SCM3515 – Principles of Supply Chain Management

Fall, 2020 Exam 1 Review

Exam will be open book & open notes
25 multiple choice questions
90 minutes to complete

Ch 1 & 3 (Ed 9 Ch 2) Supply Chain Management: An Overview & Role of Logistics in

Supply Chains
 General SCM background
o What is SCM
 SCM is the art and science of integrating the flows of products,
information and financials through the entire supply pipeline from
the supplier’s supplier to the customer’s customer.
 Looking at Vendors/Suppliers, Contracted Manufacturers,
Manufacturers, Wholesalers/distributors, and
Retailers/Customers.
 Product/Services Flow- Physical movement of goods and
materials
 Information Flow- Decision making, Enabling physical flow of
products, and Supply chain collaborations
 Finance/cash flow- Management of working capital
 Demand Flow- Detect and understand demand signals and
Synchronize demand v. Supply
o 5 external forces
 Globalization- Globalization creates more economic and political risk,
shorter product life cycle, and the blurring of traditional
organizational boundaries.
 Technology- Technology is a facilitator of internal process and supply
chain transformation. It is also a major force in changing the
dynamics of the marketplace.
 Organizational Consolidation & Power Shift- More collaboration
among organizations in supply chains
 Win-win, improved services such as:
 Scheduled deliveries
 “Rainbow” pallets
 Advance shipments notices (ASNs) shrink-wrapped pallets
 Sharing of point-of-sale data to mitigate “bullwhip effect”
  The Empowered Consumer- Consumers are empowered by
exponentially expanded access to product sources and related
information and increased buying power due to high income levels.
 Government policy and regulation- More competitive environment is
a result of the deregulation of several important sectors in the United
States occurred in the 1980s and 1990s.
 The transportation industry. Expanded services beyond
transportation, with service providers’ role evolving to
outsourcing partners
 The financial sector. More flexible and responsive to customer
needs, making businesses more cognizant of supply chain
management impact on efficiency and cash flow
 The communications industry. A component of the
information revolution, leading to dramatic improvements and
opportunities in logistics and supply chains
 Value added role of logistics (e.g. place utility, hint: marketing 4 P’s)
o Form Utility-Production
o Time Utility-Logistics
o Place Utility-Logistics
o Quantity Utility- Logistics
o Possession Utility- Marketing
 Cost tradeoffs (e.g. as inventory increases cost of lost sales decreases)
o As Inventory increases cost of lost sales decreases
o As Transportation cost increases cost of lost sales decreases
o As packaging cost, transportation cost, and Inventory cost (including
storage) increases, the Dollar value of the product as increases
o As transportation cost, Inventory cost, and warehousing cost decreases, the
product weight density decreases.
o As susceptibility to loss and damage increases Packaging cost, transportation
cost, and warehousing cost increases.
 Dynamic cost analysis (see also Ch 5 network analysis location-cost-volume)
o Logistics costs may change over time. Static views can be misleading.
o Look at all costs added together not just one specific cost.
o Look at fixed cost and variable cost for each alternative. The point of
indifference is the level of volume at which total costs, and hence profits, are
the same under both cost structures
 Supply chain contribution – sales needed to equal x% decrease in supply chain costs
(e.g. direct material and direct labor)
 o Profit= Sales – ((direct material+direct labor) + Overhead percentage as
decimal)

Ch 2 (Ed 9 Ch 3) Global Dimensions of Supply Chains

 Global & Local Strategy (example: McDonalds video)
o Success in the global marketplace requires ongoing development of a
cohesive set of strategies, including product development, technology,
marketing, manufacturing, and supply chains, that has implications to both
supply chains and customer services.
o Global strategy from Supply Chain Perspective
 Strategically sourcing materials and components worldwide
 Selecting global locations for key supply depots and DCs
 Evaluating transportation alternatives and channel intermediaries
 Understanding governmental influences on global SC flows
 Examining opportunities for collaboration with 3PLs or 4PLs
o Global Strategy from customer perspective
 Standardization to reduce complexity must maintain some
customization.
 Global competition often reduces the product life cycle.
 Organizational structures and business models change with more
outsourcing.
 Globalization introduces more volatility and complexity.
o The increased complexity and competitiveness of a global economy have
resulted in shorter product life cycles, new forms of competition, and new
business models.
o
 Drivers of global trade (e.g. comparative and absolute advantages), global
environment - legal, governmental and cultural considerations.
o Absolute Advantage- Lower cost and/or access to items not available locally
o Comparative Advantage- Difference in the cost of producing products in
different countries
o Global trade growth has been fueled by free trade agreements (FTAs) that
lift most tariff, quota, and fee/tax limitations on trade.
o Success in the global market-place requires development of a cohesive set of
strategies including product development, technology, marketing,
manufacturing, and supply chains.

Ch 4 Supply Chain and Omni-Channel

 Supply Chain Network Design Process
 o In the short run, a firm’s logistics/supply chain network and the locations of
its key facilities are fixed. Site availability, leases, contracts, and investments
make changing facility locations impractical in the short run. In the long
run, however, the design of the overall network must be thought of as
variable.

o Change in Corporate Ownership

 Mergers, acquisitions, and divestitures are changing the landscape
and providing opportunities to integrate and improve logistics
activities.
o Cost Pressures
 Removing costs from key processes is a major priority for firms
today.
 Low labor rates have driven internationalism of production and
increased the importance of logistics.
o Competitive Capabilities
 To remain competitive or establish a competitive advantage, firms
should examine facility locations.
o Step 1: Define the logistics / supply chain design process.
o Step 2: Perform a logistics / supply chain audit.
o Step 3: Examine the logistics / supply chain network alternatives.
o Step 4: Conduct a facility location analysis.
o Step 5: Make decisions regarding network and facility location.
o Step 6: Develop an implementation plan.
 Factor-Rating Method
o Key Factors for Consideration
 Labor climate.
 Transportation services and infrastructure.
 Proximity to markets and customers.
 Quality of life.
 Taxes and industrial development incentives.
 Supplier networks.
 Land costs and utilities.
 Company preference
o Six steps in the method
 Develop a list of relevant factors called key success factors
 Assign a weight to each factor
 Develop a scale for each factor
 Score each location for each factor
 Multiply score by weights for each factor for each location
  Make a recommendation based on the highest point score

 Locational Cost-Volume Analysis

o An economic comparison of location alternatives
o Three steps in the method
 Determine fixed and variable costs for each location
 Plot the cost for each location
 Select location with lowest total cost for expected production volume
 Center-of-Gravity Method
o Finds location of distribution center that minimizes distribution costs
o Considers
o Location of markets
o Volume of goods shipped to those markets
o Shipping cost (or distance)
o Place existing locations on a coordinate grid
 Grid origin and scale is arbitrary
 Maintain relative distances
o Calculate x and y coordinates for ‘center of gravity’
 Assumes cost is directly proportional to distance and volume shipped
o See slide 22 of “Ch 12 Accessible powerpoint” for formula

Ch 7 Demand Management
 All forecast methods (simply moving average, weighted moving average, exponential
smoothing is included here Ft-1 + α(At-1 – Ft-1)
o Simple moving average
 Makes forecasts based on recent demand history and allows for the
removal of random effects.
 Pros: quick and easy to use
 Cons: old demand dropped quickly; not accommodate seasonal,
trend, or business cycle influences
o Weighted moving average
 Assigns a weight to each previous period with higher weights usually
given to more recent demand.
 Pros: allows emphasis on more recent demand as a predictor of future
demand.
 Cons: not easily accommodate seasonal demand patterns.
o Exponential Smoothing
  Pros: simplicity and limited requirements for data, good for relatively
constant demand
 Cons: forecasts will lag actual demand; Not appropriate for highly
seasonal demand patterns or patterns with trends
 Seasonality
o Average monthly demand for past 3 years / Average monthly demand
o Seasonal forecast you take your expecting monthly sales and times it by the
seasonal index
o Seasonal patterns that will normally repeat themselves during a year for
most organizations.
o Find average historical demand for each month
o Compute the average demand over all months
o Compute a seasonal index for each month
o Estimate next year’s total demand
o Divide this estimate of total demand by the number of months, then multiply
it by the seasonal index for that month
 Error analysis
o MSE- cumulative squared error divided by the number of months
o Standard deviation is square root of MSE
o Mean Absolute deviation is absolute error divided by number of months
o Mean absolute Percent Error –take the sum of all divide the error by actual
demand and then divide by number of months
 Tracking signals
o Measures how well the forecast is predicting actual values
o Ratio of cumulative forecast errors to mean absolute deviation (MAD)
o Good tracking signal has low values
o If forecasts are continually high or low, the forecast has a bias error
o Tracking signal= cumulative error / MAD
 Sales and Operations Planning/CPFR (i.e. integrating demand management across
the supply chain)
o forecast internally that all functional areas agree upon and can execute
o Interal consensus forecast looks at financial forecast, Preliminary demand
forecast, marketing forecast, distribution forecast, and manufacturing
forecast.
o Step 1- Rune sales forecast reports
o Step 2- Demand Planning phase
o Step 3- Supply planning phase
o Step 4- Pre S&OP meeting
o Step 5- Executive S&OP meeting
 o Uses Collaborative Planning, Forecasting, and Replenishment (CPFR)-
Trading partners (retailers, distributors, and manufacturers) use available
Internet-based technologies to collaborate on operational planning, allowing
them to agree to a single forecast for an item where each partner translates
this forecast into a single execution plan.
 Fulfillment systems (Chapter 5 in Edition 10, but I have included with Ch 7 on this
review since it is in my Ch 7 PowerPoints)
o Channels of Distribution - A distribution channel can be thought of as the
physical structures and intermediaries through which goods, services,
information, and finances flow.
o Integrated Fulfillment
 Retailer maintains both a “bricks-and-mortar” and “clicks-and-
mortar” presence
 operates one distribution network to service both channels
o Dedicated Fulfillment
 Both a store and an Internet presence with two separate distribution
networks.
o Outsourced Fulfillment
 Assumes that another firm will perform the fulfillment.
o Drop Shipped Fulfillment
 Also called direct store delivery, vendor delivers directly to retailer,
bypassing retailer’s distribution network.
o Store Fulfillment
 The order is placed through the Internet site and sent to the nearest
store for customer pick up.
o Flow-Through Fulfillment
 Product is picked and packed at distribution center, then sent to the
store for pickup.
Ch 8 Order Management and Customer Service

 Customer Service & Order Management

o Phase 1: Influence the Order- Organization attempts to change the manner
by which its customers place orders.
o Phase 2: Execute the Order- Order receipt type (electronic/ manually),
Order fulfillment, Order shipments
o customer relationship management (CRM) is simple: Align the supplier’s
resources with its customers in a manner that increases both customer
satisfaction and supplier profits.
 Step 1: Segment the customer base by profitability
 Step 2: Identify the product/service package for each customer segment
  Step 3: Develop and execute the best processes
 Step 4: Measure performance and continuously improve
 Activity-Based Costing - Customer Service Levels as a function of the cost to serve a
customer.
o Looks at more provers such as customers, markets, and business
 The Logistics/Marketing Interface
o Marketing Objective: Allocate resources to the marketing mix to maximize
long-term profitability of the firm.
o Logistics Objective: Minimize total costs, given customer service objective,
where:
o Total costs = Transportation costs + Warehousing costs + Order processing &
Information costs + Lot quantity costs + Inventory carrying costs
 The implications of order cycle length and variability on inventory
 General understanding of order management influences on CS (outputs) and
financial implications
o Product Availability Metrics
 Increasing fill rates has a direct effect on a seller’s inventories.
o Four possible events- the buyer waits until the product is available, the buyer
back-orders the product, the seller loses current revenue, the seller loses a
buyer and future revenue.
o Cash flow increase= Invoice value x (Cost of capital/365) x Difference in Day
in the order to cash cycle
o Cash Flow Lost =
o (Number of Incomplete Orders Back-Ordered x Back Order Cost per Order)
+
o (Number of Incomplete Orders Cancelled x Lost Pretax Profit per Order) +
o (Number of Incomplete Back-Ordered x Invoice Deduction per Order)
o
Ch 9 Inventory Management in the Supply Chain
 In-transit inventory value
o Generally, carrying inventory in transit costs less than in warehouses. But,
in-transit inventory carrying cost becomes especially important on global
moves since both distance & time increase.
 EOQ and POQ as the intersection of 2 cost curves and why they perform as such
when costs increase/decrease
o Given the assumptions, the simple EOQ model considers only 2 basic types of
cost: inventory carrying cost and ordering cost.
o
 Average Inventory, ROP
 Approaches to managing inventory (e.g. Vendor managed inventory)
o Choosing appropriate inventory model considers three key differences:
Independent vs. dependent demand, Push vs. pull distribution system, and
system-wide vs. specific facility decisions.
 Inventory classifications (e.g. ABC Analysis and Square Root Rule)
o Square root Rules
 The square-root rule states that total safety stock inventories in a
future number of facilities can be approximated by multiplying the
total amount of inventory in existing facilities by the square root of
the number of future facilities divided by the number of existing
facilities.
 

o ABC classification technique assigns inventory items to one of three groups

according to the relative impact or value of the items that make up the
group. A items are considered to be the most important, B items lesser
importance, and C items least important.
 In many ABC analyses, a common mistake is to think of the B and C
items as being far less important than the A items. However, all items in
the A, B, and C categories are important to some extent and each
category deserves its own strategy to assure availability at an
appropriate level of cost (stockout cost vs. inventory carrying cost).

Distinctives Criticals
Distinctives Criticals
High High safety stocks High safety stocks
More
High than
safety one stocking location
stocks Multiple
High stocking location
safety stocks
Produce
More to inventory
than one stocking location Produce
Multiple to inventory
stocking location
Produce to inventory Produce to inventory


Risk

Generics Commodities
Generics Commodities
Low/no safety stock Adequate safety stocks
Low Single
Low/no stocking
safety stocklocation More than
Adequate one
safety stocking location
stocks
Produce
Single to order
stocking location Produce
More to inventory/to
than one order
stocking location
Low Value High