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Week 8: Production and Supply

Chain Process

MIS2101: Management Information Systems

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Agenda

Introduction

Production Problems due to lack of communication

Integrated Production Process

Supply Chain Management

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The supply chain

In the sales process, the organization is the supplier In the purchasing process, the organization is the buyer The movement of goods from supplier to the end customer is

the “supply chain”

Supplier Organization Customer

Oat/Wheat Farmer Fitter Snacker Customer

Components of a supply chain People, Technology, Information, Goods, Processes

Supply Chain Management looks at the entire supply system from raw materials to finished goods on the retail shelf

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Supply Chains

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Production

A production plan answers: Quantity of product to make? When to make product? How much raw materials to procure and when?

A successful company must be able to Develop a good production plan Execute the plan Make adjustments when customer demand differs from

the forecast

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Production Approaches

Products are made for inventory in anticipation of orders

Most consumer products

Products are made to fulfill specific orders

Expensive products or high-customization products

Combination of make-to-stock and make-to-order

Final product assembled from stock for a customer(Dell!)

Make to

Stock

Make to

Order

Assemble

to order

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Production Problems in “Un-integrated” systems

Hard to know how much and when to produce

Problems arise in:

Communication Inventory Accounting

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Communication Issues - External

“Bullwhip Effect” in Forecast Driven Distribution Channels

Small fluctuation is downstream channels result in large fluctuations in manufacturer’s predictions

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Communication issues - Internal If production isn’t integrated with marketing:

Production doesn’t know about sales promotions or unexpected planned orders Results: depleted inventory, overtime, expedited

shipments, and material shortages

Marketing doesn’t know about planned maintenance

Results: unexpected reduction in production and unmet demand

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Inventory Problems

Production manager schedules production based on experience, rather than formal planning techniques Primarily compares current warehouse inventory levels

with “normal” values

Inventory information is not available in real-time, and does not recognize inventory that has been sold but not shipped Inventory available to commit to future orders is not

known

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Inventory Problems

Inventory shortages may mean unplanned production changeovers, resulting in: Lost production capacity Potential shortages of other products

Actual sales data is not available on a timely basis, because: Lack of organizational trust

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Accounting Problems

Most companies use standard costs to account for manufacturing costs Standard costs are based on historical costs for

materials, labor and factory overhead

Manufacturing costs are estimated by multiplying production quantities by standard costs

Actual production costs invariably deviate from estimates using standard costs, and adjustments must be made regularly

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Sales and Operations Planning (SOP) Case Study

Kellogg’s achieved significant savings from coordinated sales and operations planning (SOP)

Changed focus based on how they were evaluated Marketing and sales: Evaluated on tons of cereal sold Manufacturing: Evaluated on tons of cereal produced No one evaluated on profit!

Kellogg’s new sales order process focused on profit

Kellogg’s has reduced capacity, inventory and capital needs while increasing sales

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Production planning process

Develop aggregate production plan for groups of products

Break down aggregate plan into product specific plans for smaller time periods

Determine raw material requirements based on plan

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An integrated process

Sales and Operations Planning

Demand Management

MRPDetailedScheduling

Sales Forecasting

PurchasingProduction

StartingInventory

Sales and Operations Planning

Demand Management

MRPDetailedScheduling

Sales Forecasting

Sales Forecasting

PurchasingProduction

StartingInventoryStarting

Inventory

Predicts future demand for products

Break production plan down into smaller time increments

Create production schedule based on production plan from demand management

Uses the schedule to determine products and staffing

Determines what company should

produceRequires starting

inventory levels and sales forecast based on capacity

Determines amount and

timing of raw material orders

Takes quantity and timing information

from MRP and creates orders for

suppliers

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Forecasting in an Integrated System

Accurate historical sales values available for forecasting

“Fix” historical sales: If production was unable to meet

demand sales does NOT represent actual demand

Unusual conditions like weather The effect of sales promotions

This is essentially data warehousing and data mining!

Sales provided fromSD module

Field where planner can “correct” the sales value

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MRP Materials Requirements Planning (MRP) is a process

to determine the quantity of a material to manufacture or purchase and the time when the production/purchase order should be released.

The three key concepts in MRP are: Bill of Materials Lead Time Lot Sizing

The output of the MRP process is a set of planned orders.

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Lead Times and Lot Sizing

To determine timing and quantity of purchases

Lead time includes: Time for supplier to receive and process order Time to take material out of stock, package it, load it on a

truck and deliver it to the manufacturer Time required at manufacturer to receive the material:

Unload the truck, inspect the materials, move to storage location or production line

Lot sizing: determining production or order quantities In many cases, lot sizes for purchased items are constrained

by packaging and transportation

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Purchasing and ERP

Provides way to convert Requirements to Purchase Order automatically

Help the purchasing specialist select the best vendor (best price)

Options to evaluate vendorsConvert MRP data to a purchase order

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Production and Accounting in an Integrated System

Information entered for material movement automatically updates accounting records Info can be entered

through data entry, barcode, RFID, etc.

Material received (for MRP) and the

purchase order

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Implications for Supply Chain Management

Supply chain participants often use competitive bidding to reach a “winning” prices by reacting

Creates adversarial relationship among participants

Supplier

Raw

Mat

eria

ls

Manufacturer Wholesaler Retailer

Cus

tom

er

Goods Goods Goods Goods Goods

$$ $ $ $

Information Information Information Information Information

Supplier

Raw

Mat

eria

ls

Manufacturer Wholesaler Retailer

Cus

tom

er

Goods Goods Goods Goods Goods

$$ $ $ $

Information Information Information Information Information

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Supply Chain with ERP (Integration)

Production plans can be shared along the supply chain in real time

Managers can evaluate impact of plans on total cost across the supply chain

Collaboration among participants leads to: Improved product quality Reduced paperwork Reduced inventories Increased customer responsiveness

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Measures of Success Cash to Cash Cycle Time

Time between paying for raw materials to collecting money from customers

From 100 days to one month (with SCM)

Supply Chain Costs Buying and handling inventory, processing orders, information

systems support Reduces from 12% to 5% with SCM

Other Metrics (used by Staples) On-Time Performance: meeting delivery dates Initial Order Lead Time: time needed to fill the order

Why supply chains are important Cost Efficiency

(Walmart)

Agility (Gap)

Complexity (Walmart)

Need for innovation (iPhone APIs)

Blurred organizational boundaries (Cisco)

New Technologies in Supply Chain Management

RFID Attached to items that RFID is intended to track Consists of

Electronic Integrated Circuit Miniature Antenna Substrate

Benefits on RFID in Supply Chain

RFID Innovate ways to identify, locate and monitor goods as they

travel through supply chain of many industries.

Increased accuracy of orders

Reduce inventory handling cost Improve Inventory handling

Fewer misplaced items(in warehouse)

Reduce losses from theft

RFID in Supply Chain Management (Contd)

Check out the video on use of RFID in Inventory Management.http://www.youtube.com/watch?v=4Zj7txoDxbE&NR=1

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SCM with Customer Collaboration Case Study – Wal-Mart

POS data from bar code scanners is recorded in a massive data warehouse at Wal-Mart headquarters

Wal-Mart uses data mining techniques to predict what customers will buy at different times of the year

Data is shared with Wal-Mart suppliers to plan production

Wal-Mart also allows its 5000 suppliers to directly access its data warehouse through its Retail Link program

Wal-Mart is leading the effort to leverage RFID technology

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Summary

An ERP system can improve the efficiency of production and purchasing processes

Begins with Marketing sharing sales forecast

Production plan is created based on forecast and shared with Purchasing so raw materials can be ordered properly.

Production planning can be done without an integrated system, but integrated system that allows MRP and Production to be linked to Purchasing and Accounting

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Key Learnings

Production Process Production Plan Production Approaches

Problems in Un-integrated Systems Communication, Inventory, Accounting Bull Whip Effect, Standard Costs

Integrated Production Process Sales Forecast Sales and Operations Plan Demand Management Production Purchasing

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Key Learnings Key Terms

Lead Time Lot Size Why do we need to calculate optimal lot sizes?

ERP and Supply Chain Success Metrics

Case Studies