supply chain management

SCHOOL OF

ENGINEERING

P01 – Know Your Supply Chain

E331 : SUPPLY CHAIN MANAGEMENT

Copyright © 2010 School of Engineering, Republic Polytechnic, Singapore

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Know Your Supply Chain

Uni-PCB is one of the world’s largest PCB (Printed Circuit Board) manufacturers,

and its products are used in a wide range of electronics products from mobile

phones, computers, to home appliances, etc.

Currently, the company has 4 PCB fabrication facilities, one in Singapore,

another one in Taiwan and two in China. It also has testing and assembly sites in

various global locations of Singapore, Malaysia and China. After testing and

assembly, the finished products are shipped to hundreds of customers all over

the world in varied industries. With such a competitive nature of the electronics

industry, the company has to turn-around in the shortest lead-time, whereby 95%

of customers receive their orders within 30 days from the time the order was

placed.

Allen is a fresh graduate and just joined this company as a member of its supply

chain team. Being new to the company and the industry, Allen decided to start by

understanding the supply chain of the mobile phone, since it is a key market

segment that he will handle. Can you help Allen to find out the different

companies involved in this supply chain? How could he ensure that every link of

the supply chain is effective and agile to fulfil the supply chain goal in the current

dynamic business environment?

School of Engineering

P01 – Know Your Supply Chain

E331 – Supply Chain Management

Supply Chain Management (SCM)

Multi-tier Supplier and Customer Chains

Material, Information and Financial Flows

Supplier Plant Warehouse Logistics Retailer


What is a Supply Chain?

A supply chain is the network of interconnectedbusinesses involved in the ultimate provision ofproduct and service packages required by endcustomers. It spans all movements and storageof raw materials, work-in-process inventory andfinished goods from point-of-origin to point-of-consumption.

• For example, a shampoo supply chain starts from the raw materials all

the way to the consumer.


Why Supply Chain Management?

• Fierce competition in today’s global markets, introduction of productswith shorter life cycles and the increasing customer expectationshave forced business to invest in and focus attention on the efficiencyof their supply chains

• Supply Chain Management (SCM) is a set of approaches utilized toefficiently integrate suppliers, manufacturers, warehouses etc, sothat the product is produced and distributed at the right quantities,distributed to the right locations and at the right time, so as tominimize supply chain-wide costs while ensuring customer service.


Mobile Phone Supply Chain

Timber

Company

Label &

CartonManufacturer

Packaging

Company

Manufacturer

(i.e. Nokia)

Assembly Plant

CustomerRetailerDistributor

Testing Plant

PCB

Fabrication Plant


Suppliers

(International)

Warehouse

PortAssembly Plant

Apple Shenzhen

Country-wide

Distribution

Centers (DCs)

Retailers

Apple iPhone Supply Chain

Customers via

online store

Retailers


Bill of Materials (BOM) – Laptop

• A structured list of the components which make up a product

or assembly. The list contains each component as well as

the quantity.

• Parent item shown at highest level or level zero (0), parts that

go into parent item are called level 1 components and so on


Components & Costs in a Supply Chain

Suppliers Manufacturers Warehouses & Distribution

Centres

Customers

Manufacturing Costs

Material Costs

Inventory Costs

Transportation Costs




Conflicting Objectives

• Not every stakeholder in the supplier chain has

the same objectives

• Suppliers want to purchase large quantities in stable volumes,

with flexible delivery dates to the manufacturers. But most

manufacturers would like to implement long production runs to

reduce changeovers and downtimes. They also need to be

flexible to their customers’ needs and changing demand

patterns.

• The manufacturers’ objectives of making large production

batches typically conflicts with the objectives of the

warehouses and DCs to reduce inventory.


Make Or Buy?

• The decision to “make or buy” relates to the trend of outsourcing.

This was used as a tool to rapidly cut costs and lead to the rise of

contract equipment manufacturers like Solectron, Flextronics,

Sanmina-SCI.

• Advantages of Outsourcing:

� economies of scale

� reduction in capital investment

� focus on core competencies

For example, Nike focuses on innovation, marketing, distribution

and sales and outsources its manufacturing. Apple focuses on

design and outsources its manufacturing.

• Factors considered are: cost, technology, intellectual patent (IP)

rights, confidentiality, responsiveness, etc.


Who are the Customers?

• Customers include:

� Wholesalers

� Distributors

� Retailers

� Consumers

• “First-tier customers” are customers who buy the products

directly from the manufacturer, while “second-tier customers”

are customers to the “first-tier customers”

Manufacturer Customer Customer’s

Customer


Who are the Suppliers?

• Suppliers for the mobile phone include those supplying the

phone cover, casing, battery, speakers, microphone, etc

• “First-tier suppliers” are suppliers who supply the products

directly to the manufacturer, while “second-tier suppliers” are

suppliers to the “first-tier suppliers”

• “Third-tier and fourth-tier suppliers” exist, especially for long

and complex supply chains

ManufacturerSupplierSupplier’s

Supplier


Suppliers for Mobile Phones

• First-tier Suppliers:

• Venture Manufacturing

• Flextronics

supplies the Printed Circuit Board (PCB), which is the

heart of the mobile phone and serves the functions of

wireless communication, display, sound and voice

• Second-tier Suppliers:

• Vishay is the 2nd tier supplier to the PCB

manufacturers.


A Full Supply Chain – Mobile Phone

• Full supply chain from suppliers to customers


3 Flows in a Supply Chain

ManufacturerSupplierSupplier’s Supplier

Customer’s Customer

Customer

Material Flow

Information Flow

Financial Flow

• In a typical supply chain, material (products / services) usually

flows from left to right. Due to the growing importance of reverse

logistics (product recall, customers returning products that are

unacceptable, damaged, obsolete, etc), we are seeing a growing

trend of material flows from right to left.


3 Flows in a Supply Chain

• Traditionally we view information flowing in the opposite

direction of material flow, i.e. right to left (from the customer back

to the wholesalers and manufacturers). Examples: customer

demand or sales data

• Information that flows from left to the right include many forms

such as Advance Shipment Notices (ASNs), order status

information, inventory availability information, the sharing of

sales information on a more real-time basis via Point-of-Sales

(POS) system

• Financial flow – This refers specifically to cash. Traditionally,

financial flow has been viewed as one-directional, from right to

left for the payment of goods, services and orders received


Recommendations

• Use the appropriate supplier(s) for the specific material orcomponent part is a strategic issue itself, especially since Uni-PCB

has plants globally.

• Good communication between the suppliers and the purchasers viatechnological tools and systems

• Criteria for supplier evaluation include process-based evaluations

and performance-based evaluations

• For example, Uni-PCB should demand that their suppliers be certified

through third-party organizations such as ISO 9000 certification.

• Deciding the number of suppliers that Uni-PCB should use,

should it be a single-source or multiple-source policy.

• Having multiple sources will guarantee an undisrupted supply of

parts.


Learning Objectives

• State what is a supply chain and what encompasses supply chain

management (SCM)

• Describe the concepts of multi-tier supplier and customer chains

• Describe the “make or buy” decisions that a manufacturer makes

• Define the 3 flows in a supply chain: material, information andfinancial flows

• Identify the key challenges in SCM (in particular the challenges inmanaging global suppliers) and the strategies involved

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ENGINEERING

P02 – Supply Chain Design




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Page 2 of 3

Supply Chain Design

Adam is the Distribution Centre manager of a global mobile phone company

headquartered in Singapore. He is accountable for sales order fulfilment. The

upstream ODM (Original Design Manufacturer) factory in China ships the

completed mobile phones in boxes to his distribution centre.

All along, he is practising Build-to-Stock (BTS) strategy for all the products.

However, he encountered large backlog for one product and huge inventory for

another product frequently. Due to the nature of the business, the Distribution

Centre faces intense pressure to commit short lead-times to its customers.

Whenever there is backlog, he is always under stress to ask the factory to

arrange urgent shipments. In view of this, Adam has decided to make big

changes to the stocking strategy so as to resolve this issue and prevent it from

happening.

He decides to first focus on the best-selling model N18, with 5 different country

variants to serve Japan, China, ASEAN, Europe and US markets. He has

influence on his immediate upstream and downstream partners only.

The table below shows the actual demand consolidated for the past few months.

Monthly Demand

Country Country Variants Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10

China N18-1 31,000 48,000 53,000 69,000 78,900 69,100 88,200

Japan N18-2 3,300 3,500 3,900 2,700 3,000 3,600 2,900

ASEAN N18-3 33,000 59,700 81,800 79,800 70,100 59,000 68,400

US N18-4 12,000 16,600 21,300 16,100 19,300 20,100 22,100

Europe N18-5 110,000 139,600 140,000 160,000 109,000 101,500 156,600

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Page 3 of 3

As a supply chain executive under Adam, you are required to assist him to:

(1) Look into applicability and trade-offs of each supply chain design

(2) Suggest the most appropriate supply chain strategy to be used

(3) Quantify the inventory savings for the design you have chosen

(4) Recommend how to shift from the current BTS strategy to the new strategy in

the most effective manner


P02 – Supply Chain Design


Build-To-Stock (BTS)

Configure-To-Order (CTO)

Build-To-Order (BTO)

Engineer-To-Order (ETO)

Safety Stock Estimation


Build-To-Stock (BTS)

• The BTS product is built prior to demand with a standard Bill ofMaterials (BOM). For example, Diet Coke.

• Fastest response time to the customer. The customer order isplaced and satisfied either from a retail shelf or from a finished-goods stocking point.

• Price of this immediate satisfaction is some loss of selectivity. Thecustomer takes what is available in pre-determined configurationssupplied by the manufacturer. The customer ends up purchasingmore product features than what is actually desired.

Supply and Manufacturing

Customer Leadtime

Finished ProductSupply and Manufacturing

Customer Leadtime

Finished Product


Configure-To-Order (CTO)

• The CTO product is assembled to demand with standard modules orcomponents. For example, desktop computers.

• Introduces orders prior to assembly and pushes the order to thecustomer but replenishes (pulls) the parts to build the order.

• The customer receives greater end-item choice but sacrifices someof the immediacy of order fulfillment.

• A critical issue for those using or considering CTO supply chains ishow quickly the customers’ needs are satisfied � responsiveness

Supply and Fabricate

Customer Leadtime

Finished ProductAssembly


Build-To-Order (BTO)

• The BTO product is fabricated and assembled to order with a

standard bill of materials. For example, executive jets and

industrial machinery.

• The customer orders are introduced prior to fabrication or at the

start of the production process.

• BTO products are usually highly customized to customer

specifications, very costly to manufacture or both.

Supply

Customer Leadtime

Finished ProductAssemblyFabrication


Build-To-Order (BTO)• A good example of BTO would be the

purchase of new flats in Singapore.

The Housing Development Board (HDB) will announce the sites

where new flats will be built and invite applicants to submit theirapplication forms within the application period. After the applicationperiod closes, HDB will assess the response before decidingwhether to offer all, one, or none of the contracts for booking.

• Under the BTO scheme, new flats will be constructed only

when confirmed demand hits a certain level.

• This flexibility has enabled HDB to match the supply of flats to

the demand from home-seekers – resolving the problems of

excess unsold flats (inventory to HDB!)


Engineer-To-Order (ETO)

• The ETO product is fabricated and assembled to order with uniqueparts and drawings. For example, a thermo-chemical reactor or theUS space station.

• Responds to a truly customized product that requires uniquedrawings and parts

• Lead-time from order to delivery is often long because of thecustomized nature of the product.

• Typically the single-lot, job-shop environment. Distribution andtransportation of the ETO products are often planned in units of one.

Drawing

Customer Leadtime

Finished ProductAssemblyFabrication

School of Engineering 7

Supply Chain Management Operations Strategies

STRATEGY WHEN TO CHOOSE BENEFITS

Make to Stock standardized products,

relatively predictable

demand

Low manufacturing costs;

meet customer demands

quickly

Build to Order customized products, many

variations

Customization; reduced

inventory; improved

service levels

Configure to Order many variations on finished

product; infrequent demand

Low inventory levels;

wide range of product

offerings; simplified

planning

Engineer to Order complex products, unique

customer specifications

Enables response to

specific customer

requirements

Source: Simchi-Levi


Push V.S. Pull Strategy

• In a push-based supply chain, the production and distribution

decisions are based on long-term forecasts.

� Takes a longer time to reach the changing customer demands

� Higher inventory levels, lower customer service levels and higherrisk of product obsolescence.

• In a pull-based supply chain, the production and distribution

decisions are demand driven

� Significant reduction in system inventory levels and costs.

� Difficult to implement the pull system especially when lead-timesare long (too slow to react to changing customer demands).

�It also becomes difficult to leverage on the advantages ofeconomies of scale (in manufacturing and transportation) as pullsystems are not planned far ahead in time.


Push-Pull Strategy

• This has lead to companies to use the push-pull strategy (to

take advantage of the best of both worlds).

• Typically the initial stages are pushed-based while the

remaining stages are pull-based. The interface between the

push and pull stages is known as the push-pull boundary.


Shift from One Design to Another

• BTS to CTO• Reason: customer wants more varieties and know

exactly what he/she wants

• BTO to CTO• Reason: customer wants to get product faster

• Key technologies behind the shift:• Standardization

• Modularization

• Postponement

• RAP (Raw-as-Possible) Principle


Raw As Possible (RAP) Principle

• RAP means keeping work-in-process WIP as “raw as

possible”.

• It is a strategy to use a small number of components to

configure a large variety of finished products. This principle

can be accomplished by configuring the product offerings so

that material and resource commitments are postponed for as

long as possible.

• The RAP principle can be fulfilled by the CTO supply chain,

which differentiates the product only at the final assembly

stage.


Raw As Possible (RAP) - Examples

• The extent that the RAP principle can be implemented

depends on configuration of the item being produced and the

lead-time requirements of the customer.

• Even consumer goods using the BTS system can still benefit

from the RAP principle. For example, a bottling facility can

implement the RAP principle by using in-house labeling of 2-

litre bottles rather than purchase pre-labeled bottles from

external suppliers.

• In the apparel industry, unique or differentiating parts

(for example, decal) are assembled at the downstream,

onto the finished products, thus delaying

differentiation according to the RAP principle.


Raw As Possible (RAP) - Examples

• Closely related to the RAP principle is the principle of

aggregation or risk-pooling. It is well known that aggregated

demand has lower variation than demand for the individual

products.

• For example, the BOM can be used to optimize the benefits of

risk-pooling. The idea is to pull all the unique materials to the

same BOM level across multiple stock-keeping units (SKUs).

By doing so, the manufacturer can strategically locate safety

stock upstream to pool the risk across the individual product

BOMs.

• The concept of RAP is also commonly known as

“Postponement” or “Delayed Differentiation”.


Supply Chain Design for Mobile Phone

• BTS

End Items

Components

MPS (by forecast):

N18-1: 12,000

N18-2: 11,000

… …

N18-1 cover: 24,000

N18-2 cover: 22,000

… …

N18-1 keypad: 12,000

N18-2 keypad: 11,000

… …

Switch button: 25,000

Speaker mesh: 15,000

… …


Supply Chain Design for Mobile Phone

• CTO

MPS (by forecast):

N18-1 cover assembly: 12,000

N18-2 cover assembly: 11,000

… …

Back bottom casing assembly: 50,000

Electronics Assembly: 50,000

… …

N18-1 cover: 24,000

N18-2 cover: 22,000

… …Components

Modules

End Items

N18-1 keypad: 12,000

N18-2 keypad: 11,000

… …

Various customer configurations:N18-1, N18-2, N18-3, N18-4, N18-5… …


Demand Planning -- Planning Across Supply Chain

BTS

Planning

Level

Planning

Level

Components

End Items

Components

CTO

Components

Modules

End Items


Today’s Problem

Adam’s circle of influence

Suppliers Factory Distribution center Local warehouses Reseller Customers

MakeSource Deliver

Suppliers Factory Distribution center Local warehouses Reseller Customers

MakeSource Deliver

1. Extend “Make” phase to DC

2. Maintain BTS mode in Factory for cost reason and responsiveness

3. Create CTO mode in DC doing final assemblies & localization (Postponement)

Dominant

Push-Pull Boundary


• Customer service level = 95%

• z =1.64, Period of Review, r = 1 week, LT = 2 weeks

• Safety stock (SS) for ASEAN:

• SS = Z x STDEV x √(r+L) =1.64 x 16,459 x√(3*7/22) = 26,451 units

time

Invento

ry

Q

0

SS

1st

Order

Placed

RQ

2nd

Order

Placed

3rd

Order

Placed

Q

Q+SS

LTD LTDLTD

Period of Review Period of Review

Safety StockPeriodic Review Policy(R, S)

Period of Review Period of Review


Today’s Problem

• Considering all 5 markets

• Based on BTS, Safety Stock = 102,858 units

• Based on CTO, Safety Stock = 80,751 units

• Reduction in Safety Stock = 22,107 units

From the perspective of inventory costs,

it makes sense to switch from BTS to CTO

Keep a significant lower safety stock for common modules (generic mobile phones without power supply/ manual/casing)


Learning Objectives

• Describe the 4 supply chain designs:

� Build-To-Stock (BTS)

� Build-To-Order (BTO)

� Configure-To-Order (CTO)

� Engineer-To-Order (ETO)

• State the concepts of push, pull and push-pull strategies

• Identify the push-pull boundary for each supply chain design

• Identify the pros and cons to shift from one supply chaindesign to another and the appropriate strategies to use

• Estimate the appropriate safety stock levels for BTS andCTO strategies

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ENGINEERING

P03 – Risk Pooling




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ENGINEERING

Page 2 of 3

Risk Pooling

iFitness produces and distributes fitness equipment in Australia. Its current

distribution system partitions Australia into two markets, each of which has a

single warehouse.

• Warehouse 1 is sited at Perth, serving the west of Australia.

• Warehouse 2 is sited at Sydney, serving the east of Australia.

Figure 1: Location of the 2 warehouses serving the Australia market

The top two best-selling products of iFitness are the iSofa (Body Massage Sofa)

and iSlim (Slim Belt). The warehouses receive items directly from the

manufacturing facility and lead time for delivery to both warehouses is about one

week. Customers of iFitness receive deliveries directly from the corresponding

warehouse.

Warehouse 1

Warehouse 2

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Page 3 of 3

As they haven’t fully recovered from the global economic downturn, the top

management decides to review the current distribution system to stay

competitive. One of the major revamps being considered is to consolidate the

two existing warehouses into a centralized warehouse. This proposed central

warehouse will be located in South Australia to serve all customer orders. The

CEO insists that the same service level, 97% should be maintained as before.

The historical demand data for the two products are given in Table 1 and 2.

Table.1 Historical demand for iSofa

Week 1 2 3 4 5 6 7 8 9 10

Warehouse 1 10 12 16 11 15 20 11 18 15 14

Warehouse 2 12 14 9 20 16 12 19 16 12 13

Table.2 Historical Demand for iSlim

Week 1 2 3 4 5 6 7 8 9 10

Warehouse 1 243 386 154 398 295 210 394 260 389 201

Warehouse 2 256 128 312 152 264 385 201 452 391 255

For both products:

• The ordering cost is fixed at $60 for iSofa and $40 for iSlim, regardless of the

order quantity.

• The inventory holding cost is estimated at $1.20/item/week and $0.4/item/week,

respectively

• Assume the delivery lead time remains the same at one week if the centralized

warehouse system is implemented

Help evaluate this proposal and come up with appropriate recommendations.


P03 – Risk Pooling


Risk-Pooling Game

Centralized Warehousing

De-centralized Warehousing

Benefits of Centralization / Risk-Pooling


Risk Pooling Game

• The “Centralized Warehouse” is able to generate higher profits

• This is due to the benefits enjoyed by centralization (risk-pooling)


Demand Correlation • Demand correlation is the behavior of customer demand from one market

relative to another market

� If demand is positively correlated, it is likely that if one market has

high/low demand, all the other markets will also have high/low demand

� If demand is negatively correlated, it is likely that if one market has high

demand, at least one market will have low demand

• Benefits of centralization (risk-pooling) increases when there is negative

correlation, because items originally allocated in the centralized warehouse forone market (with lower demand) can now be diverted to another market (with

higher demand)


Risk-Pooling• For the same service level, which system will require more inventory?

Is it the centralized or de-centralized system? Why?

• For the same total inventory level, which system will have betterservice? Why?

• What are the factors that affect the results?

Warehouse 1

Warehouse 2

Market1

Market 2

Warehouse

Market1

Market 2

Supplier

Supplier

De-centralized system

Centralized system


Coefficient of Variation (COV)

• Standard Deviation measures the absolute variability of the

customer demand

• Coefficient of Variation (COV) measures the variability

relative to the average demand

� The greater the COV, the greater is the demand uncertainty

faced by the product

�

MEAN

STDEVCOV =


Coefficient of Variation (COV)

• Demand variability faced by the centralized warehouse is muchsmaller than the combined variability (sum) faced by the 2 existing de-centralized warehouses.

• This has a major impact on the inventory levels in the current (de-centralized) versus the proposed (centralized) system.


Safety Stock (s, S Policy)

• SS = safety factor*STDEV*SQRT(L)

• Centralization (risk-pooling) results in reduction in safety stock whilemaintaining the same customer service level

� iSofa, safety stock reduction of 6 units/week, 42% reduction

� iSlim, safety stock reduction of 178 units/week, 47% reduction

• The higher the COV, the greater are the benefits obtained by centralization (risk pooling).

• This explains why iSlim, which has a higher COV, enjoys a higher percentage in safety stock reduction (47% reduction)


Reorder Point, s for (s, S) System

• s = average weekly demand * lead time + safety stock = d*L + SS

• Centralization (risk pooling) results in a lower Reorder Point, whilemaintaining the same customer service level

~41 units


EOQ (Optimal Order Quantity)

• EOQ = SQRT (2RD/H)• R � Ordering Cost

• D � Average Demand (weekly, monthly, annually, etc.)

• H � Holding Cost per item per week/month/year


Average Inventory Level

• Average inventory = (EOQ/2) + safety stock

• Centralization results in a lower average inventory level� iSofa, average inventory levels reduces by 17 units/week � 32% reduction

� iSlim, average inventory levels reduces by 248 units/week � 40% reduction

• The higher the COV, the larger is the impact of centralization on reduction of average inventory levels

� iSlim


Order-up-to-Level, S for (s, S) System

• S = Reorder Point (s)+ EOQ

• Centralization (risk pooling) results in a lower Order-up-to-Level, whilemaintaining the same customer service level

~117 units


Recommendations

• iFitness should consolidate the two existing warehouses into a

centralized warehouse to serve the whole Australia market.


Conclusions

• Centralization (risk-pooling) helps to reduce both the safety

stock and average inventory levels while maintaining the same

customer service level.

• In a centralized system, whenever the demand from one

market is higher than the average demand while demand from

another market is lower than the average demand, items in the

centralized warehouse that is originally allocated to one market

can be diverted to another market.

• The process of the inventory re-allocation will not be possible in

the case of a de-centralized system.


Conclusions

• Typically, the overhead costs (ongoing expenses of running abusiness, includes rental, electricity bills, insurance) are muchhigher in a de-centralized system because there are few economiesof scale.

• If a centralized and de-centralized warehousing system both carriesthe same amount of total inventory, the service level provided by thecentralized system will be higher

• Generally when we increase the number of warehouse (de-centralized system), the outbound transportation costs (costsincurred for delivering the items from warehouses to the customers)decrease, because the de-centralized warehouses are much closerto the customers.

• The inbound transportation costs (costs of shipping the productsfrom the supply and manufacturing facilities to the warehouses)increase.


Learning Objectives

• Interpret the results of the Risk-Pooling Game

• Compare the pros and cons of a Centralized versus a De-centralized warehousing system

• Calculate the Coefficient of Variation (COV) and describeits impact on Centralization (risk-pooling)

• Compare the Safety Stock, Reorder Point, EOQ, AverageInventory Levels and Order-Up-To-Level for a Centralizedversus a De-centralized warehousing system

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P04 – Distribution Network




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Page 2 of 2

Distribution Network

iFitness, a company headquartered in Singapore,

produces and distributes health and fitness products in

Singapore, US and Europe. The best-selling products

are Massage Chairs, Upper Body Massager, Slim Belts

and Treadmill, etc.

Given that the rising public bodybuilding awareness

has led to a fitness tide in China, the management has

decided to embark on its next business milestone of

brand building and globalization which is to penetrate

the China market.

To expand its market further in China, one of the areas for iFitness to look into is

sales and distribution. Your department has been tasked to perform a feasibility

study on this proposal and you are in charge of the portion on distribution

network. What are the considerations needed when you design the distribution

network? What are the factors that must be considered to ensure an effective

distribution?

Rationalize and decide the appropriate distribution network for iFitness.


P04 –Distribution Network


Strategic Role of Distribution

Factors Influencing Distribution Network Design

6 Design Options for A Distribution Network

Selecting An Appropriate Network Design


Strategic Role of Distribution

• Distribution refers to the steps taken to move and store a

product from the suppliers to the customers in a supply chain.� Raw materials & components are moved from the suppliers to themanufacturers

� Finished products are moved from the manufacturers to the endconsumers

• Distribution is the key driver of the overall profitability of a

company as it has direct impact on the supply chain costs and

the customer experience

Raw Material

SupplierManufacturing

Plant

Warehouse/

Distribution CentreCustomers

distribution distributiondistribution


Factors Influencing the Design

of a Distribution Network

• Performance of a distribution network should be evaluated in

2 major aspects:

� Customer needs that are met

� Costs of meeting the customer needs

• Companies must evaluate the impact of customer service and

costs as it compares the different distribution networks.

• The customer needs that are met influence the company’s

revenues, whereas the costs decide the company’s

profitability


Factors Influencing the Design of a Distribution Network

• Response Time

� time between when a customer places an order and receives delivery

• Product Variety

� number of different products/configurations that a customer desires

• Product Availability

� probability of having a product in stock when a customer order arrives

• Customer Experience

� ease of which the customer can place and receive their order

• Order Visibility

� ability of the customers to track their orders from placement to delivery

• Returnability

� ease at which a customer can return unsatisfactory or defective products

and the ability of the distribution network to handle such returns


Impact on Supply Chain Costs

Transportation

Co

sts

Number of Facilities

Inventory

Facilities

Total Costs

Is this the best choice?


• Transportation costs

� Outbound transportation costs per unit tend to be higher than the

inbound costs because inbound sizes are typically larger

� Increasing the number of warehouse locations decreases theoutbound transportation costs and helps to reduce the totaltransportation costs

� There comes a point whereby the number of facilities areincreased beyond a critical point and result in a significant loss ofeconomies of scale in inbound transportation, then increasing thenumber of facilities does the opposite and cause the totaltransportation costs to increase!

Changing the Distribution Network V.S. Supply Chain Costs


• Inventory costs

� As the number of facilities in a supply chain increases, theinventory and resulting inventory costs also increase

� With fewer number of facilities that Amazon.com has, it is able toturn its inventory 12 times a year, whereas Borders is able toachieve about 2 turns a year with 400 brick-and-mortar facilities.

• Facilities costs

� Facility costs decreases as the number of facilities is reduced.This is because companies benefit from economies of scale due toconsolidation of facilities.

As the number of facilities increases, the total logistics

costs first decrease then increase !

Changing the Distribution Network V.S. Supply Chain Costs


Design Options for A Distribution Network

• When designing a distribution network, the 2 key decisions to

be considered are:

� Will the product be delivered to the customer location or pickedup from a pre-ordained location?

� Will the product flow through an intermediary?

• 6 distinct distribution network designs that may be used to

move products from the manufacturer to the end customer:

1) Manufacturer storage with direct shipping (Drop-ship)

2) Manufacturer storage with direct shipping and in-transit merge

3) Distributor storage with package carrier delivery

4) Distributor storage with last mile delivery

5) Manufacturer/distributor storage with customer pickup

6) Retail storage with customer pickup


Manufacturer Storage with Direct Shipping (Drop-ship)

Europe SingaporeUSChina Manufacturer

Retailer

CustomersEurope customer China customerUS customer

Product FlowInformation Flow

• Product is shipped directly from the manufacturer to the end customer,

bypassing the retailer (who takes the order and initiates the deliveryrequest). All inventories are stored at the manufacturer. It is noted that the

order could be placed via the retailers


Drop-Ship

• Online retailers such as eBags does not hold any inventory ofbags and has them drop-shipped directly from the manufacturer

to the customer.

• Biggest advantage of drop-ship is the ability to centralize

inventory at the supply point. The supply point is able toaggregate demand across all retailers, resulting in a higher level

of product availability with lower levels of inventory.

• Benefits of centralization are best enjoyed by high-value, low

demand items with high demand uncertainty. Also, customersare willing to wait for delivery and also willing to accept partial

shipment.


Manufacturer Storage with Direct Shipping

and In-transit Merge

• In-transit merge combines pieces of the orders coming from differentlocations so that the customer gets a single delivery

Factories

Retailer

Product Flow

Information Flow

In-Transit Merge by

Carrier

Customers


Manufacturer Storage with Direct Shipping and In-transit Merge

• Aggregates inventory and postpones product customization

• Suitable for high-product variety, high-value products with

high demand uncertainty

• In-transit merge is best suited if there are no more than 5

sourcing locations, otherwise the merge becomes very

complicated to coordinate and implement

• Main advantage of in-transit merge over drop-ship is the lower

transportation costs and improved customer service level

• Main disadvantage is the additional effort during the merge

itself


Distributor Storage with Package Carrier Delivery

• Inventory is held by the distributors/retailers in the intermediatewarehouses and package carriers are used to transport productsfrom the intermediate location to the final customers.

SingaporeSingaporeChinaUS Factories

CustomersWuxi customer Hangzhou customerSuzhou customer

Product Flow

Information Flow

ShanghaiShanghaiWarehouse Storage by

Distributor/RetailerBeijingGuangdong

Europe


Distributor Storage with Package Carrier Delivery

• Distributor storage will require a higher level of inventory as thedistributor/retailer warehouse aggregates demand uncertainty to alower level as compared to manufacturer storage

• Suitable for medium to fast moving items. Also makes sense whencustomers want delivery faster than offered by manufacturer storage,but do not need it immediately. However, distributor storage canhandle somewhat lower variety than manufacturer storage, but ahigher level of variety than a chain of retail stores.

• Amazon.com only stocks the medium to fast-moving items at theirwarehouses, whereas the slower moving items are stocked furtherupstream at the distributor/retailer warehouse. In some cases,postponement can be implemented with distributor storage, but thisrequires that the distributor warehouse be equipped with someassembly capability.


Distributor Storage with Last Mile Delivery

• The distributor/retailer delivers the product to the customer’s homeinstead of using a package carrier. For example, grocery industry.

Information Flow

Factories

Customers

Product Flow

Distributor/Retailer

Warehouse

customer1 customer3customer3customer2customer2


Distributor Storage with Last Mile Delivery

• Distributor storage with last mile delivery requires higher levels ofinventory than the other options (except retail stores) because it hasa lower level of aggregation.

• Suitable for relatively fast-moving items where disaggregation doesnot lead to a significant increase of inventory. Staple items in thegrocery industry fit this description, for example, cooking oil, rice,salt and sugar.

• Transportation costs will be highest using last mile delivery. Maybejustifiable for bulk items whereby the customer is willing to pay forhome delivery. For example, home delivery for water and large bagsof rice has proven successful in China, where the high populationdensity has helped to decrease the transportation costs.


Manufacturer/Distributor Storage with Customer Pickup

• Inventory is stored at the manufacturer/distributor’s warehouse but

customers place their orders via internet/phone, and then come to thedesignated pickup points to collect their orders. Orders are shipped from thestorage site to the pickup points when needed

Factories

Pickup

Sites

Product Flow

Information Flow

Retailer / Cross-Dock DC

Customer Flow

Customers


Manufacturer/Distributor Storage with Customer Pickup

• 7dream.com, operated by 7-Eleven Japan, allows customers topickup online orders at a designated 7-Eleven store. 7-Eleven hasDCs where products from manufacturers are cross-docked and sentto the retail outlets on a daily basis. Serving as an outlet for onlineorders allows 7-Eleven to improve the utilization of its existinglogistical assets.

• Processing costs at the pickup site will be high because each ordermust be matched with a specific customer when he/she arrives.Creating this capability can increase processing costs significantly ifappropriate storage and information systems are not available.Increased processing cost at the pickup site is seen as the biggesthurdle to the success of this approach.

• Very good coordination is needed between the retailer,

the storage location and the pickup location.


Retail Storage with Customer Pickup

• Inventory is stored locally at the retail stores. Customers walkinto the retail store or place an order online or on the phone and

pick it up at the retail store.

• Local storage increases inventory costs because of the lack ofaggregation.

• Lowers the delivery cost and provides a faster response timethan other options.

• However, the major disadvantage is the increased inventory andfacility costs.

• Such an option is best suited for fast-moving items or for items

where customers place a high premium on fast response.


Recommendations for Today’s Problem

• iFitness could be best served by a combination of delivery networks

depending on the product and market characteristics:

�China is a very big country with regional disparity and varied demandwhich requires a multiple of distribution strategies

• Fast-moving products (Slim Belts) could be stocked locally and

customers can pick them up directly � Retail storage with customer pickup

• Slower moving items (Upper Body Massager) are stocked at a

centralized Distribution Center (DC) sited in regional DCs in China. Such

products are shipped to the customer within a few days/weeks � Distributor

storage with package carrier delivery

• Very slow moving items (Massage Chairs and Treadmills ) are typically

drop-shipped from the manufacturer and involve a relatively longer lead-time � Manufacturer storage with direct shipping (Drop-ship)


Learning Objectives

• State the strategic role of distribution in a supplychain

• Identify the key factors influencing the design of adistribution network

• Describe the 6 options for distribution network

• Compare the strengths and weaknesses of variousdistribution options

• Select an appropriate distribution network for real-life applications

SCHOOL OF ENGINEERING

P05 – Where to Locate?




SCHOOL OF

ENGINEERING

Page 2 of 3

Where to Locate? Pioneer Electronics is a US-based manufacturer of electrical appliances with sales in

Asia, Europe and North America. The company splits the Asia Pacific market into 5 focal

regions, that is, ASEAN, South and North China, Australia and Japan. As demand has

grown rapidly in this dynamic market, Gary, the Vice President (VP) for Supply Chain is

considering several different alternatives to meet the increasing demand. One alternative

would be to setup a manufacturing facility in each region. Another alternative would be to

consolidate plants in a few regions.

As this is a crucial decision with long-term impact on the company, Gary decides to

conduct a quantitative analysis. He has had his supply chain team to consolidate the

data required for the 5 major regions as shown below:

Demand Region Production and Transportation Cost (in thousand $)

per million Units

Supply Region ASEAN South China North China Australia Japan

ASEAN 319 360 400 380 420

South China 330 260 310 360 380

North China 355 290 250 440 300

Australia 390 430 460 350 490

Japan 430 378 322 456 330

Historical Demand (million units/ year)

30 18 16 25 15

Table 1: Demand, Production and Transportation Cost

Gary is also considering three different plant sizes in each possible location. The fixed

setup costs in each region and plant capacity are shown in Table 2.

Supply Region

Fixed Cost ($*1000)

Low Capacity

Fixed Cost ($*1000)

Medium Capacity

Fixed Cost ($*1000)

High Capacity

ASEAN 4,600 15 6,900 25 10,350 40

South China 4,000 15 6,000 25 9,000 40

North China 3,600 15 5,400 25 8,100 40

Australia 5,000 15 7,500 25 11,250 40

Japan 5,200 15 7,800 25 11,700 40

Table 2: Fixed Setup Costs and Plant Capacity (in million units/year)

SCHOOL OF

ENGINEERING

Page 3 of 3

Help Gary perform an analysis and select the most appropriate locations for the new

plants. What are the factors that should be considered in determining the suitability of

these locations?

How can Gary ensure that the company achieves and maintains excellent customer

service level at a minimum total cost? Does it make sense to set up one manufacturing

plant in each region? What are your recommendations?


P05 – Where to Locate?

Network Design Decisions

Factors Influencing Network Design Decisions

A Framework for Network Design Decisions

The Capacitated Plant Location Model

E331 – Supply Chain management


Network Design Decisions

5-2

Network design decisions have a long-term impact on supply

chain performance

• Facility role � should we build it as a plant, distribution center,

warehouse or retail store?

• Facility location � where should the facilities be located?

• Capacity allocation � how much capacity should be allocated

to each facility? Should we build a small or big plant?

• Market and supply allocation � which plants should serve

which markets?


Factors Influencing Network Design

• Government stability

• Government regulations

• Economic stability and growth

• Exchange rates

• Culture

• Climate

• Export and import regulations

• Duties and tariffs

• Raw material availability

• Number and proximity of suppliers

• Transportation and distribution systems

• Labor force cost and education

• Available technologies

• Technical expertise


Strategic Factors• Cost oriented

• Customer responsiveness

• High-end product/Mass-market product

• Classification of facilities:

• Offshore Facility: Low-cost facility for export production

• Source Facility: Low cost facility for global production – facilitieswith more strategic role in the Supply Chain, resulting from theevolution of good offshore facilities

• Server Facility : Regional production facility

• Contributor Facility: Regional production facility with developmentskills (mainly focusing on customization for the local market)

• Outpost Facility: Regional production facility built to gain localskills

• Lead Facility: Facility that leads in development and processtechnologies


Strategic Factors

• Given that Pioneer Electronics establishes its Asia

headquarters in Singapore:

• If the manufacturing plant is set up in China,

� the plant could be offshore facility or source facility

• Offshore Facility: Low-cost facility for export production

• Source Facility: Low cost facility for global production – facilities withmore strategic role in the SC, resulting from the evolution of goodoffshore facilities

• If the manufacturing plant is set up in Singapore,

� the plant could be a Contributor facility

• Contributor Facility: Regional production facility with developmentskills (mainly focusing on customization/process improvement for thelocal market)


• Characteristics of available production technologies have asignificant impact on the network design

• If production technology provides significant economies of scale, thenhaving a few high capacity locations is the most effective strategy

Example: Wafer Fabrication Plant

• If lower fixed costs is preferred, many local facilities arerecommended

Example: Bottling Plant

• Flexibility of the production technology impacts the degree ofconsolidation in the network• Flexible production � can produce various products

(Few but large facilities)

• Inflexible production � can only produce certain products

(Many local facilities)

Technological Factors


• Tax and tariffs incentive are very important factors in location

selection

• Tariffs are any duties that must be paid when productsand/or equipment are moved across international, state orcity boundaries.

• High tariffs necessitate localized production.

• FTA(Free Trade Agreement) reduces the tariffs

• Free trade zones: Areas where duties and tariffs are relaxed

as long as production is used primarily for export. It allows

companies to take better advantage of low labor costs.

Macroeconomic Factors



• Political, exchange rate and demand risk

• Exchange rate risks: This risk arises from the fact that companiesmight incur their costs in one currency and collect their revenues inother currencies.

• Potential protection to exchange rate risk: Build some flexible over-capacity to the regional facilities so that production is shifted to thelower-cost regions.

• Demand risk: Comes from extensive demand fluctuation due toregional economic crises (e.g., Asia markets between 1996-1998)

• Plant flexibility is also a potential protection to demand risk.

• Political risks: need for Well-defined rules of commerce, independentand clear legal systems , political stability



• From Year of Assessment 2010 onwards, the corporate tax rate of Singaporeis to be 17%, just 0.5% higher than that of Hong Kong – Singapore’s closest

competitor in the Asia region.

• Singapore is a favorable location for MNCs to set up offshore facilities due to

its political, infrastructure and technological factors. The EconomicDevelopment Board (EDB) offers Pioneer Tax and various tax rebate schemes

to attract FDI (Foreign Direct Investment) and new technology into Singapore.

• Pioneer Incentive: EDB may grant pioneer tax incentive to an approvedindustry which is not being carried on in Singapore on a scale adequate to the

economic needs of Singapore, and for which there are favorable prospects for

development. The tax relief period of a pioneer enterprise shall commence onits production day and shall continue for such period, not exceeding 15 years.

• Development & Expansion Incentive: A tax relief period of up to 10 years forthe manufacturing or increased manufacturing of any product from any industry

that would be of economic benefit to Singapore


• Availability of skilled labor

• Availability of transportation facilities

• Ports

• Airports

• Rail

• Highways

• Availability of necessary utilities

• Power

• Water

• Sewage

• Telecommunications / IT

Infrastructure Factors


Network Optimization Model:


• Allocating demand to production facilities

• Locating facilities and allocating capacity:

�For today’s problem, there are 3 options for production

capacity, either a low, medium or high capacity plant

• What do we need to know?

• Fixed facility costs

• Transportation costs

• Production costs


Which market is served by which plant?

Which supply sources are from which plants?

cij = cost of producing and shipping one unit from factory i to market j

xij = Quantity shipped from plant site i to market j

n = number of potential plant locations

m = number of markets

Dj = annual demand from market j

Ki = potential capacity of plant I

Network Optimization Model:



Plant Location with Multiple Sourcing

• yi = 1 if plant is located at site i, 0 otherwise

• xij = Quantity shipped from plant site i to

customer j

• fi = annualized fixed cost of keeping factory i

open

}1,0{0

..

;

1

1

1 11

∈

≤

=

+

≥

∑

∑

∑∑∑

=

=

= ==

yx

yKx

Dx

xcyf

ij i

ii

n

j

ij

j

n

i

ij

n

i

m

j

ijiji

n

ii

ts

Min

5-13

Today we need to make two decisions using Integer Programming (IP) :

• Locate the plants and decide the plant capacity

• Allocate the demand to supply regions


Define Decision Variables

Xij

amount shipped

from plant i to

customer j

yi

• 1 -> open

• 0 -> not open


Define Constraints

Dx

yx

yKx

j

n

i

ij

iij

ii

n

j

ij

=

∈≥

≤

∑

∑

=

=

1

1

}1,0{;0


Define Objective Function

∑∑∑= ==

+

n

i

m

j

ijiji

n

ii

xcyfMin

1 11


Recommendations

Optimal solution is to set up:

• 1 big plant in North China to serve North China, ASEAN and Japan

• 1 medium size plant and 1 big plant in South China to supply ASEAN, South China and Australia


• If Pioneer sets up one manufacturing facility in each region:

• If Pioneer can set up at most one plant in each region:

What-if Scenarios


Supply Chain Optimization

• Optimization is similar to network design• Use the word “design” when new facilities are added

• Use the word “optimization” when existing network is evaluated and relocated

• Network design/optimization decisions• Number & locations of facilities (plants, warehouses, etc.)

• Capacities (size) of facilities and product mix at plants

• Allocation of plants to warehouses

• Allocation of warehouses to stores

• Software (desired in complex SC design & optimization)• ILOG

• Supply Chain Guru

• SAP SCM Supply Network Planning, etc.


Learning Objectives

• Describe the factors influencing supply chain networkdesign decisions

• Identify the potential locations in each region for which acompany has decided to site a manufacturing plant

• Apply The Capacitated Plant Location Model to determinethe location and capacity allocation for each facility usingInteger Programming

• Determine how markets will be allocated to facilities

SCHOOL OF

ENGINEERING

P06 – Supply Chain Guru




SCHOOL OF

ENGINEERING

Page 2 of 5

Supply Chain Guru

Headquartered in Johnston, Iowa, SoyTech is the world’s leading developer and

supplier of hybrid seed corn in nearly 70 countries worldwide. The company also

produces and distributes hybrids or improved varieties of soybean, sunflower,

rice, and wheat as well as grain additives. With a history of over 50 years, today

it is a global business with 16 research stations and 38 production plants located

in the United States alone to serve more than 1200 farmers. SoyTech has all

along adopted a single-tier distribution network, where all products are shipped

from the plants to the various warehouses sited all over the United States.

Over the last couples of years, the increasing diverse customer needs and the

complexity of the environment have made supply chain planning and scheduling

more challenging and complex. In view of the popularity of some supply chain

software packages, the upper management decides to take a try and have an

assessment about the efficiency and the effectiveness of the available software,

Supply Chain Guru. To start small, John, the senior planner has been tasked to

test this software for their Los Angeles plant.

This portion of supply chain network comprises of:

� 2 products: Corn Seed and Soya Bean Seed;

� 4 sites: Los Angeles Plant, Farmer, Omaha Warehouse and Austin

Warehouse

Figure 1: Supply Chain Network for Los Angeles plant

SCHOOL OF

ENGINEERING

Page 3 of 5

John has consolidated some important information as attached in annex A.

Using Supply Chain Guru, help John to come up with recommendations to

optimize the current distribution network. Can you help him to perform scenario

planning (what-ifs) and analyze the results? How can he ensure the validity of the

results?

SCHOOL OF

ENGINEERING

Page 4 of 5

Annex A:

1. Product information:

Corn Seed: Soya Bean Seed:

Value: 100 Value: 50

Price: 750 Price: 320

Weight: 1 Weight: 1

Cubic: 1.5 Cubic: 1.5

Status: Include Status: Include

2. Sites information:

Sites Farmer Omaha Warehouse Austin Warehouse Los Angeles Plant

Name CZ WH1 WH2 MFG

City New York Omaha Austin Los Angeles

State New York Nebraska Texas California

Type Customer Existing Facility Existing Facility Existing Facility

Graphic Circle Triangle Triangle Square

Graphic colour Green Yellow Yellow Red

3. Demand information:

Record 1: Record 2:

Customer: CZ Customer: CZ

Product: Corn Seed Product: Soya Bean Seed

Quantity: 30 Quantity: 50

Order Time: 0 Order Time: 0

SCHOOL OF

ENGINEERING

Page 5 of 5

4. Policies

4.1 Sourcing Policies (10 in total)

o 4 of type Multiple Sources (Most Inventory)

o CZ to WHs

o 1 for each warehouse-product combination

o 4 of type Single Source

o WHs to MFG

o 1 for each warehouse-product combination

o 2 of type Make

o 1 for each product at the MFG

4.2 Transportation Policies (4 in total)

o One for each Source-Destination combination defined in Sourcing Policies

o Sources: MFG, WH1, WH2

o Destinations: WH1, WH2, CZ

o Leave all other fields at default value

4.3 Inventory Policies (6 in total)

o One for each (non-Customer) Site-Product combination

o Sites: MFG, WH1, WH2

o Products: Corn Seed, Soya Bean Seed

o Leave all other fields at default value

4.4 Costs to the Sourcing Policies Table

o Open the Sourcing Policies Table

o Add cost to one lane (2 policies)

o Site = WH1

o Source = MFG

o Products = Corn Seed and Soya Bean Seed

o Average Unit Cost = 60 for Corn Seed and 30 for Soya Bean Seed


P06 – Supply Chain Guru


Supply Chain Guru

Optimization

Simulation


Optimization

• Optimization is a technology to calculate the best possible

utilization of resources (such as people, time, processes,

vehicles, equipment, raw materials, supplies and capacity)

needed to achieve a desired result:

such as minimizing cost or process time

or maximizing throughput, service levels or profits

• Optimization searches a large number of possible solutions to a

given supply chain model, then selects the best solution with

the objective of either minimizing cost or maximizing profit. For

example:

the best site selection

the best product flow requirements

the best plant capacity


Optimization

• Optimization software tends to be a “black box” as it takes inputs

and presents a solution. It is often hard for the user to really

understand the interplay of various factors and how the supply

chain system works as a whole.

• Rules or algorithms to perform optimization includes:

Heuristics

rule of thumb

sub-optimal & usually no guarantee of performance

Exact Algorithms

guarantee optimal solutions for the problem

optimization techniques includes Linear Programming (LP),

Integer Programming (IP)


Simulation

• Simulation replicates the supply chain network design selected

based on optimization then predicts how well a design will perform

in a variety of metric categories

such as inventory level, cycle time measurement, warehouse fill

rate and detailed costing

• Important applications of simulation:

Simulate and accurately predict airbag injuries to human in the

event of car crashes

Simulate plane crashes into buildings and infrastructure, so

that critical buildings such as hospitals and fire stations can be

designed and built to withstand terrorist attacks


Supply Chain Guru

• Real-life supply chains are most often complex and long, with the

interplay of many factors coming into the picture (such as inventory,

sourcing and transportation factors affecting multiple sites – there could

be up to thousands of sites!)

• As the level of complexity level increases, commercial software such as

Supply Chain Guru are much more efficient in finding the optimal

solutions as compared to optimization techniques such as Linear

Programming (LP) or Integer Programming (IP).

• Supply Chain Guru first uses network optimization to find the best

configuration for a given supply chain. Then takes advantage of network

simulation to predict and test the effects of making the changes. It looks

at all the various parts of the supply chain, integrating transportation,

inventory, warehousing and procurement into a single model, providing a

big picture of the current and future network changes.


Supply Chain Guru

• Through the support of the World Bank, Supply Chain Guru has been

used to establish successful network design projects in Kenya,

Ethiopia, etc.

The Kenya Medical Supplies Agency (KEMSA) faces many challenges in its

mission to supply quality and affordable medical essentials to health facilities in

Kenya. Supply Chain Guru was used to model the national distribution network.

By incorporating population data, transportation and warehousing cost estimates,

Supply Chain Guru helped to define optimal warehouse locations, i.e. which

villages will be served by which warehouse, how big the warehouse need to be.

• Supply Chain Guru also has an integrated link with Google Earth,

allowing users to export their supply chain to be viewed and analyzed

using the multi-dimensional layering available with Google Earth.

Supply Chain Guru users are able to apply metrics such as population

densities, view 3D buildings for potential sites, view real-time weather updates to

understand supply chain issues, and view tours for key source/destinations to

understand detailed mileage and logistics impacts.


Supply Chain Guru - Applications

ManufacturingSourcingInventory

TransportationSite Selection


Supply Chain Guru – 4 Step Methodology (0)

1 2 3 4

Step Zero – The Starting Point

Each project should start with a valid

baseline model of the existing operations.



1 2 3 4

Optimize Network Structure for Lowest Cost or Highest Profit Objective

Optimize

Structure• Sourcing

• Facility Decisions



Optimize

Structure

Optimize

Policies

1 2 3 4


Adjust Policies to Improve Process Efficiencies and Operational Costs

• Inventory

• Transportation

• Production

• Sourcing




Optimize

Structure

Simulate

Performance

1 2 3 4

• Inventory

• Transportation

• Production

• Service Rate

• Inventory

• Capacity

• Sourcing




Simulate Supply Chain Over Time to Predict Operational Performance

Optimize

Policies



Optimize

Structure

Analyze

Risk

1 2 3 4

• Sensitivity Analysis

• Disruptions

• What-if Scenarios



Simulate Supply Chain Over Time to Predict Operational Performance

Test Alternate Scenarios to Analyze Inherent Risk or Model Sensitivity

• Inventory

• Transportation

• Production

• Service Rate

• Inventory

• Capacity

• Sourcing


Optimize

Policies

Simulate

Performance


Supply Chain Guru – Elements/Objects

• Elements include products, sites, shipments, transportation assets,

etc

• Products are physical goods that can be assembled,

manufactured, stored, shipped, ordered, or sold anywhere in a

supply chain network. A product can be any item or a component

of a product

• Sites are physical locations where products can be manufactured,

shipped, stored, or demanded. Sites initiate demands. For today’s

problem, there are 4 sites: CZ, WH1, WH2, MFG

• Demand is the requirement for a specified quantity of product at a

customer site.


Supply Chain Guru - Policies

• Inventory Policy - describes how to stock inventory and when

to replenish. An inventory policy relates to any combination of

products and sites. It determines:

• What is the quantity of a specified product to be stored at a site?

• When are replenishment orders being generated?

• What is the replenishment quantity?

• Sourcing Policy - identifies which sites to send orders and

whether the product is ordered from another source or made at

the site itself (make or buy decision). Each site that stocks or

demands products needs to send a replenishment order to the

supplier. It defines:

• Is the product is manufactured at an internal site (make)?

• Is the product is purchased from an external site (buy)?

• Which is the site that the replenishment order should be sent to?

mk:@MSITStore:C:/Program Files/Supply Chain Guru/Supply_Chain_Guru_Help.chm::/4-What_is_an_Inventory_Policy_.htm#What_is_an_Inventory_Policy

mk:@MSITStore:C:/Program Files/Supply Chain Guru/Supply_Chain_Guru_Help.chm::/5-What_is_a_Sourcing_Policy_.htm



• Transportation Policy - defines the movement of the product

between sites. It could be from the customer to the DC, or from

the DC to the manufacturing plant and vice versa. It defines:

• How is the product being shipped?

• When will the product be shipped?

• How much are the shipping costs?

• How long does it takes for product to get from site to site?

• What are the circumstances that shipments are being expedited?

• What are the transportation assets used to transport the product?

mk:@MSITStore:C:/Program Files/Supply Chain Guru/Supply_Chain_Guru_Help.chm::/6-What_is_a_Transportation_Policy_.htm


Simulation – 3 Sites and 1 Product

Demand

SPIP

SP

CZ DC MFG

IP

SP

TP TP

Results

Analysis

Product


Simulation Scenario Analysis

Changes needed:

• Site

• Sourcing policy

• Inventory policy

• Transportation policy

DC

What if one more

DC or warehouse

is added?

Demand

SPIP

SP

CZ DC MFG

IP

SP

TP TP

Product


Optimization - 4 Sites and 2 Products


Recommendations for Today’s Problem

According to the Facility Summary Table or Customer Flows:

WH1 is not used

This is because we have imposed average unit cost =60 for

Corn Seed and 30 for Soya Bean Seed onto warehouse 1,

making it more expensive than warehouse 2


Today’s Problem - What-If Scenario Analysis

According to the Customer Flows Table:

WH2 can only process a maximum of 45 metric tons of seeds

WH1 will process the rest 80 - 45 = 35 metric tons of seeds

What if the Austin warehouse can only process 45 metric tons of seeds?


Data Collection for Simulation/Optimization

• A listing of all products to be produced and transported

• Location of customers, stocking points and sources

• Demand for each product by customer location

• Transportation rates by mode

• Warehousing costs, including labor, inventory carrying

charges, fixed costs

• Shipment sizes and frequencies for customer delivery

• Order patterns by frequency, size, season, content

• Order processing costs

• Customer service goals, etc.


Model /Data Validation

• Replicate the company’s real-life network with a model (using

the data collected)

• Compare the outputs of the model to existing data

• Use the company’s accounting information

• It is advisable for John to validate the simulation results before

he submits the recommendations to the company’s top

management

• John should consider using sensitivity analysis to ensure that

the recommendations are robust

If a mistake was accidentally made in the assumption of unit cost

price for certain raw materials, will this mistake lead to a completely

different recommendation or just result in negligible impact?


Learning Objectives

• State the similarities and differences between optimization

and simulation

• Perform supply chain optimization and simulation using

Supply Chain Guru

• Apply scenario planning (what-ifs) and analyze the supply

chain optimization results

• Describe the practical considerations when using

optimization and simulation software like Supply Chain

Guru


P07 – Milk Run




SCHOOL OF

ENGINEERING

Page 2 of 2

Milk Run

Greenpoint Group is a Japanese catering company with over 15 restaurants all

over Singapore. Its central kitchen also provides bento lunch to companies

located in the industrial areas of Singapore.

One day morning, Eve, the manager of the central kitchen has orders from 13

different companies. The list of order size and the location of various companies are

shown in the table below:

Company Location and Demand

x-coordinate y-coordinate order size (no. of standard sized carton)

Central Kitchen 0 0

Company 1 2 9 40

Company 2 6 8 36

Company 3 7 18 43

Company 4 9 12 92

Company 5 15 6 57

Company 6 20 3 16

Company 7 17 -2 56

Company 8 7 -4 30

Company 9 1 -6 55

Company 10 15 -1 47

Company 11 19 -7 93

Company 12 7 -9 55

Company 13 2 -15 39

X-coordinate and Y-coordinate are the scaled units of the locations on Eve’s map.

Eve has 4 trucks in her delivery fleet. Each truck has the capacity to carry up to

180 standard sized cartons. Currently, there is no systematic way to assign the

orders to each truck and also the route for each vehicle. It all depends on the ad-

hoc decision of the truck driver. Eve has received increasing complaints from

some companies about late deliveries. Can you help Eve to come up with a

strategy to optimize the delivery routing and scheduling?


P07 – Milk Runs


Routing and Scheduling in Transportation

Milk Runs

The Savings Matrix Method


Today’s Problem

• Multiple trucks

• Capacity Constraints

• Many route possibilities

• Even more complicated if suppliers are considered at the same time (supply chain)


Milk Runs

• A milk run is a route in which:

a truck either delivers product from a single supplier to multiple

retailers or goes from multiple suppliers to a single retailer.

• Benefits include:

� To save trucking costs

� To avoid LTL

� To eliminate empty leg

� To save distance or time

� To reduce the number of trucks being used


Direct Shipment Network

• We can consider the Direct Shipment Network in 2 ways:

� without milk runs

� with milk runs

Without Milk Runs With Milk Runs


Shipments Via Central DC• We can consider this method in 2 ways:

� without milk runs

� with milk runs

Without Milk Runs With Milk Runs


Routing and Scheduling Decisions

• The most important operational decision about transportation in a

supply chain is the routing and scheduling of deliveries.

• Typical objectives when routing and scheduling vehicles are acombination of minimizing costs by:

� decreasing the number of vehicles needed

� decreasing the total distance travelled by vehicles

� decreasing the total travel time of the vehicles

� eliminating service failures such as a delay in shipments

• Eve has to consider that given a set of customer orders, the goal

is to route and schedule vehicles such that the costs incurred tomeet the delivery promises are kept as low as possible.


Routing and Scheduling Decisions

• After customers (in this case, it refers to the 13 companies all

over Singapore) place their orders, staff at the central kitchen

has to pick up the items (bento lunch) needed and load them

onto trucks for delivery.

• Eve must decide which trucks to deliver to which customers

and the route that each truck will take when making the

deliveries.

• Eve must also ensure that no truck is overloaded and that the

promised delivery times are fulfilled.


The Savings Matrix Method

• This method is simple to implement and can be used to assign

customers to vehicles even when the delivery time windows or

other constraints exist.

• The major steps involve:

Step 1: Identify the distance matrix

Step 2: Identify the distance savings matrix

Step 3: Assign customers to vehicles or routes

Step 4: Sequence customers within routes

• The first 3 steps are used to assign customers to vehicles,

while the fourth step is used to route each vehicle to further

minimize the total distance travelled


Step 1: Identify the Distance Matrix

• If the transportation costs between a pair of locations are known,

then we can use the transportation costs directly in place of the

distances.

22 )()(),(BABA

yyxxBADist −+−=


Step 2: Identify the Distance Savings Matrix

• How do we calculate the distance savings?

• Let’s consider a simple example:

• Generally,

S(A,B) = Dist(DC, A) + Dist(DC, B) – Dist(A,B)

• For this example, distance savings = 12 – 9 = 3km

A

DC

B

A

DC

B

3km

3km

3km

(3+3) + (3+3) =

12km

3km

3km

3km

3+3+3=9km


Step 2: Identify the Distance Savings Matrix

- Today’s Problem



- Today’s Problem

• Highest saving: 32 (Route 7-11)

• Truck load: 56 + 93 = 149 < 180, OK

• Next highest saving: 32 (Route 6-7)

• Truck load: 149 + 16 = 165 <180, OK (first route: 6-7-11)

• We cancel company 6, 7 and 11 as no order size is <15

• Next highest saving: 28 (Route 3-4) (start the 2nd route)

• Truck load = 43 + 92 = 135 < 180, OK

• Next highest saving: 24 (Route 5-10) (start the 3rd route)

• Truck load = 57 + 47 = 104 < 180, OK



- Today’s Problem

• Next highest saving: 23 (Route 5-4)• 4 and 5 are assigned to 2nd and 3rd route individually, thus can’t be

assigned together

• Next highest saving: 21 (Route 3-5)• Same reason as above

• Next highest saving: 20 (Route 2-4)• Truck load = 135 + 36 = 171 < 180, OK (second route: 3-4-2)

• We cancel company 2, 3 and 4 as no order size is <9

• Next highest saving: 19 (Route 12-13) (start the 4th route)

• Truck load = 135 + 36 = 94 < 180, OK



- Today’s Problem

• Next highest saving: 15 (Route 8-10)• Can be added to the 3rd route, Truck load = 134 < 180, OK

• The 3rd route is updated to be 5-10-8

• Next highest saving: 15 (Route 10-12)• 10 and 12 have been assigned to different route

• Next highest saving: 12 (Route 1-5)• Truck load = 174 < 180, OK (The 3rd route: 1-5-10-8)

• We cancel company 1, 5, 8 and 10

• Next highest saving: 12 (Route 9-13) (The 4th route)

• Truck load = 149 < 180, OK (The 4th route: 9-13-12)



• Continue with the same method, we will get the 4 route-truck

assignments as:

� Truck 1 is assigned to companies (6-7-11)


� Truck 3 is assigned to companies (1-5-10-8)


• Check that the truckload for each truck should be <180 cartons:

o6-7-11: 16+56+93 = 165o3-4-2: 43+92+36 = 171o1-5-10-8: 40+57+47+30 = 174o12-13-9: 55+39+55 = 149



First route 11-7-6

1

3

4

5

6

78

9

10

1112

13



• The 13 companies are now grouped into 4 groups, with each groupbeing assigned to a specific truck. The next step is to identify thesequence in which each truck will visit the companies.

• There are many types of route sequencing techniques, which includesNearest Neighbor and Sweep.

• Nearest Neighbor � Starting at the Central kitchen, this procedureadds the closest customer to extend the trip. At each step, the trip isbuilt by adding the customer closest to the point last visited by thevehicle until all the customers have been visited

• Sweep � In the sweep procedure, any point on the grid is chosen(generally, the Central Kitchen itself) and a line is swept eitherclockwise or anti-clockwise from that point. The trip is constructedby sequencing customers in the order that they are encounteredduring the sweep.



- Today’s Problem

• Applying the 2 route sequencing procedures of Nearest

Neighbour and Sweep on all the 4 routes, we get the resulting

trip and trip length:

Route Sequencing

Procedure

Resulting Trip Trip Length

Nearest Neighbor DC, 2, 4, 3, DC 40

Sweep DC, 3, 4, 2, DC 40

Nearest Neighbor DC, 8, 10, 5, 1, DC 45

Sweep DC, 1, 5, 10, 8, DC 45

Nearest Neighbor DC, 9, 12, 13, DC 34

Sweep DC,12, 9, 13, DC 41

Nearest Neighbor DC, 7,6,11, DC or DC,7,11,6, DC 52

Sweep DC,6,7,11,DC 50


How to make decisions practical?

• Use the real distance• How to get the real distance?

http://sg.streetdirectory.com/mileageclaims/ or map.google.com


Traveling Time or Distance?

• Traveling time maybe a better measurement.

• How to get the traveling time within Singapore?


Routing & Scheduling Using Supply Chain Guru

Transportation & Distribution Analysis• Use optimization to determine a transportation

strategy that cuts costs

• Use simulation to test the effects prior to

deployment

Optimized Network

With specific sites information

input, we can get the traveling

distance also


Routing & Scheduling Using V3

V3 Transplanner: A software that helps

in the routing /

optimization of the

transportation vehicles

Additional info we

can get from V3:• Different truckload

• Leaving time

• Arriving time

• Order info

• Item details


Learning Objectives

• Describe the concept of milk run and its benefits

• Describe the factors considered when deciding the appropriaterouting and scheduling for a given transportation network

• Apply the Savings Matrix Method for a given business case-

study:

� Step 1: Identify the Distance Matrix

� Step 2: Identify the Distance Savings matrix

� Step 3: Assign customers to vehicles or routes

� Step 4: Sequence customers within routes

• Apply the 2 Route Sequencing Procedures on a route:

• Nearest Neighbour

• Sweep


P08 – eSCM




SCHOOL OF

ENGINEERING

Page 2 of 2

eSCM

Steven is the supply chain manager of Transtar Logistics, a 3rd party logistics

(3PL) company who has grown from a small family business in Singapore.

Recently Steven attended a collaborative technologies seminar and knew that he

can understand more about his company’s current supply chain performance by

undertaking a survey from the Singapore eSCM Council. He also knew that a

score would be awarded at the end of the survey. He is curious to find out how

this score would reflect about the current eSCM implementation of Transtar

Logistics. Most importantly, Steven hopes that this survey will help him identify

the key improvement areas that Transtar Logistics should focus on to become e-

enabled. Steven completed the survey and the results are as shown as attached.

Quickquestionnaire.pdf

survey result.pdf

As a supply chain executive under Steven, you are required to assist him to find

out what the survey results imply. Can you also help Steven to find out how to

further improve communication and collaboration between Transtar Logistics and

its supply chain partners? What are the e-SCM initiatives in Singapore that

Transtar Logistics could tap on?


P08 – eSCM


eSCM

Enabling Technologies for eSCM

eSCM initiatives in Singapore


Information in a Supply Chain

• Types of information flowing to and fro in a supply chain includes:

Sales Orders, Production Orders, Purchase Orders, Forecasting, Production Capacity and Schedule, Delivery Schedule, etc

• Information technology (IT) makes information sharing easier

• Direct access to a potential world-wide on-line customer base (breaks down barriers of time and visibility)

• Direct access to a very broad/diverse supplier base• Eliminates transaction processing overhead

• Reduces cycle time and cost


Information in a Supply Chain

• Transtar Logistics needs to share information with the suppliers ofits customers to become e-enabled.

• Examples of the information being shared at location A:

� Order quantity, packaging information and delivery date andschedule (time is critical if merge-in-transit is needed)

• Examples of the information being shared at location B:� ASN (Advanced Shipment Notice), production plan, demandforecasting


The Bullwhip Effect

• A phenomenon observed in supply chains whereby the demand variability increases as one moves upstream from retailers to manufacturers

• When a supply chain is plagued with the Bullwhip Effect,and demand information is distorted, it results in:� Excessive inventory� Insufficient or excessive capacity (transportation, production)� Longer cycle times� Poor customer service due to unavailable products or backlogs� Poor forecast accuracy� Lost sales and profits� Overall supply chain costs increase


Supply Chain Collaboration• To make Merge-In-

Transit to happen, information must be shared among customers, service providers and suppliers

• The high speed movement of goods require thatinformation be shared electronically

• It means data must be shared from system to system without human intervention.

Customer

IT System

Transtar

Logistics

IT System

Suppliers

IT System


What is eSCM?

• e-Supply Chain Management (e-SCM) refers to the collaborative useof technology to improve the operations of supply chain activities aswell as the management of supply chains

• The success of an e-supply chain depends on:� Ability of all supply chain partners to view partner collaboration as a strategic asset

� Information visibility along the entire supply chain

� Speed, cost, quality, and customer service

� Level and degree of Integration of the supply chain segments


What is eSCM?• The wonder letter ‘e’ has removed the roadblocks of information sharing � the

Internet as enabler

• The Internet wave and emergence of e-business has highly influencedtraditional supply chains by enhancing Coordination and Communication

between the supply chain partners.

• The enabling technologies have tremendously improved the integration among

the buyers and sellers.

� EDI, LAN, WAN, ERP, WMS,CPFR, XML, etc.

• The playing field to compete has shifted from firm against firm to supply

chain against supply chain.

• The 2018 Manufacturing Plan revealed by Singapore EconomicDevelopment Board has identified supply chain management as one of thekey drivers to boost the competitive advantage of Singapore companies andmaintain its position as a world-class manufacturing hub.


Enabling Technologies – EDI

EDI (Electronic Data Interchange)• Automate traditional paper based, error prone and time-consuming business

transactions.

• Computer-to-computer direct transfer of standard business documents through electronic

media between the firms.

• Proprietary standard for data exchange, EDI/VAN � EDI/Internet

• One-one EDI link is now replaceable by Internet ,which is many-many linkage


With EDI


Enabling Technologies – CPFR

Collaborative Planning, Forecasting and Replenishment

• Used by Wal-Mart and Warner-Lambert firstly in

early 1990

• Work with network partners to forecast demand, develop production plans and joint

sales &operational plans, coordinate shipping

and warehousing details and electronically collaborate to generate and update sales

forecasts and replenishments plans.

• The core objective is to increase the accuracy of demand forecasts and replenishment plans

to lower inventories.

• It requires trust between partners, partners

must be willing to share their promotion schedules, POS data, and inventory data.

Develop front-end agreement

Create joint business plan

Create sales forecast

Identify and resolve exceptions

Create order forecast

Identify and resolve exceptions

Order generation


Enabling Technologies – B2BB2B Collaboration• Buyers and suppliers meet, buy and sell across cyber market places and collaborate

more quickly than the traditional way.

• Offers a wide spectrum of advantages like online ordering and tracking, managing their

logistics, sharing the forecast, demand and POS information etc.

• Private Market Place (Collaborative Commerce, C-Commerce)

• Bring together small number of strategic business partner firms that collaborate to

develop highly efficient supply chains

• Example: Procter & Gamble’s Private Industrial Network


Enabling Technologies - XML

XML (eXtensible Markup Language)• A free open standard for data exchange which requires less investment outlay

than EDI

• Extends use of EDI, allows for better integration, runs on Internet

• Machine-to-machine interaction

• Supporting standard for B2B e-business, promoted as a companion or even areplacement for EDI systems.

• Used to improve compatibility between the disparate systems of businesspartners by defining the meaning of data in business documents

• XML is the key in the development of today’s business process standards andnew XML initiatives are announced on a regular basis.

• XML standards:� RosettaNet (For semiconductor industry),� ebXML (Global Standard for electronic business)


Information

Pool

Interactions Using WWW

HTTP (Hyper Text Transport Protocol)

HTML (Hyper Text Markup Language)

URL (Uniform Resource Locator)

Web server

Application

Client

HTTP

URL

HTML Document

• Human-to-machine interaction

• Information explosion


Information

Pool

Interactions Using XML

XML (eXtensible Markup Language)SOAP (Simple Object Access Protocol)

SOAP server

Application

HTTP

XML Document

• Machine-to-machine interaction

• Service automation

SOAP server

Application

Information

Pool

XML Document


Enabling Technologies - ERP

Enterprise Resource Planning (ERP)• An ERP system is a packaged business software system that allows

a company to:�Automate and integrate the majority of its business processes

� Share common data and practices across the entire enterprise

�Produce and access information in a real-time environment



The ERP Revolution



ERP Market Share• Over 100 vendors globally• Top ERP system vendors include:

� SAP AG (German, pioneer of ERP)� Oracle Applications (including PeopleSoft, J D Edwards)� SSA Global Technologies (Baan)� Microsoft Dynamics

• Open Source Freeware



Benefits of ERP

• Utilizes a common database, thus reducing redundant data

• Avoids re-keying and reformatting data from one system for use in another

• Improves communication links between systems to automate data transfer

• Streamlines a company’s data flows

Drawbacks of ERP• Very expensive and difficult to implement, large organizations spend 2-3 years on their

initial implementation

• Inflexible (generic, not industry specific although code modification can now be done)

• Most businesses need extensive help from consultants to configure their ERP system

software around their existing business practices, or to suggest changes in business

practices in order to better fit the ERP system requirements

Transtar Logistics could look into investing in a medium scale ERP

system (i.e. Microsoft Dynamic or SAP all-in-one/business one, not soexpensive, with a suitable range of implementation budget, and not a

very long implementation period, about 3-4 months)


eSCM Initiatives in Singapore

• The eSCM task force has the charter to drive thetransformation of the manufacturing and logistics sector tobecome Asia’s key Collaborative Manufacturing Services Hubusing e Supply Chain Management (eSCM)

• Singapore eSCM Council


eSCM Initiatives - Objectives• Assess the eSCM capabilities of companies in Singapore

• Assessing the state of your supply chain is the first step towardsoperational excellence

• Identify strengths and weaknesses

• Identify opportunities for improvement

• Reduce cost

• Enhance productivity

• Increase supply chain visibility & control

• Effect e-business transformation

• Assess in 2 dimensions• Supply chain processes enabled through e-business

• Supply chain performance indicators

• eSCM Assessment indicates the current eSCM capabilities of thecompany. It is an independent and transparent verification tool

• The outputs of the assessment identify what companies need to do to improvetheir processes and infrastructure

• It will provides an internationally recognized benchmark to motivate othercompanies to adopt eSCM best practices

• It also acts as a catalyst for companies to improve their eSCM processes andsystems.


eSCM Initiatives - Benefits

• An eSCM assessed company will have an independent andtransparent verification of its eSCM capabilities and its ability toperform collaborative processes

� An understanding of its current capabilities performance in the useof eSCM (a benchmark of current performance against world classpractices)

� An understanding of the opportunities for improving businessperformance to address gaps against its peers

• MNCs and large OEMs will benefit from supporting theassessment program, as the program will provide a consistentand transparent tool for assessing supplier capabilities.

• Some audited companies in Singapore:


eSCM Assessment

• The eSCM Assessment Programme is based on a national standard TR9: 2003 “ Maturity Assessment for eSupply Chain Management (eSCM)

• eSCM model is a methodology that can be used to assess the supply chain processes of Plan, Source, Make, Deliver and Return (SCOR model).

• Step by step approach that helps companies to analyse, design and improve supply chain performance


eSCM Audit

• Complete the survey

• Go to www.escm.org.sg to register as its

user

• Create a Scorecard and a list of questions

• Submit the self-assessment scorecard for

audit

• Recognized Standard indicating that

your company has met / attained Best in

Class eSCM processes

• The “eSCM Ready” Trust Mark can be

printed in the corporate stationary of

the company.


Learning Objectives

• Describe the objectives, applications and benefits of eSCM

• Describe the enabling technologies for eSCM:

� EDI (Electronic Data Interchange)

� CPFR (Collaborative Planning, Forecasting and Replenishment)

� B2B Collaboration

� XML (eXtensible Markup Language)

� ERP (Enterprise Resource Planning)

• Describe the concepts and applications of supply chain collaboration

• Describe the eSCM initiatives in Singapore

� eSCM Assessment and eSCM Audit


P09 – What Cause Your Business

To Fail




SCHOOL OF

ENGINEERING

Page 2 of 3

What Cause Your Business to Fail

Lance works in an established third-party logistics (3PL) company in Singapore; known

as Hurry Logistics, is recently promoted to the position of Senior Manager of its Supply

Chain department. For the last couple of months, there are rumours circulating within the

company that its business isn’t doing so well and there is a possibility that the company

may wind-up. Lance downloaded the company’s annual report but he can’t make much

sense from them. Extracts of Hurry Logistics’ financial statements from its annual report

are attached below.

Income statement.pdf

Balance sheet.pdf

Larry, Lance’s friend, helped him interpret the company’s financial statements and

commented that the company might be doing just fine. In your opinion, is Hurry Logistics

making any profit? If the company is really making “profit”, does it necessarily mean the

company is not in any danger of winding up?

On a separate occasion, Mr Cooper (President and CEO of Hurry Logistics) spoke to

Lance and asked him if he can help to look into improving the productivity in the

distribution centre (DC). Lance knows this is his chance and plans to propose to Mr

Cooper that the company should adopt the activity-based allocation in the DC over the

present customer-based allocation.

Lance profiled the picking frequency of items for the past year (see Table 1).

Table 1: Annual Picking Frequency in the DC

SCHOOL OF

ENGINEERING

Page 3 of 3

Lance’s mentality is that the new activity-based

allocation will tend to result in a higher productivity

in the DC which will then translate to higher profits

for the company. How can Lance’s initiative impact

the company’s Profit and Loss account for the year

ended 31 March 2009?

Besides putting the fast-moving items in the forward picking area, are there other

effective strategies that Lance could use to improve the company’s Profit and Loss

account?

Can you help Lance understand the impact of his initiative on the Balance Sheet at 31

March 2009 as well?

Larry told Lance that in order for him to perform his task he should study terms like

Return on Assets (ROA) and Return on Capital Employed (ROCE). Help Lance

understand and calculate the ROA and ROCE for Hurry Logistics and their implication to

the supply chain performance of the company.


P09 – What Cause Your Business To Fail


Profit and Loss Account (P&L)

Balance Sheet

Return on Assets (ROA)

Return on Capital Employed (ROCE)

Supply Chain Impact on Financial Performance


Supply Chain Impact on Financial Performance

• The performance of a supply chain affects a company’s financialperformance:

� More inventory translates to higher costs to a company, thus lower profits

� Is this the only impact of inventory level on a company’s financialperformance?

• Shareholders expect the companies that they invest in deliversuperior returns on their investments. How can we measure acompany’s financial performance?

• Some common measures of financial performance:

� Profit & Loss Account (P&L)

� Balance Sheet

� Return on Assets (ROA)

� Return on Capital Employed (ROCE)

• How exactly do the supply chain/logistics strategies affect acompany’s financial performance?


Profit & Loss Account (P&L)

• The Profit & Loss statement (P&L), also known as the Income Statement, is acompany's financial statement that indicates how the revenue is transformedinto net income.

� It displays the revenues recognized for a specific period, and the cost and

expenses charged against these revenues, including write-offs and taxes

Revenue: money received from the sale of products /services before expenses are taken out

Net Income: the result after all revenues and expenses have been accounted for

Write-offs: examples include depreciation and amortization of various assets

• The purpose of the P&L is to show managers and investors whether the

company made or lost money during the period being reported.

• It summarizes the financial transactions for a business over a specific period oftime. Can be reported yearly, half yearly or even quarterly

• The important thing to remember about a P&L is that it represents a period of

time. This contrasts with the Balance Sheet, which represents a single

moment in time.


COGS and Profit

• Cost of Goods Sold (COGS)� An Income Statement figure which reflects the cost of obtaining rawmaterials and producing finished goods or services that are sold to consumers.� equal to the beginning inventory plus the cost of goods purchased duringsome period minus the ending inventory.

• In general, Profit = Revenue – Cost

• Gross profit�how much money a business would have made if it didn’t pay any otherexpenses such as salary, income taxes, etc.�Gross profit = Total Revenue - Cost of Goods Sold (COGS)

• Operating Profit� earnings or income after all expenses (selling, administrative, depreciation)have been deducted from gross profit

• Net Profit� earnings or income after considering miscellaneous income and expenses(patent royalties, interest, capital gains) and tax from operating profit


Impact of SCM to Profit & Loss Account


Impact of SCM to Profit & Loss Account

SCM Variable/Influence - Inventory Management

�� change the allocation of warehouse storage space from customer based to activity based allocation

Strategy:

Locate Fast Moving Items to Forward Picking Area

� More lines picked per unit time

• Lower labor cost per unit Cost of Goods Sold (COGS)

� lower selling & sales admin cost per unit goods

• More products can be picked and distributed per unit time

�lower unit goods costs

• Higher product turnover means lower depreciation cost

� lower unit goods depreciation cost

• Lower facility costs, insurance, inventory tracking cost per

unit goods

Business Decision

Competitive

Variable• Lower Selling & Sales

Admin Costs• Distribution Costs• Depreciation Costs

Revenue &

Cost Component• Cost of Goods Sold (COGS)• Interest Expense

Business Decision

Competitive Variable• Inventory Carrying Cost


Locating Fast Moving Items to Forward Picking Area• The forward picking area of a warehouse functions as a "warehouse within the

warehouse": many of the most popular SKUs are stored there in small amounts,so that order picking can be concentrated within a relatively small area. Thisreduces unproductive travel by order pickers.

• Trade-off: The forward picking area must be replenished from a bulk storage orreserve area elsewhere in the warehouse. A typical forward pick area for smallparts is an aisle (or more) of carton flow rack(s) through which runs a conveyor.Such an arrangement is common in high-volume distribution centers, especiallythose supporting retail sales.

These 3 items to be placed in the forward picking area


Balance Sheet• A Balance Sheet is a summary of a company’s balances.

� Consists of 3 parts: assets, liabilities and ownership equity.

� These 3 parts are listed as of a specific date, such as the end of its financial

year. Hence, a Balance Sheet is often described as a snapshot of a company's

financial condition.

• The main categories of assets are usually listed first, and typically in order of

liquidity.

• Assets are followed by the liabilities.

• The difference between the assets and the liabilities is known as equity or the

net assets or the net worth of capital of the company.

� This is according to the accounting equation: net worth must equal assetsminus liabilities.

• Another way to look at the same equation is that assets equals liabilities plus

owner's equity. Looking at the equation in this way shows how assets werefinanced: either by borrowing money (liability) or by using the owner's money

(owner's equity).


Balance Sheet• A Balance Sheet is usually presented with assets in one section and liabilities

and equity in the other section with the two sections "balancing"



• The Return On Assets (ROA) measures a company’s earnings inrelation to all of the resources it has at its disposal

• The ROA percentage shows how profitable a company's assets are ingenerating revenue:

� For example, how many dollars of earnings that a company derives from

each dollar of assets the company controls.

� It is a useful number for comparing competing companies in the sameindustry.

� ROA gives an indication of the capital intensity of the company

• ROA percentage depends on the industry.

• Usually, companies that require large initial investments will generallyhave lower ROA



• For today’s problem, refer to the Balance Sheet of Hurry Logistics:

• Total Assets for Group @ 31.3.2009

= Fixed Assets + Current Assets

= 24,372 + 39,348 = 63,720 (in $ thousands)

• Total Assets for Group @ 31.3.2008

= Fixed Assets + Current Assets

= 13,580 + 24,376 = 37,956 (in $ thousands)

• Average Total Assets

= (Total Assets for Group @ 31.3.2009 + Total Assets for Group @ 31.3.2008 ) / 2

= (63,720 + 37,956) / 2 = 50,838 (in $ thousands)


Net Profit

Average Total Assets

Net Profit Margin × Asset Turnover



• Refer to the Profit and Loss account of Hurry Logistics:

• Net Profit for Group 2008-09

= Pre-tax Operating Profit - Interest on Borrowings - Taxation

= 4,645 – 768 = 3,877 (in $ thousands)

• Return on Assets (ROA) for Group 2008-09

= Net Profit for Group 2008-09 / Average Total Assets

= 3,877 / 50,838

= 7.63 %

ROA for Hurry Logistics Group 2008-09 is 7.63 %

In this particular P&L account, Finance Cost (350)

was already subtracted away before arriving at

Pre-Tax Operating Profit


Impact of SCM – Return of Assets (ROA)


Return on Capital Employed (ROCE)

• ROCE is a ratio that indicates the efficiency and profitability of a company’scapital investment

• ROCE is used to prove the value the business gains from its assets and

liabilities

� a business which owns lots of land but has little profit will have a smaller

ROCE as compared to a business which owns little land but makes the same

profit.

• ROCE is basically can be used to show how much a business is gaining for its

assets, or how much it is losing for its liabilities

Return on Capital Employed (ROCE) Pretax Operating Profit

Capital Employed


Return on Capital Employed (ROCE)• For today’s problem on Hurry Logistics:

• Pre-tax Operating Profit = 4,645 (in $ thousands)

• Capital Employed = Total Assets – Current Liabilities

= (Fixed Assets + Current Assets) – Current Liabilities

= (24,372 + 39,348) – 22,419

= 41,301 (in $ thousands)

• Return on Capital Employed (ROCE) for Group 2008-09

= Pre-tax Operating Profit / Capital Employed

= 4,645 / 41,301 = 11.25 %

• Any reasonably managed company should achieve a ROCE of at least 10%

• Higher ROCE means more cash

� Increase Profit (to make even more cash)

� Reduce Working Capital (to use lesser cash)

Is this ROCE good?


Impact of SCM - Return on Capital Employed (ROCE)


Learning Objectives

• Interpret the Profit and Loss Account (P&L) of a company

• Interpret the Balance Sheet of a company

• Calculate the Return on Assets (ROA) of a company and

interpret the results

• Calculate the Return on Capital Employed (ROCE) of a

company and interpret the results

• Describe the supply chain impact on a company’s financial

performance


P10 – Money Matters




SCHOOL OF

ENGINEERING

Page 2 of 3

Money Matters

SEMICRON ASIA is a wafer fabrication plant in Singapore as well as a subsidiary of the

SEMICRON Corporation in the US. Besides serving the Asia Pacific market,

SEMICRON ASIA is also having the majority of its supply chains around the region.

Despite seeing the signs of economic recovery, there remain many challenges ahead;

SEMICRON ASIA is still faced with tremendous pressure by its parent company in the

US to better manage its cash flow. A month ago, Mr Martini (Vice President, SEMICRON

Corporation) was expatriated from the US to Singapore. Immediately after that, Mr

Martini announced that he aims to turn the local plant into one of the most cash-rich

subsidiary in the entire SEMICRON Corporation and having said that, he requested the

local finance department to provide him with some financial figures from the previous

years (shown in Table 1) along with the latest benchmarking data from key players in the

wafer fabrication industry (shown in Table 2).

Year Net sales COGS Inventory A/R A/P

2007 $9,800 $3,800 $915 $1,454 $650

2008 $13,500 $5,050 $1,115 $1,630 $523

2009 $13,300 $5,305 $1,234 $1,715 $600

2010 $12,200 $4,755 $1,333 $2,005 $1,007

Note: Amounts in millions

Table 1: Raw financial data for SEMICRON ASIA from 2007 through 2010

Inventory A/R A/P C2C

1.NANOCRON (Best Company) 73.6 39.3 192.6 -79.7

First Quartile Median 68.0 39.3 82.1 25.2

Second Quartile Median 75.7 48.7 58.3 66.1

Industry Median 87.3 51.7 59.0 80.0

Third Quartile Median 89.2 53.6 51.9 90.9

Fourth Quartile Median 135.7 59.9 43.4 152.2

150.PICOCRON (Worst Company) 204.1 41.5 23.5 222.2

Note: 1. Amounts in days

2. C2C: cash-to-cash cycle time

Table 2: Benchmark data of 2010 for the wafer fabrication industry

SCHOOL OF

ENGINEERING

Page 3 of 3

How can SEMICRON ASIA benchmark with its key competitors in the wafer fabrication

industry by using the table 1 provided? With reference to Table 2, where do you think

SEMICRON ASIA fit in? Identify the opportunities for financial improvements in the area

of supply chain based on the benchmarking results you obtained.

Mr Martini wishes to ramp down the local plant’s output for its high-volume products to

certain extent. This action will likely avoid having excess inventory at both the

distributors’ hubs and the suppliers’ warehouses, which may also lead to severe price

erosion problems and inventory write-offs for SEMICRON ASIA in the near future.

Mr Martini has assigned you, a Supply Chain Analyst, to help him summarise your

findings and recommendations regarding this new measure. Can you also help Mr

Martini determine if there are other good supply chain practices that can be adopted to

reduce inventory levels? What do you think are the areas SEMICRON ASIA can improve

on? Explain with some recommendations.


P10 – Money Matters


Financial flow in a supply chain

Working Capital

Cash-to-Cash Cycle Time (C2C)

How SCM affects financial performance


Overview of Supply Chain - Follow the Money

• Invoices and Payments are included in the financial flow:

• Any single organization in the supply chain has both AccountsPayable (A/P) and Accounts Receivable (A/R) activities.

• Each invoice is an A/P from the downstream buyer’s perspective andan A/R from the upstream seller’s viewpoint


Working Capital

Sell products

quicklyCollect money

more quicklyPay suppliers

later

Working

Capital

InventoryAccounts

Receivable

Accounts

Payable

• A company’s cash (working capital) is tied-up in 3 areas:

Under direct

control of SCM

Working capital, also known as net working capital or NWC, is a financial metric

which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of

operating capital. It is calculated as current assets minus current liabilities


Working Capital

• Working Capital = Current Assets - Current Liabilities

• or WC = AR + Inv – AP, where:

• AR stands for Accounts Receivable (the amount that

customers owe a business)

• Inv is the Inventory Value

• AP is Accounts Payable (payments to suppliers for goods

and services purchased)

• Also known as operating capital, it represents the amount of

day-by-day operating liquidity available to a business.


Inventory

• Inventory is one of the 3 areas that a company’s cash is tied-up in

• Risks of inventory exposure:

• Forecast Accuracy

• Supply Reliability

• Cost of Stock-outs

• Seasonality

• Batch Size

• Buildup

• Maintenance

• Transport Mode

• Distance/Speed

• Distribution Networks

• Lot Size

• Production Equipment

• Customized products

• Speculation

• Obsolescence

Total

Inventory

Safety

Stock

Cycle

Stock

In-Transit

StockLine Fill Others


Accounts Receivable (A/R) &

Accounts Payable (A/P)

Dispatch

Date

Shipment

posting

Date

Invoice

date

Invoice Mailed

Invoice

Receipt

Payment Issued

Payment

Deposit

Date

Payment

Posting

Date

Invoice

Closure

Shipment to invoicing Invoice Date to

Customer PaymentPayment to Closure

• Delays in establishing posting data

• Delays in invoicing

• Delays in finalizing pricing

• Delays in following up with customer on payment

• Inaccurate invoices & slow resolution


Improve Working Capital -

by Inventory Reduction and Controlling

• Many SCM techniques and practices exist to size it, optimize itand reduce it.

• Segment finished goods inventory based on the financial

performance, such as ABC analysis if it has not been done

• Sustainable savings will most likely require fundamental

improvements in demand planning, inventory and safety stock

policies, production planning and scheduling, lead timecompression and SKU rationalization, etc.

• Calculate financial impact of inventory decisions and link these twotogether



by Managing and Expediting Receivables

• Companies tend to get lax about receivables when credit is easy and the

economy is booming. But once things have tightened up, it’s worth taking

a hard look at how your receivables are being managed

• Some companies have unilaterally decided to delay their payments and

force the extension on their suppliers. Of course, such an approach is

likely to damage your supply relationships. Even worse, it might deprive

supply chain partners of the cash they need to maintain their operations,

which could lead to late deliveries and quality problems.

• AR can be positively affected through supply chain activities such as

providing more reliable transit times and shorter lead times.

• In order to positively impact AR, the SC plays a role by delivering

products in the right quantity and with the right specs.



by Extending Payables Intelligently

• AP is a purchasing manager’s job, aimed at extending payment termsby contract. Such as what was previously paid after 30 days is nowpaid in 45.

• Work with suppliers to establish an agreement that both of you canlive with

• Better forecast accuracy and demand reliability represent a practicalway through which supply chain practices impact AP.

• Reliable production planning and scheduling together with agreedquality assurance protocols can surely improve the quality of therelationship with suppliers. That enables the purchasing department toclose better deals once a win-win and trustworthy collaborativeenvironment has been established


Cash-to-Cash Cycle (C2C)

• A unique financial performance metric that indicates how well anentity is managing its capital

• C2C, or cash conversion cycle, is “the length of time a company’scash is tied up in working capital before that money is finallyreturned when customers pay for the products sold or servicesrendered

• It is a catch-all measure of how well a company manages the entireproduct lifecycle, from demand anticipation, to materialsprocurement, to the manufacture, sale, delivery and ultimatepurchase of the product by the customer.


Cash-to-Cash Cycle (C2C)

• It provides a link between supply chain operations and the

business environment


Compute the Cash-to-Cash Cycle

• C2C = Inventory days of supply + days sales outstanding -

average payment period for materials

• Inventory days of supply = (Inventory/Cost of Goods Sold) x 365

• Days sales outstanding = (A/R/Net Sales) x 365

• Average payment period = (A/P/Cost of Goods Sold) x 365

• A positive result indicates the number of days a company must

borrow or tie up capital while awaiting payment from a

customer

• A negative result indicates the number of days a company has

received cash from sales before it must pay its suppliers for

inventory


Cash-to-Cash Cycle for SEMICRON ASIA

YearInventory days of supply

A/R(Days sales outstanding)

A/P(Average payment

period)

C2C(Cash to cash

cycle time)

2007 87.9 54.2 62.4 79.6

2008 80.6 44.1 37.8 86.9

2009 84.9 47.1 41.3 90.7

2010 102.3 60.0 77.3 85.0

Year Net sales COGS Inventory A/R A/P

2007 $9,800 $3,800 $915 $1,454 $650

2008 $13,500 $5,050 $1,115 $1,630 $523

2009 $13,300 $5,305 $1,234 $1,715 $600

2010 $12,200 $4,755 $1,333 $2,005 $1,007

=(1,333/4,755)*365=(1,715/13,300)*365

=(523/5,050)*365

= 102.3 + 60.0 – 77.3


Why Benchmark?• While analysis of an individual firm’s C2C is helpful, industry benchmarks are

crucial for a company to evaluate its C2C performance and assessopportunities for improvement.

• According to the table above, it indicates that SEMICRON ASIA has a ratherlong inventory days and long C2C cycle time for year 2010. SEMICRON ASIA

may focus on any combination of the three key variables to improve their C2C:

�Reduction of inventory days

�Reduction of accounts receivable collection days

�Expansion of accounts payable days


Recommendations to Today’s Problem

• Ultimately the goal for SEMICRON ASIA or most of the companies is a

C2C that is as low or even negative as is reasonable

• We can address from the below 3 areas:

A/R days

• To more accurately assess the impact of SCM operations on receivables,

and to highlight the importance of the time factor in SCM, it is useful to

use the time-related figure for Days Sales Outstanding (DSO)

• This figure represents the amount of time required to collect an

outstanding bill and, therefore, measures the speed with which customers

are invoiced and payment is received.

• The crucial point sits with the sales function. By investigating how

malfunctions in SCM operations impact the sales process we can better

identify those areas in which SCM affects DSO or A/R days.


Recommendation to Today’s Problem

Inventory days

• We can take a similar time-based approach as with DSO to measureSCM's impact on inventory value using the Inventory Days of Supply.There are many glitches that can occur in SCM that will increaseinventory:

• Excess time required to receive and process items

• Excess time required to move materials in the factory

• Delays in managing purchase and sales orders

• Excess time spent preparing merchandise

• Low efficiency of the distribution channel

• Poor demand forecast and planning

• Incorrect parameters used to establish stock levels

• Purchase goods based on price volumes instead of what is really needed

• Component, in-process and finished inventory are all created too early in the supply

process. Should find ways to postpone the completion of a product to reduce the total

amount of inventory



A/P days

• If the C2C cycle time is too long and a company's resources are tiedup for long periods, then supply chain managers, working alongsidepurchasing managers, should turn their efforts to adjusting the APfigure by postponing payment terms to suppliers.

• Longer terms of payment can be negotiated only if there is anappealing counter-offer to the supplier.

� Typically, this takes the form of offering the supplier bettervisibility, more reliable scheduling and/or sharing best practices toimprove currently inefficient supply chain processes such as leanmanufacturing or Six Sigma practices.

• A/P can also be affected by other improvements in SCM, such asgreater accuracy of forecasts and demand reliability.



A/P days (cont’d)

• Clearly established parameters for materials management, such asdaily delivery quantities, minimum/maximum quantities and deliverytime windows, as well as agreed quality assurance protocols, arefurther steps that can be taken to enable a company to alter it’s A/Pfigure and negotiate better (delayed) terms with suppliers.


Inventory days

Receivable days

Payable days

C2C cycle time

Approaches to Impact C2C Cycle

Stock the right inventory

at the right place

Adopt a

BTO

model

Use 3rd

party

inventory

financing

Reduce lead-time so

that orders can be

delivered quicker and

get paid faster

Change customer

credit policies

Automate AR

process

Receivables

financing

Negotiate payment

extension with suppliers

Use 3rd party financing to

pay suppliers faster while

extending terms for the

buyer

Source: Aberdeen Group, May 2009


Financial-SCM Connection

Financial Metric Examples of How SCM Adds Value

Days of Inventory Supply

�Transportation Mgt.�Warehouse Mgt.�Network Design�Inventory Visibility�Forecasting Accuracy�Demand Planning

Days Sales Outstanding

�Shipment Integrity�Fill Rate�Proof of Delivery�Invoicing Accuracy�Internal Communications

Days Purchases Outstanding�Procurement Terms�Payment Practices

Fixed Asset Utilization

�Warehouse Management�Transportation Management�IT Management�Selective Outsourcing


Financial-SCM Connection

Financial Metric Examples of How SCM Adds Value

Revenue Growth

�Fill rates�Forecasting�Customer Service�Lead times�New Product Speed to Market

COGS as a Percentage of

Revenue

(Gross Profit Margin)

�Inbound Transportation Mgt.�Inventory Mgt.�Network Design�Procurement�Reverse Logistics�Selective Outsourcing

SG&A as a Percentage of

Revenue

�Warehouse Mgt.�Outbound Transportation�Logistics Administration�Customer Service�Information Technology

SG&A : Selling, General & Administrative Expense


Insights for Today’s Problems

• C2C represents the delay between payment for raw materials and thereceipt of cash generated by selling final goods.

• Ultimately the goal for SEMICRON ASIA or most of the companies is aC2C that is as low or even negative as is reasonable

• A lower C2C suggests that a company is more efficient in managing itscash flows, because it turns its working capital over more times peryear and generates more sales per dollar invested.

• Businesses may focus on any combination of the three key variables toimprove their C2C: reduction of inventory days, reduction of accountsreceivable collection days, and expansion of accounts payable days.


• It is difficult to estimate the effect of a change from adjusting anindividual variable, because all three are interrelated, but improvingany one will resort in a shorter C2C cycle for a company.

• The link between SCM operations and cash-to-cash cycle timebecomes clear when a company realizes that the longer its cashremains tied up in inventories (Inventory days), the greater the timerequired for its production process and, consequently, the bigger thedelay in receiving payment from customers (Receivable days).

• A key objective of SCM, therefore, is to increase the value of Payabledays to counterbalance the increased combination of (Inventory days +Receivable days)

Insights for Today’s Problems


Learning Objectives

• Describe the concept of working capital and its various components(inventory, accounts receivable, accounts payable)

• Describe strategies to improve the working capital from the supplychain side

• Describe the associated risks of working capital, its impact to thefinancial performance of a company and ways to mitigate these risks

• Describe the concept of cash-to-cash cycle time and calculate theC2C cycle time for a given business case-study

• Describe how SCM practices affect the C2C cycle time of a company


P11 – SCOR MODEL




SCHOOL OF

ENGINEERING

Page 2 of 2

SCOR Model Terence works as a supply chain analyst with Hurry Logistics, a 3rd party logistics service provider. Hurry Logistics manages not just stocked products from various customers, but also build-to-order products from a key customer, Zenn Manufacturing, a branded LCD TV manufacturer with over 10 global production facilities. Zenn has one assembly facility and one distribution centre in Singapore. The distribution centre is managed by Hurry Logistics. Zenn sources different accessories and packaging (power cord, colored casings and user manual, etc.) from suppliers in Malaysia. The finished products are then shipped to hundreds of retailers in South East Asia. Below figure shows the physical flow of the supply chain.

Steven is the Operations Director of Hurry Logistics; he just attended a seminar organized by Supply Chain Council. He was impressed by the various presentations about implementation of SCOR model by companies from different industries such as PC, automotive, aerospace and so on. He also noticed that those ROI figures are quite considerable as well. Moreover, Steven knew that Zenn has initiated a SCOR project with a few of its key suppliers. Hurry Logistics has been doing process mapping, performance measurement and benchmarking to improve its operations. Steven wonders why those companies can do better with similar process mapping, performance metrics and best practices from SCOR model. Steven wishes to understand more about SCOR model before taking any actions, thus he assigned this task to Terence. Suppose you are Terence, how can you develop the SCOR model (up to level 2) for the supply chain given above? How can companies do better by implementing SCOR process mapping?


P11 – SCOR Model

5 Operations of SCOR Model

SCOR HierarchySCOR Model Mapping Steps

Thread diagram for Level 1 and 2


School of Engineering 2

• The SCC is an independent, not-for-profit, trade association

• Membership open to all companies and organizations

• Focus is on research, application and advancement and advancing state-of-the-art supply chain management systems and practices

• Developer and endorser of the Supply Chain Operations Reference (SCOR®) as a cross-industry standard for SCM

• Offers Training, Certification, Benchmarking, Research, Team Development, Coaching, and Cross-standard Integration focused on the SCOR® framework

• Founded in 1996

• Approaching 1000 Association Members

• Chapters in North America, Europe, Japan, South Africa, Latin America, Australia/New Zealand, South East Asia and Greater China, with developing Chapters India and Middle East

2

Who is SCC?


SCOR - Process Reference Model

Process reference model contains:• Standard descriptions of management processes

• A framework of relationships among the standard processes

• Standard metrics to measure process performance

• Management practices that produce best-in-class performance

• Standard alignment to features and functionality

Once a complex management process is captured in Standard Process Reference Model Form, it can be:• Implemented purposefully to achieve competitive advantage

• Described unambiguously and communicated

• Measured, managed, and controlled

• Tuned and re-tuned to a specific purpose


SCOR - A Process Framework

• Process frameworks deliver the well-known concepts ofbusiness process reengineering, benchmarking, and bestpractices into a cross-functional framework

• Standard processes:

� Plan, Source, Make, Deliver, Return, Enable

• Standard metrics:

� Perfect Delivery, Cash Cycle Time, Supply-Chain Cost, etc

• Standard practices:

� EDI, CPFR, Cross-Training, etc.

• Pre-defined relationships between processes, metrics andpractices


SCOR Supply Chain

For the purposes of training with SCOR, we will view Supply Chain asbuilt up of five distinct management processes:

• Planning

• Material Sourcing,

• Make (build or service),

• Deliver

• Returns flows

• A collection of enabling processes linked to all five

DeliverMakeSource

Plan

Return

Enable


SCOR Supply Chain

6

Customer processesS

upplier processes

Supply Chain

Customer processesS

upplier processes

Supply Chain

Process, arrow indicates material flow direction

Process, no material flow Information flow

DeliverMakeSource

ReturnReturn

Plan


End-to-End Supply Chain

Supplier CustomerSuppliers’Supplier

Source

Internal or External Internal or External

Your Company

Return

Deliver MakeSource

Return

Plan

Deliver

Return

Source

Return

MakeSource

Return

Plan

Deliver

Return

DeliverMake

Plan

Return Return

Customers’Customer

SCOR reference model


SCOR Process Codification

• SCOR processes have unique identifiers:

o One capital only are level 1 processes: P, S, M, D and R (5 in total)

o A capital plus a number are level 2: P1, S2, M3, D2, D4 (15 in total)Two groups of exceptions for level 2:

�Enable: EP, ES, EM, ED and ER (5 in total) and

�Return: SR1, DR1, SR2, DR2, SR3, DR3 (6 in total)

o A capital plus a number, a period and a number are level 3 processes:

P1.1, P1.2, S2.1, M1.5, D3.12 (111 processes in total)Two groups of exceptions for level 3:

�Enable: EP.1, ES.3, EM.4, ED.8, ER.1 (47 in total)

�Return: SR1.1, DR1.3, SR2.2, DR2.4, SR3.5, DR3.1 (27 in total)

• X = level 1, Xn = level 2, Xn.m = level 3


SCOR 10.0 – Level 1 and 2

Cu

sto

mers

Su

pp

liers

P1 Plan Supply ChainPlan

P2 Plan Source P3 Plan Make P4 Plan Deliver

Source Make Deliver

S1 Source Stocked Products M1 Make-to-Stock

M2 Make-to-Order

M3 Engineer-to-Order

D1 Deliver Stocked Products

D2 Deliver MTO Products

D3 Deliver ETO Products

S2 Source MTO Products

S3 Source ETO Products

Return

Source

P5 Plan Returns

Return

Deliver

Enable

D4 Deliver Retail Products


SCOR Capability Models

Remark: Make-to-Order is equivalent to supply chain designs BTO and CTO

Level: Different capabilities

Stocked Product (S1, M1, D1)

• Usually Inventory Driven (Plan)

• Standard Material Orders

• High Fill-rate, short turnaround

Make-to-Order (S2, M2, D2)

• Customer Order Driven

• Configurable Materials

• Longer turn-around times

Engineer-to-Order (S3, M3, D3)

• Customer Requirements Driven

• Sourcing New Materials

• Longest long lead-times, low fill rates

D1R1 I1

Supply-chain plan

M1S1 D1

Supply-

I2

R1

D2R2 D2

S1

M2S2

I3

R1

D3R3

R1

R2

D3

R1

M3S3

S1

S2


SCOR Hierarchy

Level 1 Level 2 Level 3 Level 4 Level 5

Scope Configuration Activity Workflow Transactions

Differentiates Business

Differentiates Complexity

Names Tasks Sequences Steps Links Transactions

Defines Scope Differentiates Capabilities

Links, Metrics, Tasks and Practices

Job Details Details of Automation

Framework Language

Framework Language

Framework Language

Industry or Company Specific

Language

Technology Specific

Language

S1

Source

Stocked Product

Supply-Chain

Source

S1.2

Receive Product

Standard SCOR definitions Company/Industry definitions

EDI

XML


Source (Process Category: S)

• Objectives of this process:• The ordering, delivery, receipt and transfer of raw material items, subassemblies,

product and/or services

• Key processes comprehended:• Schedule product deliveries

• Receive, inspect, and hold materials

• Issue material to Make or Deliver processes

• Supplier/Vendor Agreements

• Vendor certification and feedback, sourcing quality

• Manage raw materials inventories

• Freight, import/export documentation

• Process element:• Source Stocked Product (S1)

• Source Make-to-Order (S2)

• Source Engineer-to-Order (S3)

12


Make (Process Category: M)

• Objectives of this process:• The process of adding value to products through mixing, separating, forming,

machining, and chemical processes

• Key Processes Comprehended:• Schedule production, request and receive material from Source and/or Make

processes

• Manufacture, assemble/disassemble and test product, package, hold/release

product

• Managing product quality and engineering changes

• Managing facilities and equipment, production status workflow and capacity

management

• Manage Work-In-Process (WIP) inventories

• Process element:• Make-to-Stock (M1)

• Make-to-Order (M2)

• Engineer-to-Order (M3)


Deliver (Process Category: D)

• Objectives of this process:• Perform customer-facing order management and order fulfillment activities

including outbound logistics

• Key processes comprehended:• Product, service and price quotations

• Order entry and maintenance

• Order consolidation, picking, packing, labeling and shipping

• Import/export documentation

• Customer delivery and installation

• Logistics and Freight Management

• Manage Finished Goods inventories

• Process element:• Deliver Stocked Product (D1)

• Deliver Make-to-Order Product (D2)

• Deliver Engineer-to-Order Product (D3)

• Deliver Retail Product (D4)


Return (Process Category: R)

15

• Objective of this process:• Moving material from customer back through supply chain to address defects in

product, ordering, or manufacturing, or to perform upkeep activities

• Key Processes Comprehended• Identification of the need to return a product or asset

• Requesting and issuing return authorization

• Inspection and disposition decision-making

• Transfer/Disposition of product or asset

• Managing return transportation capacity

• Managing returned material inventories

• Processes element:• Return Defective Products (SR1 and DR1)

• Return Maintenance, Repair & Overhaul (SR2 and DR2)

• Return Excess Products (SR3 and DR3)

• SR = Source Return (return to source)

• DR = Deliver Return (return delivered goods)


Plan (Process Category: P)

• Objectives of this process:• The process of determining requirements and agree corrective actions to achieve

supply chain objectives

• Key Processes Comprehended:• Supply chain revenue planning/forecasting

• Materials requirement planning

• Factory, repair, maintenance facilities capacity planning

• Distribution requirements planning

• Manage planning parameters

• Process element:• Plan Supply Chain (P1)

• Plan Source (P2)

• Plan Make (P3)

• Plan Deliver (P4)

• Plan Return (P5)


SCOR Mapping Process (Thread Diagram)

Suppliers My Organization Customers

1

1. Plot your facilities on a map

2. Plot customer and supplier facilities

3. Identify activities performed at each facility

4. Identify the types of supply chain involved

5. Create a level 2 supply chain map / Thread Diagram

6. Identify level 2 processes of concern. Example: S1

7. Use the SCOR model (Level 3) to identify the key process steps included in that function.

8. Map your internal level 4 processes against the Level 3 processes.

a

2 b c

d

3


Mapping Material, Info & Return Flow

Latin AmericanSuppliers

(D1)

Warehouse

Other Suppliers

(D1)

Manufacturing

European Supplier

(S1)

(SR1,SR3)

Customer

Customer

Customer

Customer

(S1, D1)

(SR1,DR1,

DR3)

(D2)

(DR1)

Warehouse

Warehouse

Warehouse

(S1, D1)

(SR1,

DR3)

(S1, D1)

(SR1,DR1,

DR3)

(S1, D1)

(SR1,DR1,

DR3)

(S1)

(SR1,SR3)

(S1)

(SR1,SR3)

(S1)

(SR1,SR3)

(S1, S2, M1,

D1)

(SR1,,DR1)


Mapping The Execution Processes

S1

D1 S1

M2S2 D2

M1 D1 S1

S2

D1M1

European RM Supplier

Key Other RM

Suppliers

Alpha Regional

Warehouses

S1

DR1 SR1

DR1 SR1 DR1 SR1

DR3 SR3

RM Suppliers

DistributorsALPHA

DR3 SR3

S1

Americas

Distributors

SR1

SR3


Identifying Plan Activities

Consumer

P2

P4

P3

P4

S1 D1 S1

P2

2

P

2

P3

P4

M2S2 D2

M1 D1 S1S2D1

M1

European RM Supplier

Key Other RM

Suppliers

S1

Alpha Regional

Warehouses

RM Suppliers

DistributorsALPHA

P1 P1 P1


Today’s Problem

Zenn’s Assembly Site

Retailer S1, S2, D4, SR1, SR3, DR1, DR2

S1, D1, S2, D2SR1, SR3, DR1, DR3

Distribution Centre(Hurry Logistics)

Suppliers

S1, M1, M2, D1, D2 SR1, SR3, DR1, DR3

S1, M1, D1,DR1, DR3


Mapping Level 2 SCOR

S1 D1M1

Hurry Logistics’ DC

SR1 SR1

SuppliersZenn’s

Assembly Site

SR3

DR1

DR3

P1

P2 P4

P1 P1

P3

P1

Retailers

P5

D1S1

DR1

DR3SR3

P2 P4

D1S1

DR1

M1

DR3

P2 P4P3 P5

M2 D2

P5

S2 D2

SR1

P1

D4S1

DR1

DR2SR3

P2 P4 P5

S2

SR1

SR3


Learning Objectives

• Understand the SCOR Model and its applications

• Describe the 5 operations of SCOR Model (Plan, Source,

Make, Deliver and Return)

• Understand and relate the 5 levels of SCOR Model

• Understand the SCOR process mapping steps (Thread

Diagram)

• Construct a SCOR Model (up to level 2) for a given

business scenario


P12 – SCOR METRICS




SCHOOL OF

ENGINEERING

Page 2 of 5

SCOR Metrics Terence, a supply chain analyst with Hurry Logistics, has developed the Level 2 SCOR model for Zenn’s Assembly Centre and Distribution Centre managed by Hurry Logistics:

In order to facilitate seamless integration with Hurry Logistics’ supply chain partners, and to review how the current operations can be improved, he reckoned that he has to develop the SCOR Model further and relate to Hurry Logistics’ existing operations (shown in Annex A). Terence is responsible for monitoring and reporting the performance of Hurry Logistics’ Distribution Centre operations. He provides reports on order fill rate, pick errors, daily/ weekly/ monthly shipments, order cycle time and average shipment lead-times, returns, etc. He is thinking of using metrics that are well defined and accepted in the industry for its supply chain performance measurement. Also, he plans to recommend best practices from SCOR model for process improvement. Specifically, Terence would like to implement the best practices in his 3PL services to reduce inventory level and improve inventory accuracy.

Can you help Terence on selection of the relevant performance metrics and best practices?

SCHOOL OF

ENGINEERING

Page 3 of 5

Annex A:

Figure 1: Inbound loose cargo Figure 2: Inbound palletized cargo

SCHOOL OF

ENGINEERING

Page 4 of 5

Figure 3: Storage Figure 4: Picking

SCHOOL OF

ENGINEERING

Page 5 of 5

Figure 5: Outbound loose cargo Figure 6: Outbound palletized cargo


P12 – SCOR Metrics

Relate Level 3 SCOR to Actual Operations Processes

SCOR Best Practices

SCOR Performance Metrics



Level 3 SCOR (D1)

Source: SCOR Model


Connecting Level 4 to Level 3 (D1.8)

D1.8:

The activities such as receiving

product, verifying, recording

product receipt, determining put-

away location, putting away and

recording location that a company

performs at its own warehouses.



D1.9:

The series of activities including

retrieving orders to pick, determining

inventory availability, building the pick wave, picking the product, recording the

pick and delivering product to shipping in

response to an order



D1.11:

The series of tasks including

placing/loading products onto modes

of transportation, and generating the documentation necessary to meet

internal, customer, carrier and

government needs.


Linking Performance Attributes and Level 1 Metrics

Performance Attribute

Performance Attribute Definition Level 1 Metric

Supply Chain Reliability

The performance of the supply chain in delivering: the correct product, to the correct place, at the correct time, in the correct condition and packaging, in the correct quantity, with the correct documentation, to the correct customer.

Perfect Order Fulfillment (RL.1.1)

Supply Chain Responsiveness

The speed at which a supply chain provides products to the customer.

Order Fulfillment Cycle Time (RS.1.1)

Supply Chain Agility

The agility of a supply chain in responding to marketplace changes to gain or maintain competitive advantage.

Upside Supply Chain Flexibility (AG.1.1)

Upside Supply Chain Adaptability (AG.1.2)

Downside Supply Chain Adaptability (AG.1.3)

Supply Chain Costs

The costs associated with operating the supply chain.

Supply Chain Management Cost (CO.1.1)

Cost of Goods Sold (CO.1.2)

Supply Chain Asset Management

The effectiveness of an organization in managing assets to support demand satisfaction. This includes the management of all assets: fixed and working capital.

Cash-to-Cash Cycle Time (AM.1.1)

Return on Supply Chain Fixed Assets (AM.1.2)

Return on Working Capital (AM.1.2)


SCOR Metrics Codification

• Performance Attribute: a characteristic to describe a strategy. Performance attributes serve as classification for KPIs and metrics

• Metric: a standard for measurement

• SCOR metrics have unique identifiers:• Two capitals are performance attributes: RL, RS, AG, CO and AM (5)

• Two capitals, a period the number one (1) and a number are strategic (a.k.a.

level 1) metrics:

RL.1.1, RS.1.1, AG.1.1, CO.1.1, CO.1.2, AM.1.3 (10 in total)

• Two capitals, a period the number two (2) and a number are diagnostic (a.k.a.

level 2) metrics:

RL.2.1, RS.2.1, AG.2.1, CO.2.1, CO.2.2, AM.2.7 (36 in total)

• Two capitals, a period the number three (3) and a number are diagnostic (or

level 3) metrics:

RL.3.1, RS.3.1, AG.3.1, CO.3.149, CO.3.151, AM.3.44 (>500)

• XX = Performance Attribute

• XX.1.n = level 1, XX.2.n = level 2, and so on Source: SCOR Model


Understanding SCOR Metrics

Source: SCOR Model


SCOR Metrics

• Improvement by inspection

• Baseline analysis

• Prioritize improvement opportunities

• Benchmarking analysis


SCOR Metrics for Benchmarking Analysis

Supply Chain SCORcard Performance Versus Competitive Population

Overview Metrics SCOR Level 1 Metrics Actual Parity Advantage Superior Value from Improvements

EX

TE

RN

AL

Perfect Order Fulfillment 80% 85% 90%

Order Fulfillment Cycle Time 7 days 5 days 3 days

Flexibility

Responsiveness

Upside Supply Chain Adaptability

Total SCM Management Cost

19% 13% 8% 3%

INT

ER

NA

L Cost

Assets

Cash-to-Cash Cycle Time 196 days 80 days 46 days 28 days

Return on SC Fixed Assets

Upside Supply Chain Flexibility 82 days 55 days 13 days

Supply

Chain

Reliability

Downside Supply Chain Adaptability

Cost of Good Sold

0% $30M Revenue

$30M Revenue

Key enabler to cost and

asset improvements

$30M Indirect Cost

$7 M Capital Charge

35 days

97 days

0%

54%

N/A

50%


SCOR Best Practices• D1.8 � Receiving product from source/make (page 3.4.14)

• Best Practices for inventory reduction and inventory accuracy

Source: SCOR Model


Is Cross Docking Suitable for Hurry Logistics?

Processes that this best practice is suitable


Is VMI Suitable for Hurry Logistics?


Conclusion

• SCOR Model provides process map, metrics and best practices.

• You will know systematically the best practices in supply chain management, know where you should implement it and how it will impact your supply chain performance.


Learning Objectives

• Construct a SCOR Model on a given business case study (up

to level 3)

• Relate to operations work flow and processes (level 4)

• Explain the inputs and outputs of a given SCOR process

element

• Select and apply best practices of the SCOR model

• Select and apply the SCOR metrics


P13 – Timely and Accurate



All rights reserved. No part of this document may be reproduced, stored in a retrieval

system, or transmitted, in any form or by any means, electronic, mechanical,

photocopying, recording or otherwise, without the prior permission of the School of

Engineering, Republic Polytechnic, Singapore.

SCHOOL OF

ENGINEERING

Page 2 of 2

Timely and Accurate

Fenzy is a leading designer, manufacturer and retailer of home fashion textiles. Its products are available in over 10 countries and distributed in over 1,000 retail point of sales around the globe. In South East Asia, its home fashion textile products are distributed by Transtar Logistics (a 3PL) to Fenzy’s various retail outlets.

Adam, the operations manager of Transtar Logistics has just finished a monthly KPI review meeting with Fenzy. Transtar has repeatedly failed to meet an important KPI required by Fenzy for timely delivery of export shipments for the past year. On several occasions, serious operational overlaps had occurred and they include inaccurate shipments being sent to the cargo complex.

Transtar is now facing an imminent risk of Fenzy not renewing their contract. During the meeting, Adam had cited the reason that the goods can be difficult to locate in the distribution center and as a result, this had increased the time for the order picking process. Fenzy was not convinced by his explanation. Currently Transtar is using the bar-coding system to facilitate the DC operations with considerable human intervention.

Nelson, the Vice President of Transtar, had recently attended a seminar on RFID updates and gotten to know that RFID is alive and growing in the supply chain again after Wal-Mart announced the RFID mandate seven years ago. In view of the consequences of the KPI review meeting, Nelson instructed that Adam has to look into this urgent issue with topmost priority. Can you help Adam conduct a study of how the RFID technology helps to improve and address the efficiency and accuracy of shipments in their DC before they approach any RFID consultants for detailed discussion?


P13 – Timely and Accurate



Types of Barcode Standards

Linear barcodes 2D barcodes

Code 128 Data Matrix

UPC PDF417

Interleaved 2 of 5 Maxi code

Different ways of obtaining the bar code optically:


RFID Readers (Interrogators)

• RFID readers can be classified into whether they are stationary,

handheld or mounted.

3

Stationary Handheld Mounted/Mobile

Stationary readers areusually mounted on a wall,doorway, rest on table ordesktop. The reader readseach tag and store in adatabase.

Handheld readers are usedto locate items in adistribution centre. Theyare battery powered andcommunicate over awireless connection to anaccess point.

Mounted readers may beattached to a forklift ortruck to record themovement of goods fromone place to another.


RFID Tags

A RFID tag is a device used to transmit information such as a serialnumber to the reader in a contact less manner

The IC chip The tag inlay

The tag antenna

A RFID paper label


Classification of RFID Tags

• Power source– Passive

– Active

– Semi-passive

• Passive RFID Tags

Operate without a separate external power source and obtain operating

power generated from the reader

• Active RFID Tags

Powered by an internal battery which gives them a longer read range

• Frequency� Low (125-134 kHz)

� High (13.56 MHz)

� Ultra high (868, 902-928 MHz)

� Microwave (2.45 GHz)


Electronic Product Code (EPC)

• Header

– identifies the length, type, structure, version, and generation of the EPC

• EPC Manager Number (Manufacturer ID)

– entity responsible for maintaining the subsequent partitions

• Object Class (Item number)

– identifies a class of objects

• Serial Number

– identifies the instance


01.0203D2A.916E8B.0719BAE03C

Header Object ClassEPC Manager Serial Number

Header: 8 bits = 256

EPC Mgr: 28 bits = 268, 435,456

Object Class: 24 bits = 16,777,216

Serial Number: 36 bits = 687,194,767,361

268 million companies can each categorize 16 million different products and

each product category may contain over 687 billion individual items !!

EPC Consists of 96 Bits


Setup for a RFID System


RFID/EPC Technology (Read & Write)

• Tagging • EPC-code - unique number (64, 96, 256 bits)

• smart-tag (microchip with RF antenna)• Each item is unique

• Reading • reader activates smart-tag • reader reads EPC-code of item • Internet or LAN translates EPC-code into useful information


EPC Versus UPC

• Both are forms of automatic identification technologies

• Universal Product Code (UPC) require line of sight and manual

scanning whereas EPC does not

• UPC require optical reader to read whereas EPC reader reads

via radio waves

• EPC tags possess memory and can be written while UPC does

not


Comparison between RFID and Barcode Technologies

RFID Barcode

Line of Sight Not required Required

Dynamic Data Can be changed Cannot be changed

Read Range Longer distance Shorter distance

Read multiple tags at once Yes No

Storage capacity High Low

Multiple reads Yes No

Survivability in hostile environment High Low

Programmability Yes No

Accuracy High Low

Read rates High Low

Privacy Issue Potential No

Material Type Performance affected Not affected

Total Cost of Ownership High Low


RFID Application (Wal-Mart and P&G)


RFID Applications in Singapore

•In Singapore, RFID tags are used to identify the

endangered arowanas. Each arowana is injected

with a 125 kHz glass encapsulated RFID, which

contains information such as the arowana’s

country of origin, farm of origin. Only arowanas

bred in captivity can be traded.

•In Singapore, Electronic Road Pricing (ERP)

gantries collect tolls in high traffic areas and

peak hours via the active RFID units installed in

motor vehicles.


RFID Applications

•In Singapore, public transportation buses and trains use the passiveRFID cards, known as EZ-link cards. This contactless smart card,which also doubles up as a stored valued card that can be used tomake purchases at certain retail outlets such as McDonalds

•RFID is in Singapore’s public libraries (NLB), where each item (book,magazines, CD/DVDs) are tagged with 13.56 MHz RFID tag. Usingself-checkout machines, library users place items one at a time on ablue pad (essentially an antenna) for identification. So long as an itemis placed on the blue pad, it is identified, checked out, and the EAS(electronic article surveillance) bit in the RFID tag is disarmed at thesame time. RFID is also used at 24/7 book drops that immediatelyidentify return items as they slide down the book chute.


Application of RFID in

Storage and Distribution

An RFID tag with an associated referencenumber is attached to each car in thecentre for tracking purposes. The systemfacilitates more efficient workflow during thepre-delivery inspection process andmonitors the progress of work to becompleted.

With new cars being delivered directly fromthe harbour to the hub and all key facilitiesavailable under one roof, customers receivenew cars in almost ex-factory condition withmileage reduced by 90 per cent, from anaverage of 50 km to less than 5 km.

Nissan RFID-enabled

automotive hub


Smart Shelf – Future Supermarket

RF Tag

NetworkedTag Readers

SavantControlSystem


RFID at the Inbound Process

• RFID at the receiving end

• As the shipments arrive at the dock doors, RFID labels are printedon the spot and affixed to each and every incoming shipment at thepallet level. After tagging, the cases and pallets move past the dockdoors. The raw information on the RFID tag is automaticallytransmitted to the Warehouse Management System (WMS).

RFID Label applied


RFID in the DC/Warehouse

• RFID in the DC/warehouse

• A handheld RFID Reader can be used for a quick scan of the

shelves or loads in the staging area and it enables the instantlocation of a specific shipment or box.

• You can also use it to check the on-the-spot association of box

and pallet tags to ensure that each pallet contains the rightboxes.


RFID at the Outbound Process

• Outbound Process

• When shipments leave the warehouse, the readers and antennascapture the RFID information on the pallet tag, which is transmittedinstantly to the WMS via a middleware. The receipt of thatinformation can trigger the automatic issue of invoices andadvanced shipping notices (ASNs). And real-time system enablesan alarm to be triggered in the event a driver attempts to load thewrong pallet onto the wrong truck. This sends a visual queue to themonitors located over each dock door. RFID Gantry

Pallet with RFID tags


RFID with GPS

• On the road

• Integration of the RFID solution with global tracking system

(GPS) expands visibility of real-time shipment location to the

trucks on the road.

• The GPS system notifies customers when the truck is on its

way to destination, enabling the consignee/facility to prepare

for the shipment, in the yard and at the loading dock.


RFID in Supply Chain Management• RFID have a significant impact on every facet of supply chain management

- from the simple tasks, such as moving goods through loading docks, to the

complex, such as managing terabytes of data as information about goodson hand is collected in real time. It has a potential to dramatically improve

supply chain by reducing costs, inventory levels, lead times, stock outs and

shrinkage rates; increasing throughput, quality, manufacturing flexibility,inventory visibility, inventory record accuracy, order accuracy, customer

service, and the collaboration among supply chain members. The

applications fall in the manufacturing, warehousing/distribution centres,

logistics and retailing environments.

• The automatic identification of products with RFID in the warehousing and

distribution centre environments has a consequence: increased visibility and

accuracy of the inventory. This increases the warehousing efficiency andorder accuracy. At the same time it reduces shrinkage, stock outs and

inventory levels. The increased warehousing efficiency has as a

consequence a reduction in the operation costs, which translates into

increased profits and also a reduction in lead times. Reduced lead timesmeans increased customer service as well as decreased inventories along

the supply chain. Ultimately, reduced inventories increase ROI.


Learning Objectives

• Describe the RFID Components and System

- RFID readers, RFID tags, etc

- Classification of RFID tags

• Describe the EPC standard

• Describe the differences between EPC versus UPC

• Describe the applications of RFID


P14 – Buyers Buy




SCHOOL OF

ENGINEERING

Page 2 of 2

Buyers Buy

Rex has just been promoted to Purchase Manager at the US headquarters of a large

Pump manufacturer, which produces and sells mechanical equipment all over the world.

His company has successfully implemented the SAP ERP system as a response to the

pressing business needs.

Rex’s company has manufacturing facilities in various parts of the USA and they are

practicing centralized purchasing policy. In such case, Rex’s department has to raise

purchase requisitions and create purchase orders in SAP system for all the plants.

Recently the Product Development department redesigned one of the car oil pumps to

include a new gasket. The left is a pump, and the right is the newly included gasket.

As a result of this change, new records have to be created in SAP for the gasket as well

as the new vendor in Germany that Rex’s company has just identified.

200 pieces of gaskets are needed for a trial production. On top of that, the Engineering

department has also informed Rex’s department that they require 10 pieces of these

gaskets to complete the necessary design documents.

Help Rex to address all these concerns.


P14 – Buyers Buy

SAP Navigation

Overview of SAP MM

Procure-to-pay cycle in SAP MM

E331 - Supply Chain Management


SAP Basics

• Systems, Applications, and Products in Data Processing

• Central relational database

• Three-tier Client/Server system

• Collections of logically related transactions within business functions�PP (“Make”)

�MM (“Buy”)

�SD (“Sell” and “deliver”)

�FI and CO (“Track”)

�HR, etc.

• Add-ons: � Customer Relationship Management (CRM)

� Supply Chain Management (SCM)

� Product Lifecycle Management (PLM)

� Etc.


Organizational Structure Terminology


Company 3000

Plant 2000London

Plant 3000New York

Plant 3100Chicago

Location 001Warehouse A

Location 002Warehouse B

Location 001Central

Location 200Receiving

Location 100Warehouse C

Location 002Southern

Organizational Elements : Example

Client 800


Procurement Specific Organizational Elements

Purchasing Organization

• Responsible for negotiating terms and conditions with Vendors for goods and services

• Has the authority to bind the company in a legal contract

Purchasing Group

• Subdivision of a purchasing organization

• Specialist buyers who are knowledgeable in particular types of goods or services


MM module is used to support the entire procurement cycle andcontrol of inventory within a company

Materials Management (MM)


The Big Picture

DemandManagement

MPS

MRP

ManufacturingExecution

ProcurementProcess

Material

Management

moduleGoods Receipt for Purchase Orders

Purchasing: Conversion of purchasing requisition

into Purchase order

MM:Purchaserequisition

Shop Floor Control, Production Confirmation

Conversion of planned orders into Production Orders

Shop Floor Control, Goods Issue

Shop Floor Control,Goods Receipt

PP:Planned Production Order


Materials

Planning

Invoice Verification

Financial and Cost

Accounting

Sales and

Distribution

Master Data

� Material

� Vendors

� G/L accounts

� Storage binsGoods Receipt Transfer

Posting

Goods

Issue

Invoice

Receipt

Inventory Management

Production

Purchasing

Purchase

Order

Components of MM


Data Types in SAP

• Master Data

Data that is relatively stable, such as Materials Master,

Customers Master, Vendors Master

• Transaction Data

� Data that is relatively temporary

� Stored at various stages of a business process, such as

customer orders, purchase orders, production orders,

customer payments


Master Data in Procurement : Material Master

PurchasingPurchasing

SalesSales

Workscheduling

Workscheduling

StorageStorage

Qualitymanagement

Qualitymanagement

Stocks in plant/storage locationStocks in plant/storage location

WarehousemanagementWarehouse

management ClassificationClassification

ForecastingForecasting

AccountingAccounting

Basic DataBasic Data

MRPMRP

A

B

St

t

MaterialMaster

• Contains all data required to define and manage a specific material

• Material master screens are segmented by departmental functions to provide

easier maintenance, thus each user has a unique view

• Purchasing, Basic Data and Accounting are the primary views in the Material

Master for Procurement


Master Data in Procurement : Vendor Master

� Contains information about a vendor from the Purchasing and Accountingperspective.

� General data is valid for the whole corporate group (client).

� Accounting data is stored at company code level (company) and with thegeneral data.

� Purchasing data of the vendor is managed separately for eachpurchasing organization, for example, payment conditions.


Invoice Verification

Purchasing Process in MM

Purchase Requisition(optional)

RFQ(optional)

Vendor Evaluation(optional)

Goods Receipt

ConvertPR to PO

(or create PO)


Purchase Requisition (PR)

MM

Purchase Requisition

Purchase Order

GoodsReceipt

InvoiceProcessing

• Internal document

• Request to MM for a

specific quantity of goods or

services by a specific date


Purchase Order (PO)

MMFI

CO

Purchase

Requisition

Purchase

Order

Goods

Receipt

Invoice

Processing

• External document

• Has the potential to create a contractual agreement between the buyer and seller for a product or service

• Specifies the conditions of the agreement, i.e. quantity, price, and delivery date


Item Category

� Item category defines the process used to procure a material

or service.


Different Types of Purchase Orders (PO)

Available in SAP

�Standard:You use this item category for materials that are procured externally

�Consignment:The vendor makes material available, which you then manage asconsignment stock.

�Subcontracting orders• Outsourcing of manufacturing process• Company purchases finished products, but provides some or all

of the materials to the subcontractor• Subcontracting is often resorted to by manufacturers due to

limited in-house production capacities of a part of their productionprocesses


Goods Receipt (GR)

MMFI

Purchase

Requisition

Purchase

Order

Goods

Receipt

Invoice

Processing

• Acceptance of materials into inventory

• Automatic updates to the General Ledger at goods receipt (MM)


Creating a Purchase Requisition (PR)


Creating a Purchase Order (PO)

The header

Item Overview

Item detail


Display a PR after PO Creation


Material Stock before Goods Receipt (GR)


Performing Goods Receipt (GR)


Material Stock after Goods Receipt (GR)

Where are the 10 pieces of gaskets requested by the

Engineering department?


Learning Objectives

• Understand the building blocks of the SAP ERP

• Describe the overview of SAP MM module

• Understand the Master Data relevant to purchasing, such as

Material Master and Vendor Master

• Describe the procurement cycle in MM

• Create Purchase Requisition (PR) and Purchase Order (PO)

• Perform Stock Overview and Goods Receipt (GR)


P15 – Sellers Sell




SCHOOL OF

ENGINEERING

Page 2 of 2

Sellers Sell

Ann is the top sales manager of a US based

pump manufacturing company and she is always

be able to ensure timely deliveries and accurate

billings to her customers.

In recent weeks, Ann and her team managed to

secure several big sales orders. However,

according to what is going on in the warehousing

and shipping departments, her reputation of

“timely delivery” is in jeopardy. In order to maintain her excellent service level,

Ann decided to tackle this issue internally to make sure that those big orders are

placed correctly and delivered on time.

As the business analyst supporting the sales department, Ann has asked you to

analyze and explain how the current SAP ERP system supports the sales order

processing cycle. In addition to that, Ann also required you to look into how sales

department integrates with other related departments such as warehousing,

logistics and accounting in SAP ERP.

P15 – Sellers Sell

E331 - Supply Chain Management


Overview of Sales and Distribution (SD)

Customer Order Management Process

Creation of a Customer Master

Creation of Sales Order/Delivery Order/Billing

Display the Document Flow

SD Organizational Elements• Client

• Company Code

• Sales Organization: Responsible for negotiating sales terms and conditions with business partners

• Distribution Channel: Defines how different goods and services reach the customer (Direct, Wholesale, Internet sale, etc.)

• Sales Division: Subdivision of a distribution channel and segments a business into product lines


business into product lines• Motorcycle

• Accessories

• Sales Area: A unique combination of Sales Organization, Distribution Channel and Sales Division (product related)

• Used for reporting and pricing

• Shipping Point: A fixed location within a plant that carries out shipping activities

• Each delivery is processed by only one shipping point

Customer Master

• Contains all the customer related data necessary for processing orders, deliveries, invoices and customer payments

• Customer Master contains all relevant data regarding business partners

Business Partner Function

Sold-to Party • Places an order for goods or services.


Sold-to Party • Places an order for goods or services.

• Contains data on sales

Ship-to Party • Receives goods

• Contains data for shipping, such as unloading point and

goods receiving hours

Bill-to Party • Receives the invoice for a delivery or service.

Payer • Pays the bill.

• Contains data on billing and bank details

Components of SD

Sales and

Sales

Support

Shipping

Transport

Sales

Information

System

Master


Sales and

Distribution(SD)

Sales

Credit

Mgmt.

Billing

Foreign

Trade

Master

Data

Data in Sales Documents


Data in a Sales Order

• Customer-related

• Sold-to Party, Ship-to Party, address

• Retrieve from Customer Master

• Order-related


• Order-related• Material

• Order quantity

• Delivery date

• Customer PO Number

• Customer Material number, etc.

Sales Order Structure

Header


Items Schedule Line

Departments involved in Order-to-Cash Cycle

CustomerInquiry

OrderProcessing Picking

Customer Billing

Customer PaymentDelivery

Sales Department Warehousing Department Accounts Department


Credit Check

Outstanding Outstanding A/RA/R

FINANCIALSAvailability

Check

Document Flow

• The documents in a sales process are linked to each other

using the document flow.

• This enables you to access the history and current status of

your sales processes at any time.


Sales Order

CustomerInquiry

OrderProcessing

Sales Department

Sales

OrderBilling

Delivery

Order

Transfer

Order

Post Goods

Issue

VA01

Information captured:


Inquiry Processing

Credit Check

AvailabilityCheck

Information captured:

• Customer number

• Material number

• Quantity

• Delivery date

• Etc.

Sales Order- Document Flow

Sales

OrderBilling

Delivery

Order

Transfer

Order

Post Goods

Issue

Document flow is updated online after each relevant transaction


Delivery Order

Warehousing/Shipping

Sales

OrderBilling

Transfer

Order

Post Goods

IssueDelivery

Order

VL01N


FINANCIALS

PickingDelivery • Delivery Order is a document used to

instruct Logistics to perform delivery

• It is usually initiated by Sales and sent to Warehouse

• To inform Warehouse of the materials and quantities to deliver

Delivery Order- Document Flow


Sales

OrderBilling

Transfer

Order

Post Goods

IssueDelivery

Order

VL01N


Transfer Order

• Transfer Order is used to initiate a picking request to warehouse to move materials within the

Sales

OrderBilling

Post Goods

IssueDelivery

OrderTransfer

Order

LT03


warehouse.

• Contains the materials and quantities to be picked

• This step is required in SAP system only if Warehouse Management option is set on.

Transfer Order - Document Flow

Sales

OrderBilling

Post Goods

IssueDelivery

OrderTransfer

Order

LT03



Post Goods Issue

Warehousing and Shipping

Sales

OrderBillingDelivery

Order

Post Goods

Issue

Transfer

Order

VL02N


FINANCIALS

PickingDelivery

• Perform Post Goods Issue when the products leave the warehouse for delivery to customer.

• The Post Goods Issue will

• reduce inventory on-hand

• increase cost of goods sold

Billing - Document Flow

Sales

OrderBilling

Delivery

Order

Transfer

Order

Post Goods

Issue



Once payment

for the invoice

has been made

the invoice will

be completed!

Procure for Sales Order

Pre-Sales Activity

Sales Order

Delivery Billing

Availability Check

Goods to Delivery

AccountsReceivable


General Ledger Accounts

Purchase Requisition

Purchase Order

Goods Receipt

In InventoryPlant or Warehouse

Invoice Receipt

NO

YES

Goods from Purchase Order

InventoryPostings

AccountsPayable

Produce for Sales Order

Pre-Sales Activity

Sales Order

Delivery Billing

Plant or

Availability Check

Goods Issued to Delivery

General Inventory

AccountsReceivable


Planned Order

Production Order

Completion Confirmation

In InventoryPlant or Warehouse

NO

YES

Goods from Production Order

General Ledger Accounts

InventoryPostings

AccountsPayable

Issue Goods to Production

Order

Learning Objectives

• Describe the overview of SAP SD module

• Understand the SD specific organizational units

• Understand the Master Data relevant to Sales and

Distribution (Customer Master)


Distribution (Customer Master)

• Describe the Order-to-Cash cycle in SD

• Create Sales Order/Delivery Order/Transfer Order/ Post

Goods Issue/Billing

• Understand the Document Flow in SD

supply chain management

Career