Chapter 12: Supply Chain Management

12.2 What is a supply chain?

 Definition of supply chain:
o Comprises all participants that are involved (direct and indirect) in fulfilling a
customer’s order, once the need for the good or service has been identified.
 From raw material stage to the final good being consumed or service rendered
 Participants include: suppliers; transporters; warehouses; manufacturers; retailers and
consumers
 A supply chain is a system that sources raw materials to produce and deliver goods or services
to the final consumers
 All aspects of the production stage
 Stages of a supply chain:
o Raw material
o Supplier
o Manufacturing
o Distributor
o Retailer
o Customer
 Example Supply chain for an apple:
o Seed grower sells the seeds to the farmer
o Farmer buys seeds and plants them
o The picked apples are transported to a sorting facility via cold chain
o The apples are transported to the supermarket warehouse
o Transported to the physical store
o Bought by customer

12.3 What is supply chain management?

 According to Council of Supply Chain Management Professionals (CSSMP) a supply chain
encompasses the planning and management of all activities involved in sourcing and
procurement, conversion, and all logistics management activities.
 Also includes co-ordination and collaboration with channel partners, which can be suppliers,
intermediaries, third party service providers and customers
 Integrates supply and demand management within and across companies
 In the past:
 Principles of SCM:
o Principle 1: segment consumers based on the service needs of specific groups and
adapt the supply chain to service these groups in a profitable way
o Principle 2: customise the logistics network to service requirements, as well as to the
profitability of consumes segments
o Principle 3: understand consumer needs and align demand planning across the supply
chain to ensure consistent forecasts and optimal resource allocation
o Principle 4: differentiate goods and services closer to the customer and speed
conversion across the supply chain
o Principle 5: manage sources of supply in a strategic manner to facilitate the reduction
in total costs of material and services
 o Principle 6: develop a supply chain wide technology strategy that will support
various levels of decision making and provides a clear view of the flow of goods,
services and information
o Principle 7: include channel spanning performance measures to understand the
collective success in delivery goods or services efficiently and effectively

12.31 The importance of supply chain management

 Integral to customer satisfaction
 CSCMP outlines the importance of supply chain management as:
o Boosting customer service:
 Consumers expect to receive the right goods and services in the right quantity
 Consumers expect the goods and services to be available at the right location
 Consumers expect to have their ordered goods or services delivered at the
right time
o Reducing operating costs:
 Decrease purchasing costs – retailers are dependant on supply chains to
quickly provide expensive goods or services that prevent retailers from
having to hold costly inventory
 Decrease production costs – manufacturers are dependant on supply chains to
continually provide them with the required raw materials and components to
avoid shortages and a production shut down
 Decrease production costs – manufactures and retailers are dependant on
supply chain managers to design networks that enable customers service
goals to be met
o Improving financial position:
 Increase profit leverage – supply chain managers have the ability to control
and reduce supply chain costs that contribute to the increasing an
organisation’s profit
 Decrease fixed assets – supply chain managers are valued by organisations as
they can decrease the use of assets in the supply chain
 Increase cash flow – supply chain mangers can ensure that product flows are
efficiently co-ordinated to meet the needs of consumers, as required

12.4 Purchasing Management

 Raw materials
o Items used in production that are the base of the good that is being produced
 Ex. Gold for a gold necklace
 Supplementary materials
o Used in production process but not part of the finished products
 The water used in water jet they use to cut certain materials for cars
 Semi-manufactured products
o Have been through the transformative process at least once and will be transformed
again at a later stage
 Ex. Wires that have been rolled that will later be used in a later stage
 Components
o Manufactured items that will be combined with other manufactured at a later stage to
finish complete the product
 Ex. Battery for a phone that will be put in the phone to complete the product
  Finished products
o Items that are purchased to be sold when value has been added
 Ex. Buying a watch to resell it
 Investment goods or capital equipment
o Value of investment goods or capital equipment in dependant on the economic cycle
and are not consumed immediately
 Ex. Buying a house
 Maintenance, repair and operating materials
o Indirect materials or consumable items that serve to support the operational activities
in the overall organisations, and not only the transformative process
 Ex. Maintenance materials
 Services
o Services carried out by third-party companies
 Ex. Security guards

12.5 Operations Management

 Defined as the administration of business practices
 Must answer a few questions:
o What goods and services are being demanded by consumers?
o How much of the goods and services are being demanded?
o When are these goods and services required?
o What quality and price do consumers expect?
 Ops management is responsible for engaging in demand planning and forecasting –
translates customer demand into operations activities

12.5.1 Forecasting
 Forecasting is a prediction of demand based on statistical and mathematical analysis
 Mathematical forecast the organisation uses should reflect all information and knowledge that
can have an impact on future demand but cannot be reflected in historic demand
 Starts with predetermined assumptions based on experience, knowledge and judgement –
used to make predictions for the coming years
Two techniques used for the analysis:
o Quantitative:
 Time series:
 Moving average or simple moving average
 Weighted moving average
 Exponential smoothing
 Casual:
 Linear regression
 Multiple regression
o Qualitative:
 Customer surveys
 Jury or executive
 Sales-force opinion
 Delphi method
Quantitative forecasting
 Technique uses past experiences and events to make a prediction on what may happen in the
future
 Relies on hard data, that eliminates the need for guess work
 Uses series of observations and arranges them in chronological order
 Includes the following models:
o Moving average:
 Assumption made: the demand of goods or services will stay constant over
time
 uses recent set of data and measures the average information over a specific
period
 the longer the average moving average, the smoother the forecasting line –
used to develop the forecast
D t + Dt −1+ D t−2+…
n
F t+ 1=forecst for the next period , t+ ¿1

Dt =demand ∈ preiod
n = number of most recent observation used to develop the forecast
o Weighted moving average:
 The difference between the moving average and the weighted average is that
the weighted moving average is that weight is added to individual data points
 Most recent data carry the most weight
 No set method to allocate the weight, done at the discretion of the forecast


( W t ) Dt + ( W t −1 ) Dt −1+ ( W t ) Dt −2 + ( W t ) D t−3 …
n
 Dt = demand in period
 Weight assigned in period to the demand period – t+1-i
 Is = 1
 NB – all assigned weights must = 1
o Exponential smoothing
 Requires most recent forecast, actual demand and the smoothing constant α
(alpha)
 New forecast will be based on the previously used forecast as well as the
actual demand
 Smoothing constant α represent a certain percentage of any forecast error
 Smoothing equation can be represented as:
 F t+ 1=α Dt +(1−α )F t
 Ft+1 = forecast for period of time t+1 (new forecast)
 Ft = forecast for the time period t (current forecast)
 Dt = actual value for the time period
 Alpha = smoothing constant used to weight Dt and Ft (0 <_ α <_
1)
o Following models can be used in casual forecasting:
 Linear regression: forecasted variable can be expressed as a linear function
of an independent variable. Uses past data to estimate the intercept term and
the slope of the coefficient
  Multiple regression: generalised form of linear regression which allows for
more than one independent variable
Qualitative forecasting
 Based on the judgement is based on the judgement of those involved in the development of
the forecast
 Data is subjectively interpreted as opposed to using mathematical techniques
 Makes use of soft data that involves a human factor
 Following methods used:
o Customer surveys:
 Based on information derived from customers or potential customers
 Participants are chosen at random and information can be collected using a
variety of methods such as telephonically using or using questionnaires or
randomly asking individuals
o Jury of executive opinion:
 Based on decisions made by top-level management
 Based on long-range plans
o Sales-force opinion:
 Given sales persons have direct contact with customers, they have valuable
information and insight that is used to develop the forecast
o Delphi method:
 Uses group of individuals from outside the organisation as well as decision
makers
 Panel consist of between 5 and 20 participants develops the forecast

[Link] Forecasting process

 Forecasting is how organisation look into the future in a systematic and concentrated manner
and is the key to planning
 Decides the course of action that is to be followed under certain circumstances
 Provides knowledge about the nature of future conditions


Step 2: Identify Step 3: Choose Step 6: Continual

Step 1: Determine the Step 4: Collect Step 5: Make the
the correct time the correct monitoring of
purpose of the forecast and analyse data foreast
horizon technique the forecast

 Step 1: Determine the purpose of the forecast

o Determines how the forecast will be used and by when it must be ready
o Provides the organisation with an indication of when the forecast should be prepared,
what resources should be allocated and the level of accuracy that should be needed
 Step 2: Identify the correct time horizon
o Each forecast must indicate a time interval
o Organisation must be cognisant of the following: the longer the time horizon, the less
reliable the forecast will be
 Step 4: Choose the correct time horizon
o Org can use qualitative, quantitative or a combo of both
 Step 5: Collect and analyse data
o Vital that all relevant data can be collected and analysed, as the omission of relevant
data will result in the forecast being reliable
o Additionally, the assumptions upon which the forecast is based must be clearly stated
  Step 6: Continual monitoring of the forecast
o Important that the forecast must be continually monitored to ensure compliance
o Purpose is to determine if the actual forecast is aligned to what was forecasted
o If not, the organisation must investigate, take corrective action, or revise in
accordance with the findings
 Accuracy of the forecast is determined when it is evaluated against the actual data and makes
plans based on the forecast

12.5.2 Demand planning

 Demand plan starts with the forecast
 Defined as: the future requirements for the goods and services of an organisation
 Part of the supply chain management process that contributes to the delivery of reliable goods
and services that satisfy the needs of customers

[Link] Demand planning process

 Step 1: Use past sales data to create a statistical forecast
o Info provides an understanding of past demand patterns and enables the organisation
to better understand fluctuation in demand from historical point of view which will,
in turn, aid in future forecasts
o Can also refer to previously compiled forecast
 Step 2: Work with consumers to determine when demand will increase and by how
much
o Organisations must also include manufacturers, distributors and consumers to better
understand the current needs
o Information is then used in the planning process
 Step 3: Manage and combine factors
o Forecast must reflect accurate data that applies to current conditions
o Having a system that will update and manage these forecasts will aid in monitoring
progress and combining forecast into one comprehensive forecast
 Step 4: Re-examine the data
o All key personnel involved in the forecast developments must have regular meetings
to evaluate the forecasts produced and identify areas that require improvement, as
well as to reconcile demand with available supply

12.6 Logistics Management

 CSCMP defines logistics management as:
o That part of the supply chain management that plans, implements and controls the
efficient and effective forward and reverse flow and storage of goods, services and
related information between the point of origin and the point of consumption in order
to meet customer requirements
o