Scm unit

Unit II

UNIT II
Customer focus in SCM- Demand planning, Purchase planning- Make or buy decision- Indigenous and global sourcing Development and
management of suppliers- Legal aspects of buying- Cost management-negotiating for purchasing and sub-contracting- Purchase insurance
– Evaluation of purchase performance ( Performance Indices). Inventory Management: Financial impact of inventory.

CUSTOMER FOCUS IN SCM

To serve consumers with excellent goods and services at minimum possible cost and
response time is the primal focus of Supply Chain. Thus the objective of every supply chain
should be to maximize the overall value generated. The value generated by the supply
chain, also known as the supply chain surplus is the difference between what the final
product is worth to the customer and the costs the supply chain incurs in filling the
customer’s request. Thus the customer focus is a very important in SCM design.

Under the sub topic Customer focus I think an understanding on impact of the Nature of
products on the Supply chain characteristics is important.

Functional and Innovative products: SCM issues – Please read about these two types of
products from Unit I notes and prepare for a question like “what are the Supply chain issues
of functional and innovative products?” Or if it is a case study identify the nature of the
product discussed in the case and elaborate on the SCM issues.

Quick Response and Accurate response- Again this is same as responsiveness and efficiency
- read unit one notes to get an understanding of this

DEMAND PLANNING & FORECASTING

Demand can be of two types

1. Independent Demand
2. Dependant Demand or derived Demand
Independent demand items are generally finished goods while dempendant demand items
are generally components or sub assemblies. Independent demand items are forecasted, as
the future requirements are not known, whereas dependant demand item requirements can
be derived based on demand for finished goods. For example demand for a car in the month
of January would be forecasted, say 100 but the demand for the tires (5 per car) would be

Supply Chain Management Notes ( Pvt Circulation Only)
Compiled by Santhosh.S, Associate Professor, SCMS Cochin

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calculated as 500 tires. Demand for Car is independent while the demand for tire is
dependant.

Key steps in demand planning include:

• Importing historical sales data

• Creating statistical forecasts

• Importing customer forecasts

• Collaborating with customers

• Managing forecasts

• Building consensus forecasts

• Supply and demand collaboration

• Securing constrained forecasts

• Confirmation with customers

• Re examining data and adjusting planning accordingly.

FORECASTING

Is important because, businesses can benefit from accurate forecasts to

1. Optimise the businesses to reduce the cost of operations
3. by prevention of unforeseen changes in production schedules – resulting in high costs due to
changes in personnel , equipments, raw material movements etc.
4. by accurate projections of raw material and finished goods leading to better inventory
management – resulting in low inventory carrying costs and minimum shipping costs.
5. Increase sales opportunities for maximising profits.
6. Provide accurate information for making better decisions.
7. Provides basis for many functional and strategic decisions.
8. example:


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9. Production : Scheduling, Inventory control, aggregate planning.
10. Marketing: Sales force allocation, promotion, and new product introduction.
11. Finance: Plant / equipment investment, budgetary planning.
12. Personnel: Workforce planning, hiring, layoffs.

Forecasting of mature products with stable demand like Milk, groceries etc where as the
forecast is extremely difficult when either the raw material supply or demand of finished
products is highly unpredictable.

Wrong forecasts or no forecasts would lead to misguided business plans, errant decisions
and a lack of collaboration and consensus, which limits buying across the organisations.

Characteristics of Forecasts

Forecasts are always wrong: All forecasts include both and expected value and the measure
of forecasting error (demand uncertainty).
Long term forecasts are usually less accurate than short-term forecasts: Forecasts for next 6
month would be more accurate than the forecast for next week, which would be more
accurate than the forecast for the next day.
Aggregate forecasts are usually less accurate than disaggregate forecasts: The forecast of
the demand for A-segment passenger cars ( Santro, Alto, indica, figo, Micra ) would be more
accurate than the specific forecast of Santro cars.) Forecast for bathing soap would be more
accurate than forecast for the specific bathing soap say Lux.
The farther up the supply chain a company is the greater is the forecast error due to greater
distortion in the information it receives. ( Bull Whip Effect )

Factors affecting demand.

It is important to understand the factors that affect the demand so that adequate provisions are
made for these factors while forecasting is done. These factors also affect the choice of selection of
the methodology to be used for forecasting.

These factors are

Past demand
Lead time replenishment
Planned advertising or marketing efforts
State of economy.


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Planned price decisions
Actions that competitors have taken.

FORECASTING METHODS

Forecasting methods are classified according to the four types

1. Qualitative: Are subjective and rely on human judgement. Are more appropriate when very
less historical data is available or the experts have the market intelligence to make the
forecast. eg Expert opinion, Delphi approach, Market research.
2. Time Series: Uses historical data to make a forecast. Based on the assumption that past
demand is a good indicator of future demand. These methods are very suitable when the
environmental situation is stable and the basic demand pattern does not vary significantly
from one year to another. Are simple to implement and provide a very good beginning.
3. Causal : Causal forecasting method assume that the demand forecast is highly correlated
with certain factors in the environment ( the state of the economy, interest rates etc.)
Causal forecasting methods find the correlation between demand and environmental factors
and use estimates of what environmental factors will be to forecast future demand.
4. Simulation: Simulation forecasting imitate the consumer choices that give rise to demand to
arrive at a forecast.

Companies find it difficult to decide which forecasting method is most appropriate for forecasting.
Using multiple methods of forecasting to arrive at a combine forecast is more effective than using
one method alone.

Observed demand generally has two components ; the Systematic component and the Random
component.

Observed demand = Systematic Component + Random component

Systematic component measures the expected value of demand and consists of

Level component : the current de-seasonalized demand.
trend: the rate of growth or decline in demand for the next period.
Seasonality: the predictable seasonal fluctuations in demand.

The random component is that part of the forecast that deviates from the systematic part. A
company cannot ( and should not) forecast the random component. All a company can predict is the


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size and variability of the random component which provides a measure of the company’s forecast
error.

Selecting a particular forecast method

Step1 : Consider the nature of the industry, the type of the product for which forecast demand is
needed. By looking at the pattern of demand, a few forecasting methods can be shortlisted.

Step 2: Consider the various estimates of forecast errors and prepare a priority list based on their
relative importance to the organization.

Step 3: Estimate the forecast error of each of the short-listed forecast methods in step one.

Step 4: Choose the forecast method/ methods which give the least forecast error estimate.

COLLABORATIVE PLANNING FORECASTING AND REPLENISHMENT - CPFR

Definition : CPFR is the sharing of forecast and related business information among, business
partners in the supply chain to enable automatic product replenishment.

The voluntary Inter industry commerce Standards association ( VICS ) has defined CPFR
as “ a business practice that combines the intelligence of multiple partners in the
planning and fulfilment of customer demand.”

Sales history, sales projections, raw material availability, lead times and other important business
information are shared between the manufacturer and business partners. The information is then
integrated, synchronised and used to eliminate excess inventory and improve in-stock positions
making everyone in the supply chain more profitable.

Sellers and buyers in a supply chain may collaborate along any or all of the following four supply
chain activities

1. Strategy and planning: Both partners decided the roles and responsibilities and checkpoints.
They then identify the significant events that affect the demand and supply like the new
product introduction, promotions, store opening / closing, changes in inventory policy etc.
2. Demand and supply management: The consolidated forecast of customer demand estimate
of the partners ( Collaborative sales forecast) is projected at the point of sale and based on
this a collaborative order plan is created that determines the future orders and delivery
requirements based on the sales forecast, inventory positions and replenishment lead times.


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3. Execution: As forecasts become firm they are converted to actual orders. The fulfilment of
these orders then involves production, shipping, receiving, and stocking of products.
4. Analysis: The key analysis focuses on identifying exceptions and on performance evaluation
metrics that are used to asses the performance or identify trends.

Risks and Hurdles of CPFR implementation

1. Risk of misuse of information : Lot of information is shared between the supplier and buyer
(partners ) and sometimes the supplier may be supplying to the buyer’s competition too.
2. If one partner changes the scale of operation or technology the other partner is also forced
to follow suit or lose the collaborative relationship.
3. The partners may have huge cultural differences and hence fostering a collaborative culture
may be very difficult.

Steps to achieve Collaborative coordination

4. Quantify bullwhip effect: Analyse the variance between the demand from your customer
and the demand you place on the supplier. This is the internal bullwhip that you are
creating. Evidence of size of bull whip effect is very effective in getting different stages of the
supply chain to focus on efforts to achieve coordination and eliminate the variability created
within the supply chain.
5. Get top management commitment for coordination.
6. Devote resources to coordination: Without committing significant managerial resources
success in coordination may not be achieved.
7. Focus on communication with other stages: Regular communication helps different stages of
the supply chain share their goals and identify common goals and mutually beneficial actions
and improve coordination.
8. Try to achieve coordination of the entire supply chain network: The full benefit of
coordination is achieved only when the entire supply chain network is coordinated.
9. Use technology to improve connectivity in the supply chain: Internet and a variety of
different types of software systems can be used to increase the visibility of information
throughout the supply chain.
10. Share benefits of coordination equitably: The greatest hurdle to coordination in the supply
chain is the feeling on the part of any stage that the benefits of coordination are not being
equitably shared. Managers from the stronger party in the supply chain relationship must be


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sensitive to this fact and ensure that all parties perceive that the way benefits are shared is
fair.
Traditional supply chain relationship

Customer store Retail DC Wholesale DC manufacturing Supplier

store

Collaborative Planning Forecasting and replenishment ( CPFR)

Synchronization of customer trend or ordering Information

Customer store Retail DC Wholesale DC manufacturing Supplier

store

ORDER FULFILMENT AND ORDER MANAGEMENT

ORDER FULFILMENT

Order Fulfilment can be defined as the activities that take place from the moment a buyer/customer
places an order until that order has been delivered in full. How well your order fulfillment process
functions is a critical determinant of how well you satisfy, and therefore retain, your customers. So
the order fulfillment process plays a crucial role in supply chain management, and many consider it
the most important business process.

Order fulfilment strategies available
Based on the production lead time P or the time taken to produce an object and the Demand lead
time D, or the time the customers are willing to wait for a product, the following strategies are
available
Case 1 : D >> P – ETO, Engineer to order ( Demand lead time is very large compared to Production
lead time)
Case 2: D>P – Make to order MTO
Case 3: D< P – Assemble to order ATO
Case 4: D=0 – Make to stock, MTS
Order fulfilment Process


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The processes involved in order fulfilment process are listed below
11. Product enquiry- Customer’s Initial enquiry about the offering, visit to the web page, ask for
catalogue
12. Sales Quote- Budgetary or availability quote
13. Order configuration – Choosing of options and finalization of the requirements
14. Order Booking – Formal placement of order ; Issue of purchase order
15. Order Acknowledgement – final confirmation that the order is booked and/ or Received.
16. Invoicing / Billing – Presentation of the bill or invoice to the customer.
17. Order sourcing /Planning – Determining the source from where to get the items ordered.
18. Order Processing – The process step where the source, ie the distribution center or the
warehouse has to execute the order ( Picking, packing, shipment etc)
19. Shipment – Shipment and transportation of goods
20. Delivery – Delivery of the goods to the customer
21. Payment – Payment of charges for the goods / services / delivery
22. Returns - Return of goods if goods are unacceptable or not required.
ORDER MANAGEMENT
Order management is the set of actions to be performed to deliver the product or service ordered by
the customer. The typical steps involved are
1. Pick the goods from inventory
2. Inform the customer that the order is despatched
However, things are always not that simple for most orders. Some interesting situations are listed
below -
1. The merchant may be out of stock on some of the items that the customer has ordered. In
that case, the merchant may ship out only part of the order with the items that are in stock.
And will ship the rest out at a later time. And that is the idea behind Partial Shipments. The
items that were not shipped are referred to as been Back Ordered.
2. Sometimes, the merchant may not stock all the items in her warehouse. For example, a
merchant who sells toys online, may decide to not stock the heavy doll-houses in her
warehouse. Anytime a customer orders a doll-house on her website, she will ask the doll-
house manufacturer (vendor) to ship it out directly from the manufacturer’s (vendor’s)
warehouse to the customer’s address. This process of shipping directly from the vendor to
the customer without going through the retailer’s warehouse is called Drop Shipping.
3. Some merchants use Outsourced Fulfillment Warehouses to avoid carrying any inventory. In
simple words, the merchant uses a third party warehouse to store her inventory for her.


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When an order is placed on her website, she forwards that order information to the third
party warehouse, who then ships the goods directly to the customer.
Though order management process is generally considered to be complete once the entire order has
been shipped out (either in multiple Partial Shipments, or via Drop Shipments as described above),
the merchant usually follows up with the customer a few days later to ensure that the customer is
happy with entire transaction. Therefore, the order management process must be tied closely to the
Customer Relationship Management process that the merchant follows.
PROCUREMENT / PURCHASE PLANNING
Overview of Procurement
Procurement constitutes a very important function of any business firm, whether it is in the business
of manufacturing or service. Procurement is an important function because
Major part of working capital of any organization remains blocked in the form of raw
material and other inputs purchased from different sources.
Quality of inputs determine the quality of finished products from the organization and this in
turn creates an image of an organization.
If insufficient quantity is procured the firm may fail to deliver the required quantity of
finished goods to its customer in time. On the other hand if the same is procured in excess
the firm will have to bear additional financial burden in terms of opportunity cost of funds
tied up in unused items.
Purchasing process model

Purchasing

Tactical Purchasing Order function

Determining Selecting Expediting Follow up
Internal
specification supplier Contracting Ordering and and Supplier
customer
evaluation evaluation

Sourcing Supply

Buying
Procurement


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Procurement is defined as sourcing the
right material
from the right supplier / s
In the right quantity
At the right time
PROCUREMENT CYCLE
Procurement cycle involves the following activities
Step 1: Identification of requirements of an item by user department in terms of type,
quantity and quality etc.
Step 2 : Identification of the right source of supply and invitation of quotations.
Step 3: Comparison of quotations, negotiations with the vendors and placing of purchase
order.
Step 4: Keeping track of purchase order.
Step 5: Inspection of quality, quantity etc and receipt of purchase order.

Determination of
Requirements

Receipt of goods
Source
Invoice & payment
PROCUREMENT determination
processing.
CYCLE

PO Monitoring Vendor selection

STEP 1 : Need Identification
In a typical manufacturing or service organization, needs for an item are raised by both functional
and supporting departments in a prescribed form and sent to the stores department. The
requisitions may vary in volume and variety and include
A brief description about the item


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Necessary quantity and quality and
The desired Delivery date .
In addition the user department also mentions the urgency and the criticality of the item. Once the
requisition is received by the stores department, the availability of the items is checked and if the
item is available the same is issued to the user department and if not the stores department
forwards the requisition to the purchase department with appropriate remarks.
STEP 2: Identification of the right sources of supply and invitation of quotations
The purchase department should identify suppliers who have the capability of supplying the desired
goods. if the right suppliers are not listed in the record, quotations of the item has to be invited from
various suppliers through tenders. Tenders may be floated in news paper, magazines and the
company web sites for a specified period within which the vendors will have to submit the
quotations.
STEP 3: Comparision of quotations, negotiations with the vendors and placing of purchase order
The quotations submitted by the suppliers are compared on price, quality, delivery schedule and
other relevant parameters which enable the purchasing firm to do short listing of the vendors. The
shortlisted vendors may be requested to make a presentation of their firms, products and other
factors affecting the quality, quantity and delivery schedule of the item. During this stage
negotiations with the vendors on one to one basis may also be carried out on price and other terms
and conditions. Finally a single supplier or more than one supplier is selected and purchase order is
placed. Copy of the purchase order is sent to the stores department, accounts department and if
necessary, may also be sent to the user department.
STEP 4: Keeping track of purchase order
Purchase department will have to follow-up the status of the purchase order with the vendors from
time to time, particularly in case of large order with vendor or those with high lead time. The
potential delays are communicated to the user department and changes in order quantity or
schedules are also communicated to the vendors by the purchase department.
STEP 5: Inspection of quality, quantity etc and receipt of purchase order
Inspection of the quality may be carried out at the suppliers premises or may also be performed in
the receiving yard of the stores department. Further it may also be carried out at the inspection
laboratory. Once incoming shipments are checked and satisfactory results are found, the goods are
taken to the stores and kept in designated places. A goods receipt note ( GRN) is prepared by the
receiving personnel and a copy is sent to the accounts department with suitable remarks for release
of payment to the vendors. If goods delivered by the vendor are not found satisfactory, they are
returned to the vendor.


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Make or buy Decisions
The decision of a firm to perform its activities internally or get those activities done by an
independent firm is known as the make versus buy decision.
The make versus buy decisions evaluates the contribution of each activity towards the fulfilment of
the customer’s requirement. The value chain framework developed by Michael porter is used to
classify the supply chain activities as primary activity and support activity. The make or buy decision
looks at each of these activities critically and ask the question: should this activity be done internally
or can it be outsourced to an external party? Once the decision to outsource has been taken, the
firm has to choose among competing suppliers and also decided on the nature of the relationship it
would like to establish with the supplier firm.
To resolve the make versus buy issue a firm has to look at total supply chain surplus generated by all
the participants in the supply chain and the risks involved in the decision to outsource the activity.
The decision to outsource is based on the growth in supply chain surplus provided by the third party
and the increase in risk incurred by using a third party
If the growth in supply chain surplus is large with small increase in risk – firm should outsource ( buy)
If the growth in surplus is small and the risk is large – firm should do it in house ( Make )

How third parties can increase the supply chain surplus?
Third parties can increase the supply chain surplus effectively if they are able to aggregate supply
chain assets or flow to a higher level than the firm itself.
Mechanisms through which firm can do this is
1. Capacity Aggregation: A third party can increase the supply chain surplus by aggregating
demand across multiple firms and gaining production economies of scale that no single firm
can on its own.
2. Inventory aggregation: Third party can aggregate the inventories of hundreds of thousands
of customers. Aggregation allows them to significantly lower overall uncertainty and
improve economies of scale in purchasing and transportation.
3. Transportation Aggregation: By aggregating the transportation of variety of shippers the
economies of scale in transportation is achieved.
4. Warehousing aggregation: Warehousing needs of several customers could be aggregated to
achieve economies of scale.
5. Procurement aggregation: By clubbing the procurement requirement of various players
lower costs of procurement and inbound logistics can be achieved.
6. Information aggregation and


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7. Relationship aggregation enable third party to achieve economies of scale.
Risks involved in using a third party (Outsourcing)

1. The process is broken- When a third party is entrusted with a supply chain activity the firm
losses control of the process.
2. Underestimation of cost of coordination- Engagement of Third party requires a lot of
coordination efforts (Transaction costs) that are often underestimated.
3. Reduced customer / Supplier contract: By engaging an intermediary the firm losses its
contact with the ultimate customer or the supplier.
4. Loss of internal capability and growth of r of third power.
5. Leakage of sensitive data and information
6. Ineffective contracts- Some contracts need the third party to have a certain amount of
inventory or the pricing pattern agreed would be cost plus pricing. Under these
circumstances there would be no initiative from the third party to either reduce the
inventory or reduce the cost because the contract clause does not permit it. This would
hamper the prospects of deriving the true benefits of outsourcing.

DEVELOPMENT AND MANAGEMENT OF SUPPLIER

The term supplier and contractor needs to be clearly understood. Supplier is a provider of product or

services available in the market to an extensive clientele in large quantities whereas Contractor is

the provider of a customized product or a service not readily available in the market to one

customer in small quantities.

Supplier Management

Is an ongoing process that minimizes the risk associated with the purchasing goods, materials and

services. As a prime source of competitive advantage suppliers should be selected on sound

commercial principles that recognises amongst other factors, the quality of the goods, materials and

services offered, relevant experience and reputation, financial stability and the ability to deliver on

time. Supplier management consists of 3 key elements

Supplier selection


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Performance evaluation
Supplier relationship.

Supplier Selection

NEGOTIATING FOR PURCHASING / SUBCONTRACTING

PURCHASE INSURANCE

LEGAL ASPECTS OF BUYING

The purchase or sale of goods is governed by the laws of each country, ie the law of contract, the

sale of goods act, the law relating to carriage and to some extent the law of insurance. The

transaction of purchase is a sort of contract and should satisfy the following requirement

Legal capacity of parties- The persons performing the buying and selling should have the

legal capacity to enter into contracts.

Legality of subject matter- The transaction should not be illegal or opposed to public policy

scuh as buying at prices higher than those fixed by the government, buying from unlawful

sources etc. similarly an agreement to do an illegal act is void.

Offer and Acceptance- In contract to buy or cell there should be an offer to buy or sell and

the acceptance of such offer. They are complete when a) a quotation

Consideration- an important requirement of contract is consideration. A contract by which

only the seller is obliged to supply certain goods is not enforceable. There should be

corresponding agreement on the part of the buyer to pay certain consideration, which here

is the price.


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Other important aspects are

Authority – The persons authorized to sign the orders and the extent of their authority

should be specified by the management.

Employers liability- The commitments of the purchasing agent are bindingon his

employers.

Signature- In signing purchase order the purchasing agent should make it clear that he

is acting on behalf of his company by prefixing the word “For” to the name of the

company.

Personal responsibility- The purchasing agent will be liable for any loss which his firm

may sustain if he has acted outside the scope of the authority given to him either

expressed or implied.

Delivery date- A deliver y date is essential if the buyer wishes to retain the right to

cancel the order for delay in delivery. If no delivery date is not fixed the seller is bound

to deliver them only within a reasonable time.

Place of delivery- The rule is that unless there is an agreement to the contrary, the

delivery is to be taken at the place at which the goods are at the time of sale or at which

they are manufactured.

Mode of despatch- Unless other wise instructed by the buyer, the seller may make his

own arrangements on behalf of the buyer for transport of the goods buty the seller

must ensure that the mode of despatch is satisfactory for the type of goods to be sent

and is the one usually adopted by similar dealers.

Title of goods- Generally the title passes when the parties to the contract intend it to

pass. If the intention cannot be determined , the normal rules which are given below are

applicable.


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o If the delivery is actual, the title passes at the time of delivery. If goods are sent

through a carrier such as a steamer, railways, road transport etc if the

documents of title are raised in favour of the buyer ie if the buyer is the

consignee, generally the title passes as soon as the goods are handed over to

the carrier and a clean bill of lading or railway receipt is obtained.

Passing of risk – The general rule is that “ risk follows title and until the title or

ownership passes to the buyer the goods remain at the seller’s risk.

INVENTORY MANAGEMENT
Types of inventory
The accounting classification of inventory categorises inventory as
Raw materials
Intermediate products
Finished goods
Inventory related costs
Cycle stock inventory model
Safety stock inventory model
Managing seasonal stock
Managing inventory for short life cycle Products
Impact of different policies on the inventory.


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