Supply Chain

Management 1
SCM - Some Definitions
Supply Chain Management encompasses every effort involved in
producing and delivering a final product or service, from the
suppliers supplier to the customers customer. Supply Chain
Management includes managing supply and demand, sourcing
raw materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry and order
management, distribution across all channels, and delivery to the
customer.

The Supply Chain Council, U.S.A.

Key Observations
Integrated activity:
* Among functions such as logistics, manufacturing,
distribution,
design/engineering, marketing, finance, etc.
* Multiple organizations i.e., suppliers, customers & 3 PL
providers
* Coordination of conflicting goals, metrics, etc.
Responsible for multiple flows:
* Information (orders, status, contracts)
* Physical (raw material, wip., finished goods)
* Financial (payment, credits, etc.)
Why is SCM Important?

Strategic Advantage It Can Drive

Strategy
Manufacturing is becoming more efficient
SCM offers opportunity for differentiation (Dell) or
cost reduction (Wal-Mart or Big Bazaar) or
customer service (TATA steel)
Globalization
Requires greater coordination of production and
distribution
Increased risk of supply chain interruption
Increases need for robust and flexible supply
chains
Why is SCM Important?
(continued)

At the company level, supply chain

management impacts
COST For many products, 20% to 40% of total
product costs are controllable logistics costs.
SERVICE For many products, performance
factors such as inventory availability and speed
of delivery are critical to customer satisfaction.
Delinking of Production it delinks
production from market volatility by providing
suitable buffers at appropriate place in the supply
chain
Why is SCM Important?
(continued)

Purpose of Supply chain

Time buffering buffering the time
between production and consumption
Distance Spanning the location of
Production & Consumption
Quantity Producers specialize in large
quantity of a limited assortment
Assortment consumers seek small
quantities and wide assortment
 Supply Chain
Product

Information

Funds

Dealer Custome
RWH/ r
PWH Distributo
r

Raw Plant Custome Custome

Materials r r
Primary Characteristics of
Supply Chain
SCM as an operating discipline can be
summarized as the practice of these
characteristics:
Performance excellence customer satisfaction at
the lowest total Cost
Collaboration with Supply chain partners -
coordinating operating activities
Information Technology Enabling SC resource
optimization
Complexities Involved in
Supply Chain Management
The supply chain is a complex network of
facilities and organizations with different,
conflicting objectives
Matching supply and demand is a major
challenge
System variations over time are also an
important consideration
Many supply chain problems are new and
there is no clear understanding of all the
issues involved
The Dynamics of the Supply Chain
a typical supply study

Demand variability & schedule

changes amplified through:
MRPs network of demand dependencies
Latency delayed communications re
downstream demand level changes that cause
upstream to overcompensate and oscillate
Misreading of demand signals between trading
partners
Excessive batching
 The Dynamics of the Supply Chain
a typical supply study
Order Size

Customer
Customer
Demand
Demand

Retailer
RetailerOrders
Orders

Distributor
Distributor Orders
Orders

Production
Production Plan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
What is the basic Problem?

Todays formal planning

systems are
fundamentally broken!

6
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Peek
Modern Planning Systems
Broken?!

Companies Using Spreadsheets for Demand

Management

Best-in- 6
Class 3

IndustryAverage 7
1

Laggards 8
4

0 2 40 80
0 60 100

DDMRP Intro

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Old Rules, Old Tools, New
Pressures
Forecast error is on the rise
Supply Chain Complexity and Volatility is
increasing
Legacy planning tactics and tools are
breaking down
Inside most modern ERP systems is MRP
79% of ERP Buyers implement MRP

Conceived in the 1950s

Codified in the 1960s

Commercialized in the 1970s and

it hasnt changed

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The New Normal

Global sourcing and Pressure for leaner

demand inventories
Shorter product life cycles Inaccurate forecasts
Shorter customer tolerance More product variety
times Long lead time parts &
More product complexity components
and/or customization
Worldwide there are more complex
planning and supply scenarios than ever
the past is NOT an predictor for the future

DDMRP Intro

9
Where to
Start?
Expectations from Supply Chain
Service
Revenue
Inventories
Expenses

Requireme
ntsthat Time is the ultimate constraint
Realization
Well defined and understood systems
Smooth linkage between points in the system
All above lead to becoming Demand Driven
The First Law of Supply Chain

All benefits will be directly related to

the speed of
FLOW of materials and information.
Informati
on
Suppliers Customers
Materials & Information

Corollary:
Materials and Information must be
RELEVANT!!!
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"All Benefits" Encompass:

Service is consistent and reliable when a system

flows well
Revenue is maximized and protected
Inventories are minimized
Expenses ancillary and/or unnecessary are
minimized
Cash flow follows the rate of product flow to market
demand

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Protect and Promote Flow = ROI

Maximization
Flow is the enabler for the
primary objectives of
most functions in the
company
Planning

Qualit Financ
y e

FLO
W
Plant/
Sale
Operatio
s
ns

Marketi
ng

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 Flow is the intersection of prevailing improvement
methods

Lean

Primary Objective:
Reduce Waste

FLO
Six-Sigma
W Theory of Constraints
Primary
Primary Objective:
Objective:
Improve
Reduce
Throughput
Variability

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Committing to the Wrong
Demand Signal
Forecasts are often converted to Planned
Orders
Three Universal Truths about Forecasts
They start out wrong
The more remote in time they are the more wrong
they are
The more detailed we make them the more wrong
the are
When Planned Orders are wrong:
We commit capacity, materials, space, time, etc. to
the wrong thing
We often have to spend more to get the right thing
within a short window of time orwe risk service
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Planning and Scheduling
Nervousness
Nervousness: The characteristic in an MRP system when minor
changes in higher level (e.g. level 0 or 1) records or the master
production schedule cause significant timing or quantity changes
in lower level (e.g. 5 or 6) schedules or orders. (APICS Dictionary
12th Edition, Blackstone, 86)

FPA
FP FPB
A

IC SA
SAA SAA SA
A A L

SA PP IC
ICB Change PP IC PP PP
B A B A B A Z

PP PP SAG
SA SA
B C G G

PP
PPD PP
PPE PP PP
D E D E

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 The Law of System Variability
The more that variability is passed between discrete
areas, steps, or processes in a system, the less
productive that system will be.
The more areas, steps, or processes and connections in
the system, the more erosive the effect to system
productivity will be.

Output Lead time

Delays accumulate while gains do not.

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Variability at the Supply
Chain Level
More parts worse the effect!
BullWhip Effect: An extreme change in the supply position
upstream in a supply chain generated by a small change in
demand downstream in the supply chain. Inventory can
quickly move from being backordered to being excess. This
is caused by the serial nature of communicating orders up
the chain with the inherent transportation delays of moving
product down the chain. (APICS Dictionary, 12th Edition)

Sub-
Foundry Component
Assembler OEM

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A Further Complication
Artificial Batches
An artificial batch is any batch that is not
function of actual demand or consumption
Examples would be:
Economic Order Quantities
Minimum Run Sizes
Minimum Order Quantities
Minimum Freight Policies
Minimum Order Cycles (imposed latency)
Artificial batches often impede the
synchronization of supply with actual
demand they are a form of management
variability

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 An Example

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Two Universal Points of
Inventory

A B

Too Little Warning Optimal Range Warning Too Much

0
Note: Optimal is from an on-hand perspective

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The MRP BiModal
Distribution
# of parts or SKU

Too Little Warning Optimal Range Warning Too Much

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The Effects of the BiModal
Distribution
Oscillation
# of parts or SKU

Optimal Range Warning Too Much

Too Little Warning

0
Three Simultaneous Effects: How can we have so much inventory
1. Persistently High Inventories and not be able to ship orders?!
2. Chronic and Frequent Shortages We paid for fast freight now we dont
3. High Expedite and Waste Related need it?!
Expenses

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Something Must Change

MRP MRP II ERP APS

Deloitte University Press DUPress.com

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A Blue Print for Change
Mitigating the Effect of
Variability on Flow

1.Use only ACTUAL DEMAND

2.Establish DECOUPLING POINTS
3.Establish CONTROL POINTS
4.Buffer Both DECOUPLING and
CONTROL POINTS
5.Measure for Flow

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1 Shift from Forecast Driven to
Sales Order Driven

Plan Plan
t t

Logisti
Forec
ast Plannin Logisti
Sal Plannin

es
cs g cs g

From: To:
Ord
er
Supplie
Supplie
rs rs

Planned orders create supply orders in Only qualified sales orders within a short
anticipation of need range horizon qualify as demand
Forecast error associated with Planned allocations
orders results in inventory Sales orders give a near perfect demand
misalignments and expedite expenses signal in terms of what will be sold and
when it will be sold.

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2 Establish Decoupling
Points
The only way to stop Nervousness and the Bull Whip Effect is to stop variation
from being passed between the parts of the system
decoupling Creating independence between supply and use of material.
Commonly denotes providing inventory between operations so that
fluctuations in the production rate of the supplying operation do not constrain
production or use rates of the next operation. (APICS Dictionary, 12th
Edition, page 34, Blackstone 2008)
decoupling points The locations in the product structure or distribution
network where inventory is placed to create independence between
processes or entities. Selection of decoupling points is a strategic decision
that determines customer lead times and inventory investment. (APICS
Dictionary, 12th Edition, page 34, Blackstone 2008)

Sub-
Foundry Component
Assembler OEM

Decoupled Lead Times

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Everything Dependent (MRP)
versus Strategically Decoupled
(DDMRP)

MRP Everything Dependent Strategically Decoupled

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3 Establish Control Points

Places to transfer, impose, and

amplify control through a defined
area.
When set as a specific resource they
are often called a Drum or a
Pacesetter
Selection Criteria:
1. Points of Scarce Capacity determine
the total system output potential.
2. Exit and Entry Points are the
boundaries of your effective control.
3. Common Points are points where one
place controls many things.
4. Points that Have Notorious Process
Instability can be planned for and
controlled
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and copyright when
Demand Driven visibility
Institute and focus
is placed on the resource and its variability.
A Decoupled System with
Control Points

Lead time =
4 week Lead time = 3 weeks Lead time = 1 week

Outsour plat = Strategic

ce e Decoupling points
operatio C
n C C = Control point

she
ar C wel
d
Raw
sa assem pain configu C Custom
bly t re er
stoc w
ks C
machining
lase
r purchase
hea d
compone
t nt stocks
trea
t

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4 Buffer Decoupling and
Control Points

Stock

Time

Capacity

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Stock Buffers Used at
Decoupling Points

Quantities of inventory or stock that are designed to decouple demand from

supply. They are commonly amounts of inventory that will provide reliable
availability to the consumers of the stock while at the same time allowing
for the aggregation of demand orders creating a more stable and efficient
supply signal.

Aggregated Supply Requirement Reliable Output/Availability

Stock Level
Cumulative Supply Variability Cumulative Demand Variability

Pre-Buffer Sequence of Events Consumer of stock

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Time Buffers Used at Control
Points

Scheduled Entry to Scheduled Start at

Buffer Control Point

WO 1595

C
WO 1781
Upstream WO 1626

WO 1601
Processes
WO 3279

WO 2001

Early Green BUFFE

Yellow Red Late
R
Example: 9 hour buffer

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Capacity Buffers Used Around
Decoupling and Control Points

The protective capacity at resources that

allow these resources to catch up (rebuild
strike Over Capacity
buffers) when variability
s.

Capacity Buffer
Stable Output

Total Capacity
Cumulative Variation
(including expedited orders)

Preceding Sequence of Events Buffered Resource

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Demand Driven
Design Model = Time
buffer
= Stock buffer = Capacity
C = Control
Lead time = 3 weeks buffer
point

Lead time = Outsour plat

4 week ce e Lead time = 1 week
operatio
n C C

she
ar C wel
d
Raw
sa assem pain configu C Custom
bly t re er
stoc w
ks C
machining
lase
r purchase
hea d
compone
t nt stocks
trea
t

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5 Three Tactical Metric
Objectives for Flow

Metric Objectives The Message

Day to Day
Operations

System Reliability Execute to the

Control

plan/schedule/market
expectation;
System Stability Pass on as little variation as possible;
System Speed/Velocity Pass the right work on as fast as
possible;

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System Reliability

Execute to the plan/schedule/market expectation

Measure:
Monitor on-hand and
available stock statuses
at decoupling points

Monitor , release, sequence

C and on-time status of work at
control points

Dispatch List - Resource C1

Start Full Duration End Sales Order Work Order Status Sales Order Qty Work Order Qty Part
2/13/2014 17:57 11:05 2/14/2014 5:02 356010 356010-5 Released, awaiting start 0 22 2003
2/14/2014 5:02 8:35 2/14/2014 13:37 356009 356009-2 Released, awaiting start 0 17 2003
2/14/2014 13:37 9:05 2/14/2014 22:42 356009 356009-1 Released, awaiting start 0 18 2003
2/14/2014 22:42 9:05 2/15/2014 7:47 356010 356010-8 Released, awaiting start 0 18 2003
2/15/2014 13:08 3:10 2/15/2014 16:18 505001 505001-1 Released, awaiting start 0 15 5001
2/18/2014 13:14 2:12 2/18/2014 15:26 505001 505001-1 Released, awaiting start 0 15 5001
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System Stability

Pass on as little variation as possible

Work Order Load

Measure: Capacity

Monitor capacity buffers in non-

control point resources looking
for potential overloads

Monitor penetrations to time

buffers focusing on red and late
zones

Monitor on-hand, available stock

and projected on-hand at
decoupling points

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System Speed Velocity
Pass the right work on as fast as possible

Measure:
Monitor Over the Top of Green (OTOG)

Monitor backlog status and dispatch list sequence of control points

Dispatch List - Resource C1

C Start
2/13/2014 17:57
2/14/2014 5:02
2/14/2014 13:37
Full Duration End
11:05 2/14/2014 5:02
8:35 2/14/2014 13:37
9:05 2/14/2014 22:42
Sales Order Work Order
356010 356010-5
356009 356009-2
356009 356009-1
Status
Arrived, LATE to Start
Arrived, LATE to Start
Released, awaiting start
Sales Order Qty Work Order Qty Part
0
0
0
22 2003
17 2003
18 2003
2/14/2014 22:42 9:05 2/15/2014 7:47 356010 356010-8 Released, awaiting start 0 18 2003
2/15/2014 13:08 3:10 2/15/2014 16:18 505001 505001-1 Released, awaiting start 0 15 5001
2/18/2014 13:14 2:12 2/18/2014 15:26 505001 505001-1 Released, awaiting start 0 15 5001

Monitor early buffer entry

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 Analytics Use of Control Charts

Starting Out
Mature Implementation

Initial Results

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 Effects of de-coupling

Replenishment stock buffers

Grey Over the recommended levels
Green comfort zone
Yellow Operating zone
Red Safety zone
Deep red Base
The Six Decoupling Point
Positioning
Factor
FactorsDefinition
Customer The amount of time potential customers are
Tolerance Time willing to wait for delivery of a good or a service.
Market The lead time that will allow an increase of price
Potential Lead or the capture of additional business through
Time either existing or new customer channels.
Demand The potential for swings and spikes in demand
Variability that could overwhelm resources (capacity, stock,
cash, etc.).
Supply The potential for and severity of disruptions in
Variability sources of supply and/or specific suppliers. This
can also be referred to as supply continuity
variability.
Inventory The places in the integrated BOM structure (the
Leverage & Matrix BOM) or the distribution network that
Flexibility leave a company with the most available options
and the best lead-time compression to meet the
business needs.

Critical The minimization of disruption passed to critical

Buffers
Green Determined on Lead Time, Consumption &
Lead time factor
Yellow Determined on Lead Time, Consumption.
The yellow zone is the rebuild zone for
replenished and replenished override
buffers.
Red Safety Determined on Lead Time,
Consumption & Lead time Variability
Red Base - The portion of the red zone sized by
Variability factors.
Lead time decompression -
Effects $
30
$
30

$ $ $ $
7 10 7 10
2 2
$
1 $ 1
5 5
2 2

Lead time in the BOM of part A on left is 35 day in one leg and 30
day in another. Thus forecast variability will have to be for a period
of 35 days and stocks to be maintained accordingly.
After providing buffers in the diagram on right the lead time is
reduced to 5 days. The longest led time in the chain is 15 days and
to be used for determining buffer level determination.
If customer tolerance time is nil, buffer is required to be maintained
at A also, which will be a factor of longest led time, that is 5 days.
 Buffer management

Plant PWH RWH/ HUB Distributo Dealer

r

Buffers are essential to decouple various nodes and make

them independent in their operations. This facilitates
improved order servicing, reduced working capital
requirement and better customer satisfaction
By distributing buffers at every control node in the critical
chain, the risk is reduced and the chain becomes more
efficient. Stocks outs are reduced greatly and overall working
capital is reduced.
 Demand driven planning - Execution

Stock movement is continuously monitored to prevent stock build up

in the system and preference is given to dispatches for SKU nearing
stock-out. This makes chain highly efficient and frees working capital
Where to Find out More?

Book
s:

Online:
www.demanddrivenmrp.com (free downloads and podcasts)
www.demanddrivenworld.com (free downloads of company presentations
from the Demand Driven World Conference)
DDMRP LinkedIn group: http://www.linkedin.com/groups?home=&
gid=3768677

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reserved
THANK YOU

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