Chapter 9. Process Inputs and Outputs: Supply Chain Management

1. Chapter 9. Process Inputs and Outputs: Supply Chain Management • Outline • The Supply Chain • Suppliers Decision Making • Transportation Decision Making • Inventory Decision Making • External or independent demand • Internal or dependent demand MAN 3504 - Chapter 9

2. Supply Chain Management • Area of emphasis in the 1990’s - opportunity for improvement is high • Important due to the continuous globalization of the transformation processes MAN 3504 - Chapter 9

3. Supplier Decision Making • Suppliers play an important role as mentioned in the Quality Chapter • Therefore, supplier selection must consider • Quality • Vision/strategy alignment • and obviously price • Supplier certification programs • Supplier decisions: one versus multiple suppliers MAN 3504 - Chapter 9

4. Transportation Decision Making • Type of transportation method • Air, Ship, Rail, Truck • Priority/”urgency” of the shipment • Dedicated transport • Consolidated transport • Transportation decisions based on value density • $/Weight or $/Volume • Another factor: customs MAN 3504 - Chapter 9

5. Inventory Decision Making • Inventory is necessary • To maintain a continuos flow (minimize idle time) • To balance operations • To separate the production system from the customer • Cost reduction trough bulk purchases • Multiple inventory points • Inventory categories • Raw materials : : Work in process : : Finished Goods MAN 3504 - Chapter 9

6. Inventory Decision Making Inventory in a simplified system MAN 3504 - Chapter 9

7. Inventory Decision Making • Inventory Costs • Holding Costs: These costs include the cost of money (discussed above) plus the costs related to storage (for example the depreciated costs of the warehouse + warehouse operating expenses), handling, insurance, obsolescence, and “loss”. • Ordering Costs: These costs include the processing of an order (clerical work) plus the cost of inspection, verification of quantities, and initial handling. • Shortage Costs: These are the costs associated with not having material when it is required. These costs include lost sales, lost customers, or lost productive time. MAN 3504 - Chapter 9

8. Inventory Decision Making - External Demand • Inventory systems for finished goods - required by consumers • Determine: • How much to order. • When to order. • Several methods exist - we will cover one of the most frequently used, the Fixed Order Quantity Model. • Assumed to reorder quantity Q is fixed - question 1 • Reorder point R also fixed - question 2 MAN 3504 - Chapter 9

9. Inventory Decision Making - External Demand • Fixed Order Quantity Model assumptions • Yearly demand (D) for the item is known and it is constant, meaning every period (I.e. day, week, ..) the same amount (q) is consumed from inventory. • The cost per order (Co) and the opportunity cost/ cost of money I is fixed and known (a percentage). • Known and constant lead time (L) to receive Q. • Q/2 is the average inventory • Ci is the cost of the item MAN 3504 - Chapter 9

10. Inventory Decision Making - External Demand • Fixed Order Quantity Model Equations • Annual Ordering Cost (AOC) = D/Q * Co • Annual Holding Cost (AHC) = Q/2 * Ci * I • Annual Purchase Cost (APC) = D * Ci • Total Inventory Cost (TIC) = Annual Ordering Cost + Annual Holding Cost • Total Cost (TC) = TIC + APC • The optimal ordering quantity is the point of lowest TIC. Qoptimal = Sqrt [ D * Co )/( Ci * I ) ] • The reorder point R = L * q MAN 3504 - Chapter 9

11. Inventory Decision Making - External Demand • Fixed Order Quantity - Discounts • Used to compare multiple options - quantities or suppliers. Note that it only considers cost. • For each alternative: • Calculate Q optimal using the discount parameters • IF Q optimal meets the minimum required for the discount, then set Q = Qoptimal and go to #4. • If Q optimal does not meet the minimum required, set Q = minimum quantity that qualifies for the discount. • Compare all options for total cost MAN 3504 - Chapter 9

12. Inventory Decision Making - Internal Demand • Inventory systems for raw materials and WIP - required by the transformation process • Determine (same as before): • How much to order • When to order • Known as Materials Requirements Planning • Main limitation is that it assumes unlimited capacity and constant lead times MAN 3504 - Chapter 9

13. Inventory Decision Making - Internal Demand • MRP Systems is a process that requires component information • Product structure • Production/Supply lead time • Lot size if any • Available inventory MAN 3504 - Chapter 9