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Basics of Supply Chain Management Session 1 Introduction to Supply Chain Management

Course Objectives • Provide a review of supply chain management from a manufacturing, planning and control perspective • Provide a basis for further study leading to APICS CPIM certification

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Key Resources • BSCM Participant Guide • CPIM Exam Content Manual • APICS Dictionary

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Basics of Supply Chain Management 1.

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Demand Management

Master Planning

Material Requirements Planning

Capacity Management and Production Activity Control

Aggregate Inventory Management

Item Inventory Management

Purchasing and Physical Distribution

Lean/JIT and Quality Systems

Theory of Constraints and Review Activity

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Introduction to Supply Chain Management

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Basics of Supply Chain Management 1. Introduction to Supply Chain Management

Manufacturing companies see one of their primary activities as transforming ideas and materials into products and services. They have to interact with suppliers of raw materials or components, and with customers who might either distribute, resell, or consume their products. Several topics will be introduced in this section: Creating value and wealth Choices manufactures make in order to compete Role of manufacturing in the supply chain Manufacturing planning and control systems Impact of technology and new productivity improvement systems and philosophies Topics will be introduced in this section and explored further in the next nine sessions. 5

Learning Objectives Introduction to Manufacturing • Explain the significance of the United Nations (UN) Global Compact. • Describe the components of the manufacturing business model. • Describe the impact of four significant aspects of the business environment on manufacturing.

Manufacturing Environments and Process Choices • Explain five manufacturing environments and their determinants. • Explain the differences among the three process choices.

The Manufacturing Supply Chain • • • •

Differentiate between internal and external supply chains. Differentiate between traditional and cross-functional supply chains. Explain common supply chain conflicts and how to resolve them. Explain the relationship between strategic, tactical, and operational performance measures. • Explain the role of materials management. 6

Learning Objectives (cont.) Manufacturing Planning and Control • Identify five objectives of manufacturing. • Describe the concepts of priority and capacity. • Present an overview of the manufacturing planning and control (MPC) hierarchy. • Describe the four steps in the evolution of MRP to ERP.

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Session 1 Introduction to Manufacturing

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Role of Manufacturing Adding value creates wealth

Raw material Product

Value to the customer

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United Nations Global Compact • Voluntary strategic policy initiative for businesses

Voluntary initiatives: - instill a culture of leadership & innovation in pursuit of responsible behavior - move corporate responsibility from concept to fact - give voice to people’s concerns securing a positive place in society for the firm

• Alignment of business operations with principles in four areas: - human rights The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted - labor practicesprinciples in the areas of human rights, labour, environment and anti-corruption. By so, business, as a primary driver of globalization, can help ensure that - environment doing markets, commerce, technology and finance advance in ways that benefit - anti-corruptioneconomies and societies everywhere.

• Adoption of UN Global Compact Management Model Provides detailed guidelines for incorporating the ten principles in business strategies and operations. Source: United Nations Global Compact: Corporate Sustainability in the World Economy, February 2011

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Ten Principles

Member firms agree to embrace, support and enact the following principles.

Human rights

1 – Support and protect internationally proclaimed human rights. 2 – Ensure non-complicity in human rights abuses. 3 – Uphold freedom of association and right to collective bargaining.

Labor practices

4 – Eliminate forced and compulsory labor. 5 – Abolish child labor. 6 – Eliminate discrimination in employment and occupation. 7 – Support a cautionary approach to environmental challenges.

Environment

8 – Promote greater environmental responsibility. 9 – Encourage the development and diffusion of environmentally friendly technologies.

Anti-corruption

10 – Work against corruption in all of its forms including extortion and bribery.

Source: United Nations Global Compact: Corporate Sustainability in the World Economy, February 2011

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UN Global Compact Management Model Commit Leadership commitment to mainstream Global Compact principles.

Communicate

Assess

Communicate progress and strategies; engage stakeholders.

Assess risks, opportunities, and impacts.

Measure

Define

Measure and monitor impacts and progress toward goals.

Define goals, strategies, and policies.

Implement Implement strategies and policies across the company and value chain. Source: United Nations Global Compact Management Model: Framework for Implementation, June 2010

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Manufacturing Business Model • • • •

Defining products and customers Designing products and processes Managing material flow Providing customer service and support

All aspects of the business model should support the goal of making a profit and competing effectively both now and into the future.

We will look at each of these in more detail. 13

Customers and Products Product Definition Positioning Breadth of product line Price Quality Brand name or generic Design Packaging Returns policy

Product Design

Important strategic decision – what to sell to who?

Customer Definition Types of customers • Industrial • Consumer • Institutional • Government Market segmentation Sales channels Market share/profitability

Choice of production environment (ETO, MTO, ATO, MTS) Choice of manufacturing process (Project, intermittent, repetitive flow, continuous flow)

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Designing Products and Processes designed to:

Most important characteristic – WHY?

To ensure a profit.

Meets Customer Needs

Be Cost Effective

DESIGN Must be addressed in design phase.

Provide Quality

Provide Efficiency

Including efficiency in distribution & transportation .

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Managing Material Flow Material Acquisition

Manufacturing

Procurement of materials driven by Demand Plans and MRP

Must balance service-costsinventory

Execute Efficiently to eliminate waste and time

Schedule Production when necessary to meet Demand Distribution

Includes both outbound & inbound (e.g Reverse Logistics)

Manage flow to and from (reverse Logistics) Customers Returnable packaging such as Totes, Recycling packaging such as drums or pallets Remanufacturing (green concept) 16

Providing Customer Service/Support • Understanding and meeting customer wants and needs • Two-way communication • Working with customers to solve problems

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Global Environment •

Global competition

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Economic, government, and regulatory influences Global recession has brought much attention to these things. For example, currency protectionism, environmental regulations, etc..

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Customer expectations I want More!

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Corporate social responsibility Both sustainability (responsible use of resources) and social behaviors.

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Customer Expectations Characteristics that provide value to the customer • Price A primary driver for standard, commodity products but not for specialty products (e.g. IPOD vs. other MP3 Players)

• Quality

Assumed in most cases today – not often a significant difference maker.

• Delivery For example, FedEx, UPS, DHL, etc..

• Pre- and post-sale service Dell Computers, Specialty Chemicals, etc.. – supplier helps with design and services after sale.

• Flexibility (product and volume) For example ease in changing product design to meet changing demands (e.g. IPOD from keypad to touch screen). Ease of increasing volumes as demand increases. Environmentally friendly is becoming more important.

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Customer Expectations (cont.) • Order qualifiers Competitive characteristics that a firm’s products must exhibit in order to be considered by customers

• Order winners Competitive characteristics that cause customers to choose a firm’s products and services 20

Session 1 Manufacturing Environments and Process Choices

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Manufacturing Environments • Engineer-to-order Customized solutions unique to the customer who is involved in the design.

• Make-to-order Production begins after receipt of customer order. Product may be sold to multiple customers and repeat orders may be received..

• Assemble-to-order (Finish-to-Order) Intermediates or sub-assemblies are stocked and final product is configured to order.

• Make-to-stock Customer orders are filled from existing stocks.

• Mass customization High volume products with large variety. For example, having it your way at Burger King or specifying a customer computer at Dell.

Green manufacturing including re-use, disassembly & re-manufacturing are future trends. 22

Determinants of Manufacturing Environments Influences • Lead time expectations

• Product design input from customers • Product volume and variety

• Product life cycle

We will look at each of these in more detail. 23

Lead Time and Manufacturing Environments ETO Delivery Lead Time Design

Purchase

Manufacture

Assemble

Ship

Engineer-toOrder

MTO Delivery Lead Time Make-to-Order

Inventory

Manufacture

Assemble

Ship

ATO Delivery Lead Time Manufacture

Inventory

Assemble

Ship MTS Delivery Lead Time

Manufacture

Assemble

Inventory

Assemble-toOrder

Make-to-Stock

Ship

Note: Mass customization would have shorter lead times and higher volumes than MTO.

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Volume/Variety Relationships For example, having the burger or Starbucks your way.

High

Product Variety

Engineer-to-Order e.g. Bridges, Buildings, Custom Homes, Custom Chemical Solutions, etc..

Make-to-Order

Fast pace, High Variety & High Volume

e.g. Specialty Chemicals, Specialized Equipment, etc.. e.g. Autos, Furniture, Bulk-to-Pkg, etc..…

Assemble-to-Order

e.g. Groceries, Hardware, Sporting Goods, Commodity Chemicals, etc…

Low

Mass Customization

Make-to-Stock

Product Volume

High

The manufacturing strategy must be effectively aligned with the Volume-Variety approach.

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Product Life Cycle

Units sold

Introduction

Cost of producing and promoting product is high.

Time

Growth

Unit Cost decreases; Competition Increases.

Maturity

Competing products exist; may stay in this stage (e.g. milk)

Decline

Cost reductions and new products are focus.

Phase-out

Sales & Production discontinued; aftersale service outsourced.

Products travel through life-cycle at different speeds (e.g. Commodity Chemicals vs. Specialty Chemicals

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Product Life Cycle and Manufacturing Environments Units sold

Introduction

Time

Growth

Maturity

Decline

Phase-out

All but ETO are used in these two stages. Align with Volume-Variance

ETO MTO ATO MTS MC

May develop prototype and use pilot plant approach at this stage.

Make-to-Order Only; Plan to take off market. Change to order on demand to reduce risks.

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Choice of Processes and Layouts • Intermittent

Lot or Batch Production flowing through work stations at different intervals (e.g. Pigments & Dyes, Machine Parts, etc..)

• Flow – Repetitive/Line – Continuous

• Project

Auto assembly lines and Campaign Wheel production in chemicals (e.g. Dispersions) are examples. High production volumes.

Very high production volumes with fixed routings. For example steel, gasoline and bulk chemicals (e.g. Basic Intermediates, Capro, MDI, etc…).

Used to produce buildings, planes, bridges, etc.. . Often the product is made at one site.

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Intermittent Manufacturing • Product moves through a series of work stations • Different products go through different work stations • Use for relatively low volume products

Source: Arnold et al., Introduction to Materials Management, 6th ed. Reprinted by Permission of Pearson Education

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Intermittent Manufacturing Characteristics • Intermittent lot/batch production Step 1

Wait

Step 2

Wait

Step 3

• Work moves only to required stations • Many different parts processed at workstations • General-purpose machinery • Relatively easy to change product or volume • Complex and expensive production and inventory control • High WIP inventory levels; long lead time 30

Intermittent Manufacturing Layout • Intermittent manufacturing layout is called process layout Multiple products are run through the same “process” layout.

• Also called functional or job shop layout

• Equipment and operations grouped together by functional specialty Machines are often grouped together by function (e.g. saws, lathes, blenders, dryers, etc..)

• Similar types of skills and equipment in each department • Volume not high enough to justify assembly line 31

Flow Manufacturing

• Workstations are in the sequence needed to make the product Blender – Reactor – Dryer - Packager

• Work flows at a nearly constant rate For example: one car every two minutes or 100 Kgs per minute

• Little work-in-process inventory Usually no work-in-process storage only inventory that is in production line.

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Flow Manufacturing Characteristics • Layout is called product layout The machines are designed to yield a given “product” (e.g. steel, oil, cars, bulk chemicals, etc..)

• Fixed routings and dedicated machinery For example an oil refinery or auto assembly line.

• Capital intensive Cost is usually in “billions” of dollars or euros.

• Two types of flow: repetitive/line and continuous • Repetitive = discrete units • Continuous = not discrete (liquids) Auto assembly line is most common example. One car every two minutes.

• Limited range of similar products Uses heating, cooling, mixing, chemicals, etc.. In a flow line to produce bulk chemicals, steel, gasoline, etc..

• High product volumes The technology is tied to the product produced.

Very costly to start & stop production; Need high utilization to justify capital expenditure.

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Advantages of Product Layout • Little work-in-process inventory Product flows through the reactor line or repetitive assembly line without building up inventory in process.

• Short throughput and manufacturing lead times High output rate is the norm. For example, an auto assembly line for Repetitive or an oil refinery for Continuous Flow.

• Lower unit cost Due to high throughput, low labor costs, and low inventory investment. 34

Project Manufacturing (Fixed Position) • • • •

Used for large, complex projects Project remains in one location for assembly Site layout Avoids cost of moving the product

For more on Project Management go to: PMI.org 35

Problem 1.1 Product Layout vs. Process Layout Continuous, Repetitive

Intermittent, Batch

Product

Process

Capital cost Flexibility Annual setup cost Run cost Work-in-process inventory Production and inventory control costs Lead time

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Problem 1.1 Solution Product Layout vs. Process Layout Continuous, Repetitive Flows

Product

Intermittent, Batch

Process

Capital cost Flexibility Annual setup cost Run cost Work-in-process inventory Production and inventory control costs Lead time

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Session 1 The Manufacturing Supply Chain

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Supply Chain Management Definitions Supply chain: The global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.

Supply chain management: The design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value , building a competitive infrastructure, leveraging world-wide logistics, synchronizing supply with demand and measuring performance globally. ─APICS Dictionary 39

Basic Supply Chain: External External supply chain from a manufacturer’s perspective Dominant flow of goods and services Returns and reverse logistics

Suppliers

Manufacturer

Distributors

Retailers Consumers

Dominant flow of demand and design information Dominant flow of cash

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Conventional Internal Supply Chain View Functional View- Working in Silos Internal supply chains include these three functions who may or may not work well together and focus on the overall results. For example, Purchasing might buy at the lowest price without consideration for the quality of the product or the delivery performance of the vendor. A goal of Supply Chain Management is to ensure highest overall value add to the firm.

Raw Materials

Purchasing

Production

Distribution Customers

Lowest purchase price Inventory buffers

High utilization %

Long runs – minimize changeovers Low unit costs

Full truckload quantities Best shipping rate Safety stocks

Safety stocks 41

Cross-Functional Supply Chain View Supply chain processes

Manage Customer Orders and Reverse Logistics

P2P Develop Products and Services

SC Plng

Manage Procurement

Key support processes:

Produce Products

OTC Manage Distribution

Perform Marketing and Sales

Focus is on the process not the organizational function. KPI’s must focus on overall results.

Manage Finance Manage Human Resources

 The value chain consists of the value-adding processes that enable a company to take its products from conception to market  The internal supply chain is a subset of the value chain  Support processes are important but are not considered primary value chain processes 42

Conflicts in Traditional Supply Systems Marketing Traditional Objective

Operations

Finance

Reduce Increase profit and Increase revenue/ satisfy customers manufacturing cost cash flow, reduce investment

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Customer service

Production efficiency

Inventory investment

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Balanced Scorecard • “Balanced” to show KPIs from the    

customer perspective business process perspective financial perspective innovation and learning perspective.

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Balanced Scorecard Financial Perspective •Contribution Margin •Cash Flow •Operating Result •Return on Assets •Days Sales Outstanding •Value-Added Productivity

Customer Perspective •Promise vs. Request Date •Promise vs. Delivery Date •Request vs. Order Date •Order vs. Delivery Date •Actual vs. Plan Ship Date •Ship vs. Order Quantity

Source: “The Balanced Scorecard” by Norton & Kaplan

Innovative Perspective

Internal Perspective •Forecast vs. Actual Sales •Actual vs. Plan Production •Inventory Velocity •Non-Optimal Shipments •Distribution Expenses •Flexibility & response time

•Trends in performance •Rates of improvement •Learn new processes •Learn new technologies •Share knowledge

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Performance Measures Key Performance Indicators

EBIT after COC

Strategic

• Inventory • Forecast Accuracy

Tactical

• On-Time Delivery • SC Costs • Daily Yield Performance • Cycle Count Accuracy

Operational

• Actual vs. Scheduled Production

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Session 1 Manufacturing Planning and Control (MPC)

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Objectives of Manufacturing • • • • •

The right products Of the right quality In the right quantities At the right time At minimum cost (right price)

Don’t Forget! The business must make a profit!

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Why Plan? • To satisfy customer demand and ensure the availability of resources Raw Matls., Intermediates, FGs, Merchandise – Material Machines, People, Money, etc.. – Capacity

Sets the priorities

Demand

Resources

Scheduling & Capacity Management

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A Good Planning and Control System • Work Centers • BOM’s

Inventory Status

• Routings

What must we get and when? Demand Planning

Production & Purchasing Schedules

These are questions of priority and capacity. 50

Manufacturing Planning and Control

Execution

Sales & Operations Planning

Resource Planning (RP)

Master Scheduling

Rough-Cut Capacity Planning (RCCP)

Material Requirements Planning (MRP)

Capacity Requirements Planning (CRP)

Production Activity Control (PAC)

Input/Output Control Order Sequencing

Execution

Feedback used to adjust plans

Business Planning

Capacity Planning

Demand Management

Priority Planning

Master Planning

Plans & Schedules Production

Validates the Plan or Schedule

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Session 1 From MRP to ERP

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Evolution from MRP to ERP 1960’s MRP

1970’s

1980’s

1990’s

MRP Closed Loop

MRP II

ERP

MRP Processor Closed-Loop Feedback Best Practice Processes Common Database Sales and Operations Planning Total Cross-Functional Software Process Integration

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Basics of Supply Chain Management Session 1