Introduction
Overview
A supply chain planning (SCP) model serves as an internal market mechanism or process for
companies. Its purpose is to match supply and demand, and align the entire organization around
key operational plans that drive success and profitability given the demand for their products in
the marketplace.
In a competitive market, customers have many options to satisfy their demand for a product.
Companies must therefore anticipate that demand and provide products to customers on a timely
basis and at a marketable price. They do this by managing the functions and activities in the
supply chain.
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Benefits of a Supply Chain Planning Model
Companies that define and implement an effective SCP model realize tangible economic and
qualitative benefits.
Economic Benefits
o Increased asset utilization, e.g., raw material, work in progress (WIP), and
finished goods inventory
o Lower operating expense, e.g., fewer expedited shipments and less manual
effort
o Improved margin, e.g., right product, right place, and right time
Qualitative Benefits
o Improved customer service, e.g., increased fill rates and on-time delivery
o Improved competitive advantage
o Lower cross-functional and organizational friction
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Objectives
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Supply Chain Planning Model
Overview
A supply chain planning (SCP) model is comprised of process, technology, and organizational
assets. Companies use these assets to intelligently commit, build, and deploy a company's
physical assets (e.g., supply, manufacturing capacity, and labor) to meet the market demand for a
product over time, and in the most profitable manner possible.
SCP helps ensure that product is available to meet the customer's desired quantity and date. In
other words, it is the process of balancing available supply against demand. Companies
accomplish this by understanding and predicting customer demand, and then fulfilling it with the
most efficient allocation of available inventory and production capacity.
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Supply Chain Planning Functional Areas
Supply chain planning allows companies to manage their supply chains by connecting the
functions in the supply chain via a set of plans and processes. Companies use SCP capabilities
to plan and integrate the supply chain functions at the execution, operational, and strategic levels.
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Supply Chain Planning Processes
SCP capabilities are grouped into four main planning processesdemand, supply, production,
and fulfillment planning. Click on the "Output" button to see process outputs.
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Factors that Influence SCP Models
Business Model
A business model describes in simple terms why a company exists and how it makes money. The
business model identifies the product a company makes, the customers they serve, and the unique
aspect(s) of the business that enable the company to create value and generate income.
Manufacturing Class
A company's manufacturing process usually differs based on the type of products they
manufacture. Manufacturers are classified into three main classesrepetitive, discrete, and
process.
The SCP model for a company is also influenced by the degree of integration between each
supply chain functional area. Most supply chains are owned "piece-meal" (not "end-to-end"), with
one executive responsible for each functional areaprocurement, manufacturing, fulfillment, and
so on. To achieve the potential benefits of an effective supply chain, companies must develop
truly integrated supply chain planning capabilities. To that end, the different functional areas must
share with one another their operating decisions as well as their SCP models.
Companies within a particular industry segment generally have common demand and supply
characteristics, as well as operating constraints. The unique characteristics of a particular
industry cause companies within that industry to have similar business model and supply chain
operating model characteristics. These common characteristics also drive similar SCP models
from company to company within an industry.
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Check Your Understanding
True False
An SCP model is comprised of process, technology, and
organizational assets.
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Topic Summary
A supply chain planning (SCP) model, comprised of process, technology, and organizational
assets, is used to intelligently commit, build, and deploy a company's physical assets (e.g.,
supply, manufacturing capacity, and labor) to meet the market demand for a product over time,
and in the most profitable manner possible. Supply chain planning allows companies to plan and
integrate their supply chain functions at the execution, operational, and strategic levels.
A company's SCP model may be influenced by their business characteristics, including their:
Business model
Manufacturing class
Supply chain operating models
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Business Model Influences
Overview
A business model describes in simple terms why a company exists and how it makes money. The
business model identifies the product the company makes, the customers they serve, and the
unique aspect(s) of the business that enable the company to create value and generate income.
It could be with a new type of product (such as a wireless cell phone or a laser disc), a new way
of selling or distributing old products (such as online retailing), or a new twist on new or old
products, sales and marketing techniques, and distribution strategies.
The bottom line is that a business model answers several key strategic questions about a
company:1
It is critical for every company to define its business model as they address strategic and tactical
issues concerning their business, including which SCP models they ultimately use.
1
Magretta, Joan. "Why Business Models Matter." Harvard Business Review (May 2002): 86-92.
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Business Model Example
Amazon.com is a well-known example of a new twist on the old business model concept of
retailing.2 The online retailer began with the simple premise to sell books directly to consumers
while minimizing the distribution assets it owned. The idea was to capture consumer demand
while simultaneously building relationships with book publishers to gain favorable wholesale
prices based on large volumes. Amazon would then mark up the product, receive an order, and
have a carrier ship it directly to consumers.
Amazon.com has since grown to carry most consumer durable products. And, while they have
acquired some of their own distribution assets to maintain appropriate service levels, the
business model (illustrated in the responses to the key strategic questions below) remains
essentially the same.
What is the product or service provided? Books, printed materials, and other consumer durable
products
Where is the product in its life cycle? Products vary in their marketplace maturity, e.g., for books,
the product ranges from new releases to "classics"
What does the customer value? Selection, convenience, and home delivery at a reasonable
price
What is the underlying economic logic? Drive scale/volume over time with a lower fixed-asset base
Aggregate demand to command low wholesale prices and
have a lower break-even point because they have fewer assets in
place
2
Spector, Robert. Amazon.com: Get Big Fast. New York: HarperCollins, 2002.
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Business Model and SCP Model Alignment
It is critical that a company's SCP model supports its business model. If it does not, two things
can happen:
1. The SCP model can fail because the investment required to build the model does not see
an adequate return.
2. The business model can fail because it requires changes, along with the planning model,
to be viable over the long term.
Decision makers must be keenly aware of this dynamic as they strive to ensure alignment and
consistency between the two modelsbusiness and supply chain planning.
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Check Your Understanding
Indicate which of the questions below are answered by a company's business model. Check all
that apply.
Answered by a company's
business model
What is the product or service provided?
What is the underlying economic logic that explains how a company can
deliver value to customers at an appropriate cost?
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Business Model Influence on SCP Model
The influence a company's business model has on the SCP model varies from case to case.
Decision makers must consider the basic characteristics of their company's business model and
how those characteristics impact the supply chain.
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Influence of Customer on SCP Model
Supply chain planners analyze and react to customer needs based on who they are and what
they value, including:
Customer Size
Large customers with many locations may be interested in collaborating on demand and
promotion planning to better enable their own production and distribution processes. A large
customer may want to replenish or place orders on a daily basis to own less inventory and ensure
appropriate in stock positions. In addition, they may require visibility to the status of their orders,
as well as receipt of product at a regional distribution center.
On the other hand, a small company will likely want to place orders and replenish stock monthly,
with a focus on customer service and minimal activity related to restocking. They may also prefer
to have the product delivered directly to their stores rather than a regional distribution center. A
supplier dealing with both large and small customer groups must consider their different needs
when determining the appropriate supply chain planning models to use.
Price Sensitivity
A customer that values low product cost usually requires minimum quantities for orders (to ensure
that a full truckload can be shipped to the customer), as well as a minimum lead-time. Companies
take these factors into account when planning for the supply and fulfillment of orders from such
customers.
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Influence of Customer on SCP Model - Customer Segmentation
Customer service involves balancing customer needs against profitability. This includes
assessing trade-offs and creating an optimal balance between meeting customer demands or
service levels, and incurring the costs associated with doing so.
Because a company may choose to segment their customers into different groups and provide
each group with the different levels of service, they may not be able to use the same SCP model
for each segment. Hence, planners must take into account the various segments and service
levels when determining the SCP strategies for the company.
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Influence of Product on SCP Model
Product Mix - A company that produces the same products over and over again may
require specialized manufacturing capability. Furthermore, their objective during
production planning would be to ensure material availability and maximize capacity
throughput. On the other hand, a company that produces unique and complex products
requires significant manufacturing flexibility to manufacture the products.
Product Life Cycle Considerations - The life cycle of the product is an important
consideration in determining the appropriate SCP model. For a new product introduction,
planners do not have historical data on which to base demand projections. They must be
able to forecast the demand for such products using historical profiles of one or more
similar or "like" products, and possibly even combine the profiles of such products. In this
case, the supply planning model must be able to quickly react to variations in the forecast.
For mature markets and products, on the other hand, planners use the historical demand
pattern to statistically forecast future demand, and develop the appropriate safety stock
and inventory policies.
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Influence of Underlying Economic Strategy on SCP Model
The underlying economic strategy of a company also influences the SCP model.
Consider the impact of Amazon's strategy of driving scale and volume over time with a lower
fixed asset base. The company does not actually manufacture the products it sells, and may not
carry some of the products in its inventory. As a result, it must tightly integrate itself with its
suppliers' information base to meet customer requirements. It would be bad business for
Amazon to promise to ship a book in two days when the book is actually out of print and not
available through any of their suppliers.
Conversely, a company such as Wal-Mart has invested heavily in its distribution system. Their
supply chain model3 requires that product demand at their stores be fulfilled through this
distribution system (exceptions to this rule exist, but we will not discuss them here). In this
situation, it is important for the company to plan their safety stock levels, inventory policies,
and transportation to optimize the cost of their entire network.
3
Walton, Sam, with Huey, John. Made in America: My Story. New York: Doubleday Books, 2000.
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SCP Model Influence on Business Model
There is a symbiotic relationship between business models and SCP capabilities. Supply chain
strategies or capabilities often drive and influence the business model. A good business model is
often anchored around a carefully designed customer channel and supply chain strategy that
leverages a company's SCP and execution capabilities to gain advantage in its marketplace.
Dell and Wal-Mart are recognized for creating a competitive advantage through their respective
supply chain advancements.4 Both companies have invested in supply chain assets to enable,
and then create, unique and effective business models that are increasingly difficult for
competitors to replicate or compete against.
In fact, it is often difficult to delineate where a good business model ends and where a supply
chain strategy or unique capability begins. What matters is that the business model works, drives
value, and allows a company to effectively compete in whatever they do.
Example
4
Copacino, William C., and Byrnes, Jonathan L. "How to Become a Supply Chain Master." Supply Chain Management
Review (Sept/Oct 2001): 24-32.
A less publicized, but equally relevant example of this symbiotic phenomenon is Scholastic5, the
world's leading publisher and distributor of children's books. They combine a diverse set of titles,
from Clifford the Big Red DogTM to the market darling Harry PotterTM, with a unique business
model and innovative supply chain capabilities.
Scholastic has invested heavily in high-volume fulfillment capabilities that allow them to target
and dominate the direct-to-classroom book club business in the United States. In this case, who
their customers are is really influenced by what Scholastic can do from a supply chain
perspective. Without their fulfillment capabilities, they might not have the direct-to-classroom
customers.
5
Mulani, Narendra P., and Lee, Hau. "New Business Models for Supply Chain Excellence." Achieving Supply Chain
Excellence Through Technology (ASCET), Volume 4. San Francisco: Montgomery Research, May 2002, www.ascet.com.
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Influence of Technology Advancement on Business and SCP Models
The advancement of technology influences the dynamic between business models and key SCP
capabilities.
As companies strive for productivity improvements and innovation, new business models and
supply chain capabilities will depend on information sharing and low cost networking capabilities.
Businesses will interact differently with customers, suppliers, and employees. New software
packages will also continue to leverage this underlying technology, influencing how companies do
business and how they choose to compete.
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Check Your Understanding
True False
Business models are stories of how companies
were initially capitalized.
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Topic Summary
A good business model answers key strategic questions about a company, telling us who their
customers are and what they value, and how the company makes money. A business model
often influences the choice of an SCP model. At the same time, supply chain planning and
execution capabilities can also influence business models. Finally, technology plays a major role
in influencing business models and supply chain capabilities.
A company that produces the same products over and over must have
manufacturing capabilities that focus on materials planning and resource utilization
A company that produces unique and complex products may need to have
manufacturing capabilities that can quickly adjust to changes
New products that don't have a market history require various modeling
techniques to estimate their demand and to set initial supply levels
More mature products rely on history to drive statistical demand plans
Production Planning
Larger customers may need visibility into order status and shared production
plans
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Manufacturing Class Influence
Overview
A company's manufacturing processes usually differ based on the type of products they
manufacture. Furthermore, the processes used to create a company's finished goods influence
the design of the SCP model. Companies generally fall into one of three manufacturing classes.
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Manufacturing Class - Discrete
In discrete manufacturing, each manufactured item is different from the previous one, requiring
customized machinery and specialized tools. Manufacturing resources are capable of working on
different products at different times; for example, a lathe machine may be used to make an auto
transmission axel at one time, and a long cylindrical steel bar at another. Given that each item is
unique, it does not make sense to forecast the demand for each. Thus, companies forecast
requirements for raw materials, semi-finished goods, and sub-assemblies.
Emphasis in discrete manufacturing is placed on the production planning process. Each item may
have multiple alternative routes through the production facility. Thus, during the planning process,
companies must ensure the availability of resources, materials, and labor, while at the same time
considering alternate routes for the product. In addition, companies must minimize production
lead-time. The goal of production planning in this environment is to maximize throughput
(produce the maximum amount of product given a limited set of resources), as well as resource
utilization (keep the resources working and minimize down times).
Once the goods have been manufactured, they must be shipped and distributed to the customers
at the lowest possible cost.
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Manufacturing Class - Repetitive
It is important for such manufacturers to continuously operate their assembly lines. There are also
a limited number of "slots" on an assembly line; if an assembly line has 150 slots during a shift,
the assembly line can produce 150 items during that shift, and items are slotted on the line to
ensure that the line is balanced. Furthermore, the amount of time needed to complete the
operations at each station is approximately equal. Planners must ensure that items are scheduled
such that the line is always balanced.
Once the items are off the line, the manufacturer sends them to the locations where they will be
sold, i.e., car dealers. During distribution planning, companies decide on the modes of
transportation that minimize costs and lead-times. When doing so, the manufacturer must also
ensure that transportation is available when needed, taking into consideration the number of
stops, and the number of truckloads to ensure minimal unloading and reloading.
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Manufacturing Class - Process
The paper industry is an example of this class of manufacturing. There are essentially two steps
to the production process. The first step is to convert the trees into paper. The second step is to
take the paper, print on it, cut it to the right shape and size, and then use it (e.g., by sticking it
onto a juice carton). Not only is the capital investment in the machines large, the stopping and
restarting costs are very high as well. Hence, manufacturers want to continuously operate the
machines, which means that raw material must be available to do so. Forecasting the demand for
the end paper products, however, is not as crucial.
Deciding what shape and size to cut the paper is not simple either. Paper manufacturers model
this problem using various operations research techniques to determine the optimal "cuts" for the
paper. The manufacturers then need to determine the best way to distribute and ship the product
to their customers.
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Topic Summary
A manufacturer plans for the use of materials and resources depending on its manufacturing
class. Manufacturing classes influence the SCP model in different ways.
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Manufacturing Model Influence
Overview
Manufacturing operating models determine the way in which a company plans and produces their
finished goods inventory. The major differentiation between the four primary manufacturing
operating models is whether the manufacturer builds a product to stock or waits for a more
specific demand signal to complete the product.
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Manufacturing Operating Models - Make to Stock (MTS)
A make to stock (MTS) manufacturer produces product in advance of receiving customer orders,
and then stores inventory at its warehouses. When an order then comes into the order
management system, they locate product at a preferred distribution center for shipment to a
customer. During demand planning, MTS organizations rely heavily on forecasting and inventory
planning.
Example
An example of an MTS company would be a canned food producer. There are a limited number
of months in the year in which food products are canned; yet the company must project demand
and ensure availability of product on grocery store shelves for the entire season. Lack of product
on the shelves translates directly to lost customer sales. Click the example button to see an
illustration of how goods flow through the supply chain of an MTS canned food producer.
Example
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Influence of the MTS Model on SCP Model
An MTS company must forecast demand for their products and then ensure availability of the
product when customers demand it. Companies in this environment consider several important
factors, including:
Distribution of Product
Distribution of the product is also crucial. Even if companies forecast demand accurately, they
must still ensure availability of the product at the locations where customers want it. To develop
optimal distribution plans, planners need to understand the demand pattern and set optimal
inventory and safety stock targets, which assist in managing demand fluctuations.
Product Allocation
Allocating product to important customers plays an important role in this environment. Typically,
long-term agreements are established with such customers. Failure to honor these commitments
carries a financial penalty.
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MTS Summary
The make to stock manufacturing model influences the SCP model in all supply chain planning
areas.
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Manufacturing Operating Models - Make to Order (MTO)
A make to order (MTO) company manufactures products only when an order is placed, keeping
little, if any, inventory on hand in a warehouse, and placing less emphasis on finished goods
inventory planning. However, because they rely on available resource capacity when an order is
placed, they must perform advanced production and capacity planning.
Example
The figure illustrates the flow of goods through the supply chain of an MTO aircraft manufacturer.
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Influence of the MTO Model on SCP Model
An MTO company receives an order before starting the manufacturing process (e.g., an aircraft
manufacturer). Every airplane ordered is customized and made to order. Companies in this
environment consider several important factors, including:
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MTO Summary
The make to order manufacturing model influences the SCP model in all supply chain planning
areas.
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Manufacturing Operating Models - Configure to Order (CTO)
A configure to order (CTO) manufacturer offers a base product with a variety of options, or
configurations, that can be added when they receive customer orders. The production of a PC is
a good example of such an environment; customers can customize their personal computer by
specifying the RAM, hard disk size, size of monitor, etc. Since there are many possible
configurations of a product, the manufacturer waits for an actual order before configuring the
finished good.
Example
The classic example of a configure to order company is Dell Computers. Dell pre-assembles a
base model computer and then adds the components upon receiving a customer order. Dell relies
on a crucial link between their order management systems and their manufacturing sites to serve
customers. Advanced supply and materials planning that reduces the lead-times of component
parts assists in quick turnaround times of finished products to customers.6
6
Copacino, William C., and Byrnes, Jonathan L. "How to Become a Supply Chain Master." Supply Chain Management
Review (Sept/Oct 2001): 24-32.
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Influence of the CTO Model on SCP Model
The CTO manufacturing model is mostly used when there are a few critical components that
need to be put together based on a specific configuration of those components as desired by the
customer. Companies consider several important factors in a CTO environment, including:
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CTO Summary
The configure to order manufacturing model influences the SCP model in all supply chain
planning areas.
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Manufacturing Operating Models - Engineer to Order (ETO)
An engineer to order (ETO) environment is one in which a manufacturer works with the
customer to design or engineer a product before it is produced. Similar to CTO, there are many
possible configurations of a product in this environment, all driven from customer orders. The
manufacturer must wait for the order before producing the finished good. This model emphasizes
production planning, customer collaboration, and research and development.
Example
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Influence of the ETO Model on SCP Model
The ETO manufacturing model is mostly used when customer specifications are unique and each
product needs to be designed and engineered specifically for the customer. Companies consider
several important factors in an ETO environment, including:
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ETO Summary
The engineer to order manufacturing model influences the SCP Model in all supply chain
planning areas.
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Topic Summary
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Procurement Model Influence
Overview
Procurement operating models determine the way in which a company interacts with its suppliers.
In recent years, the procurement mindset of even the largest, most powerful buyers, such as the
automotive industry, has shifted from the traditional adversarial cost-reduction procurement
mindset, to a more collaborative model designed to reduce joint costs and improve overall
product quality. Given this shift in dynamic, there are now two primary procurement operating
modelsHub (Just in Time) and the Classic Procurement Model.
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Procurement Operating Model - Hub or JIT Model
A company employs a Hub or Just in Time (JIT) strategy when it co-locates with its suppliers
the company's suppliers place their facilities close to the manufacturer's manufacturing facility.
This may be a supplier's manufacturing facility, an "assembly or finishing" plant, or a warehouse.
The close proximity allows the suppliers to respond more quickly and frequently to the customer's
requirements.
In this model, the manufacturer often limits the number of suppliers. Typically, in a Hub
environment the supplier is responsible for monitoring and replenishing inventory at their
warehouse. The manufacturer's procurement group does not need to generate a purchase order
(PO), through the PO execution process, to replenish the warehouse.
Example
The suppliers of Dell Computer have warehouse locations near the Dell manufacturing sites.
When Dell manufactures computers, they are able to pull components directly from these supplier
warehouses on an "as needed" or JIT basis.7
Wal-Mart is another example of a company using the JIT procurement strategy. Wal-Mart
collaborates with many of its vendors in providing them with point-of-sale (POS) data so that the
vendors can understand the market demand pattern. In return, the vendors manage the inventory
of their products at the Wal-Mart stores, determining when the shelves need to be replenished as
well as the replenishment quantities. In many cases, the vendors do not get paid until the product
has been sold by Wal-Mart to its customers. This concept is sometimes also referred to as
Vendor Managed Inventory (VMI).
7
Copacino, William C., and Byrnes, Jonathan L. "How to Become a Supply Chain Master." Supply Chain Management
Review (Sept/Oct 2001): 24-32.
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Influence of the Hub Procurement Model on SCP Model
The Hub procurement model is mostly used when the manufacturer has quick turnaround
requirements from their suppliers. In many cases, the response times to material requirements
are measured in hours, not days. As a result, the supplier must have a steady stream of material
available to meet these requirements. Companies consider several important factors in the Hub
procurement environment, including:
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Hub or JIT Procurement Model Summary
The just in time strategy influences the SCP model in all planning areas.
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Procurement Operating Model - The Classic Procurement Model
Example
Consider the case of a seasonal producer of canned fruits and vegetables. The producer must
plan in advance the demand for their products, and contract with a farmer for a crop. Strategic
planning usually encompasses their entire network of manufacturing facilities, and is generally
conducted at their headquarters by a planning and procurement group.
During the pack season, one manufacturing facility may need more sugar to can fruits. In this
case, that particular manufacturing facility places an order for the sugar. In such instances where
the manufacturing facilities are reacting to unanticipated situations, they may procure materials
directly from their suppliers without having to involve the centralized procurement group.
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Influence of the Classic Procurement Model on SCP Model
The classic procurement model is used when manufacturers determine their own material
requirements, and then pass those material requirements onto their suppliers. There are several
variations to the classic procurement model; a company may employ one or more of such
variations, including:
Centralized Procurement
A company purchases components for its entire manufacturing network. Such a company often
engages in centralized planning to aggregate the material requirements across its global network.
Decentralized Procurement
Each manufacturing facility orders components to meet its own demand. Purchase orders in such
an environment are often recommended by a material requirements planning (MRP) execution
system.
Collaborative Procurement
Companies share information with suppliers in advance so that they can plan to replenish
components in a given time frame. In such an environment, the manufacturers share their
production plans with suppliers, and may also provide visibility to their inventory positions.
Operational Integration
The manufacturer and the supplier engage early in the design process to jointly design the
required components. Once the design in finalized, the manufacturer and the supplier may jointly
create a forecast for the requirements of the designed component.
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Classic Procurement Model Summary
The classic procurement model influences the SCP model in all planning areas.
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Topic Summary
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Fulfillment Model Influence
Overview
The way in which a company chooses to distribute product to fulfill customer orders may also
have an impact on the SCP model. In an MTS manufacturing environment, product is typically
pulled from stock at central or regional distribution centers for shipment to customers. In such
an environment, companies rely on an accurate demand plan to develop stocking and inventory
policies for their distribution centers.
For some seasonal products, or for those with highly uncertain demand patterns (e.g., the retail
fashion industry), product may be distributed in a flow through model, in which cross-dock
facilities are used to receive product from manufacturers, and merchandise is dynamically
allocated to customers and regions according to the latest market demand.
For configure to order products such as Dell Computers, a direct model of distribution from
manufacturers to customers/consumers may be appropriate.8
8
Copacino, William C., and Byrnes, Jonathan L. "How to Become a Supply Chain Master." Supply Chain Management
Review (Sept/Oct 2001): 24-32.
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Fulfillment Operating Models - Pull from Stock Model
A company that pulls from stock manufactures product in advance of receiving a customer
order and stores finished goods inventory in its warehouse(s). When an order comes into the
order management system, they allocate product at a preferred distribution center for shipment to
the customer. To be successful, these types of companies rely heavily on forecasting and
inventory planning to meet customer demand and drive profitability.
Example
In addition, while school supplies are sold throughout the year, this business is also seasonal; the
big push is in the late summer months prior to new school year. Also, while some school supply
products are in the mature stage of the product life cycle (e.g., binders, paper, pencils), others,
such as fashion accessories (e.g., hair clips, temporary tattoos, etc.), come and go by the season.
As a result, companies in this business must use different forecasting and inventory planning
models for the different products.
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Influence of the Pull From Stock Model on SCP Model
The pull from stock model is most often used in the MTS environment, in which product is
manufactured, stocked, and then shipped to customers when demand arises. Companies
consider several factors in this model, including:
Long Lead-Times
Companies, such as the school supplies company, must have accurate forecasts to take full
advantage of once-per-year opportunities. Production lead-times are too long to try and correct
insufficient initial production and inventory stocking decisions. Since some of their products have
a stable historical demand pattern, they can accurately base the forecast for these products on
history.
Seasonality
Planners must base the demand forecast for trendy seasonal items on other items with similar
characteristics. Companies must also be able to respond quickly should the actual demand be
much different from the forecasted demand.
Demand planners need to integrate closely with the Sales and Marketing functions that are
closest to the customer. This allows them to better anticipate the latest back to school fads, so
that when orders come in, they can be pulled from stock and shipped to customers.
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Pull from Stock Model Summary
A pull from stock fulfillment model influences the SCP model in all planning areas.
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Check Your Understanding
True False
In the Pull from Stock Model, companies store product at distribution
centers and warehouses, and then allocate the product to customer
orders as they receive such orders.
A Pull from Stock Model does not require the company to worry about
forecasting. They should concentrate on manufacturing product and
distributing to their distribution centers and warehouses.
In a Pull from Stock Model, companies must develop sophisticated
inventory policies that consider demand and supply variability.
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Fulfillment Operating Models - Flow Through Model
A company that utilizes a flow through model to distribute product manufactures product in
advance of receiving a customer order. However, instead of storing product in a warehouse and
waiting for an order to pull it, the company ships product to a cross-dock facility. It then allocates
the inventory "in-transit" or at "time of receipt" of an actual customer order, shipping directly to a
store location.
Companies benefit from this approach because they avoid finished goods carrying costs and
customer allocation decisions, enabling them to react to more timely market conditions in
deploying product. In the make to stock and pull from stock models, the company incurs more
finished goods inventory risk and storage costs.
Example
Consider a large national specialty retailer that sells fashion apparel for men, women, and young
adults. While they sell product year around, more and more specialty retailers such as this are
trying to anticipate and even drive trends in the youth market, turning over merchandise
assortments 15-20 times a year. The majority of the capital and energy is used to stock, sell, and
introduce new attire that is "hip" and the latest in fashion.
For such a company, the new product lines may not have a historical precedent; similarly, they
will not be certain of what specifications will be popular (e.g., colors, zippers or buttons, pocket
style, etc.) for items such as shirts or slacks, leaving uncertainty about what will "take off" across
the numerous stores across a country. To solve this dilemma, they may assess trends on similar
merchandise introduced in some earlier seasons and follow the sales patterns at the stores very
closely. The company can then analyze store level POS data to know what fashions are selling
and in what areas. As this data begins to show a trend, the company can leverage it and allocate
product to the highest demand areas as it is shipped and sent to its cross-dock facilities.
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Influence of the Flow Through Model on SCP Model
The flow through model is most often used in environments where items are first shipped to
cross-docking facilities and then moved quickly to points of demand once the company has
obtained a better demand signal. Companies consider several factors in this model, including:
Accurate Forecasting
A company deals with products in various stages of their life cycles. As a result, they need to use
different types of forecasting models to forecast the demand for each of their products. For new
products, the company must have the ability to analyze similar items, and use their historical data
to forecast the demand for the new items.
Product Allocation
One advantage of the flow through model is that the distribution of the product to demand points
is delayed until the company is able to obtain a better demand signal. This is an extremely
valuable capability because it leverages the latest market intelligence to distribute product where
it could be sold for the highest retail price or margin. Furthermore,
If product is not allocated correctly, stores may have to reduce price dramatically to move
it in order to free up space for the next wave of products.
If a product completely "bombs," this approach also allows companies to signal changes
in original product plans and divert capacity to more popular products.
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Flow Through Model Summary
A flow through fulfillment model influences the SCP model in all planning areas.
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Check Your Understanding
Check all of the SCP capabilities that are most important in the flow through model.
Important in the
Flow
Through Model
"Like-item" forecasting
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Fulfillment Operating Models - Direct Model
A company that utilizes a direct model to distribute product most often produces product in a
configure to order or engineer to order manufacturing model, and distributes it directly to the end
customer or consumer. Many companies in the high tech industry fall into this category. In most
cases the product itself is not very capital intensive, allowing companies to produce and market
directly to a large, but highly fragmented, customer base.
Example
Dell Computers9 is the prototypical example of the direct model. Dell pre-assembles a base
model computer, and then adds the components upon receiving a customer order. For Dell,
linkage between their order management systems and manufacturing sites is crucial. Advanced
supply and materials planning reduces the lead-times for acquiring components and parts, and
this assists in ensuring short lead-times for customer orders.
Dell needs to forecast at a various product levelscomponent, intermediate product, and finished
goods. Because the configuration of products influences the required components on hand, Dell
must link supply planning closely with the demand forecast. Furthermore, Dell needs to tightly
integrate with its suppliers so that they can respond rapidly to Dell's materials requirements.
9
Copacino, William C., and Byrnes, Jonathan L. "How to Become a Supply Chain Master." Supply Chain Management
Review (Sept/Oct 2001): 24-32.
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Influence of the Direct Model on SCP Model
The direct fulfillment model is mostly used when a company ships directly to their customers. In
many cases, there is a base product that is configured to suit the customer's preferences. There
are a few critical components that need to be put together based on a specific configuration of
those components as desired by the customer. Companies consider several important factors in
a direct fulfillment model environment, including:
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Direct Model Summary
A direct model distribution strategy influences the SCP model in all planning areas.
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Topic Summary
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Conclusion
Module Summary
A supply chain planning (SCP) model serves as an internal market mechanism or process for
companies. Its purpose is to match supply and demand, aligning the entire organization around
key operational plans that drive success and profitability given the demand for their products in
the marketplace.
An SCP model is comprised of process, technology, and organizational assets. Companies use
these assets to intelligently commit, build, and deploy a company's physical assets (e.g., supply,
manufacturing capacity, and labor) to meet the market demand for a product over time, and in the
most profitable manner possible.
There are many factors that influence a company's SCP model, including the company's
business model, manufacturing class, and supply chain operating models (manufacturing,
procurement, and fulfillment).
A good business model answers key strategic questions about a company, telling us who their
customers are and what they value, and how the company makes money. A business model
influences the choice of an SCP model.
A manufacturer plans for the use of materials and resources depending on their manufacturing
classdiscrete, repetitive, or process. These manufacturing classes influence the SCP model
in various ways.
Companies use various supply chain operating models: manufacturing (make to stock, make to
order, configure to order, and engineer to order), procurement (just in time and the classic
procurement model), and fulfillment (pull from stock, flow through model, and the direct model).
These SC operating models each influence a company's SCP model.
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