FAQ: Efficiency in the Supply Chain

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Elaine Jennings
6 years ago
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Question 1: What is a postponement strategy? Answer 1: A postponement or delayed differentiation strategy involves manipulating the point at which a company differentiates its product or service.

1 Question 1: What is a postponement strategy? Answer 1: A postponement or delayed differentiation strategy involves manipulating the point at which a company differentiates its product or service. These delays move the point at which a company differentiates its product closer to the customer. Companies that execute this strategy most effectively have developed standard products that can be quickly, easily, and inexpensively differentiated or customized once the actual consumer demand is realized. To support this type of strategy, companies must develop and implement specific inventory strategies that satisfy consumer service expectations and meet company objectives on inventory-carrying costs while mitigating the risk of holding the right inventory, at the right place, at the right time, and in the right form. Question 2: What is the bullwhip effect? Answer 2: The bullwhip effect occurs when there is a lack of information along the supply chain. In the simplest terms, the bullwhip effect is when companies establish safety stock in an effort to minimize and/or eliminate stockouts at the next customer level. This phenomenon takes place when partners through the supply chain have information that is not aligned or congruent with others in the supply chain, causing suppliers to carry additional inventory to protect against stockouts at the next customer. The further down the supply chain, the more variables are introduced, causing suppliers to carry even more inventory to satisfy the uncertain demand from the customer. The term bullwhip describes the phenomenon as even small incremental changes by the end of the supply chain cause exponential changes in demand throughout the supply chain. As the small movements occur and the suppliers react, the end result is excess inventory, and therefore cost, to the suppliers and, ultimately, the final customer. 1

2 Question 3: What is offshoring? What is the impact to the supply chain? Answer 3: Offshoring is a relatively new tactic used by companies where companies relocate business processes from one country to another. There can be many reasons for offshoring, including those strategic in nature. Most often though, offshoring is used to support efforts to reduce costs, primarily by obtaining a comparative advantage by exploiting the availability of cheap labor. Most companies began offshoring efforts by relocating noncritical or noncore elements of their businesses offshore; today s companies are effectively and efficiently offshoring virtually any aspect of the business deemed appropriate, including core production and service functions. Even more startling are companies shifting innovation efforts offshore by relocating research and development (R&D) activities to other countries. There is much public attention on the impact of offshoring on domestic jobs and companies are simultaneously addressing concerns of higher levels of risk in supply chains due to loss of control and visibility from these extended supply chains. The fact is with the proliferation of the Internet and the ability for instantaneous communication, companies that do not include offshoring in their supply chain portfolio of strategic weapons, will likely be at competitive disadvantage. Question 4: What is a Kanban system? Answer 4: Kanban is a manufacturing and inventory control signaling system that originally used cards to signal the need for an item. Kanban is perhaps most well-known and has been historically used in conjunction with and in support of just in time (JIT). Kanban systems can be an effective weapon in the efforts to minimize or eliminate the bullwhip effect in a supply chain. By sending congruent and orderly signals with the result being a high level of visibility or transparency throughout the supply chain, suppliers develop the confidence to carry lower inventories to protect against changing demand by the customer. The result of this activity is lower costs for those in the supply chain and ultimately the customer. 2

3 Throughout its deployment, one of the Kanban system s strengths has been its simplicity. Kanban systems have not remained static and have progressed to include faxbans and now e-bans as electronic information exchange has become more common. Although Kanban systems have been used primarily within factory walls and between manufacturer and supplier, another progress has been the use with customers to support replenishment methods used at the point of purchase by the customer (Cork, 2006). Question 5: What is MRP? What is the difference between MRP and MRP II? Answer 5: MRP (materials requirements planning) is a production planning and inventory control system used by most firms in one form or another. While MRP is most commonly associated with a software application or program, it can be used without the aid of software or a computer. MRP and MRPII are both predecessors to today s ERP (enterprise resource planning) systems employed by many firms. The primary objectives of a MRP system are fundamental to a business. The first objective is to ensure product availability to the customer. The secondary objective is to maintain the lowest level of inventory possible while still satisfying objective number one. Finally, in support of objectives one and two, it is to plan manufacturing, delivery, and purchasing efforts and activities. The foundation for MRP systems is the input of a master production schedule, the driver of rudimental supply chain setups. MRP systems and MRPII (manufacturing resource planning) systems differ in that MRPII addresses the need to coordinate and align the entire manufacturing operation including the finance, materials, and human resource disciplines. MRPII is generally a modular system (that includes the MRP module) and can, and often does, include modules that assist the company in managing all areas of the company with the output coming in the form of a labor and equipment schedule that supports the master production schedule in the most efficient manner available. Question 6: How can technology support supply chain efficiency? Answer 6: There is a variety of technological tools available to those responsible for their company s supply chain. At the core of each of these technologies is the 3

4 company s ability to share data. This ability includes sharing more detailed information in an essentially instantaneous manner in the essence of what technology has brought to supply chain management professionals and the activities for which they are responsible. Beyond the benefits that technology has over traditional communication that technology offers, tools such as UPC (uniform product code) and bar coding have grown into EPC (electronic product code) and RFID (radio frequency identification): powerful new tools for the supply chain. EPC and RFID, by attaching tiny transponders to the inventory, can track that inventory any place on the globe in real time. Companies can now have accurate and timely data, allowing for previously unattainable visibility and transparency to inventory with the result being improved inventory management, lower costs for the company, and lower prices for the consumer. As companies embrace and master the opportunities offered by these technologies, companies will be able to focus efforts on other core issues of the business rather than focus on the supply chain issues addressed by these new technology solutions. Question 7: What are the factors to be considered when locating a production or distribution center? Why? Answer 7: For an individual business, the factors for selecting a production facility or distribution center can vary; however, the following are the most basic issues to be addressed when considering this type of decision: location of the customer required delivery time shipment configuration product characteristics variety of products logistics cost structure (handling, storage, and transport) Once the key characteristics of the location optimization equation are identified and understood, they can be easily converted into agreed-upon measurables with the appropriate values and solved by a wide variety of available commercial software or 3PL (third-party logistics) service companies. In determining the optimum location of a production or distribution location, what is of real importance is that the supply chain value stream be fully and correctly analyzed so that the true cost drivers of the supply chain can be identified. Once these key drivers are identified, the appropriate metrics and action plans 4

5 can be established and executed to create competitive advantages for the firm and ultimately improve the performance of the company. Question 8: What is an economic order quantity (EOQ)? Answer 8: The EOQ is the order quantity that provides the company the minimal total inventory carrying and ordering costs for the fiscal year. It is important to note that EOQ is not always able to provide exact data; however, it does provide insight as to whether or not current order quantities are reasonable. The formula for EOQ is the square root of (2 * A * Cp) divided by (Ch). In the formula, (A) is the demand for the year, (Cp) represents the cost to place a single order, and (Ch) is the cost to hold one unit for 1 year. The EOQ formula also has some important assumptions, a relatively uniform and known demand rate, a fixed item cost, a fixed ordering and holding cost, and a constant lead time. Specifically, the model equates total inventory costs to one-half the product of the economic order quantity and the incremental holding cost plus the product of the incremental cost to place an order and the annual usage divided by the incremental holding cost. The primary advantage of the EOQ model over others is its relative ease of use. Another cited advantage is that when there is a degree of variability in the demand of an item, the total cost provided by EOQ is not much higher than another possible method. As stated, some argue that the EOQ model is not acceptable because it does not adequately account for fluctuations in demand; as in many such situations, the total cost is understated and the inputs can be, at best, good estimates. This problem is largely attributed to the fact that costs associated with ordering and holding inventory are shared with other functions or disciplines. Like any other tool, EOQ should be evaluated in context of the circumstances of the specific application or situation (Fullbright, 1979). Question 9: Can you identify the two independent demand inventory models? Answer 9: The two types of independent demand inventory models are the periodic review model and the perpetual review models. The feature of the perpetual review model is that it has an inventory level that is constantly monitored. Whenever inventory levels drop to a pre-established reorder point (R), additional inventory is delivered. Economic order quantity (EOQ) is a popular method for establishing order quantities for both of the independent 5

6 demand inventory models. Like the perpetual review model, the periodic review independent demand inventory model is also a method of inventory maintenance and replenishment. The process begins as inventory levels start at an identified restocking level (R). At established time intervals, the inventory is analyzed and the new inventory level is established (I). Then, an amount of inventory is brought in to increase the inventory level back to (R), resulting in the equation (Q = R I ). The restocking level trigger is calculated by the equation (RS = Drpl + l + SS). In this equation (Drpl) equals average demand during the reorder timeframe in addition to any required replenishment lead time. (SS) in the equation stands for safety stock, which is extra inventory that a company carries to help prevent stockouts in the presence of uncertainty of both supply and demand. Question 10: What is safety stock? How do you calculate safety stock? Answer 10: There are many variations to the exact definition of safety stock, but there is a general consensus among most that safety stock is the extra inventory kept on hand by a company to protect against out-of-stock conditions due to unexpected demand and delays in delivery. As noted, in normal materials management, there are two basic inventory management systems: the periodic and perpetual models. The periodic model is a system wherein replenishment is done, keeping the quantity constant. The period becomes the variant. In summary, you fix the quantity you want for the stock to dip to trigger a requirement. As soon as the stock level is reached, you replenish the stock. The perpetual system is a system wherein replenishment is done, keeping the period constant. The quantity becomes the variant. This means you will check for the level of stock at fixed time intervals (daily, weekly, monthly, and so forth) and compare it with the requirements that normally relate with your MRP. In addition, there are four other factors that could affect the ideal procurement pattern: ordering lead time manufacturing lead time transporting lead time conversion lead time A delay in any of these can have effect on the entire replenishment process. A buffer stock must be designed to take into account the previously 6

7 mentioned coverage. Again, the determination of your safety stock depends on the accuracy of your forecast because the greater your accuracy, the lower the amount of safety stock. This relationship between forecast accuracy and service level is denoted by factor (R). It should be noted that the customer demand cannot be always satisfied 100% of the time. Therefore, what you have is (R) equaling the relationship between forecast accuracy and service level (service factor), (W) equaling the delivery time (in days) / forecast period (in days), and (MAD) = mean absolute deviation (parameter for forecast accuracy). The calculation proceeds; if replenishment lead time is greater than the forecast period by factor W, then safety stock = (R * Sq.rt. W * MAD) or else safety stock equals (R * W * MAD). Another widely accepted common method of calculating safety stock is the statistics model of standard deviation of a normal distribution (the bell curve). This statistical tool has proven to be very effective in determining optimal safety stock levels in a variety of environments. The basis for this safety stock calculation is standardized, and its appropriate use generally requires adaptation of the formula and inputs to meet the specific characteristics of your operation. References Cork, L. (2006). A sign of things to come. Works Management, 53(2), 26. Economic order quantity (EOQ) model. (2006). Retrieved from the SCRC Web site: Fullbright, J. E. (1979). Advantages and disadvantages of the EOQ model. Journal of Purchasing and Materials Management, 15(1), 8. 7

LOT SIZING IN MRP. Week Gross requirements Scheduled receipts Projected available balance Net Requirements

LOT SIZING IN MRP. Week Gross requirements Scheduled receipts Projected available balance Net Requirements LOT SIZING IN MRP The net data is subjected lot sizing Lot sizes developed can satisfy the net for one or more weeks The basic trade-off involves the elimination of one or more setups at the expense of