WHAT IS SUPPLY

CHAIN
MANAGEMENT?
SUPPLY CHAIN
MANAGEMENT
⬢ Supply chains encompass the companies and the business
activities needed to design, make, deliver, and use a product
or service.
⬢ Every business fits into one or more supply chains and has a
role to play in each of them
⬢ Those companies that learn how to build and participate in
strong supply chains will have a substantial competitive
advantage in their markets.
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SUPPLY CHAIN
MANAGEMENT
⬢ “Amateurs talk strategy and professionals talk logistics.”
⬢ The term “supply chain management” arose in the late
1980s and came into widespread use in the 1990s. Prior to
that time, businesses used terms such as “logistics” and
“operations management” instead

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SUPPLY CHAIN
MANAGEMENT
⬢ “A supply chain consists of all stages involved, directly or
indirectly, in fulfilling a customer request. The supply chain
not only includes the manufacturer and suppliers, but also
transporters, warehouses, retailers, and customers
themselves.”—from Chopra and Meindl

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SUPPLY CHAIN
MANAGEMENT
⬢ “A supply chain is a network of facilities and distribution
options that performs the functions of procurement of
materials, transformation of these materials into
intermediate and finished products, and the distribution of
these finished products to customers.”—from Ganeshan and
Harrison

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SUPPLY CHAIN
MANAGEMENT
⬢ There is a difference between the concept of supply chain
management and the traditional concept of logistics.
Logistics typically refers to activities that occur within the
boundaries of a single organization and supply chains refer
to networks of companies that work together and coordinate
their actions to deliver a product to market.

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SUPPLY CHAIN
MANAGEMENT
⬢ Traditional logistics focuses its attention on activities such
as procurement, distribution, maintenance, and inventory
management. Supply chain management acknowledges all
of traditional logistics and also includes activities such as
marketing, new product development, finance, and
customer service.

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SUPPLY CHAIN
MANAGEMENT
⬢ Effective supply chain management requires simultaneous improvements in
both customer service levels and the internal operating efficiencies of the
companies in the supply chain.
⬢ Customer service at its most basic level means consistently high order-fill
rates, high on-time delivery rates, and a very low rate of products returned
by customers for whatever reason.
⬢ Internal efficiency for organizations in a supply chain means that these
organizations get an attractive rate of return on their investments in
inventory and other assets and that they find ways to lower their operating
and sales expenses.
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Companies in any supply chain must make
decisions individually and collectively regarding
their actions in five areas:
⬢ Production
⬢ Inventory
⬢ Location
⬢ Transportation
⬢ Information

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LEAN MANUFACTURING
Focuses on the creation of value for the end
customer. Any expenditure for any goal other
than creating customer value is considered waste
and should be eliminated.

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Materials Requirement Planning
The system of production traditionally used in manufacturing. Taking a
product from raw material through delivery often is treated as a series of
discrete events.
The premises underlying MRP push-through systems include:
⬢ Demand forecasts
⬢ A materials order specifying the materials, components, and subunit
tasks required to produce a final product
⬢ A production order specifying the quantities of materials, components,
subunits, and product inventories needed to meet the demand forecast
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For example, here is how a company might calculate subunits
to produce product P and offset lead times.

If units of product P are required:

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The lead times required are:

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Benefits of MRP Systems
⬢ Less coordination is required between
functional areas
⬢ Scheduling improvements
⬢ Predictable raw material needs
⬢ More efficient inventory control
⬢ Additional inventory on hand to cover orders
⬢ Quick response to new customer demand
⬢ Better manufacturing process control
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JUST-IN-TIME
MANUFACTURING
A just-in-time (JIT) system refers to a
comprehensive production and inventory control
methodology in which materials arrive exactly
as they are needed for each stage in production.

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JUST-IN-TIME
MANUFACTURING
⬢ GOAL : To create lean manufacturing, reducing or
eliminating waste of resources by producing
production line components as they are required
⬢ Need is created by demand for a product.
⬢ Demand-pull feature required high levels of quality
at each point in the system because only the
minimum number of items demanded will be
produced.
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CHARACTERISTICS OF JIT
SYSTEMS
⬢ Production organized into manufacturing work
cells
⬢ Multiskilled workers
⬢ Reduced setup times
⬢ Reduced manufacturing lead times
⬢ Reliable suppliers

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USE OF KANBAN IN JIT
IMPLEMENTATION
Kanban – is a Japanese term that describes a visual record or a
card and is one of the most common methods used to
implement JIT systems.
⬢ Use to signal the need for a specified quantity of materials
or parts to move from one work cell department to another
in sequence.
⬢ Production is complete – Kanban is attached to the finished
order and sent downstream to the next work cell.
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USE OF KANBAN IN JIT
IMPLEMENTATION
Traditionally, it was a card with information:
● identifying the part
● the number needed
● delivery location and similar information

● E-kanban application

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JIT BENEFITS AND
LIMITATIONS
The general benefits of JIT are:
⬢ Obvious production priorities
⬢ Reduced setup and manufacturing lead time
⬢ No overproduction occurrences
⬢ Improved quality control (faster feedback) and fewer
materials waste
⬢ Easier inventory control (low or zero inventory)
⬢ Less paperwork
⬢ Strong supplier relationships
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JIT BENEFITS AND
LIMITATIONS
Special benefits of JIT are:
⬢ Lower inventory investments.
⬢ Reduced costs for carrying and handling inventories.
⬢ Reduced risk of inventory obsolescence damage, or “shrinkage.”
⬢ Lower investments in space (for production and inventories).
⬢ Higher revenue resulting from a quicker response time to
customers.
⬢ Direct tracing of some costs that would otherwise be classified
as possible.
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JIT BENEFITS AND
LIMITATIONS
Limitations of the JIT system:
⬢ No buffer inventories.
⬢ Reliance on suppliers to maintain adequate stock to meet
unpredictable demands.
⬢ Potential stock outs at suppliers.
⬢ Potential overtime expenses from unanticipated orders.

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ENTERPRISE RESOURCE
PLANNING
Enterprise Resource Planning gives
organizations an information technology tool
that combines and integrates various information
systems it uses into one comprehensive system
to manage operations.

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ENTERPRISE RESOURCE
PLANNING
⬢ Evolved from the MRP Systems
⬢ Often includes modules such as accounting,
human resources, supply chain and
inventory, as well as manufacturing
information systems
⬢ Intended to improve operational efficiency
and reduce waste

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Purpose of ERP
⬢ Facilitate the flow of information among
departments within an organization
⬢ Manage data sharing with outside
stakeholder systems

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The Fundamental Advantage of
ERP
Examples of specific tasks that benefit from ERP
integration include:
⬢ Sales forecasting
⬢ Order tracking
⬢ Revenue tracking

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The Fundamental Advantage of
ERP
Operational benefits achieved from this
integration encompass:
⬢ Improved business effectiveness and
efficiency
⬢ Better and timelier decisions
⬢ A more flexible and agile organization that
can better adapt to change
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The Fundamental Advantage of
ERP
Operational benefits achieved from this
integration encompass:
⬢ Improved data integrity and security
⬢ Improved collaboration between
organizational functions

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Disadvantages of ERP
Implementation
⬢ Problems with customization
⬢ Higher costs than less integrated or less
comprehensive solutions
⬢ Extensive training
⬢ Overcoming resistance to sharing sensitive
information between departments

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Disadvantages of ERP
Implementation
⬢ Diversion of focus on critical activities
associated with the reengineering of business
processes to fit the ERP system

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Outsourcing
⬢ Company’s decision to purchase a product or
service from an outside supplier
⬢ An organization can concentrate resources
on its core business competencies while
capitalizing on the expertise of other firms
that are more efficient, effective or
knowledgeable at specialized tasks

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Outsourcing
⬢ Information technology, customer service
and human resource functions.
⬢ Make versus buy - examines the relevant
costs of keeping activities in-house versus
outsourcing to external suppliers.

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Outsourcing
⬢ Contract manufacturing - another company
actually manufactures a portion of the first
firm’s products.
⬢ Can provide a win-win relationship if one
firm has excess capacity or expertise and
another company lacks capacity or
knowledge

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Benefits of Outsourcing
⬢ Can allow management and employees to
focus on core competencies and strategic
revenue-generating activities
⬢ Can improve efficiency and effectiveness by
gaining outside expertise or scale

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Benefits of Outsourcing
⬢ Can provide access to current technologies at
reasonable cost without the risk of
obsolescence
⬢ Can reduce expenses by gaining capabilities
without incurring overhead costs e.g.,
staffing, benefits, space)
⬢ May improve the quality and/or timeliness of
products or services
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Limitations of Outsourcing
⬢ May cost more to go outside for specific
expertise
⬢ Can result in a loss of in-house expertise and
capabilities
⬢ Can reduce process control
⬢ May reduce control over quality
⬢ May lead to less flexibility (depending on
the external supplier)
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Limitations of Outsourcing
⬢ May result in less personalized service
⬢ Creates privacy and confidentiality issues
⬢ Can result in giving knowledge away and
lead competitors obtaining expertise, scale,
customers, and the like.
⬢ Potential for employee morale and loyalty
issues.

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THEORY OF CONSTRAINTS
The Theory of Constraints states that a system's
performance is controlled by its constraints. A
constraint is something which prevents a system
from performing better than its goal
performance.

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Basic Principle of Theory of
Constraints
⬢ Inventory
⬢ Operating Expenses
⬢ Throughput Contribution
⬢ Drum-Buffer-Rope System

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Five Focusing Steps of Theory of
Constraints
⬢ Identifying the system constraint - The part
of a system that constitutes its weakest link
can be either physical or a policy.
⬢ Decide how to exploit the constraint -
Consider a constraint as an opportunity
rather than an impediment.

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Five Focusing Steps of Theory of
Constraints
⬢ Subordinate everything else - the
organization adjusts the rest of the system to
enable the constraint to operate at maximum
effectiveness.
⬢ Elevate the constraint - the organization
elevates the constraint by taking whatever
action is needed to eliminate it which may
involve major changes to the existing
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Five Focusing Steps of Theory of
Constraints
⬢ Go back to Step 1, but beware of inertia -
After a constraint is broken, the organization
repeats the steps all over again, looking for
the next thing constraining system
performance.

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Theory of Constraints
In the theory of constraints, Throughput (T),
Inventory (I), and Operating Expenses (OE) link
operational and financial measures. As
discussed:
⬢ Net Profit = Throughput / Operating
Expenses

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Theory of Constraints
⬢ Throughput = Sales Revenue / Variable
costs of production
⬢ Net Profit = Return on Investment
⬢ Inventory = ROI
⬢ Cash Flow = Throughput / Time to
generate Throughput

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Theory of Constraints Reports
⬢ Focused on eliminating constraints and
decreasing cycle time or delivery time
⬢ TOC identify key performance indicators
⬢ TOC reports are valuable in identifying both
profitability and KPIs

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Theory of Constraints and
Activity Base Costing
⬢ TOC take short term approach, ABC examine
long term costing
⬢ TOC consider how to improve short term
profitability and plausible short-term product
⬢ ABC does not consider resource constraints.
⬢ ABC is generally used as tool for planning and
control.

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Theory of Constraints and
Throughput Costing
⬢ Focuses on improving companies' profit
⬢ Uses approach in a form of variable costing
called throughput costing which means all
cost included in inventory are direct
materials

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3 items that are measured in the TOC
⬢ Throughput contribution
⬢ Inventory or investment
⬢ Operating expenses

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CAPACITY CONCEPTS
A key issue in costing is choosing the capacity
level for computing the allocation of
manufacturing overhead. Determining the
correct level of capacity to use is a difficult
strategic decision for managers. The choice of
capacity level used to allocate overhead can
have a great effect on product cost information
used by managers.
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CAPACITY CONCEPTS
⬢ Theoretical Capacity( also known as Ideal
Capacity)
⬡ Level of capacity that can be achieved
under ideal conditions, when there are no
machine breakdowns or maintenance,
delays or the like

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CAPACITY CONCEPTS
⬢ Theoretical Capacity( also known as Ideal
Capacity)
⬡ Represents the largest volume of output
possible but is unattainable and
unrealistic

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CAPACITY CONCEPTS
⬢ Practical Capacity
⬡ Represents the highest level of capacity
that can be achieved while allowing for
unavoidable losses of productive time.

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CAPACITY CONCEPTS
⬢ Practical Capacity
⬡ The benefit of this approach is that it
encourages managers to focus their
attention on the amount of unused
capacity and user departments are not
overcharged for a portion of costs related
to unused capacity.

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CAPACITY CONCEPTS
⬢ Practical Capacity
⬡ A better choice to use as the denominator
activity level for allocating overhead
because it is realistic and will generate
product costs that accurately reflect the
cost of product.

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OTHER PRODUCTION
MANAGEMENT THEORIES
Organizations constantly strive to improve on
what they already do well and to capitalize on
growth opportunities. Beyond the manufacturing
paradigms previously discussed, organizations
have a wide array of other production
management techniques to consider in their
quest for better, faster and more profitable
operations.
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CONTEMPORARY
PRODUCTIVITY
APPROACHES
Technique Description
Automation/ Uses reprogrammable,
Robots multifunctional robots designed
to manipulate materials, parts,
tools or specialized devices
through variable programmed
motions

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CONTEMPORARY
PRODUCTIVITY
APPROACHES
Technique Description
Capacity Represents an important decision
management and making involving strategic,
Analysis(Capacity tactical and operational aspects
Planning)

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CONTEMPORARY
PRODUCTIVITY
APPROACHES
Technique Description
Computer-aided Uses computers in product
Design(CAD) development, analysis and
design modification to improve
the quality and performance of
the product

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CONTEMPORARY
PRODUCTIVITY
APPROACHES
Technique Description
Computer-aided Applies the computer to the
Manufacturing planning, control, and operation
(CAM) of a production facility

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CONTEMPORARY
PRODUCTIVITY
APPROACHES
Technique Description
Computer- Involves manufacturing system
integrated that completely integrates all
manufacturing(CIM factory and office functions
)

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CONTEMPORARY
PRODUCTIVITY
APPROACHES
Technique Description
Concurrent Integrates product or service
Engineering design with input from all
(Simultaneous business units and functions
Engineering) throughout service’s life cycle

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CONTEMPORARY
PRODUCTIVITY
APPROACHES
Technique Description
Flexible Uses a computerized network
Manufacturing of automated equipment that
System (FMS) produces one or more groups of
parts variations of a product in
a flexible manner

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