Order Fulfillment
Order fulfillment is the process that actually makes and delivers a product or service Three functions are responsible:
Purchasing acquires the inputs used to support production Production converts inputs into outputs that customers value Logistics transports and stores goods assuring access
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SCOR Model
When purchasing, production, and logistics work in concert directed by overall strategy, they help deliver value to the customer. The SCOR model helps to create a common vision for managing and coordinating five primary SC processes.
SCOR Model
Purchasing Management
Four developments during the 80s and 90s increased the importance of purchasing:
1. Purchased inputs became a primary operating cost 2. Just-in-time emphasized cooperative, long-term buyer-supplier relationships 3. Information technology provided information needed to strategically manage relationships 4. Better trained and more competent managers entered supply arena
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Purchasing Costs
Manufactures spend 55% of each dollar on purchased goods and services Approximately 60-80% of operating expense Direct manufacturing costs have declined to between five and 15% of total operating costs
As little as 2% for some high-tech industries
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Transaction Management: Price Determination Purchase Order Follow-Up and Expediting Receipt and Inspection Supplier Payment
Supplier Selection
1. Identification involves making a list of all potential suppliers. A purchaser might look to the companys purchasing database or directories such the Thomas Register of American Manufacturers, which lists over 150,000 companies. Evaluation involves the identification of supplier selection criteria and the gathering of performance information that can be used to assess and compare possible suppliers.
Frequently used criteria include quality, price, delivery dependability, capacity (current and future), service responsiveness, technical expertise, managerial ability (attitude, skills, and talent), and financial stability.
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3.
Approval identifies the suppliers that are eligible to receive an order. The number of suppliers on the approved list depends on the nature of the item being purchased.
For commodity-type items, multiple suppliers are generally used; for unique items, a sole-sourcing arrangement may be preferable.
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Monitoring assures high levels of performance. Scorecards are often used to provide an overall supplier rating.
John Deere uses categories to rate suppliers into one of four groups: partner, key approved supplier, approved supplier, or conditional supplier
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Negotiation high dollar value high uncertainty items, or when a long-term relationship is desired
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Supplier certification programs focus on improving suppliers abilities to produce high quality products, eliminating the need for inspection
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Performance Monitoring
Performance monitoring allows identification of candidates for increased collaboration and long-term supplier relationships Four types of information should be tracked:
1. 2. 3. 4. Current status of all purchase orders Select evaluation criteria for all suppliers Part or commodity information Information regarding contracts of relationships
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Production Management
Also known as operations or manufacturing management - creates value by transforming capital, technology, labor, and materials into more highly valued products and services Operations drive product of the growth, innovation, and generates higher living standards
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Production Management
Operational excellence is a prerequisite for success Operations managers must manage two groups of decision variables:
Design Decisions Control Decisions
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Design Decisions
Facility location affect access to factor inputs and customer markets Facility layout determine the positioning of equipment, the flow and handling of materials Product design impact the ability to profitably capture future market share Process design involves technology selection and work design
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Control Decisions
Forecasting estimate of what needs to be produced and when Inventory control determines how much and when to make specific products Scheduling two types:
Aggregate planning determines what needs to be produced Process planning determines work done at each station
Quality control designing, building, and inspecting quality into both the process and product
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Product/Service Continuum
Pure Products Product/Service Solutions Pure Service
Tangible, Physical Low Customer Contact Can be Inventoried Economies of Scale Exits Control is Highly Objective Output can be Transported
Intangible, Perishable High Customer Contact Cannot be Inventoried Minimal Economies of Scale Control is More Subjective Location is Critical
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Lean Production
Lean production relies on a number of interrelated practices: Waste Elimination
Waste is defined as anything more than the absolute minimum necessary to add value Inventory covers up problems, Lean works to systematically reduced inventory to identify problems
Workforce Participation
Jidoka - the authority to stop the line Requires training, personal responsibility, and integration
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Basic 5S Principles
The 5 Ss Sort Basic Principle Eliminate clutter. Remove all supplies, materials, tools, and paperwork not required in the operation. Keep only that which is needed to perform the process.
Organize the work area to make it easy to find what is needed. Set In Order Everything has a place and everything is in its place.
Shine
Clean the work area. Make it shine. This includes aisles, walls, meeting and storage places.
Create and use policies, procedures, and practices to assure that the first three of the 5S activities are performed regularly.
Standardize
Sustain
Create a 5S culture by putting in place mechanisms that support, enhance, and extend 5S practices. Involving, measuring, and recognizing people is critical.
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Lean Production
Managerial Responsibility
Managers take on the role of teacher, team facilitator, and motivator
Process Development
Line workers are trained and empowered to solve problems and improve processes
Network Orientation
Lean should be practiced by critical suppliers
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Lean Production
Synchronization
Synchronization of material movement is accomplished by a pull or kanban system
Continuous Improvement
Kaizen - the quest for incremental productivity gains and consistent innovation
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Logistics Management
Logistics management is that part of SCM that plans, implements, and controls the efficient, 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 customers requirements.
- Council of Supply Chain Management Professionals
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Customer Service
Demand Forecasting
Customer service focus on understanding what customers want and measuring logistics performance against these customer requirements.
Forecastsestimates of demandmust be developed to help plan other logistics activities, allocate resources, and provide high levels of service at low costs.
Accurate documentation helps assure that the product gets to the customer Documentation on time. Documentation is particularly vital in international shipments. Information Management Inventory Management Data on carriers, customers, and inventories must be turned into useful decision-making information. Information replaces inventory in today's logistics systems. Product must be available to meet production requirements and customer demand. However, inventory is expensive. Inventory control must support high levels of customer service with as little inventory as possible.
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Packaging protects the product throughout the distribution process. Packaging also conveys information about the product and presents an attractive appearance.
Needed spare and replacement parts must be available to support sales. Parts and Caterpillar promises delivery of needed replacement parts anywhere in the Service Support world within 48 hours. This type of support increases customer loyalty. Site Selection Location Location can provide access to inputs like low-cost labor and materials. It can also affect customer service levels, providing access to important consumer markets.
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Defective products and inaccurate orders must be returned efficiently. Reverse logistics" is very important to achieving high levels of customer satisfaction. Handling excess materials is often overlooked. However, this is an important logistics activity, especially when hazardous materials or recyclable items must be managed.
Transportation is the most visible logistics activity. Five modal options exist: rail, truck, air, water, and pipeline. Storing products until they are ready for use is the role of warehousing. A variety of products are also consolidated into a single customer shipment.
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Developing good relationships with reliable transportation companies reduces transit times and increases on-time delivery performance. Adopting appropriate technologies and implementing innovative materials handling processes can increase flow speed through warehouses.
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High fixed, low variable cost structure Inexpensive, especially for bulk goods Relatively slow, average car speed 20 MPH (unless utilizing double stack unit trains, effectively doubling speed) Large quantities; full car load increments most cost effective
High fixed, low variable Very inexpensive Nature of product makes speed a non-issue Large quantities of limited products
Widespread on some continents; limited by unidirectional movement, and the availability of landmass to support pipelines
Pipeline leakage, high impact on wildlife, scenic value Medium most common Pipeline between two points required Primarily petroleum products; only practical for liquid, liquid-carried, or gas products Very low loss or damage, usually timely Routing limited to pipelines
Speed
Quantities Geographical Coverage Environmental Concerns Distances Required Infrastructure Product Variety Flexibility
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Relatively small
Widespread on some continents; limited by air terminal availability Noise pollution near major population centers Medium to very long
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Speed Quantities
Geographical Coverage
Environmental Concerns Distances
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Warehouse Activities
Shipping and receiving goods and materials Materials handling and order processing Consolidating and distributing shipments Transportation management, such as routing, tracing, and monitoring movements Product packaging and labeling (form postponement) Re-packaging and mixing of products Preparation of in-store displays (ready store delivery pallets) Light manufacturing or assembly Scrap and disposal
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Cross-Dock Operations
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Forecasting
Forecast are estimates of future demand and in some cases costs Companies use forecasts when making decisions about purchasing, production, logistics, and capacity planning. Forecasts can be:
Quantitative mathematically derived Qualitative derived from surveys, test markets, panel of experts, etc.
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Forecast 365 8
5 Period Moving Average
4 5
6 7
342 381
366 348
Forecast 8
Forecast 362.4 8
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Using the data from the previous example, calculate a 4 week weighted moving average with the weights of .1,.2,.3, and .4 (oldest to newest)
4 Period Weighted Moving Average Forecast (0.1)(342) (0.2)(381) (0.3)(366) (0.4)(348) 8 Forecast 359.4 8
4 5
6 7
342 381
366 348
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Exponential Smoothing
Helps managers balance stability and responsiveness Corrects the forecast by a percentage () of the forecast error The greater the value of , the more responsive the forecast to changes in the data
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Using the given data, calculate demand in week 12 using an exponential smoothing forecast with an alpha = 0.328
Forecast12 (0.328)(40 ) (1 - 0.328)(47. 31) Forecast12 44.91
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Regression
Least squares regression can be used to determine the straight line that minimizes total forecast error. Capable of multi-year forecasts into the future
Y b 0 b1x Where : b0
n xy - x y n x 2 x
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Regression - Example
Week (x) 1 2 3 Number of Repairs (y) 59 73 41 x
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xy 59 146 123
1 4 9
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5 6 7
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48 57 69
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25 36 49
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240 342 483
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9 10
70
46 50
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81 100
560
414 500
x 55
y 575
385
xy 3115
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Regression - Example
10(3115) - 55(575) b1 the slope of the line 0.5758 2 10(385) - 55
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Total
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47.31
-7.31
53.44
129.56
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MAD - Example
Period 7 8 9 10 Actual Demand 48 45 47 45 Forecasted Demand 52.69 48.97 45.82 46.76 Error -4.69 -3.97 1.18 -1.76 Absolute Error 4.69 3.97 1.18 1.76
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Total
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45.36
-5.36
5.36
16.96
Inventory Management
Inventory can be either:
Raw Materials Work-in-Process (WIP) Finished Goods
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Inventory Management
Inventory Management involves 2 questions:
1. How much inventory should be ordered? 2. When should orders be placed?
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EOQ Costs
A S Q 1 1 Annual Carrying Costs QCP or QW 2 2 1 A Total Costs QCP S 2 Q Where : Annual Order Costs A Annual Demand Q Order Quantity C Cost per Unit of Inventory S Cost per Order or Setup P Carrying Cost as a Percentage W CP or the Annual Cost to Carry One Unit in Dollars
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EOQ - Example
The manager of Hogan Kitchenware gathered the following data. He expects to sell 44,000 measuring cups this year. Hogan purchases the measuring cups for $0.75 each from its supplier, Shatter Industries. Every order that is placed costs Hogan $8.00 to process. The manager at Hogan estimates his companys inventory carrying cost to be 12 percent. Hogan Kitchenware is open for business 365 days per year. Calculate the number of measuring cups that should be ordered. What is the order, holding, and total cost of inventory?
EOQ
44,000 8.00 $125.86 2796.82 1 Annual Carrying Costs (2796.82)( 0.75)(0.12 $125.86 ) 2 Annual Order Costs
Total Cost of Inventory is $251.72
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Reorder Point
Reorder point is the level of inventory that triggers an order in the amount of the EOQ Assumes demand and lead time is known and constant If demand and/or lead time is not known and constant, you must add safety stock to prevent stockouts during periods of increased demand
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Reorder Point Daily Demand X Order Lead Time Reorder Point 120.55 X 8 Reorder Point 964.40 Units
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Calculate the EOQ. If the EOQ is greater than the quantity required to take advantage of the discount, then do so. If not, move to step 2. Calculate the total annual costs of both options and select the option with the lowest annual total costs.
1 44000 Total Costs5,000 5000(0.73) (0.12) 8.00 44000(0.73 ) 2 5000 Total Costs5,000 $32,409.40
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EOQ Implications
EOQ Model is fairly robust despite assumptions that are unrealistic for most companies. Technology can reduce the order costs by automating the process. By reducing order/setup cost, batch size can be reduced meaning that companies can hold less inventory but receive shipments more often.
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