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Supply Chain Management:

From Vision to Implementation

Chapter 5: The Order Fulfillment Process:

Managing the Physical Flow

Infrastructure

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Chapter 5: Learning Objectives

1. Describe how purchasing, production, and logisticsdecisions work together to create customer value.

2. Identify and describe the steps in the purchasingprocess.

3. Identify and discuss design and control decisions in

production operations management. Describe theunderlying principles and practices leanmanufacturing. Describe the characteristics ofservice operations.

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Chapter 5: Learning Objectives

4. Identify the key decision-making elements of thelogistics process. Discuss order fulfillment,transportation, and distribution strategies.

5. Describe how physical flow decisions affect thecost and service positions of the company as well asthe design of the overall supply chain.

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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 supportproduction

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.

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Elements of the SCOR Model

Plan: Processes that balance demand and supply to develop a course ofaction to meet sourcing, production, and delivery needs. This processaligns the supply chain plan with the financial plan.

Source: Processes that purchase goods and services to meet planned oractual demand. Emphasis is on selecting suppliers, establishing policies,

scheduling deliveries, and assessing performance. Make: Processes that transform product to a finished product to meet

demand. Emphasis is on scheduling production, measuring performance,managing inventory, and configuring the network.

Deliver: Processes that provide finished goods and services to customers.

Emphasis is on order management, warehouse management, andtransportation management.

Return: Processes associated with the return of products for any reason,and includes post-delivery customer support. Emphasis is on reverselogistics and long-term customer support.

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SCOR Model

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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 relationships4. 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

Service industries spend less on purchased

materials than manufacturing

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Purchased Inputs as a Percent of Sales

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Outsourcing Purchasing Role

Focusing on core competencies has led many

companies to outsource value added activities

Sourcing professionals take on the role of

acquiring and managing:

Inputs

Supplier capacity

Supplier capabilities

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The Sourcing Process

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Recognition and Description of Need

Well-managed companies use a purchasing

policy or procedure handbook to guide

interactions between internal users and

sourcing

Purchase requisition is used to clearly

describe and communicate needs to sourcing

Item description, requisitioning department,

authorizing signature, purchase quantity, delivery

day, and location are necessary information

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Supplier Selection

1. Identification involves making a list of all potential suppliers. Apurchaser might look to the companys purchasing database ordirectories such the Thomas Register of American Manufacturers, whichlists over 150,000 companies.

2. Evaluation involves the identification of supplier selection criteria andthe gathering of performance information that can be used to assess andcompare 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.

1. 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.

1. Monitoring assures high levels of performance. Scorecards are oftenused 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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Transaction Management - Price

Price is the factor used most frequently to

evaluate the sourcing groups performance

Best price is pursued using:

List price low-volume or low-value items

Competitive bidding relies on market forces to

obtain a fair price

Reverse auctions may achieve 10-30% reductions

Negotiation high dollar value high uncertainty

items, or when a long-term relationship is desired

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Transaction Management - Orders

Purchase orders specify the terms and

conditions of the purchase agreement and

initiate supplier action

Blanket orders specify the overall terms of

agreement for a given time period and cover

the entire quantity to be purchased

Smaller quantities are periodically delivered

under this agreement

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Transaction Management - Expediting

Regular follow-up allows identification of

quality or delivery problems

Expediting refers to efforts to speed up

delivery of an order

Penalty clauses can be used in purchase

agreements

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Transaction Management - Inspection

Receipt and inspection matches the invoicethe contents via physical count and qualityinspection

Primary reason for failure: The count is off (too much, too little)

Quality is inferior

Supplier certification programs focus onimproving suppliers abilities to produce highquality products, eliminating the need forinspection

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Transaction Management - Payment

Efficient procedures for invoice clearance

improve:

Supplier relationships

Financial performance

Discounts for prompt payment

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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. Current status of all purchase orders

2. Select evaluation criteria for all suppliers

3. Part or commodity information

4. Information regarding contracts of relationships

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Purchasing Manager Skills

Knowledge Management commodity expertise and

understanding of supplier capacity and capability

Relationship Management - alliance relationships

with critical suppliers, fair relationships with all;design of efficient transaction mechanisms

Process Management - continuous improvement,

collaborative processes, supplier education

Technology Management - employed new

technology to reengineer the sourcing process

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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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World Class Operations Management

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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 producedand 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

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Labor Productivity- Manufacturing

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Labor Productivity- Services

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Operations Management Skills

Operational excellence is a prerequisite for

success; however, competition is now

between chains not just companies.

Therefore, managers must understand anddevelop skills in dealing with:

Outsourcing

Supplier Integrated Manufacturing Best Practices Dissemination

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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 absoluteminimum 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 Basic Principle

Sort

Eliminate clutter. Remove all supplies, materials, tools, and paperworknot required in the operation. Keep only that which is needed toperform the process.

Set In Order

Organize the work area to make it easy to find what is needed.

Everything has a place and everything is in its place.

ShineClean the work area. Make it shine. This includes aisles, walls,meeting and storage places.

StandardizeCreate and use policies, procedures, and practices to assure that the firstthree of the 5S activities are performed regularly.

Sustain

Create a 5S culture by putting in place mechanisms that support,enhance, and extend 5S practices. Involving, measuring, andrecognizing 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 thepoint of origin and the point of consumption in order

to meet customers requirements.

- Council of Supply Chain Management Professionals

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The Logistics Process

Materials management is concerned with theinbound movement and storage of rawmaterials, purchased components, and

subassemblies entering and flowing throughthe conversion process.

Physical distribution focuses on the outboundtransportation and storage of finishedproducts from point of manufacture to wherecustomers wish to acquire them.

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Basic Logistics Activities

Activity Basic Roles and Responsibilities

CustomerService

Customer service focus on understanding what customers want andmeasuring logistics performance against these customer requirements.

DemandForecasting

Forecastsestimates of demandmust be developed to help plan other

logistics activities, allocate resources, and provide high levels of serviceat low costs.

DocumentationAccurate documentation helps assure that the product gets to the customeron time. Documentation is particularly vital in international shipments.

InformationManagement

Data on carriers, customers, and inventories must be turned into useful

decision-making information. Information replaces inventory in today'slogistics systems.

InventoryManagement

Product must be available to meet production requirements and customerdemand. However, inventory is expensive. Inventory control must supporthigh levels of customer service with as little inventory as possible.

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MaterialHandling

Because handling materials costs money and can lead to damage,factories and warehouses are designed to minimize the total amounthandling.

Order

Processing

Order processing initiates work. Many orders are transmitted

electronically, improving speed and accuracy of the fulfillment process.

Packaging

Packaging protects the product throughout the distribution process.Packaging also conveys information about the product and presents anattractive appearance.

Parts andService Support

Needed spare and replacement parts must be available to support sales.

Caterpillar promises delivery of needed replacement parts anywhere inthe world within 48 hours. This type of support increases customerloyalty.

Site SelectionLocation

Location can provide access to inputs like low-cost labor and materials. Itcan also affect customer service levels, providing access to importantconsumer markets.

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Return GoodsHandling

Defective products and inaccurate orders must be returned efficiently.Reverse logistics" is very important to achieving high levels ofcustomer satisfaction.

Salvage andRecycling

Handling excess materials is often overlooked. However, this is animportant logistics activity, especially when hazardous materials orrecyclable items must be managed.

Transportation

Management

Transportation is the most visible logistics activity. Five modal optionsexist: rail, truck, air, water, and pipeline.

Warehouse/DCManagement

Storing products until they are ready for use is the role of warehousing.A variety of products are also consolidated into a single customershipment.

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The Order Cycle

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Order Fulfillment Activities

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Order Fulfillment Activities

Placing facilities in the right location and leveragingappropriate process technologies to reduce the combined

production and delivery time.

Carrying the right quantity and mix of inventory.

Streamlining order processing eliminating unnecessary steps. Assure order-entry accuracy

Developing good relationships with reliable transportationcompanies reduces transit times and increases on-timedelivery performance.

Adopting appropriate technologies and implementinginnovative materials handling processes can increase flowspeed through warehouses.

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Transportation Modes - Rail

Rail

CostHigh fixed, low variable cost structure

Inexpensive, especially for bulk goods

SpeedRelatively slow, average car speed 20 MPH (unless utilizing double stack unit trains,effectively doubling speed)

Quantities Large quantities; full car load increments most cost effective

Geographical CoverageWidespread on some continents; limited by tracks, landmass

EnvironmentalConcerns

High impact of new tracks, low air pollution

Distances Medium to long

Required Infrastructure Tracks, rolling stock

Product Variety Large variety of products; ideally suited for bulk goods

Reliability Low loss, damage, less timely (delays at sidings, terminals)

Flexibility

Routing limited to track location, little door to door delivery (side spur required)

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Transportation Modes Motor Carrier

Motor Carriers

CostHigh variable (90%), low fixed (10%)

More expensive than rail

SpeedMedium speed where sufficient roads exist, about twice as fast as rail (50 MPH)

QuantitiesLimited capacity of about 80,000 lbs; larger capacity combination vehicles are

geographically limited

Geographical CoverageWidespread on some continents; limited by roads, landmass


High pollution, especially in developing countries, high impact of new roads

Distances Short to Medium

Required InfrastructureRoads, vehicles

Routing limited by road location

Product Variety Large variety of products

Reliability Limited loss, damage, more timely than rail

Flexibility

Routing limited to road locations, but still good for JIT, extensive access in countries

with well-developed highway systems, door to door delivery possible with appropriateroads

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Transportation Modes - Pipeline

Pipeline

CostHigh fixed, low variable

Very inexpensive

SpeedNature of product makes speed a non-issue

Quantities Large quantities of limited products

Geographical CoverageWidespread on some continents; limited by unidirectional movement, and the availabilityof landmass to support pipelines


Pipeline leakage, high impact on wildlife, scenic value

Distances Medium most common

Required Infrastructure Pipeline between two points required

Product Variety Primarily petroleum products; only practical for liquid, liquid-carried, or gas products

Reliability Very low loss or damage, usually timely

Flexibility

Routing limited to pipelines

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Transportation Modes - Ship

Ship

Cost

High variable, low fixed Very inexpensive, about $.008 /ton mile (1/4 cost of railroad) Less fuel needed

Speed Inland waterway: Slow, about 4 to 5 MPH Ocean: faster, fewer stops (10-12 days Pacific crossing)

Quantities Large. Container ships carry up to forty equivalent unit containers.

GeographicalCoverage

Global, but limited to natural and constructed waterways.


Spillage from accidents, leakage, high impact on fisheries

Distances Long to very long

RequiredInfrastructure

Ports, ships

Routing limited by waterway, ocean availability

Product Variety Low variety of heavy, bulk, or low-value-by-weight items, often commodities

Flexibility Port to port

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Transportation Modes - Airplane

Airplane

Cost

High variable, low fixed Very expensive (2 to 3 times as high as motor carriers, 12 to 15 times as high as

rail); lower packing costs than ship

Speed Fast speed within and between continents; measured in hours or days

Quantities Relatively small

Geographical Coverage Widespread on some continents; limited by air terminal availability


Noise pollution near major population centers

Distances Medium to very long

Required Infrastructure Airports, navigational aids, airplanes

Routing limited by airport location

Product Variety Large variety of small, high-value-by-weight, often perishable items

Flexibility Air terminal to air terminal

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Transportation Modes - Internet

Internet

Cost

Extremely inexpensive, where infrastructure is in place.

Low fixed, low variable costs

SpeedExtremely fast

Quantities Limited by number of source transmission lines available, or satellite access

Geographical Coverage Widespread on some continents; limited by transmission capability availability


None except where new transmission line construction occurs, then less thanother modes

Distances Very short to very long

Required Infrastructure

Telephone lines, satellite, cellular transmission capability

Routing limited by transmission path

Product Variety Limited to digital information; software, music, video, documents, information

Flexibility Computer to computer

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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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Logistics Manager Skills

Logistics may be the next source of competitive

advantage. To tap that advantage managers

must understand:

Logistics Outsourcing

Shared Logistics Services

Network Rationalization

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A Return to the Opening Story

Based on what you have now read and discussed: Why is Charlene interested in making the entire

order fulfillment process visible? What do youthink the root-cause of Coco Locos problems is?

What questions would you ask Terry, Jack, andRobert? Are the organization structure, reportingrelationships, and reward systems at Coco Locorelevant to the current crisis? Why or why not?

What mechanisms might help the order fulfillmentprocess better meet customer requests? Specifically,what policies, procedures, processes, and measuresare needed?

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Supply Chain Management:

From Vision to Implementation

Supplement E: Forecasting and Inventory

Management

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Forecasting

Forecast are estimates of future demand andin 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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Simple Moving Average

Averages actual demand/cost data for a specified

number of previous time periods.

Each period has equal weight.

The number of periods represent a trade-off betweenstability and responsiveness

Fewer time periods will be more responsive but less

stable

More time periods will be less responsive but more stable

Managers should use MAD to test various forecast

periods to determine the best to accurately reflect their

environment

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Simple Moving Average - Example

Week Demand

1 350

2 397

3 375

4 342

5 381

6 366

7 348

365Forecast

3

381366348Forecast

AverageMovingPeriod3

8

8

=

++=

362.4Forecast

5

375342381366348Forecast

AverageMovingPeriod5

8

8

=

++++=

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Weighted Moving Average

Newer/older data may be more representative

of the current environment

Any combination of weights that sums to 1.00

may be used

Any number of periods may be used

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Weighted Moving Average - Example

Week Demand

1 350

2 397

3 375

4 342

5 381

6 366

7 348

359.4Forecast

(0.4)(348)(0.3)(366)(0.2)(381)(0.1)(342)Forecast

AverageMovingWeightedPeriod4

8

8

=

+++=

Using the data from the previousexample, calculate a 4 week weightedmoving average with the weights of .1,.2,.3, and .4 (oldest to newest)

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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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Exponential Smoothing - Example

44.91Forecast

31)0.328)(47.-(1)(0.328)(40Forecast

12

12

=

+=

Using the given data, calculatedemand in week 12 using anexponential smoothing forecastwith an alpha = 0.328

PeriodActualDemand

ForecastedDemand

7 48 52.69

8 45 51.15

9 47 49.13

10 45 48.43

11 40 47.31

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Regression

Least squares regression can be used to determine thestraight line that minimizes total forecast error.

Capable of multi-year forecasts into the future

( )

==

==

+=

221

10

10

yx-xynlinetheofslopeb

y

linetheofinterceptb

:Where

xbbY

xxn

n

x

bn

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Regression - Example

=55x

= 575y =385

2x

= 3115xy

Week (x) Number ofRepairs (y)

x2 xy

1 59 1 59

2 73 4 146

3 41 9 1234 62 16 248

5 48 25 240

6 57 36 342

7 69 49 4838 70 64 560

9 46 81 414

10 50 100 500

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Regression - Example

xY )5758.0(67.60 +=

5758.055-10(385)

55(575)-10(3115)linetheofslopethe

21===b

67.6010

55)5758.0(10

575linetheofinterceptthe0 ===b

03.5215)5758.0(67.60 =+=Y

Forecast for Period 15 would be:

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Mean Squared Error (MSE)

MSE is the average of all of the squared errors

The forecast with the smallest MSE best fits the data

( )

PeriodsofNumber

DemandForecasted-DemandActualMSE

2

=

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Mean Squared Error - Example

PeriodActual

Demand

Forecasted

DemandError

Squared

Error

7 48 52.69 -4.69 22

8 45 51.15 -6.15 37.82

9 47 49.13 -2.13 4.54

10 45 48.43 -3.43 11.76

11 40 47.31 -7.31 53.44

Total 129.56

25.915

129.56MSE ==

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Mean Absolute Deviation (MAD)

MAD is the average of the absolute deviation between actualand forecasted values

The forecast with the smallest MAD best fits the data

PeriodsofNumber

DemandForecasted-DemandActualMAD

=

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MAD - Example

PeriodActual

Demand

Forecasted

DemandError

Absolute

Error

7 48 52.69 -4.69 4.69

8 45 48.97 -3.97 3.97

9 47 45.82 1.18 1.18

10 45 46.76 -1.76 1.76

11 40 45.36 -5.36 5.36

Total 16.96

3.395

16.96MAD ==

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Inventory Management

Inventory can be either:

Raw Materials

Work-in-Process (WIP)

Finished Goods

Inventory is one of the largest expenses for

most companies

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Inventory Management

Inventory Management involves 2 questions:1. How much inventory should be ordered?

2. When should orders be placed?

Two basic models address these questions:

1. Fixed order quantity orders the same quantity

at different intervals2. Fixed order interval orders different quantitiesat fixed intervals

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Fixed Order Quantity

Orders the quantity, Economic Order Quantity

(EOQ), that minimizes the total cost of inventory

each time an order is placed.

Orders are placed at different intervals.

Assumptions:

Demand rate is constant and known

All of the consumer demand is satisfied (no shortages)

Lead time or order cycle time is constant and known

Price paid for the units of inventory is constant

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EOQ Model Costs

Order Costs

Placing order

Tracking shipment

Receiving shipment

Inspecting shipment

Document costs

Invoice Costs

Setup Cost Labor and materials used

in setup

Carrying Costs

Warehousing

Overhead

Capital

Insurance

Labor

Tax costs

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EOQ Costs

DollarsinUnitOneCarryCost toAnnualor theCPW

PercentageaasCostCarryingP

SetuporOrderperCostS

Inventoryofper UnitCostCQuantityOrderQ

DemandAnnualA

:Where

SQCP2

1CostsTotal

QW2

1orQCP

2

1CostsCarryingAnnual

QACostsOrderAnnual

=

=

=

=

=

=

+=

=

=

Q

A

S

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EOQ Total Cost Curve

W

2ASor

CP

2ASEOQ =

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EOQ - Example

The manager of Hogan Kitchenware gathered the following data. He expectsto sell 44,000 measuring cups this year. Hogan purchases the measuring cupsfor $0.75 each from its supplier, Shatter Industries. Every order that is placedcosts Hogan $8.00 to process. The manager at Hogan estimates his companysinventory carrying cost to be 12 percent. Hogan Kitchenware is open forbusiness 365 days per year. Calculate the number of measuring cups that

should be ordered. What is the order, holding, and total cost of inventory?

units82.796,20.75(0.12)

8.00)2(44,000)(EOQ ==

125.86$00.82796.8244,000CostsOrderAnnual ==

$125.86)0.75)(0.12(2796.82)(2

1CostsCarryingAnnual ==

Total Cost of Inventory is $251.72

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Fixed Order Quantity Approach

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Reorder Point

Reorder point is the level of inventory that triggersan 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 - Example

Using the data from the previous example and an 8 days leadtime, calculate the reorder point for Hogan Kitchenware.

Units964.40PointReorder

8X120.55PointReorder

TimeLeadOrderXDemandDailyPointReorder

=

=

=

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Purchase Point Discount

When offered quantity discounts, the problem may berestated in terms of a choice between total inventory cost on

two different orders.

To determine whether a quantity discount offers a true

advantage, you must:1. 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.

2. Calculate the total annual costs of both options and select the option

with the lowest annual total costs.

ACSQ

AQCP

2

1CostTotal ++=

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Purchase Point Discount - Example

Using the data from the pervious example and a purchaseprice discount of $0.73 for orders in excess of 5,000 units;

how many units should be ordered each time?

$33,251.72CostsTotal

)44000(0.758.002796.82

44000

75)(0.12)2796.82(0.2

1

CostsTotal

EOQ

EOQ

=

++=

$32,409.40CostsTotal

)44000(0.738.00500044000(0.12)5000(0.73)

21CostsTotal

5,000

5,000

=

++=

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EOQ Implications

EOQ Model is fairly robust despiteassumptions that are unrealistic for mostcompanies.

Technology can reduce the order costs byautomating the process.

By reducing order/setup cost, batch size canbe reduced meaning that companies can holdless inventory but receive shipments moreoften.

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