Opening / closing of facilities

Change
Economic, financial, social, political

Hazard, environmental, man-made

Psychopathic, criminal, terrorist and

Event driven health

Compliance

Based on: Lynch, G. (2009). Single Point of Failure - The ten essential laws of supply chain risk management. EEUU.
Wiley

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 Risk management
Supply chain
vulnerability

Possible Alternative
Uncertainty Risk Consequences
events responses

Risk
management

Decisions

Based on: Watters, D. (2007). Supply chain risk management - Vulnerability and Resilience in Logistics. EEUU. Kogan Page

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Some risks identified in the supply chain

High Terrorism/sabotage Catastrophic loss
of key supplier
50
Earthquake, volcano eruption
Labor issues
Hurricane
New or foreign competitors
Building collapse
Supplier problems
Tornados

Joint venture/Alliance relations Flooding

Effect Loss of key personnel or equipment
(Aggregate loss
severity $)
Land, water, atmospheric pollution Logistics provider failure

IT systems failures (hardware, Yield problems

software, LAN, WAN)
Cargo losses
Computer virus attack
Stock-outs
Operator errors/
Hail or wind damage accidental damage Restriction of
Heavy rain or Access or egress
Bizzard or ice storm
Low thunderstorms

Low Probability or likelihood High

(the possibility of a risk event occurring)

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 Quantifying supply chain risk
(Amplifiers) = Function of (Global Nodes)
and (Constrained Dependencies)

% Pr(D) = -

(Risk Reducers) = Function of (SC Planning)

and (SC Redesign) and
$Risk = x (Visibility effectiveness

(Revenue Loss) = Function of (Excess Resources)

and (Visibility Effectiveness)
$1(D) = +

(Cost to Stabilize) = Function of (SC Redesign)

and (Excess Resources)
% Pr(D) = Prob. of Disruption
$1(D) = Impact of Disruption

Handfield, R. (2008). Supply chain risk management - Minimizing Disruptions in Global Sourcing. EEUU. Auerbach

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Supply chain risk management framework

3a. Excess resources

3b. SC collaboration
1. Map the supply 2. Identify risk and planning
chain & measure the reduction
risk of critical nodes mechanisms for
in network high-risk nodes 3c. Invest in
visibility systems

3d. Major supply chain

redesign

Goal: Resilient supply chain with ongoing Resilience: Capacity to recover from an adverse
knowledge and risk mitigation situation and prepare for the future

Handfield, R. (2008). Supply chain risk management - Minimizing Disruptions in Global Sourcing. EEUU. Auerbach

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 The role of risk mitigation strategies in final result

restoration, and

Final result
Mitigation,

restart
Consequences
Causes Event / Change

Barriers, or safety
functions

Threats

Baed on: Zsidisin, G. (2009). Supply Chain Risk - A Handbook of Assessment, Management, and [Link]. Springer

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Risk mitigation strategies

High

Buffering /
Pooling
Contingency
planning
Impact Crisis
(Loss severity $)
management

Do nothing
Low
Light Probability or likelihood Severe
(the possibility of a risk event occurring)

Based on: Kouvelis, P. (2012). The Handbook of Integrated Risk Management in Global Supply Chains. EEUU. Wiley

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 Regaining stability after an accidental event or disruption

Event / Disruption
Business indicator

Stable situation

New stable Impact

situation

Disruption time Time

Zsidisin, G. (2009). Supply Chain Risk - A Handbook of Assessment, Management, and [Link]. Springer

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Crisis management

Identify and
Clarify the nature mobilize
Disruption
of the intervention resources / plan
the assessment
D1

Identify information,
needs and sources

Deploy Design / modify D2

solution response
Collect data and
D3 information

• D1: Time to detect a disruption Report conclusions

Analyze data and
• D2: Time to design (or prescribe) a and provide a
response plan information
solution in response to the disruption
• D3: Time to deploy the solution

Adapted from: Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Crisis management (Time-based Risk Management)

• D1: Time to detect a disruption

• D2: Time to design (or prescribe) a
Impact An event Deployment of
solution in response to the disruption
occurs a recovery plan • D3: Time to deploy the solution

Impact
reduction
Response
time
reduction

Time

Response time = Recovery time

D1+D2+D3

Sodhi M., Tang C. (2009) Managing Supply Chain Disruptions via Time-Based Risk Management. In: Wu T., Blackhurst J. (eds)
Managing Supply Chain Risk and Vulnerability. Springer, London

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Recommendations to reduce reaction time

l Map risks
l Define roles and responsibilities
l Develop monitoring systems
l Design recovery plans
l Consider scenarios

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 References & Suggested Additional Reading

l Handfield, R. (2008). Supply chain risk management - Minimizing Disruptions in Global

Sourcing. EEUU. Auerbach
l Kouvelis, P. (2012). The Handbook of Integrated Risk Management in Global Supply
Chains. EEUU. Wiley
l Lynch, G. (2009). Single Point of Failure - The ten essential laws of supply chain risk
management. EEUU. Wiley
l Rushton, A. (2010). The Handbook of Logistics & Distribution Management (4a ed.).
Reino Unido: Kogan Page Limited.
l Sodhi M., Tang C. (2009) Managing Supply Chain Disruptions via Time-Based Risk
Management. In: Wu T., Blackhurst J. (eds) Managing Supply Chain Risk and
Vulnerability. Springer, London
l Watters, D. (2007). Supply chain risk management - Vulnerability and Resilience in
Logistics. EEUU. Kogan Page
l Zsidisin, G. (2009). Supply Chain Risk - A Handbook of Assessment, Management, and
[Link]. Springer

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4. Business processes and metrics

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 Business Process Organization (BPO)

Exist to ensure swift process flow Exist to fulfill customer

and increase stakeholder value driven value-proposition

Business Leadership
Team

s
er
rs

m
ie

to
l
pp

us
Su

C
Business Processes

Enabling processes

Functional unit (Core Functional unit (Core

competency) competency)

IT Foundation

Exist to enable transactions and information Exist to develop the chosen core competency (CC) and
availability across all layers and processes increase the CC’s ability to facilitate process flow

Value flow

M cCorm ack, K.(2003). Supply Chain Networks and Business Process Orientation - Advanced Strategies and Best Practices. EEUU: CRC Press

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Business Process Organization (BPO)

Suppliers

Customers

Own organization
General
Functional Staff Management Process
Units Heads Council

Functional unit Functional unit Functional unit Functional unit

P Process owner Process Subprocess

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 Strategic level supply chain business processes according to
the Global Supply Chain Forum (1998)

Customers
Suppliers
Own organizations

Service
Production

Sales
Marketing
Purchases

Logistics
Customer Relationship Management (CRM)

Service management

Demand management

Order management for fulfillment

Manufacturing flow management

Supplier Relationship Management (SRM)

Product development and marketing

Return management

Information architecture
Lambert, Douglas M. (2008). Supply Chain Management: Processes, Partnerships, Performance (3ª ed.). EEUU, Supply Chain Management Institute.

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Strategic level supply chain business process grouping

Own organizations
Customers
Suppliers

Logistics

Service
Production

Sales
Marketing
Purchases

Internal supply chain management

(Value chain)

(SRM) Supplier Relationship Management

Customer Relationship Management (CRM)

Information management

Basado en: Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Tactical level supply chain business processes

Customers
Suppliers
Own organization

Service
Production

Sales
Marketing
Purchases

Logistics
Product and services management

Demand management

Supply management

Finance

Information architecture

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Tactical-operational level supply chain business processes:

SCOR® model
l Supply Chain Operations Reference Model
l 194 processes
l 373 metrics
l More than 500 practices

Plan
Supplier of the

the customer
Customer of

Source Make Deliver Source Make Deliver Source Make Deliver

supplier

Return Return Return Return Return Return

Enable Enable
Enable

Intern or extern Intern or extern

supplier Own organization customer

SCOR is a registered trademark of the “Supply Chain Council”

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 Tactical-operational level supply chain business
processes: SCOR® model
Plan (sP) Source (sS) M ake (sM ) Deliver (sD) Return (sR) Enable (sE)

sP1: Plan sS1: Source sM 1: M ake- sD1: Deliver sE1: M anage

Supply Stocked to-Stock Stocked sSR1: Source Supply Chain
Chain Product Product Return Business
Defective sE6: M anage
Rules
Product Supply Chain
sP2: Plan sS2: Source sM 2: M ake- sD2: Deliver sE2: M anage Contracts
Source M ake-to- to-Order M ake-to- sDR1: Deliver Perform ance
Order Stock Return
Defective sE7: M anage
Product Product
Product Supply Chain
sP3: Plan sS3: Source sM 3: sD3: Deliver sE3: M anage Network
M ake Engineer-to- Engineer-to- Engineer-to- sSR2: Source Data and
Order Order Order Return M RO Inform ation
Product sE8: M anage
Product Product
Regulatory
sP4: Plan sD4: Deliver sE4: M anage Com pliance
sDR2: Deliver
Deliver 22 Sub- Retail Supply Chain
17 Sub- Return
processes Product Hum an
processes Defective
sE9: M anage
Product Resources
Supply Chain
sP5: Plan sE5: M anage Risk
sSR3: Source
Return 52 Sub- Return Excess Supply Chain
processes Product Assets

sDR3: Deliver
20 Sub- Return Excess
processes Product 58 Sub-
processes

25 Sub-
SCOR is a registered trademark of the “Supply Chain Council” processes

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Supply chain metrics

l Metrics
l Process performance assessment
l KPI
l Financial or non-financial metrics that measure processes performance that
are key to the organization's strategy
l Some KPIs
l Demand forecast accuracy
l Cash to cash cycle time
l % of perfect orders
l Service level
l Capacity utilization level

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 AMR Research supply chain metrics

Demand
Forecast ROI expectations
Accuracy
Strategic level fulfillment
Perfect SCM
Order Cost

Cash to Cash
Balance between
Working capital / Accounts Accounts customers and
Inventory
Cash flow Payable Receivable suppliers
DPO DSO

Raw Direct
Supplier Supplier Purchasing
Material Material
Operational Quality On Time Costs Root cause
Inventory Costs
level analysis

Production Order Perfect

Cost Plant WIP & FG
Schedule Cycle Order Detail
Detail Utilization Inventory
Variable Time

O’Marah, K. (2006). Supply Chain Saves the World. EEUU: AMR Research

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SCOR® Model Metrics

Level 1 • Strategic metrics or KPIs

Level 2 • Diagnostic metrics

• Complementary
Level 3 diagnostic
metrics

Bolstorff, P. (2011). Supply Chain Excellence: A Handbook for Dramatic Improvement Using the SCOR Model. (3ª ed.). EEUU: AMACOM

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 SCOR® Model Metrics
5 Perform ance attributes
10 Level 1 m etrics 42 Level 2 m etrics 321 Level 3 m etrics

Reliability Perfect Order Fulfillm ent (RL.1.1) 4 Level 2 m etrics 59 Level 3 RL m etrics
(RL)

Responsiveness Order Fulfillm ent Cycle Tim e 4 Level 2 m etrics 142 Level 3 RS m etrics
(RS) (RS.1.1)

Upside Supply Chain Flexibility

5 Level 2 m etrics
(AG.1.1)

Agility Upside Supply Chain Adaptability 46 Level 3 AG m etrics

5 Level 2 m etrics
(AG) (AG.1.2)

Downside Supply Chain

3 Level 2 m etrics
Adaptability (AG.1.3)

Overall Value at Risk (VAR) 6 Level 2 m etrics

(AG.1.4)

Costs
Total Cost to Serve(CO.1.001) 8 Level 2 m etrics 30 Level 3 CO m etrics
(CO)

Cash-To-Cash Cycle Tim e

(AM .1.1) 3 Level 2 m etric

Asset M anagem ent Return on Supply Chain 44 Level 3 AM m etrics

(AM ) FixedAssets (AM .1.2) 2 Level 2 m etric

Return on W orking Capital

(AM .1.3) 2 Level 2 m etric

SCOR is a registered trademark of the “Supply Chain Council”

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SCOR® Model Metrics: Identifiers

l SCOR® metrics have unique identifiers:

l Performance attributes:
l RL, RS, AG, CO and AM (5 in total)
l Level 1 metrics (strategic):
l RL.1.1, RS.1.1, AG.1.1, CO.1.001, AM.1.1, … (10 in total)
l Level 2 metrics (diagnostic):
l RL.2.1, RS.2.1, AG.2.1, CO.2.001, AM.2.7, … (42 in total)
l Level 3 metrics (diagnostic):
l RL.3.1, RS.3.1, AG.3.1, CO.3.009, AM.3.44, … (321 in total)

SCOR is a registered trademark of the “Supply Chain Council”

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 SCOR® Model Metrics: Examples

l Reliability
l RL.1.1 Perfect order fulfillment
l [Total perfect orders] / [Total number of orders] x 100%
l Responsiveness
l RS.1.1 Order fulfillment cycle time
l [Sum of cycle times of each of the delivered orders] / [Total number of delivered
orders]
l Agility
l AG.1.1 Upstream Supply chain flexibility
l Total days between occurrence of the unplanned event and the moment in which
the sustained desired performance of planning, supplying, manufacturing,
delivering and returning is achieved
l AG.1.4 Value at Risk - (VaR)
l VaR = Probability of a risk event (P) x Financial impact of the risk event (I)

SCOR is a registered trademark of the “Supply Chain Council”

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SCOR® Model Metrics: Examples

l Cost
l CO.1.001 Total cost of serving
l Sum of:
§ CO.2.001 Cost of planning
§ CO.2.002 Cost of supplying
§ CO.2.003 Material Landed Cost
§ CO.2.004 Cost of manufacturing
§ CO.2.005 Cost of managing orders
§ CO.2.006 Cost of delivering
§ CO.2.007 Cost of returning

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 SCOR® Model Metrics: Examples

l Asset Management
l AM.1.1 Cash to cash cycle time = Days on inventory (DOI) + Days Sales
Outstanding (DSO) - Days Payable Outstanding (DPO)

Buy components or raw

Sell Product
material from supplier

Days on inventory (DOI) Days Sales Outstanding (DSO)

Days Payable
Outstanding (DPO)
“Cash to cash” cycle
Payment to supplier Payment to customer

Gardner, D. (2004). The Supply Chain Vector: M ethods for Linking the Execution of Global Business M odels W ith Financial Perform ance. EEUU: J Ross Publishing

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SCOR® Model Metrics: Examples

l Asset Management
l AM.2.1 Days Sales Outstanding (DSO) - Impacts cash flow, it counts the
days between delivery date and the date when customer pays for the
product or service
l DSO = Accounts receivable / (Net sales/365)
l AM.2.3 Days Payable Outstanding (DPO) - Impacts cash flow, it counts the
days between supplier's delivery date and the date it is paid
l DPO = Accounts payable / (COGS/365)
l AM.2.8 Days on inventory (DOI) - Indicates the level of materials in process
or finished product
l DOI = Average inventory/ (COGS/365)

COGS = Cost Of Goods Sold

SCOR is a registered trademark of the “Supply Chain Council”

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 Some strategic level metrics
CUSTOMERS
• Customer acquisition
• Client retention
• Customer satisfaction
• Perfect orders

INTERN PROCESSES
FINANCIAL
(Some examples)
• Sales growth
• Lead time
• Market share Balanced
• Quality improvement
• Return of investment Scorecard
• Returns to inventory
• Revenue
• Order picking accuracy

LEARNING
• Employee retention
• Employee satisfaction
• Employee productivity
• Launch of new products
• Training achievements

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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Benchmarking

l Practice of comparing business processes and performance metrics

with the best in the industry and best practices from other companies

Bhandari, A. & Verma, R.P. (2013). Strategic management: A conceptual framework. New Delhi, India: McGraw-Hill Education

Objectives Without benchmarking With benchmarking

Understanding of
Internally focused competition and proven
Becoming competitive Evolutionary change practices
Defining customer Based on history or gut Market reality Objective
requirements feeling Perception evaluation
Establishing effective Reactive Proactive
goals and objectives Lacking external focus Credible, unarguable
Developing productivity Based on industry best
metrics Least resistance route practices

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 The benchmarking process

Planning Analysis Integration Action

• 1. Identify • 4. Determine • 6. • 8. Develop

what is to be current Communicate action plans
benchmarked performance findings and
gap gain • 9. Implement
• 2. Identify acceptance specific
comparative • 5. Project actions and
companies future • 7. Establish monitor
performance functional progress
• 3. Determine levels goals •
data • 10.
collection Recalibrate
method and benchmarks
collect data

Chen I.J., Paetsch K.A. (1998) Benchmarking: a quest for continuous improvement. In: Handbook of Total Quality Management. Springer, Boston, MA.

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References & Suggested Additional Reading

l Bolstorff, P. (2011). Supply Chain Excellence: A Handbook for Dramatic Improvement

Using the SCOR Model. (3ª ed.). EEUU: AMACOM
l Bhandari, A. & Verma, R.P. (2013). Strategic management: A conceptual framework. New
Delhi, India: McGraw-Hill Education
l Chen I.J., Paetsch K.A. (1998) Benchmarking: a quest for continuous improvement. In:
Handbook of Total Quality Management. Springer, Boston, MA.
l Chopra, S. (2008). Administración de la Cadena de Suministro. (3ª ed.). México: Prentice
Hall / Pearson.
l Gardner, D. (2004). The Supply Chain Vector: Methods for Linking the Execution of
Global Business Models With Financial Performance. EEUU: J Ross Publishing
l Lambert, Douglas M. (2008). Supply Chain Management: Processes, Partnerships,
Performance (3ª ed.). EEUU, Supply Chain Management Institute.
l McCormack, K.(2003). Supply Chain Networks and Business Process Orientation -
Advanced Strategies and Best Practices. EEUU: CRC Press
l O’Marah, K. (2006). Supply Chain Saves the World. EEUU: AMR Research
l Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK:
Kogan Page Limited.

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 5. Logistics: Transport in the supply
chain

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Relationship between logistics and supply chain management

l Logistics is the part of supply chain management that plans,

implements, and controls the efficient, effective forward and reverses
flow and storage of goods, services and related information between the
point of origin and the point of consumption in order to meet customers'
requirements.
Source: Council of Logistics Management (Renamed in 2004 as: Council of Supply Chain Management Professionals)

Inventories

Logistical drivers of supply

Transport
chain performance

Facilities

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Transportation in supply chain

l Movement of of product from one

location to another
l Significant cost driver in most supply
chains
l Up to 10% of some countries GDP,
employing around 15% of the
economically active population.
l Modes of transportation.
l Vary in cost, speed, shipping size,
flexibility
l Insource or Outsourced

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Four stakeholders involved in transportation processes

• Transport equipment
Carrier
• Operating costs

• Minimize transportation costs

Shipper
• Increase customer service level

Infrastructure • Maintenance
owners • Increase capacity

• Prevent monopolistic practices

Government • Promote healthy competition
• Balance environment, energy and social impact

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Transportation strategy

l A supply chain’s success is

closely related to its Responsiveness Eficiency
transportation strategy
l Transportation strategy must
support competitive strategy:
Shorter Reduced
l Responsiveness vs efficiency lead time inventories
l Transportation impacts = =
responsiveness and efficiency Higher Reduced
Revenue costs

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Modes of transportation

Billions of tons - Cents per ton- Average of

E. U. A. % of the total
miles per year mile transported miles

Truck 1,449 32.7 26.2 458

Rail 1,254 28.3 2.26 845

Water 733 16.5 0.74 481 a 1,251

Pipeline 753 17.0 1.46 418 a 766

Air 15 0.3 78 1,000

Multimodal 226 5.1

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 Air Package Carriers
l High fixed costs and relatively l Companies such as FedEx,
low variable costs UPS, DHL
l Packages ranging from letters
to 150 pounds shipments.

l Strengths
l Fastest, low risk
l Key issues
l Hubs available, high cost, small shipments
l Best suited for
l Small, high- value items or time-sensitive emergency shipments that must
travel a long distance

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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Truck

l Strenghts
l Accessible, fast and versatile, good customer service
l Key issues
l Limited capacity, more expensive than rail
l Best suited for
l Local, regional and national shipments. LTL is suited for shipments that are
too large to be mailed as small packages (typically more than 150 lbs.) but
that constitute less than half a TL.

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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 Truck

TL – Truckload LTL – Less than Truckload

Based on: Ghiani G, Laporte G, Musmanno R (2004) Introduction to logistic systems planning and control. Wiley, Chicester

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Consolidation

Advantages
• Larger shipments
• Reduces variation in shipments
size
• Reduces the cost of transportation

Disadvantages
• Reduces responsiveness

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Rail

l Strenghts
l High volume (ton), low cost
l With one diesel gallon
l A train moves a ton 410 miles
l A truck moves a ton 59 miles
l Key issues
l Limited accessibility, inconsistent service,
high damage rates
l Best suited for
l Large shipments that need to travel long
distances

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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Ship

l Strenghts
l Very large loads at very low cost, international capacity
l Key issues
l The slowest, accessibility (Limited to certain geographic areas)
l Best suited for
l Large international shipments and national shipments where rivers and
canals are available.

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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 Pipeline

l Strenghts
l High volume in transit, efficiency, low cost
l Key issues
l limited network
l Best suited for
l Relatively stable and large flows that are required to travel long distances
(used extensively in the oil-and-gas industry)

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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Intermodal
l Using more than one method of transportation to move a shipment to its
destination.
l Examples:

Plant to port

Shipper Port
Truck

Intermodal to port

Truck In-land Port

Shipper Truck
movement

Domestic intermodal

Truck In-land Rail In-land Truck

Shipper movement Customer
movement

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 Transportation planning

Prepare order

Deliver
Prepare for Exports
Manufacture
Transport Decisions
Fulfill order Commercial terms
Pack goods Insurance Select mode
Payment terms Select carrier
Documents Select route

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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International transport: Incoterms 2020

l Incoterms is a set of predefined trade terms published by the International

Chamber of Commerce (ICC)

Any transportation mode

EXW - Ex Works (named place of delivery)
FCA - Free Carrier (named place of delivery)
CPT - Carriage Paid To (named place of destination)
CIP - Carriage and Insurance Paid To (named place of
destination)
DPU - Delivered at Place Unloaded (named terminal at port
or place of destination)
DAP - Delivered At Place (named place of destination)
DDP - Delivered Duty Paid (named place of destination)

Sea and inland waterway transport only

FAS - Free Alongside Ship (named port of shipment)
FOB - Free On Board (named port of shipment)
CFR - Cost and Freight (named port of destination)
CIF - Cost, Insurance and Freight (named port of destination)

"Incoterms" is a registered trademark of the International Chamber of Commerce (ICC)

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 Incoterms 2020: Any transportation mode

S = Seller
B = Buyer

Risks S B B B B B B B B B B B
EXW
Costs S B B B B B B B B B B B
Risks S S B B B B B B B B B B
FCA
Costs S S B B B B B B B B B B
Risks S S B B B B B B B B B B
CPT
Costs S S S S S S S S S S B B
Risks S S B B B B B B B B B B
CIP Costs S S S S S S S S S S B B
Insurance S S S S S S S S
Risks S S S S S S S S S S B B
DAP
Costs S S S S S S S S S S B B
Risks S S S S S S S S S S S B
DPU
Costs S S S S S S S S S S S B
Risks S S S S S S S S S S B B
DDP
Costs S S S S S S S S S S B B

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Incoterms 2020: Sea and inland waterway transport only

S = Seller
B = Buyer

Risks S S S S B B B B B B B B
FAS
Costs S S S S B B B B B B B B

Risks S S S S S B B B B B B B
FOB
Costs S S S S S B B B B B B B

Risks S S S S S B B B B B B B
CFR
Costs S S S S S S B B B B B B

Risks S S S S S B B B B B B B

CIF Costs S S S S S S B B B B B B

Insurance S

Source: International Chamber of Commerce (ICC)

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 Transportation mode selection

Cost Transit time Volume

Service
Accessibility Reliability level

Physical
features of Risk /
Traceability Insurance
the product

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Transportation mode selection: Cost vs Weight

Cost

Parcels

LTL trucking

TL trucking

Weight

Based on: Ghiani G, Laporte G, Musmanno R (2004) Introduction to logistic systems planning and control. Wiley, Chicester

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 Transportation mode selection: Transit time

Average transit time (days)

Railway
12 -

LTL trucking

TL trucking
6-
Air

0 750 1500 2250 3000 3500 Distance

Ghiani G, Laporte G, Musmanno R (2004) Introduction to logistic systems planning and control. Wiley, Chicester

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Transportation mode selection: Volume and distance

100T Road/ Rail/

Road Sea
Rail Sea
Size of Order / load

20T Road/ Rail/

Road Road
Rail Sea
Road/
Pallet Road Road Air/Sea
Rail

Parcel Post/ Post/ Post/ Post/

Road Road/Air Road/air Air

Short Medium Long Very long

Delivery distance

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Transportation mode selection: Product type

MODE PRODUCTS FEATURES PRODUCTS EXAMPLES

Low Volume / High Value Finished

Truck Food, clothing, electronics, furniture
Products

Low value, high volume raw Coal, coke, wood, paper, grains,
Railway
materials chemicals

High value, low volume, time Computers, newspapers, drugs, B2C

Air / Parcel
sensitive finished products deliveries

Low value, raw materials, bulk

Crude oil, minerals, agricultural
Ship products, finished products in
products, textiles, electronics, toys
containers

Pipeline Low value, not time sensitive Oil, gasoline, gas

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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Fleet composition
Demand

Hired vehicles

Owned vehicles

Time

Based on: Ghiani G, Laporte G, Musmanno R (2004) Introduction to logistic systems planning and control. Wiley, Chicester

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 Transportation risk management

Category Risks Mitigation strategies

Product loss • Robbery and theft • Use generic packaging and
• Piracy and kidnapping descriptions
• Unloading • Avoid critical points without law
• Strategic routing
Product • Operator accident • Protective packaging
damage • Poor load handling methods • Establish training programs
• Improper loading equipment • Monitor carrier performance
• Temperature control failure
Pollution • Product handling • Expand automation
• Exposure to hazardous • Block entry to containers
materials • Isolation of dangerous load
• Introduction of illicit
substances

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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Transportation risk management

Category Risks Mitigation strategies

Delays • Congestion • Use event management software
• Bad weather • Employ dynamic redirection tools
• Equipment malfunction • Perform preventive maintenance
Interruption • Capacity shortage • Contract with quality carriers
• Bankruptcy of the carrier • Monitor the carrier's finances
• Work interruptions and • Establish alternative carriers and ports
strikes
Security • Loss of shipping control • Employ load tracking technology
violation • Unprotected transfer • Detect and evaluate vulnerabilities
facilities • Participate in simplified C-TPAT and
• Lax security processes FAST border programs

Based on: Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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 References & Suggested Additional Reading

l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy,

Planning, and Operation. 6th edn, Pearson Education, Essex, NE
l Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh
edition, South-Western Cengage Learning
l Ghiani G, Laporte G, Musmanno R (2004) Introduction to logistic systems
planning and control. Wiley, Chicester
l Rushton, A. (2014). The Handbook of Logistics & Distribution Management
(5th ed.). UK: Kogan Page Limited.

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6. Logistics - Distribution networks

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 Distribution channels and distribution networks

l Distribution channels
l Trading or transaction channel
l Physical distribution
l The steps taken to mobilize and store a product from the supplier to the
customer in a supply chain
l Route
l It is the path along which the product is shipped
l Distribution network
l Physical distribution network

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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Distribution channels and distribution networks: Example

Trading channel Physical channel

Production
Central sales
warehouse
Manufacturer’s
trunk vehicle
Distribution
District sales
center
Third-Party
Carrier
Wholesaler Regional depot

Local delivery

Retailer Store / shop

Consumer

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Distribution channels for customer products

Level Producer Consumers

0

Level Producer Retailers Consumers

1

Level Producer Wholesalers Retailers Consumers

2

Level Producer
Agents or
Wholesalers Retailers Consumers
3 brokers

Lamb, C. (2011). Essentials of Marketing (7ª ed.). EEUU: South-Western College Pub

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Distribution channels for industrial products

Level Producer Industrial

0 users

Level Producer
Industrial Industrial
1 distributor user

Level Producer
Agents or Industrial Industrial
2 brokers distributors users

Lamb, C. (2011). Essentials of Marketing (7ª ed.). EEUU: South-Western College Pub

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 Disintermediation

Agents or
Producer Wholesalers Retailers Consumers
brokers

Producer Retailers Consumers

Producer Consumers

Lamb, C. (2011). Essentials of Marketing (7ª ed.). EEUU: South-Western College Pub

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Distribution networks
Retail store

Retail store
Retail store
Retailers
warehouse
Parcels carrier Broker
Collect Direct delivery
Retail store Cash & carry Production Retail store

Wholesaler’s Manufacturers
warehouse Third warehouse
party

Retail store Retail store

Retail store

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Multichannel
SUPPLIERS

SMC

RDC 1 RDC 2 eFC

STORES STORES

CONSUMERS

Slow-moving goods center

SMC Flow of goods to serve
store channel
Regional distribution center
RDC
Alternative flow of goods to
e-Fulfilment center serve home shopping channel
eFC

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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Role of facilities in the distribution network

l There are 2 types of facilities:

l Production sites
l Distribution sites (Storage, Cross-dock)

l Decisions on facilities:
l Role of facilities
l Location of facilities
l Capacity allocation
l Demand and supply allocation
l Number of facilities

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Typical operations in a storage facility

Receiving

Putaway

Reserve storage

Replensihment

Order picking (and sortation)

Collation, added value services and

packing

Marshalling and dispatch

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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Typical operations in a cross-dock facility

Receiving

Sortation

Marshalling and dispatch

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Influential factors in the selection of the distribution network
Efficiency Responsiveness
Inventory cost Product variety
Inbound transportation cost Product availability
Outbound transportation cost Customer experience
Facilities and management cost Order visibility
Information management cost Returnability

Other Strategic
factors
Technological
Macroeconomic
Political
Infrastructure
Competitive

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Distribution network design

l The type of distribution network is defined by where the product is
stored and how it is delivered

Distributor
Distributor storage with
storage with last-mile
carrier delivery delivery

Manufacturer Manufacturer/
storage with distributor
direct shipping storage with
and in-transit customer
merge pickup

Manufacturer Retail storage

storage with Distribution with customer
direct shipping networks pickup

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Manufacturer storage with direct shipping

Manufacturers

Retailer

Customers

Product flow

Information flows

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Manufacturer storage with direct shipping and in-transit merge

Factories

In-Transit merge
Retailer by carrier

Customers

Product flow

Information flow

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Distributor storage with carrier delivery

Factories

Warehouse
storage by
distributor / retailer

Customers
Product flow

Information flow

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Distributor storage with last-mile delivery

Factories

Distributor /
retailer
warehouse

Customers

Product flow

Information flow

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Manufacturer/ distributor storage with customer pickup

Factories

Cross Dock
Retailer Distribution Center

Pickup sites

Customers

Customer flow
Product flow
Information flow

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Inventory location based on value and volume

Volume of distributed products

Decentralize
High Multiple distribution Regional storage
centers
Local delivery

Low Centralize
Regional storage Global distribution
center
Air shipment
Product
Low High unitary value

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Network configuration changes

Initial configuration New configuration

Local delivery cost

Primary transport cost

DC/depot storage cost Total

logistics
costs
Stock-holding cost

Systems cost

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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Impact of facilities quantity in the distribution network

Response time to customers

Outboud transportation costs

More Inbound transportation costs
Less
facilities facilitites
Facilities costs

Inventory costs

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 Relationship Between Desired Response Time and Number of
Facilities

Required Number
of Facilities

Desired Response time

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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2 distribution centers, response time: 5 days

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 26 distribution centers, response time: same day

Customers

Distribution
center

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Costs based on facilities quantity

Total distribution cost

Primary tansportation cost

Cost

Inventory holding costs

Storage costs

Systems costs

Local delivery costs

Number of DCs/depots

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Framework for Network Design Decisions

Phase I GLOBAL COMPETITION

COMPETITIVE STRATEGY
Supply Chain
INTERNAL CONSTRAINTS Strategy TARIFFS AND TAX INCENTIVES
Capital, growth strategy, existing network

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, scale / scope impact, support Size, growth, homogeneity,
required, flexibility Phase II local specifications
Regional Facility
Configuration
COMPETITIVE ENVIRONMENT
POLITICAL, EXCHANGE RATE AND
AGGREGATE FACTOR AND DEMAND RISK
LOGISTICS COSTS
Phase III AVAILABLE
PRODUCTION METHODS
Skills needs, response time Desirable Sites INFRASTRUCTURE

RESPONSE COSTS Phase IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Phase I: Define a Supply Chain Strategy

Clear competitive strategy

• Set of customer needs that the supply chain aims to satisfy

Supply chain strategy

• Capabilities the supply chain network must have to support the
competitive strategy

Forecast growth and evolution of global and local

competition

Analysis of the competition, economies of scale and

constraints

Objective: Broad distribution network design

Based on: Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Phase II: Define the Regional facility Configuration

Demand • Homogeneous requirements favor large consolidated

forecast by facilities
country or • Requirements that vary across countries favor flexible
region facilities or smaller, localized, dedicated facilities

Role of • If economies of scale are significant, it may be better Objective:

economies of to have a few facilities serving many markets.
scale in Identify regions
reducing costs
where facilities
will be located,
• How close to or far from a competitor’s facility? their potential
Identify
competitors in
• Desired response time for each market roles, and their
each region approximate
capacity

Analyze using • Logistics costs in each region

network • Regional demand, tariffs, economies of scale, and
optimization aggregate factor costs
models • Tax incentives, and any export or import restrictions

Based on: Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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Phase III: Select a set of desirable potential sites

Hard infrastructure requirements

Objective:
Soft infrastructure requirements
Availability of
suppliers Quantitative models Identify a set of
Availability of a skilled
Transportation workforce desirable
services Minimize potential sites
Workforce turnover transportation cost
Communication, within each
utilities Community receptivity (Center of gravity
to business and models) region where
Warehousing facilities industry Consider each facilities are to
facility’s capacity be located
(Capacitated models)
Minimize overall cost
considering other
relevant factors

Based on: Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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 Phase IV: Location Choices

Potential sites Objective:

Select, from among the

potential sites, a precise
location and capacity
allocation for each facility
Location of each
potential site
Response time Scenario-
required by based
customers simulation
Demand
allocation to
facilities

Based on: Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th edn, Pearson Education, Essex, NE.

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3PL (Third party logistics)

l An external supplier that performs all or part of the logistics functions of

a company.

Transportation
Service types

Distribution

Forwarding

Financial
services

Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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 Core competencies of a 3PL

Expertise

Strategic Ability to
fit invest

Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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Developing a relationship with a 3PL

Strategic assessment

Decision to form a relationship

Evaluate alternatives
• Potential partner capabilties
• Company needs and priorities

Select partners

Structure operating model

Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition, South-Western Cengage Learning

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 Difference between 3PL and 4PL
A Fourth-Party Logistics (4PL) provider is a general contractor who manages other
3PLs, truckers, forwarders, custom house agents, and others, essentially taking
responsibility of a complete process for the customer.

1 Seller

2 Buyer

3 3PL 3PL 4PL®*

4 4PL
4
3 3

3 3
1 2
1 2

*The 4PL term was first used and registered as trademark by “Accenture”

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References & Suggested Additional Reading

l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning,

and Operation. 6th edn, Pearson Education, Essex, NE.
l Coyle, J. (2011). Transportation: A Supply Chain Perspective, Seventh edition,
South-Western Cengage Learning
l Heragu, S. (2008). Facilities Design. (3ª ed.). EEUU: CRC Press.
l Lamb, C. (2011). Essentials of Marketing (7ª ed.). EEUU: South-Western
College Pub
l Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th
ed.). UK: Kogan Page Limited.

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 7. Logistics - Inventory
management

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Using inventory to balance demand and supply

Demand Supply

New products Inventory

Backorders Outsourcing

Marketing Procurement

Price Capacity

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 Using inventory to decouple supply chain stages

Protects from: Generates costs:

• Gap between supply • Invested capital
and demand • Damages and thefts
• Demand uncertainty • Obsolescence
• Supply uncertainty • Storage costs
• Processes variability

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Distribution inventory and manufacturing inventory

l Distribution inventory (Independent demand)

l Finished goods aimed to satisfy consumer demand

l Production inventory (Dependent demand)

l Raw materials
l Semi-processed products (WIP - Work in process)
l Components and Sub-assemblies

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 Traditional Replenishment Policies

Independent
demand Dependent demand

Periodic review Continuous review MRP

Reorder Point
(ROP) based on a Reorder Point
fixed review period (ROP) based on a
fixed lot size (EOQ)
or planning cycle

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Periodic Review Policy (Fixed review periods for ROP)

Reorder Point (ROP)

Target
inventory
position
On-hand Inventory

Q3
Q1 Q2

Time

Replenishment
Supplier Replenishment Supplier Replenishment Supplier
lead time (LT) lead time (LT) lead time (LT)

Review period Review period Review period

Fixed period/cycle, different lot sizes

Slack N., A. Brandon-Jones and R. Johnston (2013) Operations Management (7th edition), Harlow (Essex, UK): Pearson Education Ltd

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 Continuous Review Policy (fixed quantity for ROP)

Fixed lot sizes, different periods/cycles

On-hand Inventory
Q=EOQ Q=EOQ

ROP

Reorder
Replenishment Replenishment
Point
(ROP) Time
Supplier lead Supplier lead
time (LT) time (LT)

EOQ = Economic Order Quantity

2×D×S D = Anual demand (units)
EOQ = S = Cost per order ($)
H H = Holding cost ($)

Slack N., A. Brandon-Jones and R. Johnston (2013) Operations Management (7th edition), Harlow (Essex, UK): Pearson Education Ltd

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Costs to calculate lot size

Ordering cost
Holding cost
Total cost
Cost

l Q: Lot size
l Q*: Economic Order
Quantity (EOQ)
l D: Annual demand
l S: Ordering cost
l H: Maintenance cost
per unit
l C: Total cost

Quantity to order (Q)

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 Lot size reduction

Ordering cost
Cost

Holding cost
Total cost

Quantity to order (Q)

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Safety inventory

Inventory Replenishment

Demand Increased
(D) demand

Stock-outs
Reorder avoided by
Point safety inventory
(ROP)

Safety Lead
Stock Lead time Agreed lead time
time
(ss)
(L) Actual lead time Time

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 Safety inventory: factors

Demand
uncertainty (σL)

Product
availability level
Factors (Service level)
influencing safety
inventory size
Supply
uncertainty

Aggregation of
inventory

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Demand uncertainty

l Standard deviation of demand during lead time

!! = " !"
l Standard deviation is calculated in the units given for lead time. If there
is unit incompatibility, it is possible to convert units from standard
deviation.

!! = " [$%&] !"[$%&]

0![#$%&']
!! = " [())*] !"[())*] !"[$%&] = 12

!! = " [+,-.ℎ] !"[+,-./]

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 Product availability level

l Shortages or stockouts
l When an order arrives and the product is not available
l Product availability
l A firm’s ability to fill a customer order out of available inventory
l Product availability metrics:
l Cycle Service Level (CSL): The probability of not having a stockout in a
replenishment cycle
l Fill Rate (fr): Demand percentage that is satisfied from available
inventory at any time
§ Product fill rate: is the fraction of product demand that is satisfied from
product in inventory
§ Order fill rate: is the fraction of orders that are filled from available inventory

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Safety stock with a desired service level

Assumption:
For safety stock calculation,
“actual demand” deviates
“normally” from “forecast”.

Service level = Probability

that inventory will meet
demand during lead time
l Where:
Probability of a
stockout

It is the inverse normal function that can be

calculated with Microsoft Excel with:
“[Link](X)”. Safety stock = f (σ, D, LT, Z)

Reality:
Forecast errors are not
normally distributed

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 Safety stock given a CSL: Example

l Data: Monthly demand (D) 11500

Daily demand (d) 383
Standard deviation of daily demand
(!("[day]) 85
Average lead time for
replenishment
(L) 7
Cycle service level (CSL) 0.95

!# = " !$ = 7 x 85 = 225

%% = &%&' '(" x !# = &%&' (0.95) x 225 = 370 units

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Reorder point

l The reorder point is the inventory level indicating that replenishment

must be requested under continuous review policy
()* = "! + --
"! = Demand during lead time

"! = " ./0- x 2[./0-]

In our example, if supplier lead time was 7 days:

11500
"! = x 7 = 2683 =>?@-
30

()* = "! + -- = 2683 + 370 = 3053 =>?@-

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 If we want a higher service level?

Safety stock size is proportional

to the protection against
CSL ss demand and supply uncertainty.

To reach higher service levels,

0.90 288 safety stock must increase
exponentially
0.95 370
Safety
stock

0.97 423
Service
level
0.0 0.5 1.0
0.99 523

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Determination of the optimum service level

$ Sales
Total Cost
Maximum revenue

Service level
0% 25% 50% 75% 100%

l The level of service that maximizes profit usually lies between the low and high extremes.
l But the common práctice is: A customer service level is set first; then the logistics system
is designed in order to meet that service level at a minimum cost.

Ghiani, G. (2004) Introduction to Logistics Systems Planning and Control G. EEUU: JohnWiley & Sons.

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 Supply uncertainty

l Supply lead times variability

!! = "!"# + $ # %!#
l Where:
l D = Average demand per period
l 3! = Standard deviation of demand per period
l L = Average lead time for replenishment
l SL = Standard deviation of lead time

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Supply uncertainty: example

Monthly demand (D) 11500

l Data
Daily demand (d) 383
Standard deviation of daily demand
(σD[day]) 85
Average lead time for replenishment
(L) 7
Standard deviation of lead time
(SL[day]) 2
Cycle Service Level (CSL) 0.90

"! = DL = (383)(7) = 2683

!! = 2!"# + " # A!# = 7 85# + (2683)# 2 # = 248
-- = E$%& FA2 x !!
-- = DISTR. NORM. ESTAND. INV 0.90 x 248
-- = 317
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 Supply uncertainty: example

l Different standard deviations of lead times:

Average lead time

Standard deviation
for replenishment Safety stock
of lead time (sL[day])
(L)

7 0 288
7 1 296
7 2 317
7 3 350
7 4 392
7 5 440
7 6 492
7 7 547

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Aggregation of inventory

l Less warehouses implicate less safety stock

3' = Aggregate demand

4" ( = Standard deviation of

aggregate demand

4! ( = Standard deviation of
lead time

L= Replenishment Lead Time

ss = Safety stock

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 Aggregation of inventory: example

l With 16 warehouses:
l D= 15 washing machines
l !" = 3 washing machines
l L= 2 weeks
l CSL = 0.90 desired

!# = " !$ = 2 x 3 = 4.243
%%)*+,- = &%&' '(" x !#T = &%&' 0.90 x 4.243 = 5.5
%%*+*./ = 5.5 x 16 = 88

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Aggregation of inventory: example

l With 1 warehouse

55)**+,*)-, = 7$%& 89: x 4!' = 7$%& 0.90 x 16.971 = 22

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 Square root law

l The relationship between an aggregated and a disaggregated safety

stock into "n" equals "the square root of n"

99./0)**+,*)-, 88
55)**+,*)-, = = = 22
C 16
l Aggregation has 2 disadvantages:
l Increased response time to customer order
l Increase in freight cost to customer

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Virtual aggregation

l Information centralization
• Information system that allows access to updated inventory records in
all warehouses

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 Reorder point policies shortcomings

l Based on a forecast (not on actual demand)

l Assumes that actual demand deviates from forecast “normally”
l Uncertainty and the need to increase service level can increase safety
inventory exponentially
l Inventory level oscillates between “too much” and “stock-outs”.
Stock consumed by demand

Replenishment
Frequency

Risk of
losing sales Costs of
due to holding
stock-out stock

Stock-outs Safety stock On-hand

position

0 Re-order Replenishment
point
Based on: C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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Independent vs dependent demand: The need for MRP

Independent demand Dependent demand

Demand

Demand

Time Time
On-hand Inventory

On-hand Inventory

Time Time
Based on: Miller, J. G. & L. G. Sprague (1975) Behind the growth in materials requirements planning. Harvard Business Review, 53(5): 83-91

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 BOM of a chair

Dependent demand Bill of Materials (BOM)

A
Independent Chair
demand
Seat
B (1) C (1)
D (2) E (4)
Chair back Seat
subassembly subassembly Front legs Legs supports

Legs
Chair back supports
segments
G (4)
F (2) H (1) I (1)
Rear legs Chair back
segments Seat frame Seat

Seat frame
Chair Front legs segments
assembly J (4)
Rear legs Seat frame
segments

Prahasto, T. (2008) Modeling Bill-Of-Material With Tree Data Structure: Case Study In Furniture Manufacturer. 3. 10.12777/Jati.3.2.78-82.

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Logic behind traditional MRP

What are we What ingredients do What do we already

planning to make we need to make it? have on hand or on
(and when will we order?
make it)?
MPS BOM INV

Explosion Netting Offsetting Lot sizing

What must we need to get (and when)?

Net requirements

Baker, K.R. (1993) Requirements planning. In: Graves, S.C., A.H.G. Rinnooy Kan, and P.H. Zipkin (eds.) Handbook in
Operations Research and Management Science (Volume 4): Logistics of production and inventory, Amsterdam

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 The need of relying on forecasts when using Traditional MRP

Procurement time Cumulative manufacturing time

Planning Horizon

Sales order
Forecast
visibility

Time
Planning Customers Customers
cycle orders orders
begins placed shipped

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Gross and Net Requirements

Bill of
Amount Gross
Part Description Inventory Material Net requirement
to receive requirement
(BOM)

A High back chair 0 1 100 100

B Chair back sub-assembly 25 1 100 75
F Rear legs 50 15 2 150 85
G Chair back segments 60 4 300 240
C Seat sub-assembly 5 1 100 95
I Seat 10 30 1 95 55
H Seat frame 50 1 95 45
J Seat frame segments 100 4 180 80

D Front legs 40 100 2 200 60

E Legs support 0 4 400 400

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 MRP shortcomings

l A "nervous MRP" system is one that causes excessive changes to low-

level requirements when the master schedule is not changed
significantly.

103FP Small change

204 205

304P 305 306

401P 402P 403P 404P Big change

Steele, D.C. (1975) The nervous MRP system: How to do battle. Production and Inventory
Management 16, Second Quarter, 1-18

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MRP Nervousness causes

Order released in
unplanned quantity

Allocation not
issued in expected Order released
quantity prematurely

Master schedule MRP

changes/Unplanned Parameter changes
demand Nervousness

Heisig, G. (2002) Planning Stability in Material Requirements Planning Systems, Springer-Verlag, Berlin, Heidelberg

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 DDMRP: The evolution of traditional MRP

MPS Planned
Qualified
Resources (Master Demand adjustment Demand
sales order
planning Production forecast factors and forecast
demand
System) ADU

BOM
Inventory Inventory
levels MRP (Bill of
levels DDMRP BOM
Materials)

Planning
and
Materials
Production Suppliers Production execution Suppliers
requirements
based on
buffers

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Comparing traditional ROP replenishment policies with

DDMRP
Stock consumed by demand

Replenishment
Frequency

Risk of losing Costs of

sales due to holding
stock-out stock

Stockout Safety On-hand

stock position
0 ROP Replenishment

Stock consumed by demand

Frequency

Risk of losing Costs of

sales due to holding
stock-out Replenishment stock

SO W W O W W ES On-hand
position
0
Based on: C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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 References & Suggested Additional Reading
l Baker, K.R. (1993) Requirements planning. In: Graves, S.C., A.H.G. Rinnooy Kan, and P.H.
Zipkin (eds.) Handbook in Operations Research and Management Sci- ence (Volume 4):
Logistics of production and inventory, Amsterdam
l Cambridge Business English Dictionary (2011) Cambridge University Press
l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation.
6th edn, Pearson Education, Essex, NE.
l Ghiani, G. (2004) Introduction to Logistics Systems Planning and Control G. EEUU: JohnWiley
& Sons.
l Heisig, G. (2002) Planning Stability in Material Requirements Planning Systems, Springer-
Verlag, Berlin, Heidelberg
l Miller, J. G. & L. G. Sprague (1975) Behind the growth in materials requirements planning.
Harvard Business Review, 53(5): 83-91
l Prahasto, T. (2008) Modeling Bill-Of-Material With Tree Data Structure: Case Study In Furniture
Manufacturer. 3. 10.12777/Jati.3.2.78-82.
l Ptak, C. & Smith, C. (2016) Demand Driven Material Requirements Planning, Industrial Press,
Connecticut
l Slack N., A. Brandon-Jones and R. Johnston (2013) Operations Management (7th edition),
Harlow (Essex, UK): Pearson Education Ltd
l Steele, D.C. (1975) The nervous MRP system: How to do battle. Production and Inventory
Management 16, Second Quarter, 1-18

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8. Bullwhip effect

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 Bullwhip effect and its consequences

l The bullwhip effect is an unwanted increase in variability of material flows over

time through the supply chain as a consequence of small variations in customer
demand.

+10% Customer demand

+18% Retailer demand

+34% Distribution center demand

+45% -3% +12% Factory production output

+51% Factory production demand

Ghiani, G. (2004) Introduction to Logistics System s Planning and Control G. EEUU: JohnW iley & Sons.

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Bullwhip effect causes

l Human behavior l Delays

l Demand forecast updating l Goods flow
l Order batching l Information flow
l Price fluctuation l Financial flow
l Rationing and shortage gaming l Variability
l Complexity
Lee et al., 1997, Sloan Management Review
l Amount of supply chain
participants
l Business processes complexity
l Bill of materials depth and
breadth

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 “Bullwhip” effect term coined

Real case: P&G

Hau Lee

Lee, H. (1997) The Bullwhip Effect In Supply Chains, Sloan Management Review, Spring 1997, Volume 38, Issue 3, pp. 93-102

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Financial impact of Bullwhip Effect

Unfulfilled Reduced
Overstock
orders profit

Delivered orders Overstock

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 First studied

l Jay Forrester, MIT

l “Industrial Dynamics”
Book 1961
l System Dynamics
l Provides insight about
the impact of delays in
the Bullwhip Effect

Image from: X. Li, L. Li, Q. Hu and Y. Dai, "Systems Thinking Solving Bullwhip Effect in Supply Chain: From the Perspective of System
Dynamics," 2009 International Conference on Management and Service Science, Wuhan, 2009, pp. 1-7.

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Impact of delays on the bullwhip effect

Physical Lead Time = 16 days

7 days 2 days 3 days 3 days 1 day

16 + 24
= 40 days

11 days 4 days 7 days 1 days 1 day

Information Lead Time = 24 days

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 System Dynamics Model - typical outcome

Retailer's Order Wholesaler's Order

40 40

30 30
Order

Order
20 20

10 10

0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Week Week

Distributor's Order Factory's Order

40 40

30 30
Order

Order
20 20

10 10

0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Week Week

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Impact of human behavior on the bullwhip effect:

Beer game
l MIT Sloan School of Management
l Early 60s
l Provides insight about the impact of
human behavior in the Bullwhip Effect
Orders sold to
Raw materials customer

Incom ing Order Incom ing Order Incom ing Order

Factory Distributor Wholesaler Retailer
Factory

order Placed order Placed

step 1

order Placed
Current Current Current Current
Inventory Inventory Inventory Inventory

Outgoing Incom ing Outgoing Incom ing Outgoing Incom ing

goods goods goods goods goods goods
Factory
step 2

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 Beer game typical outcome

Campuzano, F. (2011) Supply Chain Simulation: A System Dynamics Approach for Improving Performance, 1st. Ed. Springer-Verlag London

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Dice and matches game min max

average: 3.5
l Eliyahu Goldratt, “The Goal” Book 1984
l Provides insight about the impact of dependency and variability in the
Bullwhip Effect

Initial A B C D E
4 4 4 4 0

Roll the dice

After 1 roll A B C D E
1 6 4 5 1

After 200 rolls A B C D E

23 30 45 25 581

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 Dice and matches game - typical outcome after 200 rolls

Total input = 688 Real output = 581

Units Units

200 days 200 days

Work in progress = 123 l Each dice:

Units
l Min = 1
l Max = 6
l Average = 3.5
l After 200 days
200 days l Expected output = 3.5 X 200 = 700
l Total input = 688 (1 dice)
l Real output = 581 (83% of 700)
Investment not turned into profit l Work in progress = 123 (initially 16)

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Impact of variability on the bullwhip effect

l Demand Variability
l Forecast standard deviation, Mean Absolute Deviation (MAD), or forecast
error variance.
l Supply Variability
l Supply interruptions, supply errors and delivery date deviations.
l Operational Variability
l Random intrinsic processes variability that can be controlled within statistic
limits but can not be eliminated.
l Management Variability
l Variability caused by established norms and policies.

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 Impact of complexity on the bullwhip effect

103FP

204 205

304P 305 306

401P 402P 403P 404P

104FP 104FP 105FP

206 206 205 207 205

307P 305 307P 305 306 308 306

401P 402P 401P 402P 403P 404P 405P 403P 404P

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Replenishment Policies and the bullwhip effect

Periodic Continuous
review review Demand
Forecast
(Time-phased (Consumption based MRP Driven MRP
MRP) -based MRP)

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 References & Suggested Additional Reading

l Campuzano, F. (2011) Supply Chain Simulation: A System Dynamics

Approach for Improving Performance, 1st. Ed. Springer-Verlag London
l Ghiani, G. (2004) Introduction to Logistics Systems Planning and
Control G. USA: JohnWiley & Sons.
l Lee, H. (1997) The Bullwhip Effect In Supply Chains, Sloan
Management Review, Spring 1997, Volume 38, Issue 3, pp. 93-102
l X. Li, L. Li, Q. Hu and Y. Dai, "Systems Thinking Solving Bullwhip Effect
in Supply Chain: From the Perspective of System Dynamics," 2009
International Conference on Management and Service Science, Wuhan,
2009, pp. 1-7.

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9. Introduction to Sales and

Operations Planning (S&OP) /
Integrated Business Planning (IBP)

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 Decision making frequency

At least once a At least once a At least once a

day. Eg: month. Eg: year. Eg:
Material Sales and Strategic
requirements operations planning
planning planning
(S&OP)
Decision making frequency

Time
Operational Tactical Strategic
decisions decisions decisions

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Uncertainty and Decision Making

Placed Orders Forecasts Scenarios

Uncertainty

Time
Operational Tactical Strategic
decisions decisions decisions

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 Human input required for planning

Can be automated Requires Requires

teamwork and leadership to build
problem solving a vision of the
skills future
Human input required

Time
Operational Tactical Strategic
decisions decisions decisions

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Detail level considered in planning

Item reference Product families Company

Detail level

Time
Operational Tactical Strategic
decisions decisions decisions

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 Symptoms of Inadequate Tactical Planning

l Missed customer deliveries l Reduced flexibility and

l Loss of credibility with responsiveness
customers l Higher working capital in
l Lost customers inventories
l Expediting l Late new product introductions
l Higher manufacturing costs l Reduced operational
performance
l Excess overtime
l Premium costs and freight l Reduced financial performance

Palmatier, G. (2002). Enterprise Sales and Operations Planning: Synchronizing Demand, Supply and
Resources for Peak Performance. USA: J. Ross Publishing.

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Functional areas with different planning objectives

Sales and marketing Production

• Develop new products that provide • Meet sales forecasts
greater competitiveness • Minimize costs
• Surpass sales forecasts • Achieve quality objectives

Customer service Distribution

• Maximize availability • Minimize storage costs
• Fulfill every customer order • Maintain inventory under control
• Minimize complaints • Maximize inventory turns

Finance Procurement
• Meet profit goals • Minimize costs
• Achieve corporate commitments • Maintain operation continuity

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 Isolated Planning Processes

Marketing Sales

Finance Operations

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Consequences of Isolated Planning Processes

Over
stock

L
prof ow k- outs
itabi
lity Stoc

Ob d
e s jec Ba tion
los tiv l a s
s re h i p
s

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 S&OP
l Sales and Operations planning is a
process that seeks to align customer
demand with product supply.
l Ambrose, S. & Matthews, L. & Rutherford, B. (2018) Cross-
functional teams and social identity theory: A study of sales
and operations planning (S&OP), Journal of Business
Research, Volume 92, November 2018, Pages 270-278

l Sales and Operations planning is a

process for cross functional decision
making.
l Coldrick, A. & Ling, D. (2011) Sales and Operations Planning,
Ch.20 in Ptak, C. & Smith C. Orlicky's Material Requirements
Planning (3™ ed.). ASA: McGraw-Hill.

l Sales and Operations Planning is a disciplined communication and

decision making process which helps companies achieve excellence
and alignment between all the functions of the organization.
l Palmatier, G. (2009) Integrated Business Planning (Advanced Sales & Operations Planning) An Executive Level
Synopsis, Oliver Wight, White Papers Series

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S&OP / IBP Objectives

l Improve customer service and profitability by balancing demand and

supply.
l Integrate and reconcile isolated planning processes with the
organization’s business strategy.

Sales Marketing Production Distribution Procurement

S&OP

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 Balancing Demand and Supply

Demand Supply

New products Inventories

Backorders Outsourcing

Marketing Procurement

Price Capacity

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The S&OP Monthly Cycle

))
tion

gs) g

hly
etin etin

ont
c

etin tive
olle

ent

ent

ent

me me
nag nd
nag ct

g (m
nag y
em

em

em

me xecu
ma rodu

ma ema
c

ma uppl

(or eam
ata

3. D
2. P

4. S

6. E
5. T
1. D

Integrated reconciliation

Financial appraisal

Based on:
Groves, D. & Herbert, K. Correll, J.(2008) Achieving Class A Business Excellence - An Executive's Perspective, Wiley & Sons, New
Jersey
Coldrick, A. & Ling, D. (2011) Sales and Operations Planning, Ch.20 in Ptak, C. & Smith C. Orlicky's Material Requirements Planning
(3™ ed.). ASA: McGraw-Hill.

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 Typical information required at an S&OP monthly meeting

Sales Profit

This year Last year Forecast This year Last year Forecast

Assumptions in latest view Decisions made since latest meeting

• Expected exchange rate • Pre-agreed actions in team meetings
• Expected market growth
• etc. Risks and opportunities
• Resources constraints
Latest view assumption changes • Market opportunities
• Timing changes • Competitors situation
• Business environment changes • Customer service issues
• etc. • Business environment risks
• etc.
Emerging issues in latest view
• Capacity issues Decisions required
• Market shifts • Recommendations
• Outsourcing needs • Alternatives
• Costs increase • Costs
• etc.

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Integrated reconciliation

Strategical Business
Planning

Reconciliation

Tactical
S&OP

Adjustments

Operational
Operational Everyday issues
planning and changes

Based on: Coldrick, A. & Ling, D. (2011) Sales and Operations Planning, Ch.20 in Ptak, C. & Smith C.
Orlicky's Material Requirements Planning (3™ ed.). ASA: McGraw-Hill.

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 S&OP: Integration Levels

Integration level Description

No integration Each silo develops its own plan
Some internal integration Some silos work together to develop a
plan
Complete internal integration All elements of the internal supply chain
work together to develop a plan
Integration with a customer Customer’s plan is integrated into the
internal supply chain plan
Integration with a supplier Supplier’s plan is integrated with the
internal supply chain plan

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S&OP Process Benefits

l S&OP empowers senior management to take control of the organization

through informed decision making.
l S&OP provides better integration between functions and opens the door
for customer and supplier integration.
l S&OP allows the organization as a whole to be more responsive and
also reduce costs, by anticipating to planned demand and supply
changes.
l S&OP ensures that the financial plan and the operational plan are
aligned.

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 Integrated business planning and other names

l S&OP has been renamed as: “Integrated Business Planning, Integrated

Business Management, Integrated Performance Management, Rolling
Business Planning, Regional Business Management, and Sales
Inventory and Operations Planning to name a few”.
l “Several organizations continue to use the phrase ‘S&OP’, although
stages of maturity are quite different from company to company”.

Strategic planning Brand/Product planning

Customer/Key accounts planning

Mature S&OP
a.k.a. IBP
Demand Planning

Financial Planning Supply Planning

Coldrick, A. & Ling, D. (2011) Sales and Operations Planning, Ch.20 in Ptak, C. & Smith C. Orlicky's Material
Requirements Planning (3™ ed.). ASA: McGraw-Hill.

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Gartner’s S&OP Maturity Model

Stage I Reacting II Anticipating III Collaborating IV Orchestrating

Goals Development of an Demand and supply Profitability Demand sensing, and

operational plan matching conscious tradeoffs for demand
shaping to drive an optimized
demand response.
Cross- Supply Chain driven Supply Chain driven Supply Chain becomes the Business ownership at multiple
Functional process with a strong process for purposes S&OP orchestrator and levels with strong participation
Alignment sales or operational of achieving optimum business functions take from executives and finance.
bias leading to forecast and supply ownership of input, output Collaboration extends beyond
imbalance. Lack of response to demand and results, looking at the enterprise to achieve end-
clarity as to the goal of financial impact of to-end value.
S&OP. decisions
Process and Emerging process, Formal, structured Process tailored to Process becomes balanced,
Technology inconsistent and process. One size fits business model and needs. dynamic and event-driven.
marginally effective. all approach. Tools Dialogue, and start of use Strong connection to strategic
Often more of a sales extend to include of tools, around what-if planning and execution. Tools
review meeting. Tools forecasting, SC analysis for demand also support risk-value
are mainly Excel and planning and inventory shaping, financial tradeoffs, price optimization and
ERP optimization reconciliation and cost to complex simulation.
serve.

Barrett, J. & Uskert, M. (2010), Sales and Operations Planning Maturity: What Does It Take to Get and Stay There?, Gartner

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 Shortcomings of companies without a mature S&OP process

l Siloed information
l Inaccurate forecasts
l Short-term focus
l Lack of collaboration skills
l Limited top management involvement/influence on operation
l Limited What-if modelling
l Limited demand influencing capabilities
l Limited capability to grab business opportunities with short time window
frame.

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References & Suggested Additional Reading

l Ambrose, S. & Matthews, L. & Rutherford, B. (2018) Cross-functional teams and

social identity theory: A study of sales and operations planning (S&OP), Journal
of Business Research, Volume 92, November 2018, Pages 270-278
l Barrett, J. & Uskert, M. (2010), Sales and Operations Planning Maturity: What
Does It Take to Get and Stay There?, Gartner
l Coldrick, A. & Ling, D. (2011) Sales and Operations Planning, Ch.20 in Ptak, C.
& Smith C. Orlicky's Material Requirements Planning (3™ ed.). ASA: McGraw-
Hill.
l Groves, D. & Herbert, K. Correll, J.(2008) Achieving Class A Business
Excellence - An Executive's Perspective, Wiley & Sons, New Jersey
l Palmatier, G. (2002) Enterprise Sales and Operations Planning: Synchronizing
Demand, Supply and Resources for Peak Performance. USA: J. Ross
Publishing.
l Palmatier, G. (2009) Sales & Operations Planning (Integrated Business
Management), An executive Level Synopsis”, Oliver Wight, White Papers Series

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 10. Products and services
management

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What is product management?

Product management is the practice of managing all products in an

organization's portfolio throughout their product lifecycle. Activities within
product management include:
l Analyze customer preferences and segment the market

l Determine marketing strategies

l Analyze competition products and services
l Define innovation and product and service development strategies
l Manage life cycle of products or services (Product Lifecycle
Management - PLM)
l Plan launches and withdrawals
l Evaluate portfolio profitability
l Set product reference prices

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 Economic choice
l Limited company resources are directed to a limited amount of products
in the portfolio.
l Deciding which products are introduced, which remain and which
should be retired is an economic choice.
l Decisions are made based on:
l Strategic objectives
l Profitability

Products

A B C

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Competitive environment analysis - BCG Model

• Low market • High market

share share
• High growth • High growth
and expansion and expansion

Question
marks Stars

Dogs Cash cows

• Low market • High market

share share
• Low growth • Low growth
and expansion and expansion

Fuente: Boston Consulting Group

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 Competitive environment analysis - McKinsey Model

Business Position-Strength
Strong Medium Weak

Protect. Develop
High Invest for Growth
Invest selectively
selectively building
for growth
Market Attractiveness

upon strengths

Invest. The Protect. Develop

Medium organization is and build
selective in niche selectively for Harvest
of product / revenue
service generation

Protect.
Low
Develop for
Harvest or Divest Divest
revenue
generation
Fuente: McKinsey

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Product portfolios are rarely static

l Product diversification is a strategy employed by a company to increase

profitability and achieve higher sales volume from new products
l Product life cycles are becoming shorter due to increased competition
and changing demand
l New product development (NPD) requires input from CRM and SRM
processes

SRM CRM

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 Product life cycle

New Product Planning New Product Introduction Post-Launch Product Management

Concept Feasibility Definition Development Launch Growth Maturity Decline Exit

Break-Even Point
Positive cash flow

Negative cash flow

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Product innovation levels

Real innovations: Totally new product for the world that has created a new market

Completely new product for the world, but for which a market already exists

Completely new product for the company, that offers new features compared to an
existing product from the competition for which a market already exists

New product lines for the company, which compete against fairly similar products on
the market

New product for an existing product line of the company, for which a market already
exists

Significant modifications to an existing company product

Minor modifications to an existing company product

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 Difference between Goods and Services

Intangibility Heterogeneity Inseparability Perishability

• Services • Services are • It is • Services
cannot be as unique as impossible to cannot be
seen, tasted, the costumers disconnect stored, saved,
or touched. receiving the production returned, or
them. of the service resold once
from its rendered to a
consumption. customer.

Lamb, C. (2011). Essentials of Marketing (7ª ed.). EEUU: South-Western College Pub

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Service innovation levels

New services for the market

New services for the company

Services with new processes to

reach customers

Modifications to services

Online services expansion

Services repositioning

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 Postponement

l To postpone or delay a process that can

enable product differentiation.
l Semi-finished products are transformed High
into end products after customer demand
is realized. Before Postponement
l Assets can be used more efficiently in a
dynamic and uncertain environment

Inventory
because forecast of aggregate demand
is more precise than forecast of non-
aggregate demand. So, more cost-
effective processes can planned.
Goal
l Both overstock of and out-of-stocks can
be reduced when products are Low After Postponement
differentiated based on actual demand.
So, overall inventory costs can be Poor Service Excelent
reduced while increasing service level.
l Product and Supply Chain must be
designed for postponement.
Hausman W. H. (2004) Supply Chain Metrics. In Harrison, T. P., Lee, H. L., Neale, J.J. (Eds.) The Practice of Supply Chain Management: Where
Theory and Application Converge. Springer Science and Business Media, USA

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Postponement case: Benetton

Dyeing Knitting

Without
postponement

Knitting Dyeing

With
postponement

Venkatesh, S. H. (2004) Managing Product Varieaty Through Postponement: Concept and Applications. In Harrison, T. P., Lee, H. L., Neale, J.J.
(Eds.) The Practice of Supply Chain Management: Where Theory and Application Converge. Springer Science and Business Media, USA

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 Postponement case: Inditex-Zara

Vanilla box designs

5-8 new
products per
Designers day

12.000 new
products per year

Aftab M.A. , Yuanjian Q & Kabir N .(2017), Postponement Application in the Fast Fashion Supply Chain: A Review, International Journal of
Business and Management; Vol. 12, No. 7

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Product Personalization

l Customers – be they consumers or companies - demand their products

be tailored specifically for them. This trend is causing tech companies,
and their logistics service providers, to go back to the drawing board, re-
think their supply chain operations, and re-write the definition of
postponement.

[Link]-defining Postponement for Technology Products: The “me” Factor, Delivered. The Global Logistics Magazine, November 2015

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 Product Personalization

Customers expect their personalized products to be shipped and delivered within

the same time frame of non-personalized products

Finish (customize)
Low cost Regional and pack product
manufacturing
distribution close to end
overseas
customer

Technology platforms of supply chain members must integrate to communicate

and track order requirements

[Link]-defining Postponement for Technology Products: The “me” Factor, Delivered. The Global Logistics Magazine, November 2015

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References & Suggested Additional Reading

l Aftab M.A. , Yuanjian Q & Kabir N .(2017), Postponement Application in the

Fast Fashion Supply Chain: A Review, International Journal of Business and
Management; Vol. 12, No. 7.
l DHL, Re-defining Postponement for Technology Products: The “me” Factor,
Delivered. The Global Logistics Magazine, November 2015.
l Lamb, C. (2011). Essentials of Marketing (7ª ed.). EEUU: South-Western
College Pub
l Hausman, W. H. (2004) Supply Chain Metrics. In Harrison, T. P., Lee, H.
L., Neale, J.J. (Eds.) The Practice of Supply Chain Management: Where Theory
and Application Converge. Springer Science and Business Media, USA
l Rietze, S. M.(2006) Case Studies of Postponement in the Supply Chain,
Massachusetts Institute of Technology
l Venkatesh, S. H. (2004) Managing Product Varieaty Through Postponement:
Concept and Applications. In Harrison, T. P., Lee, H. L., Neale, J.J. (Eds.) The
Practice of Supply Chain Management: Where Theory and Application
Converge. Springer Science and Business Media, USA

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 11. Demand management

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Demand management process

Planning demand
Prioritizing • Sales forecast
demand • Feedback to sales
• Establish priorities force
based on limited • Sales goals
resources availability • Product availability
for sale

Communicating
Shape / influence demand
demand • Transmit the
• Marketing tactics information for the
• Marketing mix S&OP process
• Pricing strategies • Supply
• Master Scheduling

Crum, C. (2003). Demand Management Best Practices - Process, Principles and Collaboration. EEUU: J. Ross Publishing

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 Sales forecast

l Forecast: Art and science of predicting future events.

l Forecasts error can be reduced, but it can’t be eliminated (No one can predict the future
with 100% confidence)
l Prediction interval: A range of values in which a future observation of demand will fall, with
a certain probability that the range will enclose the actual outcome. The greater the
demand uncertainty, the wider the range.

Historic Forecast
Sales

90% Confidence

68% Confidence

Forecast

Time
Today
Gilliland, M., Tashman, L., Sglavo, U. (2016) Business Forecasting: Practical Problems and Solutions, Wiley and SAS Business Series

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Forecasting Methods

Quantitative
Forecast

Time series Qualitative

• Historic Causal
information Opinion of the
people
• Information External factors
about similar • Experts • Competition actions
products and • Sales force
• Changes in the business
services • Potential environment
• Market customers • Natural disasters
share

Internal factors
• Promotion (prices, marketing,
advertising)
• Releases / Withdrawals
• Closing / Opening of channels or
points of sale

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 Historical data analysis

Actual sales Model Forecast

• Model development
• Model test

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Interpretation of historical information

Frequently Used
Demand Pattern
Forecasting Models

Moving average
Constant

Trend Linear
Regression

Seasonal Holt-Winters

Sporadic Croston

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 Naïve

l Concept:
l Demand for next period will be similar to demand of the latest period

l Mathematical model:
l Last period's actual demand is used as this period's demand forecast

Month Sales Forecast

1 10000
2 12000
3 13000
4 13000

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Moving average

l Concept:
l Demand for next period will be similar to demand of the latest few sales
periods
l Mathematical model:
l Forecast of next period is calculated averaging a predetermined amount of
recent sales periods

Month Sales Forecast

1 10000
2 12000
3 13000
4 11666.67

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 Weighted Moving Average

l Concept:
l Recent sales periods are more relevant than past sales periods.
l Mathematical model:
l Recent sales periods are assigned a greater weighting, whereas past sales
periods are assigned less weighting. The sum of the weight should be equal
to 1 or 100%.

Month Sales Weight Forecast

1 10000 0.17
2 12000 0.33
3 13000 0.50
4 12160

10000X0.17 + 12000X0.33 + 13000X0.50 = 12160

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Forecasting using exponential smoothing

l Concept:
l Demand can be forecasted based on current demand and previous
forecasts

l Mathematical model:

Forecast Current Current

for the next = U × period + 1−U × period
period demand forecast

XℎZ[Z: 1 ≥ U ≥ 0
U = -^__@ℎ?>` a_>-@/>@

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 Forecasting using exponential smoothing

F_>-?.Z[?>` U = 0.1

Forecast
for the next = 0.1 × 16000 + 1 − 0.1 × 10200
period

Month Sales Forecast

1 10000
2 12000
3 13000
4 16000 10200
5 10480

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Forecasting using exponential smoothing

Actual demand Forecast (alpha=0.1) Forecast (alpha=0.8)

35000

30000

25000

20000

15000

10000

5000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

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 Forecasting using linear regression

l Concept:
l A trendline or 'line-of-best-fit' across all past past demand data, can be used
to forecast future demand
l Mathematical model:
l Least-squares method
l Minimizes the vertical distance from the data points to the regression line
Sales

Time

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Forecasting using linear regression

Actual demand Linear (Actual demand)

35000

30000

25000

20000

y = 290.43x + 16786
15000

10000

5000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

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 Forecasting seasonal demand

35000 Seasonal peaks

30000
Trend

25000

20000

15000
Real
demand
10000

5000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

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Decomposition

l Concept:
l Future demand will be a mix of:
l Deseasonalized demand (can be calculated using centered moving average)
l Trend (can be calculated using linear regression)
l Seasonality (multiplicative or additive seasonal factors can be calculated)

l Mathematical model:

Forecast for the Deseasonalized Seasonality

next period
=
demand
+ Trend × factor

Forecast for the Deseasonalized Seasonality

next period
=
demand
+ Trend + factor

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 Seasonal Multiplicative Factors

Sales

| | | | | | | | | | | | | | | |
0 2 4 5 8 10 12 14 16
Period

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Seasonal Additive Factors

Sales

| | | | | | | | | | | | | | | |
0 2 4 5 8 10 12 14 16
Period

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 Centered
Moving Seasonal demand forecast example
Average
Month Sales (CMA) Step 1:
1 10000 Calculate Centered moving average
2 12000 (CMA)
3 13000
4 16000
5 19000 Example:
6 23000
7 26000 18791.67 CMA7=
(Sales1+(2*(Sum(Sales2:Sales12)))+Sales13)/24
8 30000 18866.67
9 28000 18895.83
10 18000 18954.17
11 16000 19100.00 Sales2 to Sales12 are double weighted
while Sales1 and Sales13 are single
12 14000 19266.67
weighted because they are
13 11000 19433.33
14 12800 19516.67
15 12900 19558.33
16 17500 19620.83
17 21000 19683.33
18 25000 19766.67

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Seasonal demand forecast example

Step 2:
Plot CMA and obtain trendline
through linear regression
35000

30000

25000

20000
Sales
Cent ered movi ng average (CMA )
15000 Lineal (Centered m oving average (CMA))

y = 93.002x + 18298
10000

5000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

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 Centered Deseasonali
Moving zed demand Seasonal demand forecast example
Average y = 93.002x +
Month Sales (CMA) 18298 Step 3:
1 10000 18391.002 Calculate deseasonalized demand
2 12000 18484.004 using trendline
3 13000 18577.006
4 16000 18670.008
Examples:
5 19000 18763.01
6 23000 18856.012 Deseasonalized demand 1 =
7 26000 18791.67 18949.014 93.002 X 1 + 18298 = 18291.002
8 30000 18866.67 19042.016
9 28000 18895.83 19135.018 Deseasonalized demand 1 =
10 18000 18954.17 19228.02 93.002 X 2 + 18298 = 18484.004
11 16000 19100.00 19321.022
Deseasonalized demand 1 =
12 14000 19266.67 19414.024
93.002 X 3 + 18298 = 18577.006
13 11000 19433.33 19507.026
14 12800 19516.67 19600.028
15 12900 19558.33 19693.03
16 17500 19620.83 19786.032
17 21000 19683.33 19879.034
18 25000 19766.67 19972.036

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Seasonal demand forecast example

Step 4:
Deseasonali
zed demand Calculate seasonality factors
y = 93.002x + Additive
Month Sales 18298 seasonality
1 10000 18391.002 -8391 Example with Additive seasonality:
2 12000 18484.004 -6484
3 13000 18577.006 -5577.01 Seasonality1 =
Sales1 - Trendline1=
10000 - 18391.002= -8391

Deseasonaliz
ed demand Example with Multiplicative seasonality:
y = 93.002x + Multiplicative
Month Sales 18298 seasonality Seasonality1 =
1 10000 18391.002 0.54 Sales1 / Trendline1=
10000 / 18391.002= 0.54
2 12000 18484.004 0.65
3 13000 18577.006 0.70

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 Seasonal demand forecast example
Deseasonaliz Step 5:
ed demand Seasonal
y = 93.002x + Additive
Calculate deseasonalized demand
Month Sales 18298 Factors to be used on forecast
1 10000 18391.002 -8391.00

13 11000 19507.026 -8507.03

25 12000 20623.05 -8623.05

Forecast
Deseasonalized demand 37 =
37 21739.07 93.002 X 37 + 18298 = 21739.07

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Seasonal demand forecast example

Deseasonaliz Step 6:
ed demand Seasonal
y = 93.002x + Additive
Calculate seasonality factors to be
Month Sales 18298 Factors used on forecast
1 10000 18391.002 -8391.00

13 11000 19507.026 -8507.03

Average (Seasonality1,
25 12000 20623.05 -8623.05
Seasonality13, Seasonality25)
= -8507.03
Forecast

37 21739.07 -8507.03

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 Seasonal demand forecast example

Step 7:
Calculate forecast
Deseasonaliz
ed demand Seasonal
y = 93.002x + factors Forecast37 =
Month 18298 (Additive) Forecast Deseasonalized demand 37 +
37 21739.07 -8507.03 13232.05 Seasonality37=
38 21832.08 -6700.03 15132.05 21739.07 – 8507.03 = 13232.05
39 21925.08 -6393.03 15532.05
40 22018.08 -2619.37 19398.71
41 22111.08 1120.97 23232.05
42 22204.08 4694.63 26898.71
43 22297.09 7601.63 29898.71
44 22390.09 10175.29 32565.38
45 22483.09 8915.62 31398.71
46 22576.09 -1344.04 21232.05
47 22669.09 -3437.05 19232.05
48 22762.10 -5196.71 17565.38

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Seasonal demand forecast example

Step 8: Plot
40000

35000

30000

25000

Sales
20000 Cent ered movi ng average (CMA )
Forecast
Lineal (Centered m oving average (CMA))
15000

10000

5000 y = 93.002x + 18298

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

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 Exponential smoothing in seasonal forecast

Deseasonalized
demand Seasonal
Trend smoothing smoothing
smoothing
• Alfa • Holt • Holt – Winters
• a • Beta • Gamma
• b • g

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Holt Winters (a, b, g)

35 000

30 000

25 000

20 000

15 000

10 000

50 00

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Sales
Ven ta s Forecast
Pron óstico

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 Forecasting intermittent (sporadic) demand

Sales
8

4
Sales
Ventas

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

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Croston method
l Concept:
l Use separate estimates for the probability of demand occurrence and
demand quantity when it occurs.
l Forecast demand interval using most recent interval and exponential smoothing
l Forecast demand quantity using most recent quantity and exponential smoothing
l Mathematical model:
l If no demand occurs in period, both interval forecast, and quantity forecast
remain unchanged.
l If a non-zero demand occurs

Interval Most recent Forecast of most

=U× + 1−U ×
forecast interval recent interval

Quantity Most recent Forecast of most

=U× + 1−U ×
forecast quantity recent quantity

Croston, J.D. (1972) Forecasting and Stock Control for Intermittent Demands. Operational Research Quarterly, 23, 289-303

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 Croston method example:
Non-zero demand occurred in months 17 & 25 (4 = 0.2)
Interval Quantity
Month Actual sales Interval forecast forecast
17 7 6 3.36 3.53
18 0 0
19 0 0
20 0 0
21 0 0
22 0 0
23 0 0
24 0 0
25 3 8 4.29 3.43

Interval
= 0.2 × 8 + 1 − 0.2 × 3.36 = 4.29 4
forecast

Quantity
= 0.2 × 3 + 1 − 0.2 × 3.53 = 3.43
forecast

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Croston method example: forecast updated

Demanda pronosticada
Forecast Ventas
Sales
8

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Interval forecast 4.29

Quantity forecast 3.43

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132
 Causal models: Scatter diagram
120
100
There is correlation
80
IMPORTANT:
60
Correlation does not
40
necessarily imply
20 causality
0
0 100 200 300 400

15

12

9 There is no correlation
6

0
0 100 200 300 400

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Forecasting using multiple regression

l Concept:
l Explore correlation between the historical information of demand and
different factors that could influence it
l The correlation does NOT guarantee the existence of a cause-effect
relationship between a factor and demand
l Example:

Sales Sales vs. Price Sales Sales vs. Advertising

Price Advertising

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133
 Example

Sale of Price Advertising

Week feet ($) ($100s)
1 350 5.50 3.3

2 460 7.50 3.3 Multiple Regression Model:

3 350 8.00 3.0

4 430 8.00 4.5

5 350 6.80 3.0

Sales = b0 + b1 (Price)
6 380 7.50 4.0
+ b2 (Advertising)
7 430 4.50 3.0

8 470 6.40 3.7

9 450 7.00 3.5

10 490 5.00 4.0

11 340 7.20 3.5

12 300 7.90 3.2

13 440 5.90 4.0

14 450 5.00 3.5

15 300 7.00 2.7

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Multiple Regression: Excel (Result)

Sales = 306.526 − 24.975 Price + 74.131(Advertising)

Linear Regression

Regression Statistics
R 0.72213
R - squared 0.52148 0 0.25 0.75 1
Adjusted R - squared 0.44172
S 47.46341
Total number of cases 15 Weak Intermediate Strong
Feet sale = 306.5262 - 24.9751 * Price + 74.1310 * Advertising

ANOVA
d.f. SS MS F p level
Regression 2. 29,460.02687 14,730.01343 6.53861 0.01201
Residual 12. 27,033.30647 2,252.77554
Total 14. 56,493.33333

Coefficients Standard error LCL UCL Statistic t p level H0 (5%) rejected?

Intercept 306.52619 114.25389 57.58834 555.46404 2.68285 0.01993 Yes
Price -24.97509 10.83213 -48.57626 -1.37392 -2.30565 0.03979 Yes
Advertising 74.13096 25.96732 17.55303 130.70888 2.85478 0.01449 Yes
T (5%) 2.17881
LCL - Lower Confidence Levels (LCL)
UCL - Upper Confidence Levels (UCL)

Residual
Observation Predicted Y Residual Standard residual
1 413.79536 -63.79536 -1.45179
2 363.84518 96.15482 2.18819
3 329.11835 20.88165 0.4752
4 440.31479 -10.31479 -0.23473
5 359.08846 -9.08846 -0.20683
6 415.73685 -35.73685 -0.81326
7 416.53116 13.46884 0.30651
8 420.97016 49.02984 1.11577
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Supply Chain 58.84108
Education Alliance1.33904
S.C. International
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478.17458 Alliance S.C.
11.82542 [Link]
0.26911 Supply Chain
[Link] Education Alliance
11 386.1639 -46.1639 -1.05055
12 346.44205 -46.44205 -1.05688
13 455.697 -15.697 -0.35722
268 14 441.1091 8.8909 0.20233
15 331.85415 -31.85415 -0.7249

134
 Forecasting using Machine Learning

Machine learning is a central branch of Artificial Intelligence (AI) that aims

to give computers the ability to learn without being explicitly programmed.

Structured and
Apply learning
unstructured Learning
data to new data

Samuel, A.L. (2000) Some studies in machine learning using the game of checkers, IBM Journal of Research and
Development, 44 (1.2.) , pp. 206-226

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Machine Learning vs Traditional Statistical Models

Find a statistical model that

best reflects reality Apply model to
new data

Real data

Relations between data

(Patterns)

Machine Learning
(Learn the pattern)
Apply pattern to
new data

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 How does a machine learn?

l There are several Machine Learning algorithms (Supervised,

Unsupervised and Reinforcement Learning)
l A popular supervised algorithm used in forecasting is the Decision
Tree algorithm
l Decision trees classify the examples by sorting them down the tree
from the root to some leaf node, with the leaf node providing the
classification to the example.
l Each node in the tree acts as a test case for some attribute, and
each edge descending from that node corresponds to one of the
possible answers to the test case
l In the following example, we use sales data related to temperature to
train our model (the product’s demand is weather sensible).
l In each node, the attribute tested is temperature.
l After the model is “trained” it can be used to “forecast” sales based
on a given temperature.

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Example: Decision Tree algorithm

Sales

100,000
? Node

75,000

Leaf Yesgvalue ?

50,000

Yesgvalue ?

25,000

Yesgvalue Nogvalue

5 10 15 20 25 30 35 40 45 50
Temp
(Celsius)

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136
 Example: Decision Tree algorithm
Sales

100,000
Temp<16

75,000
Sales=
9,500 Temp>40

50,000
Sales=
32,200 Temp>23

25,000
Sales= Sales=
75,600 37,300

5 10 15 20 25 30 35 40 45 50
Temp
(Celsius)

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Qualitative Models
l Based on people’s opinion

Who’s
Models
opinion
Expert panel
Experts
Delphi

People's opinion
Sales force CRM

Potential Market research

customers survey

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 Forecasting demand of new products and services

l There is no perfect methodology

l The best forecast is the result of considering personal judgments and
analytical skills that integrate:
l Data
l Experience
l Inter-functional communication
l Business knowledge
l Relationship with the customer
l It must consider “scenarios” and assume “suppositions”
l It must be thought in ranges and not specific numbers

Kahn, K. B. (2006) New Product Forecasting - An Applied Approach, 1st Ed., M. E. Sharpe, New York

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Impact of aggregation level on forecast accuracy

Granular Forecasts

Accuracy: 59%

Aggregate forecast

Accuracy: 65% Accuracy: 89%

Accuracy: 61%
Negative errors
compensate for
positive errors

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138
 Aggregation Dimensions

Aggregate
Family Country Company (More accurate)

Forecast accuracy
Products Regions Customers

Sales of each Sales of each Sales of each Granular

item store account (Less accurate)

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Impact of information source on forecast accuracy

Demand information is more accurate when the source is closer to the end customer

Delays in information flow translate into demand distortion

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 Forecast accuracy and precision

Accuracy

Precision
Based on: Horton, B. (2016) Accuracy and Precision, Mathematics, edited by Mary Rose Bonk, 2nd ed., vol. 1, pp.
10-12. Macmillan Reference USA

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Forecast performance
Performance measures that Performance measures that
determine accuracy determine accuracy and precision

Mean
Error = Actual error – Forecast error Square
Error

Mean Error Mean Absolute

Deviation

Mean Percentage Mean Absolute

Error Percentage
Error

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 Demand shaping

l Demand shaping: The use of marketing mix tactics to influence baseline

demand volume
l Demand must be shaped considering supply chain responsiveness and
constraints
Product Increase
demand
elasticity

Price
Demand “What-if” Achieve
better market
shaping Analysis share
Promotion
Achieve
profitable
revenue
Place growth

Chase, C. (2016) Next generation demand management _ people, process, analytics, and technology, John Wiley
& Sons, Inc., Hoboken, New Jersey.

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Demand shaping through product management

New product Product life cycle

development management
• Innovative features • Phase-in
• Design for • Phase-out
postponment

Product
portfolio
used to
shape
demand

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 Influencing Demand: Pricing
l The law of demand states that, if all other factors remain equal, the higher
the price of a good, the less people will demand that good.
l Price management is a valuable tool to increase chain profits and achieve a
balance between supply and demand.
l Price elasticity of demand is a measure of the change in the quantity demanded
or purchased of a product in relation to its price change

Inelastic
Factors that make
Elastic
Quantity

Quantity
demand demand demand inelastic
• No substitutes
• Little competition
• Bought infrequently
• Innovative

Price Price

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Demand change over time

Quantity

D0 D1 D2 D3

Price

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142
 Price promotions

l When a promotion is offered during a period, that period’s demand

tends to go up.
Shipments
Consumption

l Sales increase and demand from peak period can be moved to the off-
peak period. But product margin is reduced and logistic costs increase.
during promotion
Additional costs

Additional supplier inventory

Additional transportation
Aditional retailer inventory

Time

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When to launch a promotion?

l Four key factors influence the

Objectives Right time to
timing of a promotion: launch promotion
l Impact of the promotion on Encourage forward Low demand period
demand buying
l Cost of holding inventory Steal market share Peak demand
l Cost of changing the level of period
capacity Market growth Peak demand
l Product margins period

l Mechanisms to meet objectives:

l Promotions based on ”sell-thru" instead of "sell-in"
l Every Day Low Prices (EDLP)

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 Pricing according to market segments
l Offering different prices to multiple customer segments can increase total profits if:
l Prices are determined based on the value perceived by each segment
l Prices are set with barriers such that the segment willing to pay more is not able to pay the lower
price
l Capacity is reserved for the more valuable customer segment
l Forecast at the segment level

Demand Demand

D = 6000-1000*P D = 6000-1000*P

Capacity Capacity

2000 *
$2.00 =
Total revenue: $4,000.00
Total revenue:
3500 *
$2.50 = $8,750.00 $12,000.00
$8,750.00 2000 * $4.00 =
$8,000.00

Price Price
Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Oversell to reduce the impact cancellations

Cancellations
probability

Quantity
to
oversell
Stockouts
probability

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 References & Suggested Additional Reading
l Chase, C. (2013) Demand-driven forecasting _ a structured approach to forecasting, 2nd.
Ed. John Wiley & Sons, New Jersey
l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and
Operation. 6th ed, Pearson Education, Essex, NE.
l Croston, J.D. (1972) Forecasting and Stock Control for Intermittent Demands. Operational
Research Quarterly, 23, 289-303
l Crum, C. (2003). Demand Management Best Practices - Process, Principles and
Collaboration. EEUU: J. Ross Publishing
l Gilliland, M., Tashman, L., Sglavo, U. (2016) Business Forecasting: Practical Problems
and Solutions, Wiley and SAS Business Series
l Horton, B. (2016) Accuracy and Precision, Mathematics, edited by Mary Rose Bonk, 2nd
ed., vol. 1, pp. 10-12. Macmillan Reference USA
l Kahn, K. B. (2006) New Product Forecasting - An Applied Approach, 1st Ed., M. E.
Sharpe, New York
l Samuel, A.L. (2000) Some studies in machine learning using the game of checkers, IBM
Journal of Research and Development, 44 (1.2.) , pp. 206-226
l Sankaran, G., Sasso, F., Kepczynski, R., & Chiaraviglio, A. (2019) Improving Forecasts
with Integrated Business Planning: From Short-Term to Long-Term Demand Planning
Enabled by SAP IBP, Springer, Switzerland
l Vandeput, N. (2018) Data Science for Supply Chain Forecast, Independently published

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12. Supply management

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 Balancing Demand and Supply

Demand Supply

New products Inventories

Backorders Outsourcing

Marketing Procurement

Price Capacity

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Impact of operational parameters in a manufacturing

organization

Sales and
Operational
Demand operations
parameters
planning

Master
Production
Schedule - MPS

Materials
Production Purchase orders
Requirement
orders to suppliers
Planning - MRP

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 Examples of operational parameters considered in aggregate
planning

Machine Inventory on
Subcontracting
capacity level hand

Production
Workforce Overtime
rate

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Aggregate planning strategies

Chase Flexibility Level

strategy strategy strategy
• Using • Using • Using
capacity as utilization inventory
the lever as the lever as the lever

To consider:
• Inventory cost and backlog
• Workforce motivation
• Cost of changes and utilization capacity

Bozarth, C., Handfield, R. (2018) Introduction to Operations and Supply Chain Management, 5th Edition, Pearson, UK

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education,
Essex, NE.

Jacobs, R., Berry, W., Whybark, D., Vollmann, T. (2018) Manufacturing Planning and Control for Supply Chain Management:
The CPIM Reference, Second Edition, McGraw-Hill, USA

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 Aggregate planning using linear programming

Linear programming

l Linear equations
l Decision variables
l Objective Function
l Constraints

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Aggregate planning using linear programming: example

l Data:

Month Demand forecast

January 1600
February 3000
March 3200
April 3800
May 2200
June 2200

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 Aggregate planning using linear programming: example

l Data:
Item Cost
Material cost $10/unit
Inventory holding cost $2/unit/month
Marginal cost of stockout/backlog $5/unit/month
Hiring and training costs $300/worker
Layoffs costs $500/worker
Labor hours required 4/unit
Regular time cost $4/hour = $640/month
Overtime cost $6/hour
Cost of subcontracting $30/unit

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Definition of decision variables

Wt = Workforce size for Month t, t = 1, ..., 6

Ht = Number of employees hired at the beginning of Month t, t = 1, ..., 6
Lt = Number of employees laid off at the beginning of Month t, t = 1, ..., 6
Pt = Number of units produced in Month t, t = 1, ..., 6
It = Inventory at the end of Month t, t = 1, ..., 6
St = Number of units stocked out at the end of Month t, t = 1, ..., 6
Ct = Number of units subcontracted for Month t, t = 1, ..., 6
Ot = Overtime hours worked in Month t, t = 1, ..., 6

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 Creating an Objective Function:

6 6
Minå 640W t + å 300 H t
t =1 t =1
6 6 6
+ å 500 Lt + å 6 Ot + å 2 I t
t =1 t =1 t =1
6 6 6
+ å 5 S t + å10 Pt + å 30 C t
t =1 t =1 t =1

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Identifying constraints

l Workforce size is determined by hires and

layoffs.
W =W t t -1
+ H t - Lt, or

W -W t t -1
- H t + Lt = 0
EℎGHG W = 80.
for t = 1,...,6, donde
0

l The production of each month cannot exceed

capacity.
W =W t t -1
+ H t - Lt, or

W -W t t -1
- H t + Lt = 0
for
IJH
t = 1,...,6, donde W = 80.
0

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 Identifying constraints

l Inventory balance for each month.

I t -1
+ Pt + C t =
D +S +I -S t t -1 t t
,

I + P +C - D - S - I + S
t -1 t t t t -1 t t
= 0,
para EℎGHG I = 1,000,
IJH t = 1,...,6,donde 0

S = 0, y I ³ 500.
0 6

l Overtime per month.

Ot £ 10W t,
10W t - Ot ³ 0,
for t = 1,...,6.
Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Aggregate planning using *Excel Solver

Data to build an aggregate plan

Demand forecast
Month Demand forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200

Costs

Item Cost
Materials cost $ 10/unit
Inventory holding cost $ 2/unit/month
Marginal cost of a stockout $ 5/unit/month
Hiring and training costs $ 300/worker
Layoff costs $ 500/worker
Labor hours required 4/unit
Regular-time cost $ 4/hour
Overtime cost $ 6/hour
Cost of subcontracting $ 30/unit

* Options > Complements > Manage Excel complements> Enable

Analysis and Solver Tools

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 Aggregate planning using Excel Solver

Constraints
Cell Cell Formula Copied to

M5 = D5 - D4 - B5 + C5 M6:M10
N5 = 40 * D5 + E5/4 - I5 N6:N10
O5 =F4 – G4 + I5 + H5 – J5 – F5 + G5 O6:O10
P5 = -E5 + 10*D5 P6:P10

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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Aggregate planning using Excel Solver

Aggregate Plan Decision Variables Constraints
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price Workforce Capacity Inventory Overtime
0 0 0 80 0 1,000 0 0
1 0 15 65 0 1,983 0 0 2,583 1,600 40 0 0 0 646

2 0 0 65 0 1,567 0 0 2,583 3,000 40 0 0 0 646

3 0 0 65 0 950 0 0 2,583 3,200 40 0 0 0 646

4 0 0 65 0 0 267 0 2,583 3,800 40 0 0 0 646

5 0 0 65 0 117 0 0 2,583 2,200 40 0 0 0 646

6 0 0 65 0 500 0 0 2,583 2,200 40 0 0 0 646

0 874 38 0
Aggregate plan costs

Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production
1 0 7,708 41,333 0 3,967 0 0 25,833
2 0 0 41,333 0 3,133 0 0 25,833
3 0 0 41,333 0 1,900 0 0 25,833
4 0 0 41,333 0 0 1,333 0 25,833
5 0 0 41,333 0 233 0 0 25,833
6 0 0 41,333 0 1,000 0 0 25,833

Total cost $ 422,270

Total
revenue $ 640,000
Profit $ 217,730 It is possible to change the
parameters and re-run the Solver

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 References & Suggested Additional Reading

l Bozarth, C., Handfield, R. (2018) Introduction to Operations and Supply

Chain Management, 5th Edition, Pearson, UK
l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy,
Planning, and Operation. 6th ed, Pearson Education, Essex, NE.
l Jacobs, R., Berry, W., Whybark, D., Vollmann, T. (2018) Manufacturing
Planning and Control for Supply Chain Management: The CPIM
Reference, Second Edition, McGraw-Hill, USA

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13. Consensus, prioritization and

strategic planning integration

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 S&OP executive meeting prerequisites

1. Set the foundations in senior management

2. Create agenda

3. Determine participants

4. Determine process, timeline, schedule

5. Define level and horizon of planning

6. Select tools and software

7. Implement performance evaluation

Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in der Konsumgüterindustrie, Springer Fachmedien Wiesbaden;Springer Gabler City

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1. Set the foundations in senior management

l Senior management representative chairs but does not moderate the

meeting.

l Ensures that discussions are always done in the spirit of the company's
results.

l Resolve conflicts between departments in a goal-oriented way.

l Move individual topics that are only of interest to a small group of

participants to detailed discussions following the monthly S&OP
meeting.

Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in der Konsumgüterindustrie, Springer Fachmedien Wiesbaden;Springer Gabler City

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 2. Create agenda

l Current situation
1. Report of assigned tasks in the previous meeting
2. Exposure of current operational problems
l Review
3. Forecast accuracy evaluation
4. Production performance
5. Trends
6. Service level
7. Material availability
l Anticipation
8. Sales forecast
9. Capacity management
10. Sales strategy based on the forecast

Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in der Konsumgüterindustrie, Springer Fachmedien Wiesbaden;Springer Gabler City

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3. Determine participants

Senior
management
(CFO, COO
...)
IT Controller

Procurement
S&OP SCM

meeting
Planning Sales

Production Logistics

Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in der Konsumgüterindustrie, Springer Fachmedien
Wiesbaden;Springer Gabler City

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 4. Determine process, timeline, schedule

l Dates set for 12 months from the beginning.

l The documents and information that will be discussed at the meeting
should be available on a shared platform with access authorization.
l Recurring structure
l Focus on the discussion of atypical situations and the proposed
solutions to address them (Administration by exception).
l Ideally, a secretary creates the minutes directly in the session and then
distributes them both to the session participants and to those who do
not attend but who need the results for their daily work.

Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in der Konsumgüterindustrie, Springer Fachmedien Wiesbaden;Springer Gabler City

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5. Define level and horizon of planning

l Product aggregation by groups or families

l It is important to master the balancing act between too high level of detail
and too much aggregation that does not provide enough information.

l Medium-term planning horizon

l Between 3 and 24 months (in exceptional cases, even more)
l It depends on the influencing factors, such as lead or manufacturing times.
l The most frequently used horizons are 12 and 18 months.

Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in der Konsumgüterindustrie, Springer Fachmedien Wiesbaden;Springer Gabler City

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 6. Select tools and software

l It is important to ensure the highest possible degree of automation that

provides valuable data and analysis.

l It is convenient to invest in technological tools that minimize manual

data preparation.

l Initial IT investments can be amortized over time, or reduced by using

SAS applications.

Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in der Konsumgüterindustrie, Springer Fachmedien Wiesbaden;Springer Gabler City

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7. Implement performance evaluation

• Identify KPIs, tolerance ranges for alerts and actions when an alert is triggered

Strategic Emphasis Focus Key indicators

approach

Customer service, forecast variability

Cost leadership A single data set Volume and cost and stability, Assets usage, cost
reduction

Account executives activity, Volume, margin

Customer retention, revenue per
Customer sales planning, impact of growth, seize
customer or channel, customer
Relationship promotions, customer opportunities, identify
profitability
segmentation risks
Very closed marketing to
operations, investment or Contribution of new products to revenue
Product / recovery decisions, and margin, time in which new products
Volume and margin
service prediction of new activity, generate profits, margin by product /
Risks vs. Opportunities
differentiation risk management, strong brand / category, brand position, market
product portfolio share
management

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 Consensus

Promotions Seasonality

Different
Key
time customers
horizons

Different
levels of
Demand Capacity or
supply
aggregation planning constraints

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Consensus: Top down vs Bottom up

Start at the
aggregate
level of Start at the detailed level of
product products and points of sale
portfolio
Co

Top down Bottom up

n se

(constrained by (unconstrained by
supply) supply)
nsu
s

Supply driven planning

Demand
(allocated to products and driven
stores based on demand planning
prioritization)

Kepczynski, R., Dimofte, A., Jandhyala, R., Sankaran, G., Boyle, A. (2019) Implementing Integrated Business Planning - A Guide Exemplified With
Process Context and SAP IBP Use Cases, Springer

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 Top down vs Bottom up Demand Planning

Division: Division:
Dairy [?] Dairy [1000]

Brand: Brand: Sour Brand: Brand: Sour

Yogurts [300] Cream [200] Yogurts [600] Cream [400]

Top-down
Bottom-up
SKU: SKU:
SKU: Sour SKU: Sour
Strawberry Strawberry
[200] Cream [200] [400] Cream [400]

SKU: Cherry SKU: Cherry

[100] [200]

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Consensus: inputs
Quantitative

Quantitative
constraints

constraints
Qualitative

Qualitative
Factors

Factors

Factors

Factors
Supply

Supply

Top Down Planning

Consensus Consensus
S&OP S&OP Monthly
meeting meeting adjustments
Bottom Up Planning

Customer Customer
requirements requirements

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 Demand prioritization

l Prioritization based on:

l Most profitable portfolio
Placed orders products
l Strategic products
l Preferred customers
Accepted
orders l Supplier constraints
l Own constraints
l Profitability

Orders that can

be fulfilled

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Demand prioritization

l Prioritization Policies l Prioritization processes

l Define risk levels l Meet demand with higher
l Establish who sets priorities profitability
based on each level l Seek the optimal balance
l Set limits based on supply between fullfilment costs and
constraints customer service
l Establish sequence of l Avoid losing orders
fulfillment based on priorities l Offer compliance at another
time (demand-shifting)
l Offer substitute products

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 Strategic planning reconciliation

Strategic Business
planning

Reconciliation

Tactical
S&OP

l Understanding of recent changes and their impact on the current

situation
l What is the impact on the strategic agenda?
l What actions must be taken to achieve strategic objectives?

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References & Suggested Additional Reading

l Kepczynski, R., Dimofte, A., Jandhyala, R., Sankaran, G., Boyle, A.

(2019) Implementing Integrated Business Planning - A Guide
Exemplified With Process Context and SAP IBP Use Cases, Springer
l Lütke Entrup, M. & Goetjes, D. (2019) Sales & Operations Planning in
der Konsumgüterindustrie, Springer Fachmedien Wiesbaden;Springer
Gabler City

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 14. Supply Chain Relationships

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Relationship management
Suppliers

Own organizations
Customers
Procurement

Marketing
Logistics

Service
Production

Sales

Relationships within the organization

(SRM) Supplier Relationship Management

Customer Relationship Management (CRM)

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 Relationship management

Corporate strategies
review

Develop guidelines to Identify customer /

share benefits of supplier segmentation
process criteria and their value
improvements

Establish relationship Guidelines for product

metrics and service contracts

Lambert, D. (2008).Supply Chain Management: Processes, Partnerships, Performance. (3ª ed.). EEUU: Supply Chain Management Institute.

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Relationship levels

Increase the level of:

• Trust
• Transparency
• Loyalty
• Iterdependence
• Common goals
• Mutual benefits
• Relationship focus
• Risk sharing
• Outcomes focus
• Alignment
• Synergy
• Innovation
Coordination Cooperation Collaboration

Tony Lendrum, T. (2011). Building High Performance Business Relationships: Rescue, Improve, and Transform Your Most Valuable Assets. EEUU: Wiley

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 Relationship levels

Communication Coordination Cooperation Collaboration

and information
• Communication • Coordination + • Cooperation +
exchange and information • Synchronization • Joint planning
• Adversarial exchange + oriented to the • Use information
relationships • Greater same goal to “create”
• High cost of efficiency • Teamwork something new
ensuring • Components (synergy)
fulfillment and synchronization • Share
quality • Elimination of technology and
redundant Know How
processes • Share
responsibilities,
risks and
rewards

Höhn, M. (2010) Relational Supply Contracts: Optimal Concessions In Return Policies for Continuous Quality Improvements.
1st ed. 2010. Lecture Notes in Economics and Mathematical Systems, number 629, Springer, Germany

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Relationship levels

Collaboration
Cooperation
Coordination
100
% of value

95 C

B
80

50
A

% of customers /suppliers

0 20 50 75 100

80% of a company’s value comes from

about 20% of its customers /suppliers

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 Value of relationship with an ally

t
en
s m
se ve
es pro
oc m
pr d i
in an
r gy
ne
Sy

Trust and commitment

Relationship length

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Gaining opportunities awareness

Business objectives

Market opportunity Business resources

Peter Cheverton-Key Account Management - Tools and Techniques for Achieving Profitable Key Supplier Status-Kogan Page (2008)

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 To manage a relationship

l We must be clear:
l At the company level, what do we want from this ally?
l What kind of behavior do we want to influence in this ally?
l How do we want to structure the relationship with this ally?
l How do we ensure that we are internally aligned when dealing with this ally?
l What are the appropriate tools and schemes to manage interaction with this
ally?

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Supply chain relationship tools

High

The Diamond
Supplier’s strategic intent

supplier’s team
“frustration
zone” Cotton-
Reel

One-on-
many
The
customer’s
Bow-tie “frustation
zone”
High
Low Customer’s strategic intent
Adapted from a model first developed by AF Millman, and KJ Wilson (1994)

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 ’Bow-tie’ relationship

Buyer Seller

R&D R&D

Operations Operations

Marketing Marketing

Logistics Logistics

Account Account
manager manager

McDonald, M, Millman, AF, and Rogers, B (1996) Key Account Management: Learning from supplier and customer perspectives, Cranfield University
School of Management

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‘One-on-many’ relationship

Buyer Seller

R&D R&D

Operations Operations

Marketing Marketing

Logistics Logistics

Account
manager
McDonald, M, Millman, AF, and Rogers, B (1996) Key Account Management: Learning from supplier and customer perspectives, Cranfield University
School of Management

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 ‘Cotton-reel’ relationship

Buyer Seller

R&D R&D

Operations Account manager Operations

+
’Specialist’ to
Marketing Marketing
‘Specialist’

Logistics Logistics

McDonald, M, Millman, AF, and Rogers, B (1996) Key Account Management: Learning from supplier and customer perspectives, Cranfield University
School of Management

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Diamond team relationship

Buyer Seller

R&D R&D

Operations Operations

Marketing Marketing

Logistics Logistics

Account manager Account manager

McDonald, M, Millman, AF, and Rogers, B (1996) Key Account Management: Learning from supplier and customer perspectives, Cranfield University
School of Management

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 Diamond type relationship challenges

Buyer Seller
l People working to ‘tangential
agendas’
R&D R&D
l The absence of an opposite
number Operations Operations

l Bureaucracy M arketing M arketing

l Recognize the true costs Logistics Logistics

Account m anager Supplier m anager

McDonald, M, Millman, AF, and Rogers, B (1996) Key Account Management: Learning from supplier and customer perspectives, Cranfield University
School of Management

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Agreements / Contracts

Production
cost

Supplier

Wholesale Replenish- Replenish-

payment ment ment order

Buyer / Retailer

Sale price Sales Demand

Customer

Financial Materials Information

Höhn, M. (2010) Relational Supply Contracts: Optimal Concessions In Return Policies for Continuous Quality Improvements. 1st ed. 2010. Lecture
Notes in Economics and Mathematical Systems, number 629, Springer, Germany

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 Agreement types

Parameters Specification of decision rights

Pricing
Minimum purchase commitments
Quantity flexibility
Buy-back on return policy
Allocation rules
Lead time
Quality
Horizon length
Periodicity of ordering
Information sharing

Höhn, M. (2010) Relational Supply Contracts: Optimal Concessions In Return Policies for Continuous Quality Improvements. 1st ed. 2010. Lecture
Notes in Economics and Mathematical Systems, number 629, Springer, Germany

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Some types of supply agreements

Quantity
Wholesale price Price discount discount
contract contract contract
Supplier

Quantity
Buy-back Flexibility Revenue
contract Contract sharing contract Buyer / Retailer

Contracts to
Contracts to Contracts to induce Customer
motivate sellers coordinate costs performance
improvements F M I

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

Höhn, M. (2010) Relational Supply Contracts: Optimal Concessions In Return Policies for Continuous Quality Improvements. 1st ed. 2010. Lecture
Notes in Economics and Mathematical Systems, number 629, Springer, Germany

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 Agreements negotiation

Acceptable range to customer

Zone of Mutual
Agreement
(ZoMA)

Acceptable range to supplier

Most Desirable Most Desirable

Less Desirable Less Desirable Outcome
Outcome
Outcome (LDO) Outcome (LDO)
(MDO) by (MDO) by
by supplier by customer
customer supplier

Jonathan O'Brien, J., (2016) Negotiation for Purchasing Professionals provides purchasers and their team, 2nd Ed., Kogan Page, UK

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Claiming value or creating value

ZoMA

Customer Supplier Customer Supplier

Claiming value
Creating value

Jonathan O'Brien, J., (2016) Negotiation for Purchasing Professionals provides purchasers and their team, 2nd Ed., Kogan Page, UK

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 Agreements aimed to claim value or to create value

Claiming value Creating value

Zone of Mutual Agreement Both parties agree to

Scope for agreement
(ZoMA) expand required effort

win / win
Agreement WIN / win win/win
win / lose

Parties work together to

Implementation Parties claim their benefits
realize benefits

Jonathan O'Brien, J., (2016) Negotiation for Purchasing Professionals provides purchasers and their team, 2nd Ed., Kogan Page, UK

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Relational contracts

l Relational contracts are informal agreements sustained by the value of future

cooperation.
l In a long-term business relationship partners often expect a level of performance and
flexibility that goes well beyond contractual requirements.
l A formal contract may provide a reasonable starting point. But the key to success will
be the ability of the supply chain partners to adapt to specific circumstances without
incessantly insisting on contractual agreements.
l A relational contract is an infinitely repeated trust game. Choosing “Trust” and not
choosing “Betray” may be more beneficial in the long run.

Supplier / Honor
Trust
customer
Customer /
supplier
Not trust Betray

Höhn, M. (2010) Relational Supply Contracts: Optimal Concessions In Return Policies for Continuous Quality Improvements. 1st ed. 2010. Lecture
Notes in Economics and Mathematical Systems, number 629, Springer, Germany

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 Relational contract reward

l Partners involved in a relational contract will make a tradeoff between

their short-term and long-term interests.
l The higher the value of the relationship, the more likely the relationship
will continue

Taking advantage of the partner provides a

short-term payoff. But a long-term
Payoff $

relationship provides a long-term payoff

Defection Cooperation

Punishment

Time
Höhn, M. (2010) Relational Supply Contracts: Optimal Concessions In Return Policies for Continuous Quality Improvements. 1st ed. 2010. Lecture
Notes in Economics and Mathematical Systems, number 629, Springer, Germany

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Relationship obstacles

• Local optimization within functions or stages of a supply chain

Incentive Obstacles • Sales force incentives

Information-Processing • Forecasting based on orders and not customer demand

Obstacles • Lack of information sharing

• Orders in large lots

Operational Obstacles • Large replenishment lead times
• Rationing and shortage gaming

• Lot-size-based quantity discounts

Pricing Obstacles • Price fluctuations

• Lack of understanding of impact in other stages

• Reaction to current local situations rather than trying to
identify the root causes
Behavioral Obstacles • Blaming other stages
• No stage of the supply chain learns from its actions
• Lack of trust
Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 References & Suggested Additional Reading

l Cheverton, P., (2008) Key Account Management - Tools and Techniques for
Achieving Profitable Key Supplier Status-Kogan Page
l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning,
and Operation. 6th ed, Pearson Education, Essex, NE.
l Höhn, M. (2010) Relational Supply Contracts: Optimal Concessions In Return
Policies for Continuous Quality Improvements. 1st ed. 2010. Lecture Notes in
Economics and Mathematical Systems, number 629, Springer, Germany
l Lambert, Douglas M. (2008). Supply Chain Management: Processes,
Partnerships, Performance (3ª ed.). EEUU, Supply Chain Management Institute.
l Lendrum, T. (2011). Building High Performance Business Relationships:
Rescue, Improve, and Transform Your Most Valuable Assets. EEUU: Wiley
l McDonald, M, Millman, AF, and Rogers, B (1996) Key Account Management:
Learning from supplier and customer perspectives, Cranfield University School
of Management
l O'Brien, J., (2016) Negotiation for Purchasing Professionals provides
purchasers and their team, 2nd Ed., Kogan Page, UK

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15. Customer Relationship

Management (CRM)

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 Customer Relationship Management
l CRM - Customer relationship management
l Supply chain process that provides the structure for how relationships with
customers are developed and maintained.

Review of corporate
and marketing
strategies

Develop guidelines
to share benefits of Identify customer
process segmentation
improvements with criteria
customers

Contract
Set performance differentiation
metrics
guidelines

Lambert, D. (2008).Supply Chain Management: Processes, Partnerships, Performance. (3ª ed.). EEUU: Supply Chain Management Institute.

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Customer relationship environment

Product or
service

Other customers Distribution

Customer

Competitors Service / support

Based on: Gummesson, E. (2008) Total Relationship Marketing: Marketing Management, Relationship Strategy and CRM Approaches for the
Network Economy, 3rd edn.

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 Importance of CRM

Marketing and
sales force
capture new Up-sell
customers Cross-sell

Competition

Customers with Customer

positive base
Dissatisfaction
experiences drives away
recommend the existing
product / service customers

Competition

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Customer segmentation based on value

e
al
rs
pe
y
lit
bi
ita
of
Pr
Number of sales

Relationship lenght

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 Retention value

Increase trust and

relationship level
More interactions
offer more Issue referrals to
opportunities for
cross-sell and up- other clients
sell

Acquiring clients Loyal customers

costs more than Profitability are less price
retaining them sensitive

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Customer profitability analysis

Several customers produce a loss,

C even on a variable cost basis
100
Cumulative percentage of profit

B
Many lower-profit customers at least cover
their costs

A few important customers make a huge

A
contribution to profit

0 100
Cumulative percentage of customers

Christopher, M., Payne, A. and Ballantyne, D. (2001), Relationship Marketing: Creating Stakeholder Value, Oxford, Butterworth - Heinemann

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 Operational CRM

Marketing Sales Service

Attract Acquire Sell Understand Retain Retire

Potential
Target One-time Recurring High value Low value
customers
market customers clients customers customers
(Leads)
Up-Sell
Cross-Sell
Lost to
Recover competition

Based on: Payne, A. (2005). Handbook of CRM: Achieving Excelence in Customer Management. Reino Unido, Elsevier

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Acquisition

Campaign
response
• Is there a
No:
qualified Dead
opportunity?
email
Potential
customer
Lead Yes: Convert
Phone call

Business card /
events
Account

Web form

Data base
Contact(s) Opportunity(ies)

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 Converting Leads into Opportunities

Calls

Dates
Sales force
Tasks
Account
Cases

Documents

Contact(s) Opportunity(ies)

$$$
Sale

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Qualifying Leads

Leads
Each qualified sales
opportunity:

Qualification • Expected date

• Amount to be sold
• Probability to close deal
Opportunities (used to calculate
weighted amount)

Weighted Sales Pipeline

Based on: [Link]

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 Pipeline used for demand planning

Global
forecast

Aggregate Aggregate Aggregate

Forecast 1 Forecast 2 Forecast 3 Required to forecast:
• Weighted amount
Sales representative 1 • Expected date
Pipeline
Opportunity 1
Sales representative 2
Pipeline Account 1 Opportunity 2

Sales representative 3
Account 2 Opportunity 3
Pipeline

Sales representative 4 Account 3

Pipeline

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Retention

Calls

Dates
Sales force
Tasks
Account
Cases

Documents
Analysis
Operations / Service
New contacts for
same account Contact(s) Opportunity(ies)

New opportunities
for same account

Referred potential
customers
Potential
customer

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 CRM types

Operational
CRM

RM An
aly
tiveC tica
ora l CR
llab M
Co

Based on: Payne, A. (2005). Handbook of CRM: Achieving Excelence in Customer Management. Reino Unido, Elsevier

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Analytical CRM

Insight Sought What to do

What will
happen
Why did it Prescriptive
happen analytics
What has Predictive • Optimization
happened analytics analysis
Diagnostic • Machine • Decision
analytics learning automation
Descriptive • Root-cause • Model • What-if
analytics analysis building scenario
• Reports • Drill-down • Forecasting analysis
• Dashboards • Data
• Visualization discovery
for decision • Data mining
making • Correlations
• Identify
outliers
Based on Gartner's analytics maturity model

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 Role of CRM in demand planning

+ Sales quantity
+ Sales
+ Sell higher margin products
+ Profit
+ Production efficiency
- Expenses
+ Logistic efficiency

Value$ + Advanced order visibility

- Inventory improve demand planning

- Safety stock
- Assets
Improve fixed assets utilization

Improve current assets (cash-to-cash cycle)

Lambert, D. (2008). Supply Chain Management: Processes, Partnerships, Performance. (3ª ed.). EEUU: Supply Chain Management Institute.

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References & Suggested Additional Reading

l Christopher, M., Payne, A. and Ballantyne, D. (2001), Relationship

Marketing: Creating Stakeholder Value, Oxford, Butterworth -
Heinemann
l Gummesson, E. (2008) Total Relationship Marketing: Marketing
Management, Relationship Strategy and CRM Approaches for the
Network Economy, 3rd edn.
l Lambert, Douglas M. (2008). Supply Chain Management: Processes,
Partnerships, Performance (3ª ed.). EEUU, Supply Chain Management
Institute.
l Payne, A. (2005). Handbook of CRM: Achieving Excelence in Customer
Management. UK, Elsevier

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 16. Supplier Relationship
Management (SRM)

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Supplier Relationship Management

l SRM - Supplier relationship management

l Supply chain process that provides the structure for how relationships with
suppliers are developed and maintained.
Review of
corporate,
manufacturing and
supply strategies

Develop guidelines
to share benefits of Identify supplier
process segmentation
improvements with criteria
suppliers

Contract
Set performance differentiation
metrics guidelines

Lambert, D. (2008).Supply Chain Management: Processes, Partnerships, Performance. (3ª ed.). EEUU: Supply Chain Management Institute.

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 Supplier relationship environment

• Prices
• Added value
Suppliers • Integration
• Supplier development

External
environment

• Supply sources
• Available technologies
• Economic environment
Internal environment

• Budget
• Requirements
• Demand
• Capacities

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Activities associated with supplier relations

Strategic
Sourcing

Tactical Procurement

Purchasing
Operational

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 Supply strategy

Supply strategy

Supplier Commodity Process

Risk management
management management management

Sourcing Purchasing
S2C P2P
Source to Contract Procure to Pay

Based on: Weigel, U., & Ruecker, M. (2017). The Strategic Procurement Practice Guide. Springer. Germany; and
Dragan M., Nagy V., (2014) New procurement model, p.926-933, from Markovic A., Rakocevic S.B., Proceedings of the XIV International Symposium
SYMORG

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Activities associated with supplier relations

Analyze demand
Analyze expense Identify needs
and own Create requisition
capacities

Identify supply Channel

sources authorizations

Sourcing Purchasing
Define a supply Create purchase
strategy cycle S2C cycle P2P order

Qualify, select
and develop Manage shipping
suppliers
Evaluate Process invoice
performance and and pay
relationship value Receive goods /
Manage contracts services

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 Value of supplier relationship

s
t se
en ces
em ro
ov p
pr nd
im y a
rg
ne
Sy

Trust and commitment

Relationship length

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The classic supplier relationship approach

l Traditionally, there were several suppliers available for obtaining one component. It was
easy to substitute one supplier with another.
l Price and quality were some of the driving forces for choosing a supplier.

Supplier M
Supplier N
Supplier L Supplier B
Supplier A Component X Supplier C
Component Y
Component X Supplier D
Component Y

A wide-range
enterprise

Östring, P. (2004) Profit-Focused Supplier [Link]: AMACOM

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 The new supplier relationship approach

l Relationships are strategic. An increasing number of suppliers are more like partners, not
merely suppliers for certain components.
l There are more complex products and the supplier’s ability to change with its customer is
increasingly important.
l Suppliers are creating networks made up of fewer suppliers delivering complete products
to a company
l The entire supply chain must be flexible to enable the focused enterprise to succeed.

A focused supplier
Supplier A Partner B Supplier E
Cooperation and purchases in different areas
Supplier B
Product Y

Supplier C Supplier D A focused

Component X Component Y enterprise

Östring, P. (2004) Profit-Focused Supplier [Link]: AMACOM

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Supplier evaluation

Delivery
Replenishment Performance in Frequency /
Supply flexibility
lead time lead times Minimum Order
Size

Incoming Capacity to
Supply quality transportation Price terms coordinate
cost information

Collaborative Exchange rates,

Supplier viability
design capacity taxes, tariffs

Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 Suppliers selection by product type: Kraljic model

High Leverage Items Strategic Items

Exploitation of full Diversify, Long-term

Profit Impact purchasing power relationships

Non-critical Items Bottleneck Items

Reduce costs with

Ensure required
standarization and
volume
automation

Low Supply risk High

Kraljic, P. (1983) Purchasing must become Supply Management, Harvard Business Review, Sep-Oct, pp. 109-117

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Supplier segmentation

l Separate those suppliers that really matter from the overwhelming

number of suppliers a company usually has.
l Define how the Company should interact with suppliers based on
performance and strategic potential

Harvest Influence Integrate

Improve Sustain Invest

Mitigate Develop Bail out

Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship Management: How to maximize vendor value and
opportunity. Apress.

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 Supplier segmentation based on performance

l Performance axis: There are a number of supplier-performance variables that potentially

matter to a customer.
l At the highest aggregation level, these include time (e.g., on-time, in-full deliveries); cost
(e.g., savings vs. the previous period); and quality (e.g., number of implemented
improvement ideas in the period).
Number of suppliers

Time
Cost
Low Medium High Quality
5% 90% 5%
Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship Management: How to maximize vendor value and
opportunity. Apress.

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Supplier segmentation based on performance and strategic

potential
l Strategic potential axis: The relevance the supplier can have in relation
to the execution of the company’s strategy.
l A supplier with high strategic potential should hold the key to a
competitive advantage for the company like: Growth, Innovation, Scope
& Collaboration
Number of suppliers

Low High
Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship Management: How to maximize vendor value and
opportunity. Apress.

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 Supplier relationship management based on supplier
segmentation

High value relationships

Ordinary relationships

Problematic relationships

Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship Management: How to maximize vendor value and
opportunity. Apress.

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Ordinary relationships

3%
Harvest

54% 31.5%
Improve Sustain

Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship Management: How to maximize vendor value and
opportunity. Apress.

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 Problematic relationships

3% 1.75% 0.25%
Mitigate Develop Bail out

Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship Management: How to maximize vendor value and
opportunity. Apress.

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High value relationships

1.75% 0.25%
Influence Integrate

4.5%
Invest

Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship Management: How to maximize vendor value and
opportunity. Apress.

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 Outsourcing

Outside of
location
(Offshore)

Inside of
location

Insource Outsourcing
Allocation or reallocation of Act of moving some of a firm’s
resources internally within internal activities and decision
the same organization responsibilities to outside
providers

Marc J. Schniederjans, Ashlyn M. Schniederjans, Dara G. Schniederjans-Outsourcing and Insourcing in an International Context-M E Sharpe Inc (2005)

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Insourcing Cost-Benefit Ratio

Costs Benefits

Increased
labor cost
relative to Loyal
outsourcing workforce
competition

Unable to
compete with Control of
firms that production
outsource activity

Marc J. Schniederjans, Ashlyn M. Schniederjans, Dara G. Schniederjans-Outsourcing And Insourcing in an International Context-M E Sharpe Inc (2005)

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 Outsourcing Cost-Benefit Ratio

Costs Benefits

Loss of control of Reduced cost of

activity activities

Reporting/accounting Reduced risk in

problems operations

Employee Greater diversification

resentment/bad morale of activities

Marc J. Schniederjans, Ashlyn M. Schniederjans, Dara G. Schniederjans-Outsourcing And Insourcing in an International Context-M E Sharpe Inc (2005)

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Outsourcing from a resource perspective

Organizational
resources Strategy
attributes

Gaps Outsourcing

Information Information
System (IS) System (IS)
Resources Capabilities

Cheon, Myun Joong & Grover, Varun & Teng, James. (1995). Theoretical perspectives on the outsourcing of information
systems. Journal of Information Technology - J INFORM TECHNOL. 10. 209-219. 10.1057/jit.1995.25.

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 Outsourcing

Outsource
Uncertainty
Insource
Characteristics of
processes that are
candidates for
outsourcing:
Outsource • High uncertainty
Outsource
Insource vs • Low
Insource Outsource Insource volume/frequency
• Low assets
Volume/ Assets speciatization
Frequency specialization requirement

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Outsourcing

Quadrant 1 Quadrant 2
• Activities that interfere with • Failing or broken Candidates for
customer purchase processes or activities.
decision; must stay in- Getting a third party outsourcing:
house involved could make things • Processes in
worst.
Quadrants 3 and 4

Quadrant 3 Quadrant 4
• Healthy noncore business • Adequate (but not broken)
activities; good candidates noncore business
for outsourcing activities, could be
enhanced through
outsourcing

Dominguez, L. (2006). The Manager's Step-by-step Guide to Outsourcing. EEUU: McGraw-Hill

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 Outsourcing management

Set goals and KPIs

• Contract - related
• Budget
• Management Information
System (MIS)

Review and redefine Track performance

• Operations • Metrics
• Strategic improvement
• Meetings
• KPIs
• Audits

Identify opportunities:
• Operational re-adjustment
• Future improvement

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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Outsourcing supplier selection

3. Identify potential RFI= Request for information

service providers RFP= Request for proposal

2. Identify type of service 4. Produce RFI and

required shortlist

1. Review scope for 5. Prepare and issue

outsourcing RFP

10. Manage ongoing 6. Tender evaluation and

relationship comparison

9. Mobilize and 7. Contractor selection

implement and risk assessment

8. Contract
determination

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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 Dedicated or multiuser outsourcing

Dedicated Multiuser
• Organization and resources focused • Scale economies gained by sharing
Advantages exclusively on the customer resources between a number of clients
• Specialism and loyalty of staff • Consolidation of loads enable higher
• Specialism of depot, handling delivery frequency
equipment and delivery vehicles • Opportunity to find clients with different
• Confidentiality of customer’s product business seasonality to maximize
specifications/promotional activity utilization of assets
Disadvantages

• Total costs of the operation borne by the • Conflicting demands of each customer
sole customer can compromise service
• Off-peak seasonal under-utilization of • Staff do not gain specialist customer
resources knowledge
• Equipment is not specialized and may
not exactly meet individual customer’s
requirements

Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page Limited.

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Associated outsourcing risks

Reduced Lack of data

The process Customer / and
has problems Supplier confidential
Contact information

Loss of
Underestimate internal Ineffective
coordination capacity and
cost power growth contracts
of third party

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 Supplier relationships value

+ price + perceived value

+ Sales
+ Order fill rates

- Goods costs
+ Margin
- Quality costs

- Process costs
- Costs
- Workforce
Value $
- Management costs

- Non-compliance costs
- Current
assets - Inventories
- Investment
- Required assets
- Fixed
assets
+ Capacity utilization
Lambert, D. (2008).Supply Chain Management: Processes, Partnerships, Performance. (3ª ed.). EEUU: Supply Chain Management Institute.

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References & Suggested Additional Reading

l Cheon, Myun Joong & Grover, Varun & Teng, James. (1995). Theoretical perspectives on the
outsourcing of information systems. Journal of Information Technology - J INFORM TECHNOL. 10.
209-219. 10.1057/jit.1995.25.
l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed,
Pearson Education, Essex, NE.
l Dominguez, L. (2006). The Manager's Step-by-step Guide to Outsourcing. EEUU: McGraw-Hill
l Kraljic, P. (1983) Purchasing must become Supply Management, Harvard Business Review, Sep-Oct,
pp. 109-117
l Lambert, Douglas M. (2008). Supply Chain Management: Processes, Partnerships, Performance (3ª
ed.). EEUU, Supply Chain Management Institute.
l Östring, P. (2004) Profit-Focused Supplier [Link]: AMACOM
l Rushton, A. (2014). The Handbook of Logistics & Distribution Management (5th ed.). UK: Kogan Page
Limited.
l Schniederjans, M., Schniederjans, A., Schniederjans, D., (2005) Outsourcing And Insourcing in an
International Context-M E Sharpe Inc
l Schuh, C., Strohmer, M. F., Easton, S., Hales, M. D., & Triplat, A. (2014). Supplier Relationship
Management: How to maximize vendor value and opportunity. Apress.
l Weigel, U., Ruecker, M. (2017) The Strategic Procurement Practice Guide_ Know-how, Tools and
Techniques for Global Buyers-Springer International Publishing

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 17. Supply chain collaboration tools

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Supply chain collaboration

Incentive
Alignment
Decision Resource
Synchronization Sharing

Goal Collaborative
Congruence communication

Quality of
Information
Supply chain Joint Knowledge
Sharing collaboration Creation

Cao, M., Zhang O. (2013) Supply chain collaboration: Roles of Interorganizationnal Systems, Trust, and, Collaborative Culture, Springer, Verlag
London

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 Supply chain collaboration tools selection

1980s 1990s 2000s 2010s

Demand Driven
DDSC Supply Chain

Collaborative Planning
CPFR
Forecasting and Replenishment
VMI Vendor-Managed Inventory

ECR Efficient Consumer Response

CRP Continuous Replenishment Program

QR Quick Response

Adapted from:
Davis, E. (2003) The Extended Enterprise - Gaining Competitive Advantage through Collaborative Supply Chains, FT Press
Sabath RE, Autry CW, Daugherty PJ (2001) Automatic replenishment programs: The impact of organizational structure. J Bus Logist 22(1):91–105

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“Quick Response” (QR) in the fashion industry

Understanding
Sourcing Forecasting
Design
fabric & Planning
New season of customer
Pre-production garment design preferences &
accesories Scheduling
behaviour

Production First sales

through Distribution before selling Demand signal:
plants Network POS data
season
network

Production Distribution High value sale

Replenishment based on for selling For selling before end of season
Point of Sale (POS) data season season mark-down
Based on: MacCarthy, B. (2010) Fast Fashion: Achieving Global Quick Response (GQR) in the Internationally Dispersed Clothing Industry,
Springer

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 “Efficient Consumer Response (ECR)” in the Fast Moving
Consumer Goods (FMCG) industry

Scheduling of Demand signal:

Forecasting &
Distribution Store Orders
planning based Customer
Center (DC) based on
on historical
orders to inventory and purchases
retailer data
suppliers POS data

Demand signal:
Order
DC Orders to
acknowledgement
suppliers

Supplier
Advanced shipments scan
shipment notice & Cross-dock
prior to shipment
Replenishment
shipments to
stores

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Continuous Replenishment Program (CRP)

Forecasting & Demand signal:

planning based Product activity Customer
on historical record (sales purchases
retailer data and inventory)

Order Demand signal:

acknowledgement Order to supplier

Direct store
delivery
Replenishment
Based on: Yao, Y. and Dresner, M. (2006) The inventory value of information sharing, continuous replenishment, and vendor-managed inventory, Elsevier

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 Vendor-Managed Inventory (VMI)

Forecasting & Demand signal:

planning based Product activity Customer
on historical record (sales purchases
retailer data and inventory)

Order triggering.

Inventory &
Fulfilment planning

Direct store
delivery
Replenishment
Based on: Yao, Y. and Dresner, M. (2006) The inventory value of information sharing, continuous replenishment, and vendor-managed inventory, Elsevier

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VMI benefits

VMI benefits for the

VMI benefits for the retailer
manufacturer

• Lower inventories ($) raw • Less stockouts or OOS

material and finished (Out-of-Stocks)
product • Actual market information
• Better planning • Lower inventory in own
• Actual market information channels
• Closer relationship with • Lower replenishment
customer costs

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 VMI success factors

l Commitment and trust between the parties

l Effective information systems and good information quality (Electronic
Data Interchange - EDI, barcodes, Radio Frequency Identification -
RFID)
l Competent manufacturers (high response and forecasting capacity)

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Collaborative Planning, Forecasting and Replenishment

(CPFR)

Joint business plan

Retailer forecast Purchases

Manufacturer
forecast
Market knowledge

Agreement on joint sales forecast

Agreement on replenishment orders plan

Orders fulfilment

Exception management

Performance assessment
CPFR is a Registered Trademark of VICS, Voluntary Interindustry Commerce Standards (VICS) Association, now part of GS1.
Detailed information on VICS and GS1 websites.

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 Frequent problem in retail industry

Manufacturer Retailer Customer

Orders Regular demand

Orders Promotion
$ $ $ $ $ $
$ $ $ $

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Ahead planning need

Purchase time Total manufacturing time

Planning horizon

Orders
Forecast
visibility

Start of the Placed orders by Orders

Time
S&OP monthly
planning customers shipped to
cycle
cycle customers
(mo eting tive
ent

ent

ent
nag nd

etin (or
t
ma roduc

ma upply

me xecu
m
em

em

em
ma ema

gs)
ion

ly)
me eting
coll ata

e a
nag

nag

nth
ect

6. E
5. T
1. D

3. D
2. P

4. S

me

Reconciliation with strategic planning

Financial appraisal

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 Knowing future orders in advance

Purchase time Total manufacturing time

Planning horizon

Forecast Orders visibility

Start of the Placed orders by Orders

Time
S&OP monthly
planning customers shipped to
cycle
cycle customers

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Knowing future orders in advance

Supplier / Manufacturer Customer / Retailer

l More alternatives to satisfy l More qualified orders

demand l More ranges in order size
l Higher service level l More on-time deliveries
l Better return on marketing l Higher replenishment accuracy
investments l Compliance with promotions
l Visibility of promotions
l Lower stockouts at Point of
performance
Sale (POS)
l Lower costs
l Higher sales
l Higher sales

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 CPFR and S&OP
CPFR
S&OP manufacturer S&OP retailer

(mo eting tive

(mo eting tive

nt age d
Planning

nt age d

nt nage t

g r
me

me

me
ma eman
nt nage t

ma roduc
g r

ma upply
me

me

me

etin (o
Analysis

ma eman
ma roduc

ma upply

me xecu
etin (o

me eam
me xecu
me eam

on

6. E s)

ly)
6. E s)
on

nt age
coll ata

me ting
ly)
nt age
coll ata

me ting

ecti

nth
ecti

3. D
nth

2. P

4. S

5. T
3. D

1. D
2. P

4. S

5. T

e
1. D

e
Reconciliation with strategic planning Reconciliation with strategic planning
Financial appraisal Financial appraisal

Forecasting
Replenishm ent

Purchase time Total manufacturing time

Planning horizon

Forecast Orders visibility

Time
Start of the Placed orders by Orders
S&OP monthly
planning customers shipped to
cycle
cycle customers
Source: Voluntary Interindustry Commerce Standards (VICS) Association

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CPFR® - Collaborative Planning, Forecasting and Replenishment

Manufacturer
Account
Customer
Planning Planning
Analysis Scorecard
Collaboration
Performance
arrengement
assessment
Vendor
Market
Executing Supplier Management
Planning
Monitoring Scorecard Joint
Exception
Category Business
Management
management Plan
Store
execution Retailer
POS
Forecasting
Logistics /
Distribution Sales
Order Forecasting
fulfillment Buying / Re-
Replenishment
Buying Market Data
Logistics / planning
Analysis
Distribution Order Order
generation Planning /
Forecasting
Replenishment Production & Demand Forecasting
Supply Planning
Planning

Ireland, R. K. and C. Crum (2005) Supply Chain Collaboration: How to Implement CPFR and Other Best Collaborative Practices. Boca Raton,
FL: J. Ross Publishing

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 Benefits

l S&OP benefits l CPFR benefits

l Forecast accuracy increase: l Sales increase: 10% to 30%
18% to 25% l Margin increase: 2% to 6%
l Sales revenue increase: 10% to l On-Stock increase: 2% to 7%
15%
l Inventory reduction: 10% to
l On-time deliveries 30%
improvement: 10% to 50%
l On-time deliveries
l Inventory reduction: 18% to improvement: 5% to 10%
46% l Forecast accuracy increase:
l Safety stock reduction: 11% to 20% to 30%
45% l Logistics cost reduction: 10% to
l Productivity increase: 30% to 28%
45% l Source: VICS
l Source: Oliver Wight

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Why can CPFR fail?

l Too much work to obtain results

l It is necessary that the account be significant for both parties (Relationship
value)
l Products with low demand variability do not benefit
l CPFR has value for products with high demand uncertainty
l Short life cycle
l Competitive categories
l Seasonal variability
l Highly promoted
l Low quality forecasts
l Lack of systems integration
l Benefits are determined by the speed at which you respond to alerts with
actions

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 VMI vs CPFR

High
S&OP
(Sales & Operations Planning)
VMI +
(Vendor CPFR

Demand variability
Management (Collaborative Planning,
Inventory) Forecasting and
Replenishment)

Statistical
forecasts

Low
• Order size for replenishment
Low • Lead time per order High
• Relationship value

Mendes, P. (2011). Demand Driven Supply Chain: A Structured and Practical Roadmap to Increase Profitability.

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Power balance

High
Supplier dominance Collaboration
Supplier concern to retailer

VMI CPFR

CRP

ECR

QR

Low Independence Retailer dominance

Low High
Retailer concern to supplier

Based on: Jonah, T. and Hui-Ming, W. (2003) VMI: a survey of the Taiwanese grocery industry. J. Purchasing Supply Mgmt, 9: 11–18.

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 DDSC – Demand Driven Supply Chain

Sense

Translate

Supply Demand Driven Demand

Shape

Response

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Demand Driven Materials Requirements Planning (DDMRP)

Manufacturing
orders / Placed
Orders to orders Customer
suppliers Strategically
positioned buffers purchases

Replenishment

Supplier Demand
relationships /
Visibility tools
sensing
Buffer adjustments

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 References & Suggested Additional Reading

l Cao, M., Zhang O. (2013) Supply chain collaboration: Roles of Interorganizationnal

Systems, Trust, and, Collaborative Culture, Springer, Verlag London
l Davis, E. (2003) The Extended Enterprise - Gaining Competitive Advantage through
Collaborative Supply Chains, FT Press
l Ireland, R. K. and C. Crum (2005) Supply Chain Collaboration: How to Implement CPFR
and Other Best Collaborative Practices. Boca Raton, FL: J. Ross Publishing
l Jonah, T. and Hui-Ming, W. (2003) VMI: a survey of the Taiwanese grocery industry. J.
Purchasing Supply Mgmt, 9: 11–18.
l MacCarthy, B. (2010) Fast Fashion: Achieving Global Quick Response (GQR) in the
Internationally Dispersed Clothing Industry, Springer
l Mendes, P. (2011). Demand Driven Supply Chain: A Structured and Practical Roadmap to
Increase Profitability.
l Sabath RE, Autry CW, Daugherty PJ (2001) Automatic replenishment programs: The
impact of organizational structure. J Bus Logist 22(1):91–105
l Yao, Y. and Dresner, M. (2006) The inventory value of information sharing, continuous
replenishment, and vendor-managed inventory, Elsevier

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18. Information systems and digital

supply chain

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 Information systems

Business
Challenges
• Rapid expansión through acquisitions
People • Lack of customer knowledge
• Fragmented customer data

Information Business
Organization System Solutions

• Consolidate customer • Increase revenue

and vendor data • Increase productivity
Technology
• Identify customers and
sales opportunities

Laudon, K. (2011). Essentials of Management Information Systems. 9a Edición. EEUU: Prentice Hall

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Impact of information systems in trhe supply chain

l Information systems can increase profits by improving key processes

and making the supply chain either more responsive or more efficient.

$
Profit margin

Sales

Costs

Responsiveness
0% 25% 50% 75% 100%

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 Data and information value

Data Information Knowledge Intelligence

•What •Data relationships •Know-how •Make decisions

•When •Meaning •Know-why •Control actions
•Where •Purpose •Know-what
•Who
•etc.

Data analytics

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Applications for supply chain management 1960 - 1970s

Materials Requirements Planning

Production
schedule Inventory levels

Suppliers MRP Customers

BOM

B (1) C (1) D (2) E (4)

F (2) G (4) H (1) I (1)

J (4)

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 Applications for supply chain management 1970s - 1980s

Manufacturing Resources Planning

MRP II

Inventory Forecast

Costs MRP Purchasing

Production MPS

Based on:
Langenwalter, G. A. (1999). Enterprise resources planning and beyond integrating your entire organization. Boca Raton, FL: St. Lucie Press

Ross, D.F. (2002). Introduction to e-supply chain management: Engaging technology to build market-winning business partnerships. Boca Raton, FL:
CRC Press.

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Applications for supply chain management 1980s - 1990s

Enterprise Resources Planning

ERP

Human Inventory Forecast Finance

resources

Costs MRP Purchasing

Production MPS

MES
EDI VMI

Based on:
Langenwalter, G. A. (1999). Enterprise resources planning and beyond integrating your entire organization. Boca Raton, FL: St. Lucie Press

Ross, D.F. (2002). Introduction to e-supply chain management: Engaging technology to build market-winning business partnerships. Boca Raton, FL:
CRC Press.

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 Applications that complement ERP systems

Collaboration and e-
Planning Operation
commerce
• DSS: Decisions • WMS: Warehouse • VMI: Vendor
Support System Management Managed
• APS: Advance System Inventory
Planning and • TMS: Transporting • CPFR:
Scheduling Management Collaborative
• S&OP: Sales and System Planning
Operations • CRM: Customer Forecasting and
Planning Relationship Replenishment
• SS: Strategic Management • EDI: Exchange
Supply • SRM: Supplier Data Information
• SCM: Supply Relationship • B2B: Business to
Chain Management Business
Management • WFM: Work Force • B2C: Business to
Management Consumer

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Applications that complement ERP systems

APS
BI WMS SRM SS

TMS CRM
S&OP ERP CPFR
EDI VMI

DSS SCM
WFM

B2B B2C

Based on:
Langenwalter, G. A. (1999). Enterprise resources planning and beyond integrating your entire organization. Boca Raton, FL: St. Lucie Press

Ross, D.F. (2002). Introduction to e-supply chain management: Engaging technology to build market-winning business partnerships. Boca Raton, FL:
CRC Press.

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 Customer relationship management (CRM) applications

Operational CRM Analitical CRM Knowledge

• Perceive - what
Data: customer does
Sales, Marketing,
Organization, • Remember – what
Customer analysis,
service and order customer have done
interpretation over time
processing
(data mining) • Learn – what
customer remember
• Decision making -
business intelligence
Act

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Supplier Relationship Management (SRM) applications:

One to many model

Seller

Seller
Buyer

Seller

Seller Corporate Buy-

Side System

Seller

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 Supplier Relationship Management (SRM) applications:
Independent portal model
Buyer Buyer

Independent
Portal

Seller Seller Seller

Seller

Seller Seller Seller

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Warehouse Management System (WMS) applications

Replenishment
Planning
Storage
Work management
Cross-Dock

Picking

Maquila

Receipt Packaging and dispatch

Permanent inventory control

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 Transport Management System (TMS) applications
Features of
TMS

Performance
Optimization Execution management

Route
Optimization & Integrated Track and
Consolidation WMS trace

Mode and
carrier Integrated EDI Visibility
Selection

Integrated Business
audit and Inteligence and
payment Analysis
module

Multi-modal
transportation
facility

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Data quality

Accuracy

Integrity

Consistency

Data quality Totality

Validity

Opportunity

Accessibility

Automatic data capturing technologies:

l Bar code l Voice recogition
l RFID l OCR
l GPS l Cameras / imagers / object
recognition

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 Digital Supply Chain

Supply Chain Emerging digital Digital supply chain

processes technologies processes

• Speed
• Flexibility
• Transparency
• Connectivity
• Intelligence

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Emerging digital technologies

Self-driving vehicles
Supply chain transformation level

IoT (Internet of Things)

Artificial Intelligence (AI)
Big Data analysis
Additive Manufacturing /
3D Printing
Unmanned aerial vehicles

Low-cost sensor solutions Distributed ledger and blockchain

Augmented reality

Present Future
Based on: Chung, G., Gesing, B., Chaturvedi, K., Bodenbenner, P. (2018) Logistics Trend Radar, DHL Customer Solutions & Innovation,
Germany

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 Big data analysis

Volume

Big
data
Variety Velocity

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Data in Demand Driven Supply Chain

DSR
(Demand Signal
Repository)

Cold / Ingestion Data

Analysis
warm every month, warehouse / takes hours
week or day Data marts
Data
Ingestion
every day, Real time
Hot Data hour or
Data lake
analytics
second

Based on: Sharma, V. (2019) The Cloud-Based Demand-Driven Supply Chain, Wiley, New Jersey

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 Data Warehouse

OLTP Processing (Write)

ERP Data

CRM Data

Other data sources

ETL
Data Warehouse OLAP Processing
(Extract-Transform-Load) (read)

Data Marts

Based on: Sharma, V. (2019) The Cloud-Based Demand-Driven Supply Chain, Wiley, New Jersey

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Data Lake

ESP (Event Stream Processing)

Structured and semistructured data

Any scale data ”raw” data

(in its native format, without transforming)
Big Data

Dashboards and visualizations

Big Data processing
Data Lake
Real time analytics
Machine learning

Data structure in Data Lake is not defined until it is needed

Based on: Sharma, V. (2019) The Cloud-Based Demand-Driven Supply Chain, Wiley, New Jersey

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 Artificial Intelligence

Artificial intelligence
• Computers imitate
human behavior

Machine learning
• Computers improve
their tasks through
experience

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Machine Learning

Machine learning is a central branch of Artificial Intelligence (AI) that aims

to give computers the ability to learn without being explicitly programmed.

Structured and
Apply learning
unstructured Learning
data to new data

Samuel, A.L. (2000) Some studies in machine learning using the game of checkers, IBM Journal of Research and
Development, 44 (1.2.) , pp. 206-226

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 Machine Learning vs Traditional Statistical Models

Find a statistical model that

best reflects reality Applying model
to new data

Real data

Relations between data

(Patterns)

Machine Learning
(Learning the pattern)
Applying pattern
to new data

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Advantages and disadvantages of Machine Learning

Advantages Disadvantages

• Able to handle complex mathematical • Requires large processing capacities

algorithms

• Automatic pattern recognition • An expert must determine the

(conclusions without human characteristics with which the model
intervention) must be fed

• Can process a large quantity of • Requires quality data in large quantities

structured and unstructured data

• Models can be retrained, adapting to • Greater accuracy at cost of greater

changing conditions complexity

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 Machine learning examples in supply chain

Relations Planning Logistics

• Customers and • Data cleaning • Sale floor

Suppliers • Demand replenishment
evaluation forecast • Warehouse
• Chatbots • Balance management
between • Self-driving
supply and vehicles
demand
• Risk analysis

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Distributed ledger / Blockchain

VS

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 Blockchain in supply chain

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Internet of Things – IoT: Events

Supplier 3PL events: Manufacturer Distributor Retailer Customer

events: What? events: events: events: events:
What? When? What? What? What? What?
When? Where? When? When? When? When?
Where? Why? Where? Where? Where? Where?
Why? Why? Why? Why? Why?

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 Internet of Things - IoT

IoT
Platform

Connected Connected Connected Connected Connected Connected

raw materials transportation manufacturing facilities Points of Sale products and
and supplies units assets customers

Supplier 3PL Manufacturer Distributor Retailer Customers

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Demand Driven MRP (DDMRP) applications

101

204 203 201

Quantity Quantity
304P 303P 302 301

404P 403P 402 401P

Time 501P Time

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 References & Suggested Additional Reading

l Chung, G., Gesing, B., Chaturvedi, K., Bodenbenner, P. (2018)

Logistics Trend Radar, DHL Customer Solutions & Innovation, Germany
l Langenwalter, G. A. (1999). Enterprise resources planning and beyond
integrating your entire organization. Boca Raton, FL: St. Lucie Press
l Laudon, K. (2011). Essentials of Management Information Systems. 9a
Edición. EEUU: Prentice Hall
l Ross, D.F. (2002). Introduction to e-supply chain management:
Engaging technology to build market-winning business partnerships.
Boca Raton, FL: CRC Press.
l Samuel, A.L. (2000) Some studies in machine learning using the game
of checkers, IBM Journal of Research and Development, 44 (1.2.) , pp.
206-226
l Sharma, V. (2019) The Cloud-Based Demand-Driven Supply Chain,
Wiley, New Jersey

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19. Lean Six Sigma

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 The seven wastes of Lean

l Lean manufacturing can be defined as “a systematic approach to

identifying and eliminating waste through continuous improvement by
flowing the product driven by the customer demand”.

l Taiichi Ohno’s seven wastes

(Muda)
l 1. Overproduction
1
l 2. Waiting
l 3. Transporting
2 3
l 4. Inappropriate Processing
l 5. Unnecessary Inventory 4 5
l 6. Unnecessary Motion
l 7. Defects 6 7

Silva, S.K.P.N., 2012. Applicability of value stream mapping (VSM) in the apparel industry in Sri Lanka. International Journal of
Lean Thinking, 01 December 2011, Vol.3(1), pp.36-41

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Some Lean Milestones

1973

1913
1948
Ford
1988
• Model T Toyota
assembly (Ohno) 1990
line
Krafcik
• Toyota (under 1996
production Womack & Womack
System
(TPS)
Jones) & Jones Womack
• Lean term
• Just-in-Time
coined • The & Jones
machine
that • Lean
changed thinking
the world • 5
Oil crisis principles

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 Five principles of Lean manufacturing

Specify value:
Value can only be
defined by the
ultimate customer
Identify the
Pursue value stream:
perfection: Set of all the
Remove successive specific actions
layers of waste required to bring a
Lean specific product

Pull: Create flow:

Let customers “pull” Act to create "flow"
value of value

Womack, James P., and Daniel T. Jones. 1996. Lean thinking: banish waste and create wealth in your corporation. New York, NY: Simon & Schuster.

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Impact of Lean on inventory

Just-in- Pull processes

Produce and time
Kanban
supply only what
is required

Meet
customer Maintain only required
demand inventory

Overall inventory reduction

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 Inventory: Waste hiding other wastes

Inventory

Inventory

Overprocessing Defects Overprocessing Defects

Overproduction Overproduction

Waiting Waiting
Unnecessary Unnecessary
Transporting Motion Transporting Motion

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Pull inventory replenishment based on Kanban

Suppliers Customers

Kanban Signals

Process Process Process

A B C

Raw Material WIP WIP Finished Goods

Supermarket Supermarket Supermarket Supermarket

Product Flow

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 Lean tools: Value Stream Map
Current State

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Lean tools: Value Stream Map

Future State

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 Lean tools: 5S’s

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Six Sigma quality

Customer tolerace Customer tolerace

lower limit upper limit

Process
within
3s

-6s -5s -4s -3s -2s -1s 0 +1s +2s +3s +4s +5s +6s

6 s Process

3 s = 66,807 dpm

Process 6 s = 3.4 dpm

within
6s

-6s-5s-4s-3s-2s-1s 0 +1s+2s+3s+4s+5s+6s

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 Cost of poor quality (COPQ)

Visible costs of poor quality

• Inspection costs Tangible
• Guarantee costs
• Recalls
• Rework
• Production waste

• Setups Hidden costs of poor quality

• Re-programming
• Logistic costs Intangible
• Surplus inventory Hard to quantify
• Penalties
• Lost sales
• Impairment of
customer relations
• Long cycle times

Average COPQ = 15% of total sales

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Some Six Sigma Milestones

1982-1985
1989-1994
Motorola / Bill
Smith under Bob Adopted by 1994-1999
Galvin many companies General Electric /
• Six Sigma Saved • Including Jack Welch
$940M AlliedSignal
(Honeywell) • Six Sigma Saved
$2.5B

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 DMAIC and DFSS methodologies

DFSS Define
DMAIC
No Yes
Do products,
process or
services exist to
satisfy
requirem ents?
Design Measure

Measure Analyze

Explore
No
Is Im provem ent
enough?
Yes
Develop
Improve

Implement
Control

Leverage

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SIPOC

Fictitious Car Dealer Example

SIPOC Diagram

Suppliers Inputs Process Outputs Customers Requirements

- Manufacturer - Cars - See Below: - New Client Account - Car Buyer - Color Selection
- Suppliers - Option packages - Paperwork to State - Dealership Owners - Build To Order
- Gas Station - Fuel for cars - Paperwork to Dealer - Department of Motor - Paperwork Filled
- Sal’s Car Wah - Car Washes - Paperwork to Vehicles Within 48 Hours of
- Printer - Car Needs Manufacturer - Service Dept Car Purchase
Worksheet - Payment - In-State Checks Or
- Service Contract Money Orders
- Service Notifications

Come To
Understand Present Options Sign Paperwork
Meet With Agreement on
Client Needs In To Client And Test and Hand Over
New Client Options. Price and
New Car Drive Cars Keys / Title
Delivery Date

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 CTQC (Critical To Quality Characteristics) Tree

Need Driver CTQC

What the
Measurable and
customer
Operational quantifiable
needs
activities that have characteristics that
(Product an impact on the product or
quality, meeting customer service must have
commitments to satisfy customer
in lead times,
needs
perfect orders needs
fill rate, etc)

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CTQC (Critical To Quality Characteristics) Tree

Need Drivers CTQC

Invoices arrive on time Receive invoice within 5
days of order receipt

Ability to match invoices PO matches orders number

with correct order 100% of the time

Timely and
accurate
supplier
invoicing
Invoice quantities match Goods received match
goods received invoice 100% of time

Invoice and contract price

Invoice prices match match 100% of time
contract contract
Gardner, D. (2004). The Supply Chain Vector: M ethods for Linking the Execution of Global Business M odels W ith Financial Perform ance. EEUU: J Ross Publishing

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 Time value map

0 minutes

Day 1 Day 2 Day 3 Day 4

Non value- Non value- Value-

added time added added time
business
process

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Pareto chart

l The Pareto Principle specifies that 80% of consequences come from

20% of the causes.

Pareto chart of titanium inclusion casting defects

80 100%

90%
70
Cumulative percentage

80%
60
Defect frequency

70%
50
60%

40 50%

40%
30
30%
20
20%
10
10%

0 0%
ink ity
LO
F ion sio
n
sio
n
sh ros ld lus clu clu
po we inc
ell a in n in
sh alph gste
rd tu
ha

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 Time plots

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Cause and effect diagram

Methods Machines
Cause
Cause
Cause

Effect

Cause Cause Cause

Cause
Cause Cause
Cause

Management Materials Manpower

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 Scatter diagrams
Scatter diagram for quality characteristics XXX

Quality characteristics XXV

Process inputs

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Prioritization matrix
Impact

Initiatives that Long term initiatives

have priority
(actively work to reduce
required effort)

Low value initiatives Unattractive initiatives

(Pursue when an (Do not pursue)

opportunity window opens)

Effort

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 Control charts
Quality characteristic XXX
102.5

102
101.5 UCL

101
Average value (units)

100.5

100
CL
99.5
99

98.5
LCL
98
0
0
0
00
30
00
30
00
30
00
30
00
30
00
30
00
:3
:0
:3
0:
0:
1:
1:
2:
2:
3:
3:
4:
4:
5:
5:
6:
22
23
23

Sample

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DFSS - Quality Function Deployment (QFD)

l Tool used to translate the “voice of the customer” into design requirements.

Correlation
matrix
HOW

(Design requirements)
I
C
m o r
p
WHAT o
m
p
a
t
r e
Relationship matrix i
(Customer t t n
a i g
requirements) n t s
c o
e r
HOW MUCH
(Design targets)

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 DFSS - QFD

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DFSS – Kano model

l Product development and customer satisfaction tool that categorizes customer

preferences.
l According to the Kano model,
Customer satisfied service/product features chould be
classified into three classes:
l Must-be requirements (features); if
One- these conditions are not met and do
Attractive not perform the basic functions, the
dimensional
requirements customer will be extremely unhappy.
requirements
l One-dimensional requirements
Requirement Requirement (features); customer satisfaction is
not fulfilled fulfilled proportional to the needs of the level
Must-be of fulfillment – the higher the
requirements fulfillment level is, the higher the
customer’s satisfaction is.
l Attractive requirements (features);
Customer these requirements are neither
dissatisfied urgent nor expected by the
customer. But they can produce
great joy and delight in customers.

Gailevičiūtė I. (2011). Kano model: how to satisfy customers? Global Academic Society Journal: Social Science Insight, Vol. 4, No. 12, pp. 14-25

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 Implementing Lean Six Sigma

Champions - "Top Management” members who define vision and provide power,
resources and relevance to initiatives

Master Black Belts - Internal Lean Six Sigma Coaches. Identify projects.

Black Belts - They apply Lean Six Sigma methodology in specific projects

Green Belts - Responsible for each area where the methodology is implemented.
Integrate Lean Six Sigma implementation to other routine activities

Yellow Belts - Operational workforce with basic Lean Six Sigma training

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References & Suggested Additional Reading

l Gardner, D. (2004). The Supply Chain Vector: Methods for Linking the
Execution of Global Business Models With Financial Performance.
EEUU: J Ross Publishing
l Gailevičiūtė I. (2011). Kano model: how to satisfy customers? Global
Academic Society Journal: Social Science Insight, Vol. 4, No. 12, pp.
14-25
l Kiran D.R. (2016) Total quality management: key concepts and case
studies. Elsevier Science
l Silva, S.K.P.N., 2012. Applicability of value stream mapping (VSM) in
the apparel industry in Sri Lanka. International Journal of Lean Thinking,
01 December 2011, Vol.3(1), pp.36-41
l Womack, James P., and Daniel T. Jones. 1996. Lean thinking: banish
waste and create wealth in your corporation. New York, NY: Simon &
Schuster.

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 20. Theory of constraints (TOC)

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Theory Of Constraints - TOC

l Constraint: Anything that stands in the way of achieving a goal

Goldratt, E. M., & Cox, J. (1986). The goal: a process of ongoing improvement. Rev. ed. New York: North River Press.

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 Some TOC Milestones

1984
1997
Goldratt’s “The
Goal” 2010
Critical Chain
• Dice Game Project TOC Handbook
• Buffers Management • Ptak & Smith’s
• Five focusing steps
• Time buffers DDMRP (Named
ASR back then) in
Buffer Mgmt
chapter

Cox, J. and Schleier, J. (2010). Theory of constraints handbook. New York: McGraw-Hill
Goldratt, E.M. (1997) Critical Chain, The North River Press, MA
Goldratt, E. M., & Cox, J. (1986). The goal: a process of ongoing improvement. Rev. ed. New York: North River Press

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Factors affecting business processes

Each activity requires that the

previous activity is completed

Dependency

Each activity’s outcome will

impact subsequent activities

Normal fluctuations inherent to

any process

Variability

Variations are random and

cannot be predicted

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 Two vision types

Traditional vision Flow vision (TOC)

• Improvement of any chain • Improvement of constraint
link results in an overall results in an overall
performance improvement improvement
• Total improvement = sum • Total improvement =
of local improvements improvement of constraint

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Example

Resources A B C D E

Capacity
(Units /day) 10 9 5 7 8

Process +/- 2 +/- 2 +/- 2 +/- 2 +/- 2

variability

A B C D E
12 11 7 9 10
Raw Finished
WIP WIP WIP WIP
material product

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 Traditional vision results
A B C D E

Finished product
Raw material

Potential

Potential

Potential

Potential

Potential
Current

Current

Current

Current

Current
Period

WIP

WIP

WIP

WIP
A B C D E
1 12 10 10 11 9 9 7 5 5 9 7 7 10 8 8 8 Capacity 10 9 5 7 8
2 12 10 10 12 7 7 11 5 5 7 7 7 9 8 8 8 Variability (+-2) (+-2) (+-2) (+-2) (+-2)
3 12 9 9 15 9 9 13 5 5 5 6 5 8 8 8 8 Initial stock 12 11 7 9 10
4 12 11 11 15 9 9 17 5 5 5 7 5 5 9 5 5 Final stock 12 56 283 5 4
5 12 10 10 17 10 10 21 5 5 5 6 5 5 7 5 5 Max. 1000 1000 1000 1000 1000
6 12 10 10 17 10 10 26 5 5 5 7 5 5 8 5 5 A B C D E Total
7 12 10 10 17 9 9 31 5 5 5 8 5 5 8 5 5 In process 12 56 203 5 4 280
Nominal
8 12 10 10 18 11 11 35 5 5 5 8 5 5 8 5 5 cap. 10 9 5 7 8 7,8
9 12 10 10 17 9 9 41 5 5 5 7 5 5 9 5 5 Average cap. 9,88 8,94 4,94 7,06 8,02 7,8
Average
10 12 10 10 18 8 8 45 6 6 5 8 5 5 7 5 5 Prod. 9,88 8,94 4,94 5,02 5,12 6,8
11 12 10 10 20 8 9 47 6 6 6 7 6 5 10 5 5 Utilization 100% 100% 100% 71% 64%
12 12 10 10 21 7 7 50 4 4 6 7 6 6 8 6 6 Efficiency 99% 99% 99% 72% 64%
48 12 10 10 54 9 9 194 4 4 5 7 5 5 9 5 5
49 12 10 10 55 9 9 199 5 5 4 7 4 5 7 5 5
50 12 11 11 56 9 9 203 5 5 5 9 5 4 8 4 4
Prom 9.88 9,88 9,94 8,94 4,94 4,94 7,06 5,02 8,02 5,12 256

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TOC Five Focusing Steps

1. Identify the
system's
constraint

5. Prevent 2. Decide how

Inertia if to exploit the
constraint is system's
eliminated constraint

4. Elevate the 3. Subordinate

system's everything to
constraint the constraint

Goldratt, E. M., & Cox, J. (1986). The goal: a process of ongoing improvement. Rev. ed. New York: North River Press.

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 Drum-Buffer-Rope (DBR)

Capacity
(Units /day) 10 9 5 7 8

Process +/- 2 +/- 2 +/- 2 +/- 2 +/- 2

variability

A B CC D E
C 7
Raw Buffer Drum Finished
material product

Rope

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DBR model results

A B C D E
Finished product
Raw material
Potential

Potential

Potential

Potential

Potential
Current

Current

Current

Current

Current
Period

WIP

WIP

WIP

WIP

A B C D E
1 5 10 5 5 8 5 10 5 5 5 8 5 5 8 5 5 Capacity 10 9 5 7 8
2 5 9 5 5 9 5 10 5 5 5 7 5 5 7 5 5 Variability (+-2) (+-2) (+-2) (+-2) (+-2)
3 5 10 5 5 9 5 10 7 7 5 7 5 5 8 5 5 Initial stock 5 5 10 5 5
4 7 11 7 5 8 5 8 5 5 7 8 7 5 8 5 5 Final stock 5 5 10 5 6
5 5 9 5 7 9 7 8 6 6 5 6 5 7 8 7 7 Max. 1000 1000 1000 1000 1000
6 6 10 6 5 8 5 9 5 5 6 6 6 5 9 5 5 A B C D E Total
7 5 10 5 6 9 6 9 5 5 5 7 5 6 8 6 6 In process 5 5 10 5 6 31
Nominal
8 5 9 5 5 9 5 10 5 5 5 7 5 5 8 5 5 cap. 10 9 5 7 8 7,8
9 5 9 5 5 9 5 10 5 5 5 7 5 5 9 5 5 Average cap. 9,92 8,94 5,08 7,1 8,04 7,8
Average
10 5 11 5 5 9 5 10 5 5 5 7 5 5 8 5 5 Prod. 5,08 5,08 5,08 5,08 5,08 5,1
11 5 10 5 5 10 5 10 6 6 5 7 5 5 8 5 5 Utilization 51% 57% 100% 72% 63%
12 6 10 6 5 9 5 9 5 5 6 7 6 5 8 5 5 Efficiency 51% 56% 102% 73% 64%
48 6 9 6 5 9 5 9 5 5 6 5 5 5 9 5 5
49 5 11 5 6 8 6 9 5 5 6 7 6 5 8 5 5
50 5 10 5 5 9 5 10 5 5 5 6 5 6 9 6 6
Prom 9,92 5,08 8,94 5,08 5,08 5,08 7,10 5,08 8,04 5,08 254

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 Impact of the lot size in buffer size

Time

Time

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Inventory buffers

A B C D E

Raw Finished
material product

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 Time buffers

Activity 1

Activity 2

Activity 3

Activity 4

Activity 5

Time

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Capacity buffers

Resource Capacity

Nominal Capacity

Time

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 BOM and distribution network buffers

101

204 203 201

304P 303P 302 301

404P 403P 402 401P

501P

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References & Suggested Additional Reading

l Cox, J. and Schleier, J. (2010). Theory of constraints handbook. New

York: McGraw-Hill.
l Goldratt, E.M. (1997) Critical Chain, The North River Press, MA
l Goldratt, E. M., & Cox, J. (1986). The goal: a process of ongoing
improvement. Rev. ed. New York: North River Press.
l Ptak, C. & Smith, C. (2011) Orlicky's material requirements planning 3rd
edition. Mc Graw Hill, New York

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 21. Demand-driven supply chain
(DDSC) framework

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Customer’s expectations are higher than ever

l 65% say their standard for good customer experiences is higher than
ever
l 76% of customers expect companies to understand their needs and
expectation
l 76% of customers say it’s easier than ever to take their business
elsewhere
l 56% percent of customers (including 66% of business buyers) actively
seek to buy from the most innovative companies.
l 71% of customers say they buy products and services they didn’t know
would exist five years ago.

Salesforce Report (2018) State of the Connected Customer - Insights from 6,700+ consumers and business
buyers, Second Edition, Salesforce Research

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 Demand-Driven Value Network

l A Demand-Driven Value Network is a network that senses and

translates demand with minimal latency to shape demand and drive a
near real-time response.
Sense

Translate

Supply
Demand Demand
Driven

Shape

Respond

Created with information from:

O'Marah, K. and J. Souza. (2004) DDSN: 21st Century Supply on Demand. AMR Research
Cecere, L. [Link], R. Martin and L. Preslan. (2005) The Handbook for Becoming Demand Driven. AMR Research

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Difference between being reactive and being responsive

l React = “to act in return”

l Emergency response mode.
l High stress narrows the focus and doesn’t allow to see the entire picture.
l Important details and information needed to make informed decisions is not
used.
l It is easy to misunderstand the situation.

l Respond = “to reply”

l Take all relevant information into account
l Make informed decisions
l Find the solution or the required resources to provide the expected reply
l Deal with the handed issue in the best possible manner

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 DDSC impact on niche markets

Competitive advantage
Require efficiency
Innovation Price
Require responsiveness

• Make-and-Sell
Broad Product Cost organizations rely on
market differentiation differenciation efficiency and economies
of scale to support their
competitive strategy

• Organizations relying on
Niche Focus / Relationship product differentiation or
focusing on specific
market niches must
become Demand-Driven
Adapted from Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. EEUU, Free Press

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The cost-responsiveness efficient frontier

l Efficiency: The ability to reduce costs and wastes.

l Responsiveness: The ability to respond purposefully and within an appropriate timeframe to customer
requests or changes in the marketplace.
l Given the trade-off between cost and responsiveness, a key strategic choice for any supply chain is the
level of responsiveness it seeks to provide. A firm on the efficient frontier can improve its
responsiveness only by increasing cost and becoming less efficient.
l Firms on the efficient frontier must improve their processes to shift the efficient frontier itself and
become “Best in class”.

Best in class
Responsiveness

Processes
Improvement
Strategic
choice
Efficiency
Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson Education, Essex, NE.

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 Customer’s innovation requirements

Rate of increase
New technology disruption
Customer’s innovation
nt
expectations me
elop
ev
ctd
du
pro
Customer’s perception of w
Ne
current product’s
innovation

Time

Adapted from: Chen, J.; Liu, S.; Tseng, C. (2000) Technological Innovation and Strategy Adaptation in the Product Life
Cycle. Technology Management-Strategies & Applications, Vol. 5, pp.183-202.

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DDSC impact on innovative industries

Organizations with dynamic portfolios must become Demand-Driven

Product portfolio innovation

New New New New New New New New New

Make-and-Sell organizations have slow changing portfolios

New New New

1 2 3 4 5 6 7 8 9 10 Years

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 DDSC impact on short life cycle products

Units
2,000,000
Manufacturing ability of a
“Make-and-Sell” organization
1,500,000
Total demand of “Short Life
Cycle” Products
1,000,000

500,000

10 20 30 40 50 60 70 80 90 100
Time (weeks)

Based on: Higuchi T. Troutt MT (2004) Dynamic Simulation of the Supply Chain for a Short Life-Cycle Product –
Lessons from the Tamagotchi Case. Computers and Operations Research 31: 1097–1114

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Impact of customer’s demand changes in product Life-Cycle in

the supply chain
Introduction
• Little product variety
• Small volume
• Innovative product development
Variability of
customer’s Growth
demand • Product variety increases
• Volume increases
Changes in • Product development based on
market acceptance Supply Chain
customer’s
demand Maturity
Uncertainty of • Product variety increases,
customer’s • Product volume decreases
demand • Substitute product development
volumen/design
turbulence Decline
• Product variety increases
• Product volumes declines
• Substitute products
developement

Adapted from: Szozda, N., Swierczek, A. (2008) The Success Factors For Supply Chains Of A Short Life
Cycle Product, Total Logistic Management No. 1 Pp. 163–173

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 Innovation pays off

l The top 20% (the “best”) of business surveyed achieved on average

38% of sales revenues from new products released in the most recent 3
years

l The rest of business surveyed achieved on average 27% of sales from

3-year new products

l The profit contribution from new products breaks down to be 42.4% of

profits for the top 20% best performers vs. 28.4% from the rest

Cooper, Robert & Edgett, Scott. (2003). Benchmarking Best Practices

Performance Results and the Role of Senior Management.

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DDSC impact on high product variety portfolios

Revenue for Make-to-Sell organizations is

mainly provided by best-selling products
Quantity per order

Organizations relying on a diversified

product portfolio as main revenue source,
must become Demand-Driven

Demand uncertainty

Based on: Anderson, C. (2008) The Long Tail: Why the Future of Business is Selling Less of More, Hyperion

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 DDSC impact on high product variety portfolios

• Customers require products and services that match

their specific needs
• There are far more “niche goods” than “top sellers
Order quantity (products sold in large volumes)”
• The costs of reaching more niches is falling
• Product life cycles are getting shorter
• Demand is becoming more volatile

Demand uncertainty

Based on: Anderson, C. (2008) The Long Tail: Why the Future of Business is Selling Less of More, Hyperion
Cecere, L. (2017) The Power of Downstream Data, Supply Chain Insights, July 2017

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Forecast error of products in the Tail

66%

34%

Most frequently Products with few sales

sold products (89% of products in the
portfolio)

2018 Forecasting and Inventory Benchmark Study, E2open, LLC.

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 Make-and-sell organization

l An organization designed to consistently carry out particular purposes in

predefined ways executing repeatable procedures in accordance with
business plans.
Command Mission
and control and Policy

Make-and-Sell loop
Forecast Functional
based hierarchy
planning structure

Product-
down
strategy
Haeckel SH. (1999) Adaptive Enterprise: Creating and Leading Sense-and-Respond Organizations. Boston: Harvard Business
School Press

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Demand-driven organization

l An organization that does not attempt to predict future demand for its
offerings. Instead, it identifies changing customer needs and new
business challenges as they happen, responding to them quickly and
appropriately.

Adaptive
Adaptive structure with
Act Sense defined
loop purpose and
bounds

Adaptive Demand-Driven
loop (Sense-and-
Respond) loop
Interpert and
Decide analyse External and
internal Coordination
feedback of capabilities

Haeckel SH. (1999) Adaptive Enterprise: Creating and Leading Sense-and-Respond Organizations. Boston: Harvard Business School Press

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 Make-and-sell supply chains vs Demand-driven supply chains

Make-and-sell Demand-Driven
Goal Become an efficient Become an adaptive
enterprise enterprise (efficient and
responsive)
Operation Firm-forward Customer-back
Insight flow Cascading down the Empowered units capable
organization’s hierarchy of sensing, interpret, and
communicate to higher
hierarchy levels
Planning focus Meet forecast Meet demand
Demand nature • Predictable variability • Unpredictable
on most items variability on most
• Demand can be items
forecasted • Demand must be
sensed

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Demand Driven Supply Chain Benefits

Improved
Data and planning
processes
integration

Improved
risk
mitigation

Reduced costs
Improved processes that are Increased value
both efficient and responsive

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 References & Suggested Additional Reading
l Anderson, C. (2008) The Long Tail: Why the Future of Business is Selling Less of More, Hyperion
l Cecere, L. [Link], R. Martin and L. Preslan. (2005) The Handbook for Becoming Demand Driven. AMR Research
l Chase, C. (2016) Next generation demand management _ people, process, analytics, and technology, John Wiley &
Sons, Inc., Hoboken, New Jersey.
l Chopra, S & Meindl, P (2016) Supply Chain Management: Strategy, Planning, and Operation. 6th ed, Pearson
Education, Essex, NE.
l Chen, J.; Liu, S.; Tseng, C. (2000) Technological Innovation and Strategy Adaptation in the Product Life Cycle.
Technology Management-Strategies & Applications, Vol. 5, pp.183-202.
l Cooper, Robert & Edgett, Scott. (2003). Benchmarking Best Practices Performance Results and the Role of Senior
Management.
l Haeckel SH. (1999) Adaptive Enterprise: Creating and Leading Sense-and-Respond Organizations. Boston: Harvard
Business School Press
l Higuchi T. Troutt MT (2004) Dynamic Simulation of the Supply Chain for a Short Life-Cycle Product – Lessons from the
Tamagotchi Case. Computers and Operations Research 31: 1097–1114
l O'Marah, K. and J. Souza. (2004) DDSN: 21st Century Supply on Demand. AMR Research
l Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. EEUU, Free Press
l Sabath RE, Autry CW, Daugherty PJ (2001) Automatic replenishment programs: The impact of organizational structure.
J Bus Logist 22(1):91–105
l Salesforce Report (2018) State of the Connected Customer - Insights from 6,700+ consumers and business buyers,
Second Edition, Salesforce Research
l Szozda, N., Swierczek, A. (2008) The Success Factors For Supply Chains Of A Short Life Cycle Product, Total Logistic
Management No. 1 Pp. 163–173
l T.C. Edwin Cheng • Tsan-Ming Choi (2010) Innovative Quick Response Programs in Logistics and Supply Chain
Management, Springer-Verlag Berlin Heidelberg
l 2018 Forecasting and Inventory Benchmark Study, E2open, LLC.

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22. Introduction to Demand Driven

Material Requirement Planning -
DDMRP

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 MRP systems embeded in ERP systems used nowadays are
40 years old

Capabilities
Extended ERP

Enterprise Resource Planning

(ERP)

Manufacturing Resources Planning

(MRP II)

Material Requirements
Planning (MRP)

Time
1970s 1980s 1990s 2000s

Based on: Rashid, M. A., Hossain, L., & Patrick, J. D. (2002). The evolution of ERP systems: A historical perspective.

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Traditional MRP in today’s business environment

Any change here Leads to big changes here

What the
company has

MRP: What the What the

What the company The big company company can
produces (BOMs) calculator needs to get (and
Market order when)
driven
What the company
needs (and when)

More changes Manual adjustments

Multiply by the amount of products the company produces

to assess the depth of the planner’s nightmare

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 Traditional MRP in today’s business environment

Traditional MRP + Few items

Today’s business are in
plenty of
environment spreadsheet work optimal
stock status

• MPS changes
• BOM changes
• Delays in inventory
Most items are
status updates either in Over-stock
• Lead times changes or stock-out status
• Unplanned events

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The need for MRP evolution

Changes in the last 40 years

• Supply chain complexity
• Product complexity Now:
Then: • Product customization
• Product life cycles
• Variety of products Demand
Traditional • Forecast precision Driven
MRP • Customer tolerance time MRP
• Supplier lead time (DDMRP)
• Pressure to reduce inventories

Based on: Smith, D. and Smith, C. (2013) Demand Driven Performance Using Smart Metrics, McGraw-Hill Professional, New York

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 The Five Components of DDMRP

1. Strategic
Inventory 2. Buffers
Positioning 5 1 Profiles and
Levels

5. Visible and
Collaborative
DDMRP
Execution 4 2
3. Dynamic
Adjustments
4. Demand Driven
Planning

C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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Inventory positioning factors

1 • Customer tolerance time

2
• Market potential lead time

3 • Sales order visibility horizon

4 • External variability

5 • Inventory leverage and flexibility

6 • Critical operation protection

C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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 Decoupled materials explosion

MRP Explosion DDMRP Decoupled Explosion

101 101

201 203 204 201 203 204

301 302 303P 304P 301 302 303P 304P

401P 402 403P 404P 401P 402 403P 404P

501P 501P

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Buffer size

Individual Part
Buffer profiles
Attributes

Part Average Daily

Item Type Usage (ADU)

Part Lead Time

Lead Time
Part Minimum Order
Quantity (MOQ)

Variability Part Location

C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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 Buffers Adjustments Types

Recalculated
adjustments

Planned
adjustments

C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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Recalculated adjustments

Quantity

Time

Quantity

Time

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 Planned adjustments

Quantity

Inventory

Time

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DDMRP Stock buffers

5 days

Lead time
compression 3 days 2 days

Variability
absorption

Supply order
Supplier
generation

C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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 Difference between DDMRP planning and execution

Planning Execution
• Process of placing • Management of
supply orders using placed orders based
the Net Flow Equation on On-hand inventory

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DDMRP execution alerts

Buffer Status 101

Alerts
203 204

302 303P 304P

DDMRP Execution
403P 404P

Synchronization
Alerts

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 Comparing reorder point (ROP) replenishment policies with
DDMRP

Traditional DDMRP

signal
Replenishment

signal
Replenishment
Green
Q
Net flow
ROP
position Yellow
Forecasted Demand
During LT

Safety Stock Red

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Comparing reorder point (ROP) replenishment policies with

DDMRP: Order size

• Periodic Review Policy:

Replenishment
signal
Traditional

Q Q= Target inventory position - On-hand inventory

ROP
Forecasted Demand
During LT • Continuous Review Policy :
Safety Stock
2×D×S D = Forecasted demand
Q= S = Cost per order
H H = Holding cost
Replenishment
signal

Green • Stock
DDMRP

Net flow position physically • Sales orders past due

Top of available
Yellow
Q= green - • Stock ordered + • Sales orders due today
• Qualified spikes
but not
Red received

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 Comparing reorder point (ROP) replenishment policies with
DDMRP: Protection against stockouts

ROP = Forecasted demand during LT + Safety stock

Replenishment
signal
Traditional

Q Safety stock = f (σ, D, LT, Z)

ROP
Safety
Forecasted Demand Service level
During LT stock

Safety Stock

Service
level
Z score 0.0 0.5 1.0
Replenishment
signal

Green
DDMRP

Net flow position

Yellow zone • Average Daily Usage (ADU)
Yellow • Decoupled Lead Time (DLT)
Red zone • Lead Time Factor
Red • Variability Factor

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Comparing reorder point (ROP) replenishment policies with

DDMRP: Stockouts and cost of holding stock

Stock consumed by demand

Replenishment
signal
Traditional

Q
Replenishment
Frequency

ROP
Forecasted Demand Risk of losing Costs of
During LT sales due to holding
stock-out stock
Safety Stock
Stockout Safety On-hand
stock position
0 ROP Replenishment

Stock consumed by demand

Replenishment
signal

Green
DDMRP

Net flow position

Frequency

Risk of losing Costs of

Yellow sales due to holding
stock-out Replenishment stock

Red On-hand
SO W W O W W ES
position
0
Based on: C Ptak and C Smith (2016) Demand Driven Material Requirements Planning, Industrial Press, Connecticut

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 Comparing reorder point (ROP) replenishment policies with
DDMRP: Dynamic adjustments

Replenishment
signal
Traditional

Q
ROP Little or no flexibility
Forecasted Demand
During LT

Safety Stock

Dynamic adjustments based on:

Replenishment
signal

Green
• ADU
DDMRP

Net flow position • DLT

Yellow • MOQ
• Demand Adjustment Factor (DAF)
• Zone adjustment factor
Red
• Lead time adjustment factor

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References & Suggested Additional Reading

l Ptak, C., Smith, C. (2016) Demand Driven Material Requirements

Planning, Industrial Press, Connecticut
l Rashid, M. A., Hossain, L., & Patrick, J. D. (2002). The evolution of ERP
systems: A historical perspective
l Smith, D. and Smith, C. (2013) Demand Driven Performance Using
Smart Metrics, McGraw-Hill Professional, New York

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 23. Financial key performance
indicators

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Relationship between financial, operational and cost accounting

Financial
accounting

Cost Operational
accounting accounting

Barfield, J. y Kinney, M. (2006). Contabilidad de Costos (5ª ed.). México Thomson International. ISBN 9706863583

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 P&L statement

ABC Company P&L Statement

Year 1
Sales $ 1,000
(-) Sales costs $ 500
Gross profit $ 500
(-) Operating expenses $ 100
(-) Depreciation $ 100
Profit before taxes $ 300
(-) Income Taxes $ 150
Net income $ 150

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Balance sheet
“Creciendo S.A.”
Balance sheet - September 30
Current assets Current liabilities
Cash $ 20,000 Suppliers $ 125,000
Marketable security $ 240,000 Documents to pay $ 45,000
Accounts receivable $ 245,000 Various creditors $ 10,000
Inventory $ 275,000 Taxes to pay $ 20,000
Various debtors $ 10,000 Total $ 200,000
Total $ 790,000
Fixed liabilities
Fixed assets Long term debt $ 60,000
Plants $ 150,000 Total $ 60,000
Equipment $ 60,000
Total $ 210,000
Stockholders equity
Common stock $ 350,000
Retained earnings $ 390,000
Total $ 740,000

Total Liability and

Total Assets $ 1,000,000 stakeholders’ equity $ 1,000,000

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 SCM Impact on the Financial Statements

Order cycle time / order to cash

Cash Order completion rate
Receivables Invoice accuracy
ASSETS On-time delivery

Inventories Service levels / stockout rates

Property, plant, Distribution facilities

and equipment Transportation equipment

Current liabilities Outsourcing policies

Debt Financing options for

inventory, warehouses,
Equity and equipment

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SCM impact on return on assets (ROA)

Response capacity Revenue

- Profit
Efficiency Costs

Inventory Return on
assets
+
Accounts
Deployment receivable
and use of Capital
+
assets employed
Cash

Fixed
assets

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 SCM impact on required working capital

Real value of inventory

Inventory

Losses due to ROI decline Optimum ROI decline Losses due to

stockouts overstock

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EBITDA and OCF

EBITDA (Earnings Before Interest, OCF (Operating Cash Flow)

Taxes, Depreciation and
Amortization)
Cash generated by customer
revenue
Net sales
- Cash paid to suppliers
- Production expenses

- Cash generated by operations

EBIT
+ Depreciation costs

+ Amortization costs

EBITDA

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 Opinions on EBITDA and OCF

EBITDA (Earnings Before Interest, OCF (Operating Cash Flow)

Taxes, Depreciation and
Amortization)

“EBITDA is one of the most highly “OCF: The One Best

deceptive and overused financial Supply Chain Metric”
terms in business and investment David schneider
finance … we need to move from
EBIDTA to cash flow, ACTUAL
cash flow”

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Managing cash flow: Operating cycle

l Time it takes to convert inventory and receivables into cash

Buy
components or
raw material Sell product Collect money
from supplier

Days of inventory Days receivable

- Raw material - Billing

- Material in process - Payment
- Finished product

Gardner, D. (2004). The Supply Chain Vector: M ethods for Linking the Execution of Global Business M odels W ith Financial Perform ance. EEUU: J Ross Publishing

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 Cash-to-cash cycle

l Cash-to-Cash Cycle Time = Inventory Days of Supply + Days Sales

Outstanding – Days Payable Outstanding
l DSO = Accounts receivable / (Net sales/365)
l DPO = Accounts payable / (COGS/365)
l DOI = Average inventory / (COGS/365)

buy raw material,

components or finished Sell prodcut
product from supplier
Inventory Days Days of receivables

Days payable
Cash-to-cash cycle
Pay supplier Collect money
Gardner, D. (2004). The Supply Chain Vector: M ethods for Linking the Execution of Global Business M odels W ith Financial Perform ance. EEUU: J Ross Publishing

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Example

l 90 Days inventory + 45 Days receivables - 30 Days payables

l Cash to cash cycle = 105 Days

l If the company can collect the payments faster (on-line), hold less inventory,
and negotiate better (longer) payable terms.

l 45 Days inventory + 30 Days receivables - 45 Days payables

l Cash to Cash Cycle = 30 Days

l Reducing the Cash to Cash time from 105 to 30 days provides available cash
75 days sooner to support supply chain operations.

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 Working capital
Net working capital = Current assets – current liabilities

Net working capital = (Cash + inventory + accounts receivable) –

accounts payable

Example:
US 1,000,000 = US$500,000 + US$300,000 + US$400,000 – US$200,000

If the company can collect sooner (online sales),reduce inventory and negotiate
better (longer) terms with suppliers…

Example:
US$ 200,000 = US$500,000 + US$100,000 + US$0 – US$400,000

If less working capital is required, the company has a lower debt and reduced
financial costs

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Break-even analysis

l Break-Even analysis tells you how many units of a product must be sold to cover
the fixed and variable costs of production.
l Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin
l Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

l Example: V
$
l Company XYZ has sales of
$400,000 Profits Total costs
l Cost of goods sold (COGS) is
$300,000 Variable
l Fixed expenses are $120,000 costs =
Break-Even point COGS
l Operating loss is $20,000
l Calculate sales increase required to
Losses Fixed costs =
Break-Even
$120,000

q (Units)

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 Break-even analysis

l If COGS were $300,000 when sales

were $400,000, then COGS is 75% of
sales

l If COGS is 75% of sales, then

“Contribution Margin” is 25% of sales
V
l Break-Even Point (sales dollars) $
= Fixed Costs ÷ Contribution Margin Profits Total costs
= $120,000 ÷ 0.25
= $480,000 Variable
costs =
Break-Even point COGS
l Sales need to increase $80,000 to reach
Break-Even point
Losses Fixed costs =
$120,000

q (Units)

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Inventory valuation and costing systems

Product mix
(what
products
should I
make?)
Product
Profits launch
determination (feasibility)

Decisions based on
product profitability
Product
Bid for an withdrawal
order (unprofitable)

Price fixing Make or buy

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 Inventory valuation and costing systems

Variable costs Cost per work Normal historical

Costing systems
Costs

Cost accounting types

Fixed costs order costing
Cost per process Standard costing
ABC costing
Absorption
costing
Direct costing
Throughput
costing

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Pure historical costing

Direct Direct Factory

Material Labor Overhead
(DM) (DL) (FO)

Inventory

Martin, J. R. (2004). Cost accounting systems and manufacturing statements. Management accounting concepts, techniques, and
controversial issues. Management And Accounting Web

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 Normal historical costing

Direct Direct Factory

Material Labor Overhead
(DM) (DL) (FO)

Inventory Overhead
variances

Martin, J. R. (2004). Cost accounting systems and manufacturing statements. Management accounting concepts, techniques, and
controversial issues. Management And Accounting Web

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Standard costing

Direct Direct Factory

Material Labor Overhead
(DM) (DL) (FO)

Total variance

Direct Direct
Inventory Material Labor
Overhead
Variances
Variances Variances

Martin, J. R. (2004). Cost accounting systems and manufacturing statements. Management accounting concepts, techniques, and
controversial issues. Management And Accounting Web

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 ABC costing

Variable Fixed
Direct Direct Factory Variable
Sell Sell
Material Labor Overhead Costs
Costs Costs
(DM) (DL) (FO) (VC)
(VS) (FS)

Activity Cost
Pools
Inventory Expense

Martin, J. R. (2004). Cost accounting systems and manufacturing statements. Management accounting concepts, techniques, and
controversial issues. Management And Accounting Web

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Absorption costing

Direct Direct Variable Fixed

Factory Variable
Sell Sell
Material Labor Overhead Costs
Costs Costs
(DM) (DL) (FO) (VC)
(VS) (FS)

Inventory
Expense
Martin, J. R. (2004). Cost accounting systems and manufacturing statements. Management accounting concepts, techniques, and
controversial issues. Management And Accounting Web

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 Direct costing

Variable Fixed
Direct Direct Factory Variable
Sell Sell
Material Labor Overhead Costs
Costs Costs
(DM) (DL) (FO) (VC)
(VS) (FS)

Inventory
Expense
Martin, J. R. (2004). Cost accounting systems and manufacturing statements. Management accounting concepts, techniques, and
controversial issues. Management And Accounting Web

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Throughput costing

Variable Fixed
Direct Direct Factory Variable
Sell Sell
Material Labor Overhead Costs
Costs Costs
(DM) (DL) (FO) (VC)
(VS) (FS)

Inventory Expense

Martin, J. R. (2004). Cost accounting systems and manufacturing statements. Management accounting concepts, techniques, and
controversial issues. Management And Accounting Web

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 Throughput Accounting fundamentals

Traditional accounting

Costs
Net •Variables Sales
(by product) revenue
profits •Fixed (by
company)

Throughput Accounting

Totally Operating
variable Expense Sales
Net profits
costs By revenue
by product Company

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Throughput Accounting

Operating
Throughput (T) Inventory (I) expense
(OE)
Speed at
All money All money
which
system invested to spent on
buy items converting
generates
money that system inventory by
intends to means of
through
sales sell Throughput

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 Throughput Accounting

Throughput (T) Sales (V) – Totally variable costs (TVC)

Net Profit (NP) Throughput (T) – Operating expense (OE)

Throughput (T) – Operating expense (OE)

Return on Investment
(ROI)
Inventory (I)

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Improved financial performance with Throughput Accounting

metrics

• Increase sales revenue

• Reduce totally variable
Throughput
costs
(T)

• Sell something the company

Inventory has bought
(I) • Do not buy or manufacture
products you do not plan to
sell

Operating • Reduce expenses that do

expense not contribute to increase
(OE) Throughput

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 Example:
l A manufacturing company
l Net sales = $10 Millions
l Inventory = $2 Millions (Value in books)
l Inventory = $1.5 Millions (Materials value)
l Total assets (Including inventory) = $6 Millions
l COGS = $9 Millions
l MP contained in PT = 40%
l Net profit = $1 Million
l ROA = 1/6 = 16.66%
l Flow cash = $1 Million
l What would happen if….?
l Increase of sales = $0.5 Millions
l No increase of:
l Inventory level
l Operating expense
l Assets

Srikant, L. (1993). Regaining Competitiveness – Putting “the Goal” to Work. EEUU: North River Press

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Example:

l CTV increase
l 40% of sales increase = $0.2 Millions
l Net profit increase
l Sales increase – CTV increase
l $0.5 - $0.2 = $0.3 Millions = 30% more
l ROA increase
l Net profit / Total assets
l ($1 + $0.3) / $6 = 21.67% = 30% more
l Cash increase
l If no increase in operating expenses, profits increase is equal to cash increase
l $0.3 Millions = 30% more

Srikant, L. (1993). Regaining Competitiveness – Putting “the Goal” to Work. EEUU: North River Press

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 Example (Scenario 2):
l What would happen if….?
l Inventory reduction = 20%
l Implications
l Sales and CTV without changes
l Assets reduction = 20% de $2Millions = $0.4 Millions
l Net profit increase
l By not increasing Throughput, Net profit increase is equal to Operating Expense
reduction due to cost reduction of maintaining inventory = 20% de $0.4 Millions =
$0.08 Millions = 8% more
l ROA increase
l Total assets = $6 - $0.4 = $5.6 Millions
l ($1 + $0.08) / $5.6 = 19.3% = 16% more
l Cash increase
l Due to increase in net profit and inventory sale that will not be replaced on first month
l $0.08 + (0.2 X $1.5) = $0.38 Millions = 38% more

Srikant, L. (1993). Regaining Competitiveness – Putting “the Goal” to Work. EEUU: North River Press

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Impact of Throughput Accounting on supply chain decisions

l The Low Price, High Volume Decision

l The Low Price for Export Market Decision
l The Outsourced Production Decision
l The Increased Downstream Capacity Decision
l The Increased Upstream Product Processing Decision
l The Increased Sprint Capacity Decision
l The Additional Quality Workstation Decision
l The Increased Constraint Staffing Decision
l The New Product Addition Decision
l The Product Cancellation Decision
l The Altered Product Priority Decision
l The Raw Material Constraint Decision
l The Constraint in the Marketplace Decision
l The Plant Closing Decision
Bragg, S. (2007). Throughput Accounting: A Guide to Constraint Management. EEUU: Wiley

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 Prioritizing products according to Throughput Accounting

Product A Product B

Sale price 200 150

Totally variable costs 180 90

Throughput per sold unit ($) 20 60

Corbett, T. (2001). La Contabilidad Del Truput (4ª ed.). Colombia, Ediciones Piénsalo. ISBN 958 97012-0-5

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Prioritizing products according to Throughput Accounting

Product A Product B

Throughput per sold unit ($) 20 60

Minutes per unit on the constraint 2 10

Throughput per unit time on the 10 6

constraint ($/minute)

For each minute that constraint processes product A, the company

increases its throughput by $ 10. For each minute that constraint
processes product B, its throughput increases by $ 6.

Corbett, T. (2001). La Contabilidad Del Truput (4ª ed.). Colombia, Ediciones Piénsalo. ISBN 958 97012-0-5

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 Priorities based on profitability according to Throughput
Accounting
l The sale of any product whose price is greater than its totally variable
costs, and that does not contribute to increasing operating expenses;
will contribute to increase profits.
l When comparing products that are processed by a contraint:
• Demand > Contraint capacity
• Criteria: Throughput per unit time on constraint

• Demand < Contraint capacity

• Criteria: Throughput per unit

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References & Suggested Additional Reading

l Daniel L. Gardner, D. (2004). The Supply Chain Vector: Methods for Linking the
Execution of Global Business Models With Financial Performance. EEUU: J
Ross Publishing
l Barfield, J. y Kinney, M. (2006). Contabilidad de Costos (5ª ed.). México
Thomson International. ISBN 9706863583
l Srikant, L. (1993). Regaining Competitiveness – Putting “the Goal” to Work.
EEUU: North River Press
l Corbett, T. (1998) Throughput Accounting, North River Press
l Bragg, S. (2007). Throughput Accounting: A Guide to Constraint Management.
EEUU: Wiley

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 24. Leadership and change
management

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Supply chain manager evolution

1980s 1990s 2000s

Supply Chain
Strategy Enabler
Logistics Organization
Function

Technically Narrow Skills Coordination Skills

Local Hierarchical Leadership Sparse ability to Influence

Reactive Responsive

Source: MIT Center for Transportation & Logistics

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 Supply chain manager skills requirements

Analytical

Project
management Technological

Adaptability Planning

Leadership Relationship

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Leadership and management

l Manager
l Cares about maintaining status quo
l Leader
l Cares about changing status quo

Management Leadership

Shriberg, A. & Shriberg, D. (2011), Practicing Leadership Principles and Applications, Hoboken, NJ: John Wiley and Sons

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 Personality characteristics

Personality dimension Manager Leader

Attitude towards goals Passive attitude. Think that goals Active attitude. Think that
come from necessity and reality goals come from desire and
imagination
Conception of work See work as an enabling process Find new approaches to old
that combines people, ideas, and problems. Seek high risks
things. Look for moderate risks with high rewards
through coordination and balance
Relations with others Avoid lonely work but also avoid Comfortable working alone.
conflict and very close and Does not avoid conflict and
intense relationships promotes very close and
intense relationships
Self perception Accept life as it is Question life and fight to put
it in order

Shriberg, A. & Shriberg, D. (2011), Practicing Leadership Principles and Applications, Hoboken, NJ: John Wiley and Sons

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Power

l Needed to manage and lead

Legitimate By position, the boss

Recognition Tangible or intangible recognition

Specialized skills or know-how

Power Expert
execution

Charisma, personal characteristics,

Referent
reputation

Coercitive Fear of punishment or sanctions

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 Empowerment

Traditional power Empowerment

• The less power subordinates
have, the more you can get • Keeping people powerless
fosters dependence and limits
them to do what
risk taking
you want
• I gain power by giving it
• I lose power by giving it
• The more people feel power,
• People will abuse power and
the greater their satisfaction
take advantage of the
organization (the greater their performance)

Topping, P. (2002). Managerial Leadership. USA: McGraw-Hill

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Situational leadership styles

High There is no universal theory or style of leadership

3. SUPPORTING 2. COACHING
Supportive behavior

4. DELEGATING 1. DIRECTING

Low Directive Behavior High

Blanchard, K., Fowler, S. and Hawkins, L. (2005), Self Leadership and the One Minute Manager: Increasing Effectiveness Through Situational
Self Leadership, HarperCollins Publishers Inc.

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 Leading teams / communities

Shared knowledge interest in this knowledge

Shared practices
domain domain

Create common
ground and a Continuous learning Applied by domain
common sense of of its members members
identity

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Teams / communities life cycle

Transformation
Stewardship
Maturing

Coalescing

Potential

Franz HW., Kaletka C., Pelka B., Sarcina R. (2018) Building Leadership in Project and Network Management. Management for Professionals.
Springer, Cham

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 Team and individual motivation

Individual

Task Team

Adair, J. (2007). Leadership and motivation: The fiftyfifty rule and the eight key principles of motivating others. London, UK: Kogan Page

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Team and individual motivation

External Internal motivation

motivation • Autonomy
• Rewards • Growth
• Punishment • Purpose

Pink, D. (2009). Drive: The Surprising Truth About What Motivates Us. New York City: Riverhead Books.

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 The role of recognition in capitalization

l Decline cycle l Growth cycle

Limited Limited Higher Higher

effectiveness recognition effectiveness recognition

Limited Limited Higher Higher

aspirations commitment aspirations commitment

Franz HW., Kaletka C., Pelka B., Sarcina R. (2018) Building Leadership in Project and Network Management. Management for Professionals.
Springer, Cham

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Catalysts of Business Change

Technology advancements

New markets and customers

New/lower priced competition

Higher customer expectations

Rapidly changing risk profile (economic, geopolitical,

compliance, etc)

Unplanned events (natural hazards, weather, extreme

financial volatility)

Based on: Lynch, G. (2009). Single Point of Failure - The ten essential laws of supply chain risk management. EEUU. Wiley

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 Systemic change vision

World-view

Transformation by
Customers
Actors

Control by owners

Environment

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Change management

Current state

Unfreeze

Transition state

Refreeze

Desired state

Topping, P. (2002). Managerial Leadership. USA: McGraw-Hill

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 Impact of change in organizations

Planning

Preparation
Implementation higher productivity

Need for change Education /

Change Training
impact

Change
assimilation time

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Change process

Plan Prepare Implement Review Improve

Provide Engage, enable Gain Develop

Leadership Empower people Commitment Ownership

Motivators

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 Change process
Steps
Plan Prepare Implement Review Improve

Where
(From and to)

Why

What

Who

When
(Start and finish)

Provide Engage, enable Gain Develop

Leadership Empower people Commitment Ownership

Tony Lendrum , T. (2011). Building High Perform ance Business Relationships: Rescue, Im prove, and Transform Your M ost Valuable Assets. EEUU: W iley

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References & Suggested Additional Reading

l Adair, J. (2007). Leadership and motivation: The fiftyfifty rule and the eight key principles
of motivating others. London, UK: Kogan Page
l Blanchard, K., Fowler, S. and Hawkins, L. (2005), Self Leadership and the One Minute
Manager: Increasing Effectiveness Through Situational Self Leadership, HarperCollins
Publishers Inc.
l Franz H.W., Kaletka C., Pelka B., Sarcina R. (2018) Building Leadership in Project and
Network Management. Management for Professionals. Springer, Cham
l Kloppenborg, T. (2003). Project Leadership. EEUU: Management Concepts Inc
l Pink, D. (2009). Drive: The Surprising Truth About What Motivates Us. New York City:
Riverhead Books.
l Tony Lendrum, T. (2011). Building High Performance Business Relationships: Rescue,
Improve, and Transform Your Most Valuable Assets. EEUU: Wiley
l Topping, P. (2002). Managerial Leadership. USA: McGraw-Hill
l Shriberg, A. & Shriberg, D. (2011), Practicing Leadership Principles and Applications,
Hoboken, NJ: John Wiley and Sons

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 25. Introduction to project
management

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Project management

l Project
l A project is a temporary endeavor designed to produce a unique
product, service or result

Temporary Projects characteristics Unique

l Temporary – With a defined beginning and end

l Unique – New entrepreneurship, unknown field - Risks

l Project management
l Project management is the application of knowledge, skills, tools and
techniques to project activities to meet the project requirements

Project Management Institute, publisher (2017) A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Sixth Edition

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 Project life cycle

Starting Organizing Ending the

the and Carrying out the work project
project preparing

Process groups
Monitoring
Initiating Planning Executing and Closing
processes processes processes controlling processes
processes

10 knowledge areas

Project Management Institute, publisher (2017) A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Sixth Edition

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Project Management Knowledge Areas

Integration

Scope

Schedule

Cost

Quality

Resources

Communications

Risks

Procurement

Stakeholders

Project Management Institute, publisher (2017) A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Sixth Edition

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 Initiation processes

Integration Stakeholders
management management
• Project Charter • Identify
development stakeholders

Project Management Institute, publisher (2017) A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Sixth Edition

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Project Charter

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 Planning processes

Scope Requirements WBS Schedule

Budget Quality Resources Communications

Risks Procurement Stakeholders

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Project constraints

Time
Scope
(Schedule)

Resources

Cost
(Budget)

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 Project constraints
Measurable
Organizational
Value
(MOV)

Scope

Phases
Sequence
Schedule
Tasks Resources
Budget
Time
intervals

Marchewka, J. (2009). Information Technology Project Management - Providing Measurable Organizational Value (3ª ed.). EEUU: Wyley

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Work Breakdown structure (WBS)

Project Name
l A deliverable-oriented
hierarchical decomposition of 1.0 Deliverable 2.0 Deliverable 3.0 Deliverable
the work to be executed by the 1.1 Task
project team to accomplish the
1.1.1 Sub-task
project objectives
1.1.2 Sub-task
l Main 2 levels –Define a set of
planned results that collectively [Link] Work Package
and exclusively represent 100% [Link] Work Package
of the project's scope
[Link] Work Package
l Subsequent levels - The
children of a parent node [Link].1 Level of Effort

collectively and exclusively [Link].2 Level of Effort

represent 100% of the scope of [Link].3 Level of Effort
their parent node
1.1.3 Sub-task

1.2 Task

1.3 Task

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 Gantt chart

l Gantt chart is a bar chart that provides a visual view of tasks scheduled over
time. A Gantt chart is used for planning projects of all sizes, and it is a useful
way of showing what work is scheduled to be done on a specific day

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CCPM – Critical Chain Project Management (TOC)

l Critical chain project management is a scheduling method that plans and

manages projects using buffers as defined in the "theory of constraints” (TOC).

2. Resource conflicts removed

1. Reduced task times

3. Critical chain

5. Resource buffers
A B C

RB RB RB RB
8. Buffer management
A C D

B E C
4. Project buffer
7. Late start
6. Feeding buffer

Time
Lawrence P. Leach, L. (2005). Critical Chain Project Management, 2da Edición. EEUU: Artech House

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 Resource Utilization Chart

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Pert diagram

40
T=1 month T=3 months
D F
T=3 months T=2
10 30 months 50
A E
B C
T=4 months 20 T=3 months

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 Execution processes

l Direct and manage project work

l Manage project knowledge
l Manage quality
l Acquire resources
l Develop and manage team
l Manage communications
l Implement risk responses
l Conduct procurements
l Manage stakeholder engagement

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Monitoring and controlling processes

l Monitor and control project work

l Perform integrated change control
l Validate scope
l Control scope
l Control schedule
l Control costs
l Control quality
l Control resources
l Monitor communications
l Monitor risks
l Control procurements
l Monitor stakeholder engagement

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 Project status dashboard

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Closing processes

Inputs Outputs

• Project Charter • Document update

• PM Plan • Product, service or
• Project documents final result
• Accepted • Assets update
deliverables
• Business documents
• Agreements
• Procurement
documents
• Assets

Project Management Institute, publisher (2017) A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Sixth Edition

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 Project evaluation
Short-term Long-term
Inputs Activities results results

Changes in
behavior,
practices or
policies

Quantifiable immediate
results

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References & Suggested Additional Reading

l Marchewka, J. (2009). Information Technology Project Management - Providing

Measurable Organizational Value (3ª ed.). EEUU: Wyley
l Lawrence P. Leach, L. (2005). Critical Chain Project Management, 2da Edición.
EEUU: Artech House
l Project Management Institute, publisher (2017) A Guide to the Project
Management Body of Knowledge (PMBOK® Guide), Sixth Edition

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 26. Sustainable supply chain
management

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Sustainable supply chain management

l The management of material, information and capital flows as well as

cooperation among companies along the supply chain while taking
goals from all three dimensions of sustainable development, that is,
economic, environmental and social, into account which are derived
from customer and stakeholder requirements.

Economic Social

Environment

Seuring, S. and Müller, M. (2008) From a Literature Review to a Conceptual Framework for
Sustainable Supply Chain Management. Journal of Cleaner Production, 16, 1699-1710.

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 The 3 Pillars of Sustainability

Economic Social
• Profit • Standards of living
• Cost Saving • Education
• Economic Growth Community
• Research & • Equal Opportunity
Development Sustainability

Environment
• Natural Resources Use
• Environmental
Management
• Pollution Prevention
(air, water, land, waste)

Purvis, B., M ao, Y. and Robinson, D. (2018) Three pillars of sustainability: in search of conceptual origins. Sustainability Science
Abualfaraa, W .; Salonitis, K.; Al-Ashaab, A.; Ala’raj, M . (2020) Lean-Green M anufacturing Practices and Their Link with Sustainability: A Critical Review.
Sustainability, 12, 981.

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The 3 Pillars of Sustainability

Economic -
Social
Economic • Business
Social Ethics
Environment - Sustainability • Fair Trade
Economic
• Worker’s
• Energy Rights
Efficiency Social - Environment
• Subsidies/Ince • Environmental
ntives for use Justice
of Natural
• Natural Resources
Resources Environment Stewardship
• Locally and Globally

Purvis, B., M ao, Y. and Robinson, D. (2018) Three pillars of sustainability: in search of conceptual origins. Sustainability Science
Abualfaraa, W .; Salonitis, K.; Al-Ashaab, A.; Ala’raj, M . (2020) Lean-Green M anufacturing Practices and Their Link with Sustainability: A Critical Review.
Sustainability, 12, 981.

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 United Nations Sustainable Development Goals (SDGs)

UN (2015). Transforming our world: The 2030 Agenda for Sustainable Development. United Nations, New York

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United Nations Sustainable Development Goals (SDGs)

• End poverty in all its forms everywhere

Goal 1

• End hunger, achieve food security and improved nutrition and promote sustainable
Goal 2 agriculture

• Ensure healthy lives and promote well-being for all at all ages
Goal 3

• Ensure inclusive and equitable quality education and promote lifelong learning
Goal 4 opportunities for all

• Achieve gender equality and empower all women and girls

Goal 5

• Ensure availability and sustainable management of water and sanitation for all
Goal 6
UN (2015). Transforming our world: The 2030 Agenda for Sustainable Development. United Nations, New York

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 United Nations Sustainable Development Goals (SDGs)

• Ensure access to affordable, reliable, sustainable and modern energy for all
Goal 7

• Promote sustained, inclusive and sustainable economic growth, full and productive
Goal 8 employment and decent work for all

• Build resilient infrastructure, promote inclusive and sustainable industrialization

Goal 9 and foster innovation

• Reduce inequality within and among countries

Goal 10

• Make cities and human settlements inclusive, safe, resilient and sustainable
Goal 11

• Ensure sustainable consumption and production patterns

Goal 12
UN (2015). Transforming our world: The 2030 Agenda for Sustainable Development. United Nations, New York

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United Nations Sustainable Development Goals (SDGs)

• Take urgent action to combat climate change and its impacts*

Goal 13

• Conserve and sustainably use the oceans, seas and marine resources for sustainable
Goal 14 development

• Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably

manage forests, combat desertification, and halt and reverse land degradation and halt
Goal 15 biodiversity loss

• Promote peaceful and inclusive societies for sustainable development, provide access
Goal 16 to justice for all and build effective, accountable and inclusive institutions at all levels

• Strengthen the means of implementation and revitalize the global partnership for
Goal 17 sustainable development

UN (2015). Transforming our world: The 2030 Agenda for Sustainable Development. United Nations, New York

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 Methods to Trace Natural Resource Use and Pollution Over
Supply Chains

• Comprises methods to quantity and map land,

Environmental footprint water, material, carbon and other
assessment (EFA) environmental footprints

• A method for estimating and assessing the

Life cycle assessment environmental impacts attributable to the life
(LCA) cycle of a product

Environmentally • A method for studying the relation between

different sectors of the economy and indirect
extended input–output natural resource use and environmental
analysis (EE-IOA) impacts

Bouchery, Y., Corbett, C.J., Fransoo, J.C., Tan, T. (Eds.) (2017) Sustainable Supply Chains - A Research-Based Textbook on Operations and
Strategy, Springer

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Linear economy

Materials
Waste

Manufacturer

Distributor User /
Consumer

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 Circular economy

Materials
Waste
Waste

Manufacturer
Collection
Reduces
waste through:
• Re-use
• Repair
Distributor • Refurbish
User / • Recycle
Consumer

Bouchery, Y., Corbett, C.J., Fransoo, J.C., Tan, T. (Eds.) (2017) Sustainable Supply Chains - A Research-Based Textbook on Operations and
Strategy, Springer

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Life cycle assessment (LCA)

Cradle-to-Gate

• The effects caused along the life cycle from the extraction of raw
materials to the production, packaging and distribution phases are
evaluated.

Cradle-to-Grave

• The phases linked to the usage cycles of the product in question by

consumers until its end-of-life and disposal are added to the previous
phases.

Cradle-to-Cradle

• In the cases where, at the end of its life cycle, either a part of or the
entire product can become a useful component in new life cycles of
the goods it generates.
Belvedere, V., Grando, A. (2017) Sustainable operations and supply chain management, John Wiley & Sons Ltd

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 Sustainability and new product design

Raw material Manufacturing,

extraction and packaging and Product use End of life
processing distribution
• Design for • Design for • Design for • Design for
resource cleaner energy efficiency. environment.
conservation. production. • Design for water • Design for reuse.
• Design for • Design for conservation. • Design for
low-impact low-impact • Design for remanufacturing.
materials. packaging. minimal • Design for
• Design for • Design for consumption. disassembly.
biodiversity efficient • Design for • Design for
conservation. distribution. low-impact use. recycling.
• Design for • Design for
maintenance. service and
repair.
• Design for
durability.

Belvedere, V., Grando, A. (2017) Sustainable operations and supply chain management, John Wiley & Sons Ltd

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Sustainability and procurement (approaches)

Reconsider
conventional Specify
Reduce the green and Redesign
quantity to purchases
and identify social the product
buy products
alternative
solutions

Belvedere, V., Grando, A. (2017) Sustainable operations and supply chain management, John Wiley & Sons Ltd

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 Sustainability and production

l Reduce energy waste

l Reduce water waste
l Reduce physical waste
l Reduce emissions
l Air pollutants
l Heavy metals
l Organic micro-pollutants
l Carbon Dioxide
l Reduce noise
l Reduce land contamination and protect biodiversity
l Embrace Lean Six Sigma manufacturing principles, practices and tools

Belvedere, V., Grando, A. (2017) Sustainable operations and supply chain management, John Wiley & Sons Ltd

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Sustainability and transportation

Specify the Identify

Identify all Offset the
activities and mode of solutions that remaining
transportation can reduce the
processes that and the environmental negative
require effects of
transportation. distances impact of transportation.
covered. transportation.

Belvedere, V., Grando, A. (2017) Sustainable operations and supply chain management, John Wiley & Sons Ltd

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 References & Suggested Additional Reading

l Abualfaraa, W.; Salonitis, K.; Al-Ashaab, A.; Ala’raj, M. (2020) Lean-Green

Manufacturing Practices and Their Link with Sustainability: A Critical Review.
Sustainability, 12, 981.
l Belvedere, V., Grando, A. (2017) Sustainable operations and supply chain
management, John Wiley & Sons Ltd
l Bouchery, Y., Corbett, C.J., Fransoo, J.C., Tan, T. (Eds.) (2017) Sustainable
Supply Chains - A Research-Based Textbook on Operations and Strategy,
Springer
l Purvis, B., Mao, Y. and Robinson, D. (2018) Three pillars of sustainability: in
search of conceptual origins. Sustainability Science
l Seuring, S. and Müller, M. (2008) From a Literature Review to a Conceptual
Framework for Sustainable Supply Chain Management. Journal of Cleaner
Production, 16, 1699-1710.
l UN (2015). Transforming our world: The 2030 Agenda for Sustainable
Development. United Nations, New York

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End of Course
Thanks!

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 Glossary of terms

Term Definition Based on reference CSCM course section

5S Amethod for organizing the workplace in a shop Kiran D.R. (2016) Total 19. Lean Six Sigma
floor or even in an office, is more a practice than quality management: key
a technique used to establish and maintain concepts and case studies.
quality environment in an organization. Elsevier Science

Aggregate planning A process by which a company determines Chopra, S & Meindl, P (2016) 12. Supply management
operational parameters over a specified time Supply Chain Management:
horizon to support decision making at an Strategy, Planning, and
aggregate rather than a granular level. Operation. 6th ed, Pearson
Analytical CRM The process through which an organization Education, Essex, Handbook
Payne, A. (2005). NE. 15. Customer
transforms customer data gathered from of CRM: Achieving Excelence Relationship
Operational CRM and other transaction in Customer Management. Management
procesing systems into actionable customer UK, Elsevier
Artificial Intelligence insight.
The theory and development of computer Oxford dictionary 18. Information
(AI) systems able to perform tasks that normally systems and digital
require human intelligence. supply chain
Assemble-to-order Order fulfillment strategy in which customized Chopra, S & Meindl, P (2016) 1. Supply chain
products are assembled from components after Supply Chain Management: management essentials
the receipt of a customer order. Strategy, Planning, and
Backorder An order or part of an order waiting to be filled Operation.
Chopra, S &6th edn, Pearson
Meindl, P (2016) 7. Logistics - Inventory
because it could not be filled when it was placed. Supply Chain Management: management
Strategy, Planning, and
Benchmarking The process of comparing one's business Operation.
Bhandari, A.6th
& ed, Pearson
Verma, R.P. 4. Business processes
processes and performance metrics to industry (2013). Strategic and metrics
bests or best practices from other industries management: A conceptual
Benchmarking Practice of comparing business processes and framework.
Bhandari, [Link] Delhi,R.P.
& Verma, India: 4. Business processes
performance metrics with the best in the (2013). Strategic and metrics
industry and best practices from other management: A conceptual
Big data companies high-velocity and/or high-variety
High-volume, framework. New Delhi, India:
Gartner 18. Information
information assets that enable enhanced systems and digital
insight, decision making, and process supply chain
automation.
Bill of materials (BOM) A list of the raw materials, assemblies, Prahasto, T. (2008) Modeling 7. Logistics - Inventory
subassemblies, parts and components, as well Bill-Of-Material With Tree management
as the quantities of each, required to Data Structure: Case Study In
manufacture a product. Furniture Manufacturer. 3.
Blockchain An expanding list of cryptographically signed, 10.12777/Jati.3.2.78-82.
Gartner 18. Information
irrevocable transactional records shared by all systems and digital
participants in a network. Each record contains a supply chain
time stamp and reference links to previous
transactions.
Bottom-Up demand Demand Planning approach that is Kepczynski, R., Dimofte, A., 13. Consensus,
planning unconstrained by supply. Planning begins at Jandhyala, R., Sankaran, G., prioritization and
product and store level and requirements at an Boyle, A. (2019) strategic planning
aggregate level are gathered to satisfy demand. Implementing Integrated integration
Bullwhip effect An unwanted increase in variability of materials Business
Ghiani G,Planning - A Guide
Laporte G, 8. Bullwhip effect
flows over time through the supply chain as a Musmanno R (2004)
consequence of small vbariations in customer Introduction to logistic
demand. systems planning and
control. Wiley, Chicester
Business process A Business process is a series of steps 1. Supply chain
performed by a group of stakeholders to achieve management essentials
a concrete goal. Business processes have inputs
and outputs, and its performance can be
Carbon footprinting measured
The activitythrough metrics.
of measuring greenhouse gases Bouchery, Y., Corbett, C.J., 26. Sustainable supply
(GHGs) emissions Fransoo, J.C., Tan, T. (Eds.) chain management
(2017) Sustainable Supply
Carrier A company that moves or transports the product Chains
Chopra,- SA&Research-Based
Meindl, P (2016) 5. Logistics - Transport
from one point in the supply chain to another. Supply Chain Management: in the supply chain
Strategy, Planning, and
Cash to cash cycle The number of days between paying cash its Operation.
Gardner, D.6th edn, The
(2004). Pearson 23. Financial key
suppliers for inventory and collecting cash on Supply Chain Vector: performance indicators
sales from its customers. Methods for Linking the
Execution of Global Business
Cause-and-effect Also called fishbone diagram and Ishikawa Models With Financial 19. Lean Six Sigma
diagram diagram, it is a cause analysis tool that helps
identify many possible causes for an effect or
Change management problem.
The management of change and development Oxford dictionary 24. Leadership and
within a business or similar organization. change management
Circular Economy An industrial and economic system in which all Belvedere, V., Grando, A. 26. Sustainable supply
waste streams and emissions can be a source of (2017) Sustainable chain management
value creation, limiting environmental impact operations and supply chain
and moving towards the search for decoupling management, John Wiley &
forms that allow for sustainable development Sons Ltd
and the restorative capacity of natural resources.
Collaboration Cooperative arrangement in which two or more Tony Lendrum, T. (2011). 14. Supply Chain
parties work jointly towards a common goal Building High Performance Relationships
sharing knowledge, responsibilities, risks and Business Relationships:
Collaborative Planning, rewards.
A collaborative process for supply chain partners Rescue,[Link],
Jonah, and W.
and Hui-Ming, 17. Supply chain
Forecasting and to coordinate plans in order to reduce variance (2003) VMI: a survey of the collaboration tools
Replenishment (CPFR) between supply and demand. Under a CPFR Taiwanese grocery industry.
process, both parties share and compare data J. Purchasing Supply Mgmt,
and agree on forecasts. They collaborate to 9: 11–18.
determine repleshment schedules, work with
discrepancies and solve problems together.
Community of practice A congregation of people with mutual Franz H.W., Kaletka C., Pelka 24. Leadership and
(CoP) engagement, a joint enterprise and a shared B., Sarcina R. (2018) Building change management
domain of knowledge. Leadership in Project and
Network Management.
Competitive strategy Management
An organization's long-term strategy directed to Chopra, for P (2016)
S & Meindl, 2. Strategic planning in
gain and defend a competitive advantage over Supply Chain Management: the supply chain
its rivals. A competitive strategy defines, Strategy, Planning, and
relative to its competitors, the set of customer Operation. 6th edn, Pearson
needs that it seeks to satisfy through its Education, Essex, NE.
products and services. Porter, M. (1980).
Constraint Anything that stands in the way of achieving a Competitive Strategy:
Goldratt, E. M., & Cox, J. 20. Theory of
goal (1986). The goal: a process of Constraints (TOC)
ongoing improvement. Rev.
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A variation of "Quick Response" that eliminates Yao, York:
Y. and North M.
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replenishment of the need for replenishment orders; moving from (2006) The inventory value of collaboration tools
products (CRP) "pushing goods" from inventory holding areas to information sharing,
"pulling goods" onto grocery shelves based on continuous replenishment,
consumer demand at previously agreed intervals and vendor-managed
to maintain specific inventory levels. inventory, Elsevier
Continuous review Inventory replenishment policy in which Chopra, S & Meindl, P (2016) 7. Logistics - Inventory
inventory inventory is continuously tracked, and an order Supply Chain Management: management
replenishment policy for a lot size Q is placed when the inventory Strategy, Planning, and
declines to the reorder point (ROP) Operation. 6th ed, Pearson
Cooperation Mutually beneficial arrangement in which two Education, Essex,
Tony Lendrum, NE.
T. (2011). 14. Supply Chain
or more entities work together to the same end. Building High Performance Relationships
Business Relationships:
Coordination The synchronization and integration of activities Rescue, Improve,
Tony Lendrum, and
T. (2011). 14. Supply Chain
and processes so they can work effectively as a Building High Performance Relationships
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V., Grando, 26. Sustainable supply
along the life cycle of a product where, at the (2017) Sustainable chain management
end of its life cycle, either a part of or the entire operations and supply chain
product can become a useful component in new management, John Wiley &
life cycles of the goods it generates. Sons Ltd
Cradle-to-Gate Environmental assesment of impacts caused Belvedere, V., Grando, A. 26. Sustainable supply
along the life cycle of a product from the (2017) Sustainable chain management
extraction of raw materials to the production, operations and supply chain
packaging and distribution phases. management, John Wiley &
Sons Ltd
Cradle-to-Grave Environmental assesment of impacts caused Belvedere, V., Grando, A. 26. Sustainable supply
along the life cycle of a product from the (2017) Sustainable chain management
extraction of raw materials until its end-of-life operations and supply chain
and disposal; including production, packaging, management, John Wiley &
distribution and usage by consumers in the Sons Ltd
primary and secondary markets.
Critical Chain Project A scheduling method based on the "Theory of 20. Theory of
Management constraints" and "Time buffer management" Constraints (TOC)
used to shorten the period required to finish a
project with limited resources.
Cross-docking An activity whereby goods are received at a Rushton, A. (2014). The 6. Logistics -
warehouse and dispatched without putting them Handbook of Logistics & Distribution networks
away into storage. Distribution Management
Customer Relationship Supply chain process that provides the structure (5th ed.). D.
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Customer relationship A technology platform connecting different Gartner 18. Information
management (CRM) departments, from marketing to sales to systems and digital
system customer service into one cohesive system that supply chain
optimizes revenue and profitability while
promoting customer satisfaction and loyalty.
CRM technologies enable CRM strategy, and
help manage customer relationships, in person
or virtually.
Customer retention A company's ability to retain its customers over Lamb, C. (2011). Essentials of 15. Customer
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characteristics: Item type, lead time and Demand Driven Material Demand Driven
variability Requirements Planning, Material Requirement
Industrial Press, Connecticut Planning - DDMRP
Decoupled materials Materials explosion that stops at buffered Ptak, C., Smith, C. (2016) 22. Introduction to
explosion decoupling points inside the Bill of Materials of Demand Driven Material Demand Driven
a Demand Driven Materials Requirements Requirements Planning, Material Requirement
Planning system. Industrial Press, Connecticut Planning - DDMRP
Demand driven An inventory buffer management method used Ptak, C., Smith, C. (2016) 7. Logistics - Inventory
material requirements to create replenishment orders, reduce lead Demand Driven Material management
planning (DDMRP) time and absorb supply chain variability; based Requirements Planning,
on orders placed by customers. Industrial Press, Connecticut
Demand Latency The time it takes to translate a demand signal 21. Demand-driven
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Demand management The process of planning, communicating, Crum, C. (2003). Demand 11. Demand
influencing and prioritizing demand. Management Best Practices - management
Process, Principles and
Demand Prioritization The process of translating organizational Collaboration.
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priorities into demand fulfilment rules given a Jandhyala, R., Sankaran, G., prioritization and
constrained supply. Boyle, A. (2019) strategic planning
Implementing Integrated integration
Demand Sensing The action of capturing demand signals into Business Planning - A Guide
Barrett, J. and Barger, R. 21. Demand-driven
analytic and intelligence processes to identify (2010) Supply Chain Strategy supply chain (DDSC)
short-term sales demand patterns and demand for Industrial Manufacturers: framework
changes. The Handbook for Becoming
Demand Driven, Gartner
Chase, C. (2016) Next
generation demand
management _ people,
process, analytics, and
technology, John Wiley &
Sons, Inc., Hoboken, New
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support and transform supply chain processes to systems and digital
become more agile and customer-driven. supply chain
Emerging digital technologies provide supply
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DMAIC A process improvement methodology used to Kiran D.R. (2016) Total 19. Lean Six Sigma
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company's profits before interest on debt and
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Lean Six Sigma product
A design
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leader or senior manager who 19. Lean Six Sigma
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Black Belt responsible for strategic Lean Six Sigma
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A software application designed for planning, Gartner 18. Information
Management System executing and optimizing the shipment of goods. systems and digital
(TMS) A TMS application is used to plan freight supply chain
movements, do freight rating and shopping
across all modes, select the appropriate route
and carrier, and manage freight bills and
Truckload (TL) payments.
A truck transportation service that moves a full Rushton, A. (2014). The 5. Logistics - Transport
load directly from its origin to its destination in Handbook of Logistics & in the supply chain
a single trip. Distribution Management
Value Chain A set of activities that a firm operating in a (5th ed.).
Porter, [Link]: Kogan Page
(1985). 1. Supply chain
specific industry performs in order to deliver a Competitive Advantage: management essentials
valuable product or service for the market. Creating and Sustaining
Value Network [Link].
A web of relationships that generates economic Porter, (1980). USA, 1. Supply chain
value and other benefits through complex Competitive Strategy: management essentials
dynamic exchanges between two or more Techniques for Analyzing
individuals, groups or organisations. Industries and Competitors.
Value stream mapping A lean tool that documents every step in a EEUU, Free Press 19. Lean Six Sigma
process to be improved. Value stream mapping
is used to identify waste, reduce process cycle
times, and implement process improvement.
Two maps are created through Value stream
mapping: The first represents the current
process as-is. The second, represents a future
state map of how value should flow.
Vendor-Managed A collaborative inventory replenishment process Yao, Y. and Dresner, M. 17. Supply chain
Inventory (VMI) where the supplier monitors the customer's (2006) The inventory value of collaboration tools
inventory movements information and assumes information sharing,
the responsibility of keeping the customer continuous replenishment,
properly stocked with materials. and vendor-managed
Warehouse A software application that helps manage the inventory,
Gartner Elsevier 18. Information
Management System operations of a warehouse or distribution systems and digital
(WMS) center. WMS applications offer capabilities such supply chain
as receiving, put-away, stock locating, inventory
management, cycle counting, task interleaving,
wave planning, order allocation, order picking,
replenishment, packing, shipping, labor
management and automated materials-
handling equipment interfaces.
Water footprint (WF) A measure of freshwater appropriation Bouchery, Y., Corbett, C.J., 26. Sustainable supply
underlying a certain product or consumption Fransoo, J.C., Tan, T. (Eds.) chain management
pattern. (2017) Sustainable Supply
Chains - A Research-Based
Work Breakdown A hierarchical decomposition of the total scope Project Management 25. Introduction to
structure (WBS) of work to be carried out by the project team to Institute, publisher (2017) A project management
accomplish the project objectives and create the Guide to the Project
required deliverables. Management Body of
Knowledge (PMBOK® Guide),
Sixth Edition
[Link]

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