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Questions and Answers
What does a contracted index help to ensure in agreements?
Which of the following accurately describes service level?
How does spending too much affect profit in a supply chain context?
What is one way to assess the adherence to a production plan?
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What is the primary focus of the tradeoff between performance and costs?
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What does a high service level indicate about a company's performance?
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Which factor negatively impacts both cost and profit in a supply chain?
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What impact does measuring the change in contract index have on sales decisions?
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What is the primary purpose of determining the trade unit for each customer?
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Which transportation mode is specifically mentioned for finished product shipments?
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What is an essential factor to consider when evaluating trade units?
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What financial metric is important for analyzing supply chain decisions?
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What does total landed costs generally include in logistics management?
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Why might a company increase safety stock?
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What trade-off must a company consider when analyzing transportation options?
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What is the significance of evaluating shelf life in supply chain management?
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What is the formula to calculate Return on Investment (ROI)?
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Which of the following is a primary activity in the value chain?
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What does gross margin represent in financial performance?
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What is the main objective of a supply chain strategy?
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Which component is NOT included in the calculation of operating profit?
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Which of the following does NOT describe a competitive priority?
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What is measured by its return on investment (ROI)?
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Which of the following is a component of 'cost of goods sold'?
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Which activity is included in secondary activities of the value chain?
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Which of the following metrics is used to measure financial performance?
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What is the main purpose of maintaining a high service level in a company?
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Which of the following best defines 'lead time'?
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Why is safety stock essential for a company?
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What can be a consequence of running out of stock when a consumer demands a product?
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What factors are used to determine the necessary amount of safety stock?
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Which of the following is a potential effect of low service levels on a business?
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What drives the need for safety stock?
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What is one of the trade-offs that companies face regarding safety stock?
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What is the primary function of safety stock in supply chain management?
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What factor is typically NOT considered when determining lot size?
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Which of the following statements best describes inventory?
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What defines a 'production interval'?
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Which cost is typically NOT associated with holding inventory?
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What is a 'frozen period' in the context of production?
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How does safety stock contribute to managing obsolescence?
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Which of these is NOT a critical component of safety stock determination?
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Study Notes
Understanding the Value Chain
- The value chain is a model to visualize and analyze the sequence of activities a company undertakes to create value for its customers
- It helps organizations understand their internal processes, identify sources of competitive advantage, uncover areas for improvement, and enhance profitability
The Value Chain
-
Secondary Activities
- Firm infrastructure
- Human resource management
- Technology development
- Procurement
-
Primary Activities
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Service
- All activities contribute to margin value
Value Chain Analysis
- Examines each activity within the value chain
- Identifies areas for improvement
- Determines the impact of each activity on overall value creation
3 Steps to Value Chain Analysis
- Identify the key activities
- Analyze the costs and contribution of each activity
- Develop strategies to improve value creation
How do we measure financial performance?
- Return on Investment (ROI)
- Profitability
- Efficiency
- Market share
- Customer satisfaction
Supply Chain Performance Linkage to Financial Performance
- Improved supply chain performance can enhance financial performance
- Measures include:
- Delivery time
- Inventory levels
- Cost of goods sold
- Customer satisfaction
- Effective supply chain management impacts financial growth, profitability, and customer loyalty
Measured by its return on investment (ROI)
- ROI is the ratio of profit earned to the investment made
- Calculating ROI:
- ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
How Is ROI Calculated?
- Step 1: Calculate the profit from the investment
- Step 2: Divide the profit by the cost of the investment
- Step 3: Multiply the result by 100 to express it as a percentage
Improved Customer Value
- Reduced lead times
- Higher product availability
- Enhanced order accuracy
- Increased customer satisfaction
Improved Procurement and Operational Efficiency
- Lower procurement costs
- Reduced waste and inventory
- Improved production processes
Improved Speed and Rotation
- Shorter lead times
- Faster inventory turnover
- Increased revenue generation
Improved Asset Deployment and Utilization
- Optimized inventory levels
- Improved warehouse utilization
- Increased production capacity
Main Components
-
Realized Revenue
- Revenue generated from actual sales
- Calculated by:
- Contracted sales revenue (+/-) Bonus or penalties
-
Contracted Sales Revenue
- Revenue expected from sales based on agreements
- Calculated by:
- Units sold * Contracted sale index for each customer
-
Cost of Goods Sold (COGS)
- Total direct costs incurred in producing goods
- Includes purchasing and production costs
-
Gross Margin
- Difference between realized revenue and COGS
- Represents the profit margin on production
-
Indirect Costs
- Expenses not directly related to production
- Includes overhead, stock, handling, administration, distribution, project costs, and interest
-
Operating Profit
- Profit generated from core business operations
- Calculated by: Gross margin - Indirect costs
-
Investments
- Assets used in the business
- Includes buildings, inventory, machinery, payment terms, and software
Supply Chain Strategy
- Defines how to manage the flow of goods and services to meet organizational goals
- Objective: Ensuring alignment with the overall organizational strategy
- Key factors:
- Customer needs
- Competitive landscape
- Cost considerations
- Resource availability
What is a competitive strategy?
- A plan that outlines how a company will compete in its industry
- Focuses on achieving a sustainable competitive advantage
What are the competitive priorities?
- Cost
- Quality
- Delivery
- Flexibility
Competitive Strategy Drives Supply Chain
- To meet customer needs and achieve competitive advantage, organizations must develop supply chains that align with their competitive strategy
- Competitive priorities influence supply chain design, operations, and performance
Competitive Priorities
- Cost: Minimize costs to achieve price competitiveness
- Quality: Focus on delivering high-quality products or services
- Delivery: Ensure timely and reliable delivery to meet customer deadlines
- Flexibility: Adapt to changing customer needs and market conditions
Capacity
- The maximum output that a resource can produce in a given period
- Critical for meeting demand and avoiding bottlenecks
Inventory Costs
- The expenses associated with holding inventory, including:
- Storage costs
- Insurance
- Opportunity costs (lost revenue from investment)
- Obsolescence costs
Overall Inventory Level
- The amount of inventory on hand at a given time
- Measured as:
- Stock weeks: Number of weeks of supply
Production Plan Adherence
- Measures how closely actual production output aligns with the planned schedule
- Percentage of products that meet production targets
Service Level
- Measures how timely and accurately customers’ orders are fulfilled
- Measured as:
- Percentage of orders shipped on time and in full (OTIF)
Tradeoffs - Performance vs Costs
- Tradeoffs between competitive priorities and cost
- Decisions based on cost-benefit analysis
- Higher performance usually comes with higher costs
- Finding an optimal balance based on organizational needs
Tradeoffs - cost vs profit
- Balancing spending on supply chain improvements with profitability
- Investing too much may reduce profits due to high costs
- Investing too little may impact customer satisfaction and profitability
Sales & Supply Chain Decisions
- Sales: - Trade units - Picking time - Shelf life
- Supply Chain: - Safety stock - Stock weeks
What is a contracted index?
- A numerical measure used in agreements to adjust prices based on market changes
- Tracks fluctuations in the price of materials or products, allowing for fair adjustments to the sale price
- Benefits both buyers and sellers by ensuring accurate and consistent pricing
Contract Index
- Promise/Requirement: The agreed-upon quantity and specifications of the product or service
- Contract index: The numerical value used to adjust prices based on market fluctuations
- Basic price (*): The base price of the product or service
- Purchase/Sales price: The final price paid or received, adjusted by the contract index
- Contract index values: Based on widely accepted industry benchmarks or custom indexes
Measuring the impact of the change in contract index...Sales Decisions:
- Higher Index: May result in increased selling prices, impacting revenue
- Lower Index: May result in reduced selling prices, impacting revenue
Service Level
- A measure of how well a company fulfills customer orders on time and in full
- Impact on ROI: Higher service levels lead to improved customer satisfaction, increased sales, and higher ROI
- Understanding service level is critical for planning, forecasting, and resource allocation
What is service level and how is it measured? Impact on ROI?
- Service level: Measurement of how frequently a company meets customer needs and timely delivery
- Measured by: Percentage of on-time deliveries, order accuracy, perfect order fulfillment rate
- Impact on ROI: Positive correlation, higher level of service, higher customer satisfaction, repeat business, and ultimately improved ROI
What causes low service levels?
- Inventory shortages
- Production delays
- Logistical issues
- Order inaccuracies
What is the impact of low service levels?
- Lost sales
- Negative impact on customer relations
- Reduced profits
- Increased operational costs
Understanding Order Deadline
- This determines when a customer expects to receive the order
- Critical for planning production and logistics
- Short deadlines may require expedited shipping and additional resources
What are the shortage rule options?
- Backorder: Hold the order until stock becomes available
- Lost order: Refuse the order and avoid missing the shipment deadline
- Partial shipment: Send what you can from available inventory now.
- Substitute: Send an alternate product to fulfill the order
Purchasing Delivery Reliability
- Measures how consistently a supplier delivers on time and in full
- Important for managing lead times and planning inventory
- Low delivery reliability can lead to production delays and stockouts
Purchasing...Understanding Delivery Window
- The time frame within which deliveries from suppliers are expected
- Important for planning production and inventory
- Must be carefully considered for timely order fulfillment and avoiding delays
Lead times?
- The time between ordering a product or service and its actual receipt
- Includes: Production time, delivery time, processing time
- Key for determining production schedules and ensuring timely deliveries
- Longer lead times can increase production costs and affect customer satisfaction
How to determine the net change in revenue based on the new and old contract index?
- Step 1: Calculate the difference between the new and old contract index
- Step 2: Determine the percentage change in the index
- Step 3: Calculate the change in revenue by multiplying the percentage change in the index by the contracted sales revenue
- Step 4: Add the change in revenue to the old contracted sales revenue
- Step 5: Adjust the revenue for any bonus or penalties involved
Understanding stock
- Safety stock: Extra inventory kept on hand to mitigate against unexpected demand or supply chain disruptions
- Stock weeks: Represents the number of weeks of supply available based on current inventory levels
What is safety stock? And how can you determine how much you need?
- Safety stock: Extra inventory kept on hand to mitigate against unexpected demand or supply chain disruptions
-
Determining how much you need: Consider:
- Demand variability (how unpredictable is the demand?)
- Lead time variability (how unpredictable is the delivery process?)
- Service level goal (how often do you want to meet customer demand?)
What drives the need for safety stock?
- Demand fluctuation
- Lead time variability
- Service level requirements
- Disruptions to the supply chain
- Product obsolescence
Safety stock protects you from uncertainty and stock outs
- Higher safety stock: Reduces the risk of stockouts but increases costs
- Lower safety stock: Increases the risk of stockouts but reduces costs
- Finding the right balance: Consider your risk tolerance and service level targets
Safety Stock Determination - Components
- Demand uncertainty: How much does demand fluctuate?
- Lead time uncertainty: How much does the time it takes to receive an order vary?
Safety Stock Determination - Finished Product
- Demand: How much of the finished product is expected to be sold?
- Lead time: How long does it take to get the finished product?
Safety Stock Estimation
- Consider available data, historical trends, and industry benchmarks
Operations...Capacity and Resource Availability
-
Impact of lack of capacity:
- Increased lead times
- Reduced service levels
- Higher production costs
- Missed sales opportunities
Operations - Pallet Locations
-
Determining the number of pallet locations:
- Available warehouse space
- Product size and configuration
- Inventory turnover rates
Utilization = usage/capacity
- Utilization: Measures how effectively a resource is being used
-
Factors influencing pallet location needs:
- Pallet size
- Warehouse layout
- Product flow
- Inventory management practices
- Seasonality
Remember...
- Maintaining adequate capacity is essential for fulfilling orders and minimizing production delays
- Balancing capacity with demand is critical for optimizing operational efficiency and profitability
What is lot size? And how can it be determined?
- Lot size: The quantity of a product produced or ordered in a single batch
-
Determining lot size: Consider:
- Production capacity
- Demand forecast
- Storage costs
- Set-up costs
What is inventory and its purpose?
- Inventory: A collection of all the raw materials, work-in-progress, and finished goods stored by a company
-
Purpose of inventory:
- Meeting customer demand
- Smoothing production schedules
- Taking advantage of economies of scale
- Protecting against supply chain disruptions
What are the costs associated with inventory?
- Holding costs: Expense of storing inventory (e.g., warehouse costs, insurance, obsolescence)
- Ordering costs: Expenses related to placing an order (e.g., administration, transportation)
- Shortage costs: Penalties for running out of stock (e.g., lost sales, customer dissatisfaction)
- Opportunity costs: Lost potential return from investing inventory capital
What is a production interval and frozen period?
- Production interval: The time period dedicated to a specific production run
- Frozen period: A time frame during which orders and production plans are not allowed to change
How should you evaluate the production interval which is best for each period?
-
Consider:
- Demand patterns
- Customer lead times
- Production capacity
- Inventory levels
How does the frozen period, production interval and safety stock impact obsolescence?
- Longer frozen period: Increased risk of obsolescence if demand changes
- Shorter production interval: More frequent production runs, potentially lower risk of obsolescence
- Higher safety stock: Reduced risk of stockouts, potentially lower risk of obsolescence
Determine the material required based on demand using MRP
- Material Requirements planning (MRP): A planning system that utilizes material requirements planning (MRP) to determine the components required for each product based on forecasted demand
-
Steps involved in MRP:
- Forecast demand (how much product will you need?)
- Determine the bill of materials (BOM) (what components are needed for each product?)
- Calculate the required material by multiplying the BOM with the demand
- Generate purchase orders (place orders for the necessary materials)
- Monitor inventory levels (check if the required materials are available?)
Lecture 9 - Round 1 Debrief, Round 2 Prep and Inventory Concepts
New Decisions - Sales & Purchasing
- Trade unit: The quantity of product sold or purchased in a single transaction
- Picking time: Time required to gather and prepare an order for shipment
- Shelf life: The length of time a product can be stored without becoming unusable
Sales - Trade Unit
- Customers often purchase varying amounts of each product
- Trade unit: The quantity of product sold in a single transaction
Sales - Trade Unit
-
Determining the "best" trade unit:
- Consider customer demand
- Inventory carrying costs
- Transportation costs
- Customer satisfaction
How to evaluate?
- Analyze customer order patterns
- Compare trade unit options
- Assess trade-offs between cost and customer service
Pro's and Con's
- Large trade unit: Lower order and shipping costs but higher inventory carrying costs
- Small trade unit: Higher order and shipping costs but lower inventory carrying costs
New Decision - Sales
- Trade unit calculator: Tool to help determine the optimal trade unit based on demand and other factors
-
Factors to consider:
- Product demand
- Lead times
- Average order size
- Transportation costs
- Customer preferences
Trade Unit Calculator
- Determine the optimal trade unit based on demand and other factors
What to consider by customer/product?
- Order frequency: How often do customers order?
- Average order size: How much do customers typically buy?
- Product demand: How popular is the product?
New Decision Sales
- Shelf life: The length of time a product can be stored without becoming unusable
-
Factors influencing shelf life
- Product characteristics
- Storage conditions
- Packaging
Lecture 11 - Logistics Management
Logistics
- The process of planning, implementing, and controlling the flow of goods, services, and related information
- Purpose: Ensuring the efficient and timely delivery of goods and services from point of origin to point of consumption
The Challenge:
- Meeting customer needs: Delivering on time and within budget
- Minimizing costs: Optimizing transportation, storage, and handling expenses
- Managing complexity: Coordinating multiple functions and stakeholders
Total Landed Costs
- The total cost of a product, including all expenses incurred from origin to final destination
-
Includes:
- Purchasing cost
- Transportation
- Storage
- Handling
- Insurance
Transportation Management
- Making decisions about transportation modes, carriers, routes, and schedules
- Objective: Efficiently and cost-effectively moving goods to the intended destination
Government's Role:
- Regulation: Setting standards for carrier safety, environmental protection, and trade practices
- Infrastructure: Investing in roads, ports, and airports
Government Regulations
- Safety regulations: Ensuring the safe operation of transportation vehicles
- Environmental regulations: Minimizing the environmental impact of transport operations
- Trade regulations: Controlling the flow of goods across borders
Goal of trade agreements
- Facilitating international trade
- Reducing trade barriers between countries
Modes of Transportation
- Road (Trucking): Flexible and widely available but can be susceptible to traffic congestion and weather delays
- Rail: Cost-effective for long distances but less flexible than trucking
- Water (Shipping): Cost-effective option for large quantities over long distances but subject to port congestion and weather disruptions
- Air: Fastest mode of transport but most expensive
- Pipelines: Suitable for transporting liquids and gases but lack of flexibility and potential environmental concerns
By Water - Ocean Freight
- Cost-effective option for transporting large quantities over long distances
- Suitable for: Bulk commodities, manufactured goods, and containerized cargo
By Water - Inland Waterways
- Transportation on rivers, canals, and lakes
- Suitable for: Heavier goods and bulk materials
Air
- Air freight: Used for high-value, time-sensitive, and perishable goods
Air freight
- Provides the fastest delivery times, but it is also the most expensive mode of transport
Land Transportation
- Railroad: Cost-effective, large capacity, and can be used for long distances but less flexible than trucking
Trucking Segments
- Long haul: Transports goods across long distances, often between states or provinces
- Short haul: Transports goods over shorter distances, often within a city or region
- Local trucking: Provides door-to-door delivery within a particular area
- Specialized carriers: Transport goods that require specific handling or equipment, such as refrigerated trucks, flatbeds, and tankers
Intermodal
- Combining multiple modes of transportation to maximize efficiency
- Example: Shipping goods by rail to a port and then by ship to a customer’s location
Pipelines
- Transportation of liquids and gases through underground pipes
- Suitable for: Crude oil, natural gas, water, and other fluids
Service Selection
-
Consider:
- Transportation cost
- Delivery time
- Reliability
- Carrier availability
Fresh Connections - Transportation Modes
-
Supply chain uses a combination of truck and boat transportation:
- Trucks used to transport goods from suppliers
- Boats used to ship bulk commodities
- Finished products are transported by trucks: Ensuring timely delivery to customers
The cost of transporting
-
Factors influencing transportation costs:
- Distance
- Weight
- Mode of transport
- Carrier availability
- Fuel prices
Lecture 12 - Tradeoffs and Financial Implications
What is ROI?
- Return on investment: A measure of how much profit is generated from an investment
- Calculates the effectiveness of an investment
How is ROI calculated?
- (Gain from Investment - Cost of Investment) / Cost of Investment
Trade-Offs
- Cost vs. performance: Balancing the need to minimize costs with the need to meet customer expectations
- Centralization vs. decentralization: Deciding whether to manage the supply chain centrally or to delegate responsibilities to individual departments
- Inventory vs. service: Finding the right balance between carrying inventory and meeting customer service needs
In the supply chain..Cost benefit analysis
- Analyzing the costs and benefits of different supply chain decisions
- Weighing the potential risks and rewards of each decision
- Evaluating the return on investment of supply chain improvements
Understanding the financial implications of decisions
- Assessing the impact of supply chain decisions on profitability, cash flow, and other financial metrics
- Analyzing the cost-benefit analysis of different options
Increase Safety Stock
- Increased safety stock: A supply chain strategy that is used to minimize the risk of stockouts
- Higher inventory levels: Can improve service but also carry higher costs
- Important to find a balance between stock levels and costs
Customer Service Level
- Improved customer service levels: Lead to higher satisfaction and increased retention
- Higher service levels: May result in higher costs, but can also drive revenue growth
What about component Safety stock?
- Holding safety stock for components essential to fulfill orders for finished products
Calculations Must Knows:
-
Calculating ROI:
- ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
-
Calculating gross margin:
- Gross margin = Realized revenue - Cost of goods sold
-
Calculating operating profit:
- Operating profit = Gross margin - Indirect costs
-
Calculating safety stock:
- Safety stock = (Demand variability * Lead time variability) + Service level factor
-
Calculating inventory turnover:
- Inventory turnover = Cost of goods sold / Average inventory
-
Calculating lead time:
- Lead time = Time from order placement to order receipt
-
Calculating service level:
- Service level = (Number of orders fulfilled on time) / (Total number of orders)
-
Calculating utilization:
- Utilization = (Usage / Capacity)
Warehouse Capacity
- Understanding the maximum storage capacity of the warehouse
-
Factors influencing warehouse capacity:
- Warehouse size
- Pallet configuration
- Storage height
Bottling Line Capacity
- Understanding the maximum output capacity of the bottling line
-
Factors influencing bottling line capacity:
- Bottling line speed
- Number of bottling lines
- Production scheduling
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