BASICS OF SUPPLY CHAIN MANAGEMENT: KEY FORMULAS

Raouf Elkholy – May 2015

METRIC DEFINITION FORMULA
ABC Calculation The classification of a group of items in decreasing order of The A group usually represents 10% to 20% by number of items and 50% to 70% by projected
annual dollar volume (price multiplied by projected volume) or dollar volume. The next grouping , B, usually represents about 20% of the items and about 20%
other criteria. This array is then split into three classes, called A, of the dollar volume. The C class contains 60% to 70% of the items and represents about 10% to
B, and C. The ABC principle states that effort and money can be 30% of the dollar volume.
saved through applying looser controls to the low-dollar-volume
class items than will be applied to high-dollar-volume class Al’’s Note: 20% of the items = 80% of the value ‘A’ Items
items. The ABC principle is applicable to inventories, 30% of the items = 15% of the value “B” Items
purchasing, sales, and so on. Also known as the 80/20 rule and is
an application of Pareto's law. 50% of the items = 50% of the value ‘C’ Items

Available Time The product of hours of operation multiplied by number of workers or equipment in use during
those hours.

Available to The uncommitted portion of a company's inventory and planned First Period ATP = On-hand inventory less customer orders that are due and overdue. Following
Promise (ATP) production maintained in the master schedule to support periods ATP = master production schedule - orders.
customer-order promising. Al’s Note: Know the principles of ATP

Average Actual The average actual cycle time consistently achieved to fulfill Sum of actual cycle times for all orders delivered/Total number of orders delivered.
Cycle Time customer orders. For each individual order this cycle time starts
from the order receipt and ends with customer acceptance of the
order. This cycle time consists of a ‘gross’ component and a ‘net’
component defined as Order Fulfillment Process Time, according
to the following formula: Order Fulfillment Cycle Time = Order
Fulfillment Process Time + Order Fulfillment Dwell Time. Note
that dwell time will equal 0 for companies who do not utilize this
metric, so Order Fulfillment Cycle Time will equal Order
Fulfillment Process Time

Benefit/Cost A way to determine whether the revenue/profit of doing an Benefit/Cost Analysis = Total Benefits/Total Costs (calculate for a defined period of time)
Analysis activity will exceed the cost within a certain timeframe.

Capable-to- A process of committing orders against available capacity, as Capable-to-promise employs a finite-scheduling model of the manufacturing system to
Promise well as inventory, to determine when new or unscheduled determine when an item can be delivered. It includes any constraints that might restrict the
customer orders can be delivered. production, such as availability of resources, lead times for raw materials or purchased parts, and
requirements for lower-level components or subassemblies. The resulting delivery date takes into
consideration production capacity, the current manufacturing environment, and future order

1
Capacity Determines in detail the amount of labor and machinery required Step 1: Check open order file. Step 2: Check planned order releases. Step 3: Check the routing
Requirements to complete production tasks specified by MRP. Short term file. Step 4: Check the work center file. Calculate in CRP to determine if capacity exceeds load
Planning (CRP) capacity planning. Open shop orders and planned orders input to or not. If not, change load to match capacity
CRP which uses parts routings and time standards to calculate
hours of work by work center by time period.

Cash-to-Cash The time it takes for an investment made to flow back into the Cash to Cash Cycle Time = Inventory days of supply + days of sales outstanding - days of
Cycle Time company after it is spent on raw materials. payables outstanding.

Coefficient of Measures variability relative to average demand coefficient of variation = standard deviation/mean
Variation (CV)

Cost Effect of Number of warehouses for the logistics system impacts costs of: Total costs = inventory costs + warehouse costs + transportation costs + costs of lost sales
Increasing warehousing, carrying inventory, transportation and cost of lost
Number of sales. Total costs tend to decline as number of warehouses
Warehouses increase until the point where increasing inventory costs
eventually overwhelm savings in other areas.

Cost of Goods Cost associated with buying new materials and finished goods. COGS = Direct material + Direct Labor + Overhead
Sold (COGS) Includes direct costs (Labor, materials) and indirect costs
(overhead).

Customer Measure of delivery performance of Finished Goods. In MTS,

Service Levels number of dollars or items (on one or more customer orders, or Total $ or Items Shipped on Time
by Fill Rate overall for a specific time period) that were shipped on schedule, Total $ or Items That Were
divided by the total that were supposed to be shipped. Supposed to Ship
Cycle Count Method to determine how many items to count daily, considering
Item Count the A-B-C classification so that important items are counted Item # of
Calculation more often and all items at least once a year. Class Items Count Policy # of Items to Count Daily

Al’s Note: Uses ABC Classification method. A 1000 Monthly - 20 days 1000/20 = 50
B 3500 Quarterly - 60 days 3500/60= 58
C 5500 Semiannually - 120 days 5500/120= 46
Total counts per day -> 154

Debt-to-Equity Amount of Bonds and Preferred Stock relative to the Owner's

Ratio Equity position. Measures the use of borrowed funds to leverage Total amount ($) of Bonds + Preferred Stock
the Owner's Equity. Total amount ($) of Owner's Equity

2
Demand Time Used in MPS. That point in time inside of which the forecast is See appendix I
Fence (DTF) no longer included in Total Demand and Projected Available Al’s Note: Understand principle of time fences in planning.
Impact Balance calculations - only customer orders are included.
Beyond this point, Total Demand is a combination of forecast
and orders, depending on forecast consumption method chosen.
Disaggregation Process by which the Operations Plan (usually monthly time See appendix II
of Operations periods) is broken down by the Master Scheduler into smaller
Plan time periods (usually weeks, could be days or other) and specific
item (SKU) level of detail.
DRP Grid An MRP like calculation that takes planned orders from DCs and See appendix III
Calculation consolidates them on a central supply location.
Efficiency Efficiency measures how well something is performing relative Efficiency is a measure of actual output as a percentage of standard expected output (standard
to existing standards. A work center that produces 110 standard hours of work / hours worked x 100).
hours of work while operating for only 100 hours has an
efficiency rate of 110 percent. (The term “standard hours,” or
“standard time”, refers to the amount of time an average worker
or piece of equipment is expected to need, following prescribed
methods, to produce one unit of output.

EOQ Economic Order Quantity. The EOQ is the order size that gives General quantity – cost relationships: (1) The total cost tends to drop until they reach a
you the least total cost for holding, ordering, and setup. The minimum, and then they start rising again, (2) The minimum total cost occurs where holding
EOQ is the point on the total cost curve that lies directly above and setup cost are equal – which is the point where the cost lines intersect.
the intersection of the holding cost and setup / order cost curves. Understand the variables in the EOQ equation, as well as the assumptions that
make it valid.

Exponential A type of weighted moving average forecasting technique in New Forecast = Previous Periods Forecast + α (Last Periods Demand – Last Periods Forecast)
Smoothing which past observations are geometrically discounted according Three basic terms: the last period’s forecast, the last period’s actual demand), and a smoothing
to their age. constant, a number between 0 and 1 represented by the Greek letter α (between 0.05 and 0.5).
The higher the constant, the more weight your forecast gives to the actual demand data from the
preceding period. Understand the principles of exponential smoothing and what the
alpha factor is.

Forecast Error The deviation of actual from the forecasted quantity. Forecast Error = Actual Demand - Forecast

Hidden Cost See Landed cost Landed Cost – Purchase Prices, Import Duty, International Freight, Special Packing, Travel and
other Communication Cost, Fees and Commissions, Currency Exchange, Interest Cost, Hiring,
Training Personnel.

Import Duty Import duties are generally assessed as a percentage of either the
CIF (Cost, Insurance, Freight) or on the Fob (Free On Board)
amounts. The FOB amounts paid by the exporter to transport the
freight from its dock and load it on the ship.

Inventory days This is related to an IMS (Inventory Management System) Inventory days on Hand = inventory on hand / average daily usage
on Hand (average daily usage takes into account historical usage and forecast damand)

3
Inventory Turns Inventory Turns are also a measurement of IMS inventory turns = (annual usage X value of component) / current Value of inventory or
The number of times that an inventory cycles, or “turns over,” = annual cost of sales / average inventory value
during the year. A frequently used method to compute inventory This turn analysis can be done for a single component, a product line and the total system
turnover is to divide the average inventory level into the annual
cost of sales. For example, an average inventory of $3 million
divided into an annual cost of sales of $21 million means that
inventory turned over seven times. Syn: inventory turns,
inventory velocity, turnover

Landed Cost Landed cost needs to take into account hidden costs associated to Landed Cost = purchase price + import duties+ Freight +Packaging + Travel and
the procurement transaction Communication fees used during purchase + exchange rate and interest costs + Hiring and
training of employees to deal with the purchase

Lead Time lead-time offsetting is a process to determine the latest start time
offsetting for an release based on the lead-time to complete the activity.
The BOM structure is an intregal part of the calculation

MRP Material Requirements Planning (MRP) : A set of techniques that Time-phased MRP begins with the items listed on the MPS and determines (1) the quantity of all
uses bill of material data, inventory data, and the master components and materials required to fabricate those items and (2) the date that the components
production schedule to calculate requirements for materials. It and material are required. Time-phased MRP is accomplished by exploding the bill of material,
makes recommendations to release replenishment orders for adjusting for inventory quantities on hand or on order, and offsetting the net requirements by the
material. Further, because it is time-phased, it makes appropriate lead times.
recommendations to reschedule open orders when due dates and
need dates are not in phase.

MPS Master Production Schedule (MPS) The master production The master production schedule must take into account the forecast, the production plan, and
schedule is a line on the master schedule grid that reflects the other important considerations such as backlog, availability of material, availability of capacity,
anticipated build schedule for those items assigned to the master and management policies and goals. Syn: master schedule
scheduler. The master scheduler maintains this schedule, and in
turn, it becomes a set of planning numbers that drives material
requirements planning. It represents what the company plans to
produce expressed in specific configurations, quantities, and
dates. The master production schedule is not a sales item forecast
that represents a statement of demand.

Mean The mean (or average) is the sum of demand for given set of Mean=(Sum of demand for all Periods)
periods divided by the number of periods # of Periods

Mean Absolute The average of the absolute values of the deviations of observed MAD=(Sum of Absolute Errors for each Period)
Deviation values from some expected value. # of Periods
(MAD)
Mean Square Process of squaring provides much wider range of numbers. The MSE=(Sum of Absolute Errors for each Period)2
Error (MSE) wider range gives a more sensitive measure of the error rate. # of Periods
MSE is especially useful if the absolute error numbers are close
together and reduction of errors is important.

4
Min/Max A type of order point replenishment system where the "min" An order is recommended when the sum of the available and on-order inventory is at or below
System (minimum) is the order point, and the "max" (maximum) is the the min.
Calculation "order up to" inventory level. The order quantity is variable and
is the result of the max minus available and on-order inventory.
3-Month Moving Uses average demand per month for the three preceding months MA=(P1 + P2 …+ Pn)
Average to determine forecast for next month. n

P= Period
n= # of periods
Moving Average The theory behind a weighted moving average (WMA) is that the WMA=[(W1)P1 + (W2) P2 …+ (W3) Pn]
– Weighted recent data is more relevant than past data. Therefore, it puts n
more "weight" on the recent data and less weight on the older
data. A weighted average is any average that has multiplying W=Weight Factor Al’s Note: Understand the principles of weighted average
factors to give different weights to different data points P= Period
n= # of periods
MRP Grid An inventory balance projected into the future. The running sum of on-hand inventory - requirements + scheduled receipts and planned orders =
Calcuations Inventory balance projected into the future. Al’s Note: Basics of the MRP grid.

Net Requirement In MRP, the net requirements for a part or an assembly are Gross Delivery minus on-hand items and scheduled receipts
Calculation derived as a result of applying gross requirements and allocations
against inventory on hand, scheduled receipts, and safety stock.
Net requirements, lot-sized and offset for lead time, become
planned orders.

On-Time A measure (percentage) of meeting the customer's originally On Time Orders/Total Number of Orders x 100%
Delivery negotiated delivery request date.

Order The minimum amount of time to fulfill a customer order in the Calculation: Total average lead time from [Customer signature/authorization to order receipt] +
Fulfillment Lead absence of inventory. [Order receipt to completion of order entry] + [Completion of order entry to start manufacture] +
Time [Start manufacture to complete manufacture] + [Complete manufacture to customer receipt of
order] + [Customer receipt of order to installation complete]

Order The Level 1 measure of Supply Chain responsiveness. It starts Order Fulfillment Cycle Time = Order Fulfillment Process Time + Order Fulfillment Dwell
Fulfillment with the order receipt and ends with customer acceptance of the Time
Cycle Time order.

Perfect Order The only Level 1 measure of supply chain reliability. The The only Level 1 measure of supply chain reliability. The percentage of orders meeting
Fulfillment percentage of orders meeting delivery performance with delivery performance with complete and accurate documentation and no delivery damage.
complete and accurate documentation and no delivery damage.

Planned Order Order date + lead time

Receipt
Calculation The quantity planned to be received at a future date as a result
of a planned order release. Planned order receipts differ from
scheduled receipts in that they have not been released.

5
Planned Order Due date of order - lead time of part
Release
Calculation A row on an MRP table that is derived from planned order
receipts by taking the planned receipt quantity and offsetting
to the left by the appropriate lead time.
Planning Time NA
Fence (PTF)
Impact

A point in time denoted in the planning horizon of the master

scheduling process that marks a boundary inside of which
changes to the schedule may adversely affect component
schedules, capacity plans, customer deliveries, and cost.
Outside the planning time fence, customer orders may be
booked and changes to the master schedule can be made
within the constraints of the production plan. Changes inside
the planning time fence must be made manually by the master
scheduler.
Profitable-to-
Promise
This combines CTP (Capable-to-promise) with a profitability
analysis to determine how profitable a particular order would
be after all costs are considered. NA
Projected
Available
Balance (PAB) An inventory balance projected into the future. It is the PAB=OH + Receipts - Customer Orders (Inside Demand Time Fence)
running sum of on-hand inventory minus PAB= OH + Reciepts - Greater of Forecast or Customer Orders (Outside Demand Time Fence)
requirements plus scheduled receipts and planned orders.
Rated The expected output capability of a process. Rated Capacity = Available hours x Efficiency x Utilization
Capacity

Return on
Investment
(ROI)
(Percentage) A financial measure of the relative return from
an investment, usually expressed as a
percentage of earnings produced by an asset to
the amount invested in the asset. (Total Benefits-Total Costs/Total Costs) X100
Return on ROI (Time)=((Installation,Integration,Stabilization time)+Years to Recoup onetime cost)/Yearly
Investment return
(ROI) (Time) Years to Recoup onetime cost=onetime cost/yearly return
Return on Measures return an organization receives on its invested capital RSCFA=(Supply Chain Revenue-COGS-Supply Chain Management Costs)/Supply Chain Fixed
Supply Chain in supply chain fixed assets Assets
Fixed Assets
Rough Cut Capacity Planning technique used at the Master Planning level. Use bill of labor to extend master schedule quantity x labor requirements per unit at critical work
Capacity Focus is on critical or bottleneck work centers. centers. Offset by lead-time. Al’s Note: Understand the Planning Hierarchy, and the
Planning relationships, inputs and outputs, of each of the main boxes.
(RCCP)

6
Safety Stock Extra stock to build as a hedge against demand forecast Safety Stock=Z*(standard deviation forecast error)
variability In Excel: Z=NORMIN(Desired Service Level, Average Forecast Error, Standard Deviation of
Forecast) Al’s Note: Safety Stock assumes 100% supply reliability.
Seasonality Seasonal effect for a product Seasonality=(Seasonal monthly average)/Deseasonalized Average Monthly Sales
Smoothing A number between 0 and 1 represented by the Greek letter alpha α=(New forecast – Previous Period’s Forecast)/(Last Period’s Demand – Last Period’s Forecast)
Factor α. Used in exponential smoothing forecasting technique. The or can be chosen arbitrarily
higher the number, the more responsive is the forecast to changes Al’s Note: Understand the concept (as in exponential smoothing).
in demand.
Standard Measures absolute variability of demand for an item Standard Deviation=Square root(((Actual1- Mean)2 +…+(Actualn-Mean))2/n-1)
Deviation
Takt Time When Production of finished product is exactly synchronized Takt time =
with customer demand. Available production time /customer demand
Total Supply Key performance indicator Total annualized supply chain cost of sales/average total supply chain inventories
Chain Turns
Utilization Percentage of available time that a work center is using Utilization =
Hours worked/available hours X 100
Value Added Resembles sales tax in the United States and are assessed by the VAT = %VAT(currency value CIF or FOB x duty)
Tax (Cost, Insurance, Freight) or Freight on Board plus the import
duty
Volume Growth Key performance indicator Percentage of increase in volume. Volume P2 – Volume P1 / Volume P1 x 100%
Wait time by Group performance measure for determining customer service Wait time by SKU = date finished – date shipped
SKU/Group level. The time when a SKU remains at a locations until it is
shipped

Supply Chain All direct and indirect costs associated with operating process TSCMC = Cost to plan + Cost to source + Cost to make + Cost to deliver + Cost to return
Management across the SC
Cost

7
Appendix I:

Item Number A
Master Schedule
Lead Time 1
Safety Stock <--------------------------------------------Planning Horizon-------------------------------------------------------->
Lot Size 30 Period
Demand Time Fence 3 1 2 3 4 5 6 7 8
Forecast 2 32 2 32 2 32 2 32
Customer Orders 0 25 15 5
Scheduled Receipts 30
Projected Available Balance (PAB) 20 20 25 25 23 21 19 17 15
Master Production Schedule
(MPS) 30 30 30

<-Demand from Orders Only-> <-----Demand from Greater of Forecast or Orders----->

To calculate PAB: Demand Time Fence

Period 1 = Previous PAB + Scheduled Receipts + MPS - Orders [but NOT Forecast] = 20 + 0 + 0 - 0 = 20
Period 2 = Previous PAB + Scheduled Receipts + MPS - Orders [but NOT Forecast] = 20 + 30 + 0 - 25 = 25
Period 3 = Previous PAB + Scheduled Receipts + MPS - Orders [but NOT Forecast] = 25 + 0 + 0 - 0 = 25
Various "consumption methods" can be used after the DTF, such as "Orders Only" or "Greater of Forecast or Orders".
For this example we will use "Greater of Forecast or Orders".

Period 4 = Previous PAB + Scheduled Receipts + MPS - Greater of Forecast or Orders = 25 + 0 + 30 - 32 = 23

Period 5 = Previous PAB + Scheduled Receipts + MPS - Greater of Forecast or Orders = 23 + 0 + 0 - 2 = 21
Period 6 = Previous PAB + Scheduled Receipts + MPS - Greater of Forecast or Orders = 21 + 0 + 30 - 32 = 19

8
Appendix II:

Operations Plan

Month Jan Feb Mar Apr

Days 21 19 23 20
Planned Production 21,000 19,000 23,000 20,000

Master Production Schedule for April

Week 1 2 3 4
Product X 2,000 4,000 5,000 2,500
Product Y 3,000 1,000 2,500
Total 5,000 5,000 5,000 5,000

Appendix III:
Distribution Center A Distribution Center B
Part 1234 Lead Time = 1 week Part 1234 Lead Time = 1 week
Week 1 2 3 Week 1 2 3
Forecast aa aa aa Forecast bb bb bb
Scheduled Receipts aa aa aa Scheduled Receipts bb bb bb
Projected Available aa aa aa aa Projected Available bb bb bb bb

Planned Order Release 200 200 Planned Order Release 100

Central Supply
Part 1234 Lead Time = 2 weeks
Week 1 2 3
Gross Requirements 200 100 200
Scheduled Receipts 500
Projected Available 400 200 100 400
Planned Order Release 500

Central Supply Order would be P.O. to outside supplier or an order on the factory

9
Appendix IV:

D needs to start 6 wk prior to A being completed

when used in C but only 4 wk when used thru B
a simple example: (lot size?)
2
1 wk wk

D B
1
1 wk wk

D A
4
wk
C
2 wk
E
E needs to start 7 wk prior to A being completed

10