Synthese SCM 2021 2022

SUPPLY CHAIN MANAGEMENT
EVALUATION
Continuous evaluation 20%
- homeworks
- tests linked to the guest speakers (at the end of that lesson)
activity 30% : participate in the BMC, Brussels Management Challenge

exam 50%
PS : il est fort probable que si du contenu des slides manquent, c’est parce que le prof les a skippé, et
que donc j’estime qu’il faut pas les connaître.
Supply Chain Management 1

TABLE OF CONTENT
Evaluation .................................................................................................................................................... 1
Table of content .......................................................................................................................................... 2
1 Supply Chain Management ...................................................................................................................... 4
What is SCM ? ......................................................................................................................................... 4
What are the objectives of SCM ? .......................................................................................................... 4
Decisions of SCM..................................................................................................................................... 5
Process view ............................................................................................................................................ 6
2 Sourcing and procurement ...................................................................................................................... 7
Role of sourcing in a supply chain .......................................................................................................... 7
In-house or outsource ............................................................................................................................ 8
Risks of using a third party ...................................................................................................................... 9
Total cost of ownership .......................................................................................................................... 9
Supplier selection – auctions and negotiations ................................................................................... 10
Sharing risk and reward in the supply chain ........................................................................................ 10
Tailored sourcing................................................................................................................................... 11
The Zara case ........................................................................................................................................ 11
negotiation game .................................................................................................................................. 13
3 Make ....................................................................................................................................................... 13
Hystory of manufacturing ..................................................................................................................... 13
lean ........................................................................................................................................................ 14
Six Sigma................................................................................................................................................ 17
Lean Six Sigma ....................................................................................................................................... 17
DMAIC Methodology : introduction ..................................................................................................... 18
Bottleneck ............................................................................................................................................. 25
4 Deliver .................................................................................................................................................... 25
Transportation in a Supply Chain.......................................................................................................... 25
Distribution in Supply Chain ................................................................................................................. 29
5 Inventory ................................................................................................................................................ 34
Inventory management – what is about? ............................................................................................ 34
The operational point of view .............................................................................................................. 36
The financial point of view .................................................................................................................... 37
How much inventory should we hold? ................................................................................................. 39
6 Demand Forcasting ................................................................................................................................ 42
Definitions ............................................................................................................................................. 42
4-Dimensions Demand Forecasting Framework .................................................................................. 42

demand collection ................................................................................................................................ 44
metrics................................................................................................................................................... 45
demand forecasting process ................................................................................................................ 49
7 Strategy & Financial metrics .................................................................................................................. 51
Supply Chain Strategy ........................................................................................................................... 51
Make strategy explicit ........................................................................................................................... 52
From competitive strategy to supply chain strategy ........................................................................... 53
The theory of strategic fit ..................................................................................................................... 54
Sales and operation planning ............................................................................................................... 55
8 IBPS/Sustainability.................................................................................................................................. 56
Problem definition ................................................................................................................................ 56
Issue Tree .............................................................................................................................................. 57
Analysis .................................................................................................................................................. 58
Storyboard............................................................................................................................................. 58
Insight .................................................................................................................................................... 59
Impact ................................................................................................................................................... 59
IBPS Wrap-Up ........................................................................................................................................ 60
9 S&OP....................................................................................................................................................... 61
What is S&OP ? ..................................................................................................................................... 61
What is supply chain management ? ................................................................................................... 61
Fundament 1 : the SC triangle .............................................................................................................. 61
Fundament 2 : balancing ...................................................................................................................... 62
Reflection 1 ........................................................................................................................................... 63
Reflexion 2............................................................................................................................................. 64

1 SUPPLY CHAIN MANAGEMENT
WHAT IS SCM ?
Supply chain = all stages involved (in)directly in fulfilling a customer request. The word customer request
is the most important !
Different steps in supply chain for a bottle of water :
- distribution centre : Bottles are stored and then send to the based on the demand
- retailor : you go to the supermarket to buy a bottle of water
EXAM : Each stage is connected through flows
1. Product (or service) : Material flows, the bottle of water

2. Information : you send a bottle of water with the price, the destination, date of use
3. Funds : x pays x
You don’t always have all the different steps. Amazon for example does not use any retailer. They spend
more money in the distribution but it’s reducing their cost a lot. Some companies can outsource the
distribution or manufacturing. But for sure, every company has a customer and a supplier.
The organization in a company is the following. All the steps can be seen as supply chain, but in reality
Often stand Not always under always under SC majority under SC

alone SC
You will never have a chain supply chain. It’s rather a network as you have several
customers/retailers/distribution centers/manufacturing sites and suppliers.
WHAT ARE THE OBJECTIVES OF SCM ?
1. Primary purpose : satisfying the customer needs, the value for the customer. Have a nice and
decent product or service. For example be it about lead time, price, one type or different types,
…
2. Make money out of it
The supply chain service = customer value – supply chain cost
- Difficult to quantify the customer value

- Supply chain cost = all the costs you have within the company (manufacturing, distribution,
procurement …)

DECISIONS OF SCM
Supply chain decisions are important, as there is a close connection between
- The management and design of supply chain flows : product, info and funds
- The success of a company
You also need to adapt to your changing environment. You need to react as fast as possible to
environmental changes !
The decisions C-level managers make are structured like this :
- The frequency of each decision : how many times ?

- The time frame during which your decision made apply : for how long does it apply ?
EXAM : give examples of what is done in what phase
Design phase /supply chain strategy decisions - Inhouse or outsource : production,

: not that frequent and apply to a very long transport, …
horizon (next 2-10 years), based on very - Location of production and warehousing
uncertain forecast and expectations, you facilities
need a buffer as the situation might change - Transport modes : plane to be very reactive
but more expensive, boats that are slower
but cheaper
- Type of information systems :
planning phase/decisions/supply chain tactics - Which markets will be supplied by which
: a bit more often and a bit smaller time frame locations. Who is supplied by who ?
(1 year). You also have uncertainties but less - Subcontracting of manufacturing :
than the strategy. You have a better view on outsource a small part of the production
the demand, the exchange rates, the - Inventory policies to be followed : the level
competition etc. Incorporate everything that and the place
you know in these decisions - Target production quantity, timing and size
of marketing/price promotion. If demand
rises you can rise prices too.
operations phase : very often and very short - Allocation of the inventory : to whom am I
time frame. They are day to day decisions. sending the products ?
- Generate picking lists : demand comes in so
you pick the products in the warehouse and
put products in the truck
- Set delivery schedules of trucks
- Place replenishment orders: retailers
determine when they want to receive their
products.
Design decisions will enable and constrain decisions in the planning phase. Planning decisions will enable
and constrains operation decisions.

PROCESS VIEW
Supply chain = sequence of processes and flows that take place within and between stages.
There are 3 ways to view how these processes are performed :
1. Push and Pull view of supply chain processes
It’s a very important one for the supply chain and a strategical decision to take. Push and pull depends
on when you make the decision, when the decision is executed.
a. Push process : Decision/process in anticipation
To anticipate the customer order based on forecast
=speculative process, as we need to try to predict the future (=forecast) and prepare our supply
chain based on those forecast
Boundaries : uncertain environment
b. Pull process : Decision/process in response/reaction to a customer
To respond to a customer order instead of predict the order
This is all about lean six sigma
Boundaries : inventories and capacity decisions
Deciding pull or push is a strategical decision. There are 4 different supply chain strategies :
a. Make-to-stock : typical example of a push philosophy. We try to forecast the future and
put some stock in different location based on the forecast. If the demand for the
product can accurately be forcasted, this strategy can be an efficient choice.
b. Make-to-order : we wait for the order of the customer to come. When it comes, we
start buying and making the product. In the automotive industry, they do that.
Unfortunatemy, the customer has to wait longer for its product to come, but for
customization this is the best process.
c. Assemble-to-order : Basic parts for the product are already manufactured but not yet
assembled. Based on the order, they assemble the different parts to make the end
product and personalize it (color etc). Toyota does this. It’s between the push and pull.
d. Engineer-to-stock : Based on the order of the customer, engineer something unique for
that customer. This is the case for architects but also in the aerospace industry. This is
when the end product tends to be complex.
Example : McDonalds
- Make-to-stock : During peak orders, but only the most sold and they have to be thrown away
after 10 minutes
- Assemble-to-order : During low hours. Bread is already and steak too. Same for the burgers that
are not sold often
A lot of companies produce in different ways depending on the hours and the clients they serve !
The companies have different approaches. The customer decoupling point (CODP) is the boundary
between anticipating and waiting the customer order.
Example : Cigars sold in different boxes
- The cigars are stored in different boxes.

- For the cigars with the highest demand, the cigars are made and put last minute in the right box
when the orders arrived.
- This is a decision to postpone the decoupling point.

2. Cycle view of supply chain processes
They are within the different boxes, the different steps in the supply chain. Usually, the structure
depends on the link or the intersection between the boxes.
The link between the boxes, the steps in the cycle view :
a. Customer order : the customer service manages the customer orders
b. Replenishment : make sure that the retailers (supermarket) have the right and enough
products in stock
c. Manufacturing : organized by the industrial department related with the production
d. Procurement : make sure that you buy the right product at the right time and price. A
big chunk of the cost can come from a lower price from your suppliers.
3. Macro processes
IT way to look at the processes, ERP (entreprice resource planning) are sudivised withing those macro
processes
e. CRM : Everything related to the customer : generate customer demand, put right prices,
payment terms (how many and when), track orders,…
f. SRM : supplier relationship management
Negotiate with your customer, make options, interchange information with suppliers
g. ISCM : internal supply chain management
Related to internal processes like manufacturing
2 SOURCING AND PROCUREMENT
= buying the primary material
ROLE OF SOURCING IN A SUPPLY CHAIN
Purchasing/procurement
Definition : the process by which companies aquire raw materials, components, products, services or
other ressources from suppliers to execute their operations
The operational activity of placing orders. When you need a raw material, you place an order, you buy
it and you receive it several days later
Sourcing
Definition : entire set of business processes required to purchase goods and services
Much broader : which supplier, how to negotiate the price, which system am I using to do all the
transactions, … the more tactical part of the first step in your supply chain

Outsourcing
Definition : supply chain function being performed by a third party

You give a part of a function to another company
Example : 3PL, 3rd party logistic providers. When your company asks to another company to take care
of the transportation, that is specialized in transport, as buying trucks is expensive. You can do the same
for production, in for example the pharma world you have 3rd party manufacture.
Benefits of a good sourcing decision
- Reduce costs if you negotiate well and buy at a lower price

- Increase or decrease the risks of your supply chain, as you’re not sure that the other company
will do it right or will do it at all, which can have a big impact on your company
- Higher quality
- Better economies of scale
- Lower inventories
- Improve forecasting and planning
- Higher profits for your company and your customer
IN-HOUSE OR OUTSOURCE
Why outsource ?
1. Agregation or economy of scale: For example, if you sell ice-creams, you’ll sell the most in the
summer. Therefore, you’ll need the most warehouses and transport during the summer. So, it’s
easier to outsource the trucks for a small amount of time instead of buy them and only use
them for a small period. DHL will be able to aggregate the demand of the ice cream in the
summer by using their trucks. DHL will flatten the demand.
2. Specialization : The third party usually has lower cost or higher quality because that company
has the experience and is specialized in that. The company optimized its system over the years,
which a small company cannot do, because of a lack of time and money.
Outsource or not ?
3 questions to ask yourself
1. Can outsourcing increase the supply chain surplus ? Supply chain surplus = customer satisfaction
– supply chain cost. Can another company, because of aggregation or specialization, make your
customer more satisfied ? If yes, than you will increase supply chain surplus, then outsource !
2. To what extent do risk grow upon outsourcing ? What’s the risk for my company ? There are
some risks that the 3rd company won’t work right.
3. Are there strategic reasons to outsource ? It’s supposed to make sense in the overall strategy of
the company. Outsourcing your core activities makes no sence. For example, bpost cannot
outsource sorting or distribution as it’s the purpose of that company to be good at that.
EXAM ! When does firm gain the most by outsourcing to a 3rd party ? The 3 characteristics that will
impact the supply chain surplus are :
1. The scale : The more the scale of your company is low, the more you will be tempted to
outsource. If you have a big company, it’s unlikely that outsourcing will grow the supply chain
even more.

2. The uncertainty (or volatility) : The more the uncertainty of your demand is high, the more likely
you will outsource. If you know every week how much you need to produce and ship, you do it
yourself. But if, like the ice-cream, you have a lot of demand in the summer but not in the
winter, you’ll outsource.
3. The specificity of the company’s asset : The more your asset is specific, the more difficult it will
be to outsource. If you have a unique machine, you won’t be able to outsource
RISKS OF USING A THIRD PARTY
The risks of using a third party depend on the situation !
1. Inability to meet demand on time : The company that outsources the part of your supply chain
also has other clients. If another client pays more, he’ll probably have priority over you. So, you
don’t know if you will receive the product in time. In the contract, you can say that the supplier
will get some penalties. But if that company can just not provide that service, it can cause a lot
of problems.
2. Understanding of cost of coordination : You have the prices of different aspects like the
transport, manufacturing etc. But what companies underestimate effort to coordinate the
management between you and the supplier. This effort has also big costs.
3. Loss of internal capability and growth in third-party power : Internal capability = something a
person working in the company can do. When you outsource, you are not able to do the part
you outsource, and the 3rd party is able to do it.
4. Loss of supply chain visibility : We call this the bullwhip effect : you don’t know what the next
step in the supply chain is doing. You can improve this with a good communication.
Nevertheless, you will always lose some visibility.
5. The process is broken : You are not managing the whole supply chain but only a part of it.
6. Reduce customer/supplier contact : As the customer or supplier may have contact with the 3rd
party.
7. Leakage of sensitive data and information : If the activity you outsource contains information
that is sensitive, it can be dangerous. You should be very careful. That’s usually the case for IT
suppliers, to who you outsource a part of your cloud.
8. Ineffective contracts : The contract between you and your 3rd party not producing any significant
or desired effect.
9. Negative reputation impact : If your supplier is using child labor or has a bad impact on the
environment, it will impact the reputation of your company as well.
TOTAL COST OF OWNERSHIP
= Different costs, namely the acquisition, ownership and post-ownership costs, which are quantifiable
or not.
Acquisition costs
All acquisition costs are quantifiable but for the managing costs it’s more difficult
- supplier costs : What’s the price of the product ? The supplier price.
- Supplier terms : when do you have to pay ? delivery frequency, minimum lot size, quantity
discounts
- Taxes and duties : all tariffs and compliance costs
- Delivery costs : all transportation costs from source to destination, packaging costs

- Incoming quality costs : cost of inspection, defectives and rework
- Management costs : cost of managing and planning the purchase
Ownership costs
- Inventory cost : if your supplier is keeping the products for you and can send very fast the
products to your place. This means that you don’t need to keep inventory, that you need to
store less products and pay less for a place to keep all the products etc. The one holding the
inventory makes a big difference. Keeping inventory can cost a lot.
- Warehouse cost : warehousing and material handling costs to support additional inventory
- Manufacturing costs : cost of manufacturing associated with the sourced part
- Production quality costs : impact of sourced part on finished product quality
- Cycle time costs : impact of sourced part on production cycle time
Post-ownership costs
- Reputation : reputation impact of quality problems

- Warranty and product liability costs : warranty and product liability costs associated with
sourced part
- Environmental cost: environmental costs affected by sourced part. If your company is working
on something that pollutes the earth, you’ll have to clean it, which costs.
- Supplier capabilities : replenishment lead time, on-time performance, flexibility, information
coordination capability, design coordination capability, supplier viability.
When a company selects a supplier, they ask the customer what criteria are the most important and
they add weights on the different performance categories. Then, the company does a request for
proposal (RFP) and they ask to the different suppliers the payment terms, the delivery costs (is it for you
or for me) etc in order to have full transparency on all the different parameters. The sum of the weights
is taken and the chosen supplier is the one with the highest sum.
SUPPLIER SELECTION – AUCTIONS AND NEGOTIATIONS
You can choose your supplier in different ways. One of them is the auction. This also exists for houses.
Auctions
Auctions are best used when the quantifiable acquisition cost is the primary component of total cost.
They are not appropriate if ownership or post-ownership costs are significant
Elements of auctions
- When unit price is important, buyer must specify performance expectations, for example
utilities (gas, electricity etc)
- Qualify potential suppliers
- Suppliers bid on requirements
- Setting up auctions when not all attributes can be quantified is difficult
- When there are many important non-price attributes, use direct negotiations
SHARING RISK AND REWARD IN THE SUPPLY CHAIN
Independent actions by two parties often result in lower profits than could be achieved

Risk sharing
Stronger firms tend to push risk on to supply chain partners
Reward sharing
A buyer may want performance improvement from a supplier who otherwise would have little incentive
to do so. A shared-savings contract provides the supplier with a fraction of the savings that result from
performance improvement. For example, for your supplier it’s better and cheaper to send trucks that
are full rather than half full trucks. The supplier can give a reduction if the trucks are full. It’s a win-win
situation, as the customer has a reduction but the supplier has less de pollution. Benefits and risks are
shared between the supplier and customer.
Effective in aligning supplier and buyer incentives when the supplier is required to improve performance
and most of the benefits of improvement accrue to the buyer
TAILORED SOURCING
If you decide to outsource a part of your activities, you must decide how you outsource. Options
regarding whom and where to source from
- Produce in-house or outsource to a third party

- Will the source be cost efficient or responsive ?
- Onshoring, near-shoring, and offshoring
o Some years ago, we outsourced in the Asian region because wages where low, but
the quality is bad and transport is long. We call this offshoring.
o Now, the trend is to outsource closer, which we call nearshoring. Your outsourcing
activities are close to your companies. Some outsource in eastern Europe.
Depending on the characteristics you want, you can make different decisions and tailor your
outsourcing. Tailor supplier portfolio based on a variety of product and market characteristics. Firms
must consider a tailored sourcing strategy that couples responsive onshore or near-shore sources with
low-cost offshore sources.
- The responsive onshore sources should focus on high-value products with high demand
volatility,
- Whereas the low-cost, offshore sources should focus on lower-value, high-volume products
with high labor content.
THE ZARA CASE
The specificity of the sypply chain of Zara is that it’s divided in 2 types of supply chain : the standard
products and the fashion products.

Standard products
A white t-shirt has a very constant demand so it’s rather easy to forecast and cheap to make, which we
call standard products. Those are produced in Asia and shipped by boat, which is a time-consuming
supply chain, but they have a little bit more stock of these white t-shirt everywhere to put them in the
shops and it’s very cheap to produce.
Fashion products
On the other side, they have a big chunk of their products that are fashion products. Zara is very good
at reacting quickly to the market, new tendences and putting new products on the market. They are
faster than all the other players in that field. How ? Their full supply chain is set up to react fast to the
market.
- Sourcing : They decided that their fabric is very limited to a set of colors. The design of their
products is done in-house. They screen the market. As soon as a product is working well, their
in-house designer come up with the same design with their own product, ready to be produced,
in a few weeks. For other companies, this can take 6 months a year.
- They only chose suppliers that are close to their manufacturing cites, in Spain and Portugal. In
less than one day, it can be supplied. Zara has less stock but as soon as they need some, they’ll
have it very soon (1 day).
- The manufacturing is in Spain and Portugal, with the prices and ironed. Other shops do that in
the shops/supermarket, not I the manufacturing site.
- Distribution is very reactive and sent over night within Europe. They can send their products in
1 day in Europe.
If a product that they put on the market is not working very well, they don’t care, as they did not produce
a huge pile of stock of that product. They produce less and face out to that product, as they are also
very reactive in that way, when the trend is going down.
What’s the result ?

Standart products Fashion products
Stock high Low
Price of stock Low high
Manufacturing costs Low High

NEGOTIATION GAME
Debrief about the negotiation game
- Assessing your goals is very dangerous, as you might lose the opportunity to win even more. It’s
better to reassess the goal during the negotiation
- BATNA : some students could not find a deal. What is the best alternative to a negotiated
agreement. If there are some, this determines the power in tge negotiation
- What’s the BATNA of your opponent. You have to find more information of your opponent. Do
they have another alternatives or not ? If not, your negotiation power is higher.
- The ZOPA strategy agreement. When you start your deal as seller, you should say a very high
number. The buyer should say a very low number. But, if you are selling too high or too low, it
looks like a bluff, and the buyer will go away
o Look at the max and minimum
o Shape the perception : show how valuable the house is as seller or say you don’t care
about the house as a buyer
o Credibility : give some examples ! buyer can say he visited some houses last week and
got their price
3 MAKE
HYSTORY OF MANUFACTURING
1. Hundreds of years ago, most goods were made by individual craftspeople or

artisans. Every artisan was making their own good on its own way. There was no
standard way to make a good.
2. Early concepts like “labor specialization” (Adam Smith), in which an individual was
responsible for a single, repeatable activity, which was a part of the process of
making the good.
3. Standardized parts (Eli Whitney) helped to improve efficiency and quality and
produce much more.
4. In the early 20th century, the era of “Scientific Management” came about. In which
concepts such as: time and motion studies (Frederick Taylor) and Gantt charts
(Henry Gantt) allowed management to measure, analyze, and manage activities
much more precisely and improve the manufacturing processes.
5. The really big advancement came in the early 1900s with the area of mass
production (push process). Every single person puts one item on the car, which
was very standardized (1 color, standard weels etc). The demand was endless but
there were not enough people and manucaturing sites. The subsequent concepts
where applied

o The moving assembly line (e.g. Ford motor Company)
o Economies of scale (produce large quantities of the same item to spread
fixed costs)
o Statistical sampling
6. Now, the companies can produce more than the demand. In the 1980s, organized
by the Japanese after the second world war when resources where scarce, we
started hearing about the new concept of Just in Time (pull process). This is the
starting time of the lean and six sigma.
7. Method of keeping the minimal inventory of material (and information) – Not to
much, nor to little
8. Finally, additional (statistical) concepts and tools emerged
LEAN
Philosophy
Il aime bien demander cette définition à l’examen

Lean is a team-based effort of continuous improvement in identifying and eliminating “waste”, centred
on making obvious what adds value (to the customer) by reducing everything else.
- It’s al about working together. About something that’s coming from the workers.
- Continuous improvement : the improvement is never finished, it’s not a one time process
- Identify and eliminating waste : get rid of the waste to focus on only what’s adding value to the
final customer. We stop doing what does not add value to the customer.
It’s management philosophy derived mostly from the Toyota Production System (TPS). Renowned for
its focus on reduction of the original Toyota seven wastes to improve overall customer value.
As waste (muda) is eliminated quality improves while production time and cost are reduced.
Continuous improvement
The lean philosophy is applied in 5 steps
1. Define the value from customer point of view and refer to a particular product and a
process.Determine what brings value to the customer : the product, lead time, the color etc.
2. Make a value stream : Look at the company and the steps in the supply chain. How can you
make the value come the fastest way to the customer? Identify and map all tasks that are
performed to deliver products or service to client. Identify value-adding and non-value adding
tasks from a client perspective.
3. Ensure flow : Organize a process in a way allowing for uninterrupted delivery of a value to
customer. Eliminate wastes from a process!
4. Adjust to the client need : Eliminate inventory and tasks performed “in advance”.Organize work
to do only what is required and only if it is required.
5. Aim at perfection : do it over and over again to improve it. Continuously improve a process
through identification and elimination of wastes. Aim at perfection!
Go back to nr 1 again !
The 8 types of waste
Examples : time, money, raw materials.

TIM WOOD : an easy way to remember the types of waste
Typical waste items EXAM, il aime bien demander les 8

1. Inventory waste : As it’s money and it takes space that could be used for something else. But
it’s also necessary to buffer when you don’t have enough time. It’s needed to compensate for
lead times and variability in the system (machine breakdown).
There are 4 different types of inventories that cost money to maintain (holding or carrying cost)
a. Raw materials: purchased materials & components
b. Work-in-process (WIP): where transformation process has started, but not yet
completed
c. Finished goods: Saleable products
d. Materials, repairs, and operation (MRO): equipment spare parts and supplies, products
to maintain the different machines
Businesses need some inventory, and have to make tradeoff between:
a. Cost of carrying inventory (range from 15 to 30% of product value – Cost of capital,
taxes, storage, insurance, handleling, labor, obsolescence, damage)
b. Customer service, that determines how much
You need a right level of inventory. Some companies have too much inventory of products that
they don’t sell enough and not enough products you sell a lot. Inventory management is very
important. Let’s get rid of the inventory !
2. Transportation (or movement) waste : Moving products the less possible in the warehouse by
having a good set up in the warehouse. The excess of those movements is waste.
There are different set-ups, layouts in the warehouse, to reduce the transportation. The black
rows contain A products, which are the products who have a good turnover and will be
transported the most. B products are products sold a bit less, and C even more.
There are 2 doors, so the A There is only one door. The The more lanes you have,
products are put in the products you sell a lot should be the more possibilities you
middle. The further away close to the door, and then you have.
you go from the middle put B and C products.
layer, the less you’ll have to
go there, as there are B and
then C products.
3. Motion waste : Moving people around the working area. For example, the time to find a right
tool should be very little. Possible with a plank that presents the tools on a wall. It’s the same
for a printer, which should be In the middle of the area.
Concept of “point-of-use storage”: having just enough material & information nearby, which
can be replenished when needed from further away.

4. Waiting waste : Time spend waiting on: supplies, materials, information, and people that are
needed to finish a task. In most of the processes, a great amount of production or service lead
time is spend waiting between the different steps.
5. Overproduction (and over-procurement) waste : Sometimes people want to produce a lot

because it’s efficient (not change the machine etc), but they end up producing too much. The
typical results are:
• Excess of inventory (Raw material, WIP, finished goods, and MRO)
• Longer lead times
• Greater amount of defects
• High storage costs
Instead of Just In Time (JIT), it ends up being just in case!
Taking the first example : inventory is piling up with products you cannot sell on the market.
You need to make sure you produce the right quantity of the right product.
6. Over-processing waste : You produce something of too high quality. For example a company
who makes confetti with a very costly machine that makes perfect wholes. You need to know
what the client wants ! This happens when too much time (or effort) is put into processing
material (or information) that is not viewed as adding value to the customer.
• Can include: using equipment that may be too expensive, complicated, or precise to
perform the operation.
• Occurs when the company :
• Receives unclear customer specifications
• Include lengthy approval process
7. Defect (or error) waste : If there is a problem in your manufacturing process that ends up at to
your clients, it’s catastrophe. You’ll have to ship a new product. This generates the most waste.
You need to detect the defect as early as possible in the supply chain. The more far it gets in
the chain, the more waste it will generate. If there is a problem in the raw material, try to fix it
asap and don’t wait for it to enter the supply chain !
The are many causes of defects, such as :
• Poor processes
• Too much variations
• Supply issues
• Insufficient or improper training
• Not properly calibrated tools & equipment
• Bad layouts
• Excessive handling
• High levels of inventory
8. Behavioral/talent waste (or underutilized employees) : When you don’t use the talents of the
people at the full potential. 50% of the companies (at least in the US) tend to fail their lean
effort, because requires both:
• Top-down management commitment
• Bottom-up groundswell of participation & ideas
• Have to encourage team based continuous improvement mentality

SIX SIGMA
Six Sigma: helps companies to reduce defects (focus on that type of waste)
- Manufacturing process can be described by a sigma rating indicating its percentage of defect-
free products (yield) it creates. Sigma is a % or a rating.
- A six sigma process is one in which 99.99966% of all opportunities to produce some feature of
a part are statistically expected to be free of defects (3.4 defective features / million
opportunities). You are very close to perfection !
- Getting to the six sigma is an optimum for some companies. For the aerospace industry it’s very
important, but in the toys industry for example it’s not that important.
The concept of Six Sigma was originated by Motorola in the early 1980th and now is used in many
industries. They set a goal of "six sigma" for all its manufacturing operations, and this goal became a by-
word for the management and engineering practices used to achieve it.
Make sur that the process does not vary too much and that the quality stays between some variations.
Sigma 2 means that you have 308 537 errors on a million of operations. When the sigma goes up, the
possibility of errors is getting smaller. 6 sigma means you are above 99,99% possibility to not defect.
- In a restaurant, you would have only 1 bill that is incorrect over the lifetime of your restaurant.
The quality is nearly perfect.
- For airlines systems, you could only have one too long or too short lading every 5 year which
can cause and accident.
- In the postal service, you could only loose 7 articles per hour.
Conclusion : depending on the industry, you’ll target a different sigma level. Originally, it’s called six
sigma as it’s the perfection level, but not every industry needs it.
LEAN SIX SIGMA
Lean + Six Sigma = Faster process with lower cost and higher quality
Lean six sigma is very famous as they created different levels of certification.
- Basic level : yellow

- Green belt
- Black : when you really are close to perfection.
This supply chain tool has also been used in another environment, the office. It came apparent that
waste was everywhere, as for example lead time. Benefits of lean offices include:
- Simplified process : get rid of processes that don’t maximise customer satisfaction

- Improved utilisation of personnel and their satisfaction
- More flexibility & responsiveness
- Reduce: lead time, errors, extra processing, and transactions
DMAIC METHODOLOGY : INTRODUCTION
There are a lot of tools that come from the Lean Six Sigma approach to reduce the waste and errors.
The most famous one is DMAIC.
Six Sigma Methodology : overview
1. Define : Selection of the Project (how and why ?), Process and Project Leader, organization. This
can be very useful when you are writing a thesis or start a job.
a. Project
b. Process mapping, SIPOC
c. Voice Of the Customer
2. Measure : Make the problem quantifiable and measurable
a. Define the CTQ’s
b. Validate the measurement procedures
3. Analyze : Analyze the current situation and make a diagnosis
a. Diagnose the current process
b. Identify potential influence factors
4. Improve : Develop & implement improvement actions
a. Establish the effect of influence factors
b. Design improvement actions
5. Control Adjust the quality control system and close project
o Improve process control
o Close the project
1. Define
Definition of the project scope, deliverables, team and

project planning
There are different tools you can use in this step.
Using one of these tools, what can you get rid of the
waste, which is that the process of making a coffee is
too long ?
a. Project management template : I have a team. Who takes what responsibility? These
templates are very usefull when starting a project.

b. SIPOC = Suppliers Inputs Process Outputs Customers : Leads to insight concerning the
process, used to understand the different steps of the process and the problems. You have
to look at the business and list the suppliers that you are buying from and the inputs you
need to produce your product. Then, look at the steps that you need, and finaly the outputs
required from the whole process. Cluster your different customers, as they have different
needs.
o High Level Process Mapping
§ Very effective communication tool
§ Defines boundaries and provides uniform vision
SIPOC tool nr 1 : Stakeholder analysis

Used by consultants. How important are the different
stakeholders ?
- Are they in favour of the project ?
- Do they have a big impact/decision power ?
Based on the stakeholder analysis, you adapt your

stakeholdermanagement.
You should spend more time with people who have a big
decision power but are not in favour of the project to
convince them to be in favour !
SIPOC tool nr 2 : Process Mapping (It’s complicated.)

Macro Process Map Micro Process Map
High level view on your process. Your full supply

chain. In the macro process, you have
subprocesses, with different actions. These
actions can have different processes too !

Process trigger : the first step, the beginning of
your process, the start
Process : should be an action “select your coffee”
Decision : you validate ? yes or no ?
Exit process : at the end
Documentation : explanation (example with
mcdo : “the information goes through a
machine” or in starbucks “the name of the
customer is on the coffeecup”.
Line structure :
- Manual operations : dashed line (………)
- Automated operations : full line (_____)
Example : BPM Training
SIPOC tool nr 3 : Quick Win Improvement Opportunities

List all the possibilities/initiatives to improve the process. Some initiatives are complicated, and some
are easy to implement. We try to find the impact of the initiatives and the effort the initiatives will
take. The ones with a lot of value and not a lot of effort are the quick wins or the “low hanging fruit”.
A quick win is something that is easy, fast, cheap to implement, and that is within the Team’s control,
that you can implement yourself.
After that, you need to rank the initiatives.
We also need to determine the requirement. In the six sigma approach, we need to focus on what adds
value. What is bringing value to my customer ? There are 3 tools for that :
Tool nr 1 : Kano Analysis We are looking at the actual performance and

what can be done on top of that performance.
Some things are a basis requirement/basic
expectations for satisfying a customer (have a
clean shop), which are the expected. Then you
have the delighters, which is something extra
that the other companies don’t do (receiving a
homemade cookie with your coffee) and that
will enhance the experience of your customer.
Needs depend on:
• Target audience
Classifying customer needs • Culture
• Geographic location
• Time

Tool nr 2 : CTQ (Critical To Quality) Something that is used to try to capture what’s
= property of a product or service that is relevant the quality of the customer.
to a customer
- Selection of the Customer Requirements
- Examples of ExCTQ’s
o Timeliness of delivery
o Good image quality of a display
o Operational Costs
Tool nr 3 : VOC – Voice of customer Exercise to do when starting the DMAIC

approach. Determine what adds value to the
final customer. The different buckets of value
that you can create are :
- Quality of the product
- Cost of your products (not if the quality
is very high)
- Delivery of the product (fast ? nice guy
?)
- Services on top of the product
- Corporate responsibilities
Listing those can make you understand what
your customer wants/expects from you/your
product.
Listing those can make you understand what
your customer expects from you/your product.
How ?
- Interviews
- Focus groups surveys
- Observations of customers (what are
they buying ? less buying ?)
Once you have determined what is important
for your customer, all the rest is waste.
Different stages on how you can consolidate
the critical to quality. This is the first step in the
lean approach : the value of the product is
explicit !
Voice of the customer

1. List of customers
2. Identification sources of data
3. Identification of customer needs
4. Critical-To-Quality requirements
Specifications for each CTQ

Example : value stream map
Look at the different steps and the time they
take. We call that value stream mapping :
making sure that the value we make streams
as fast as possible to the customer.
5. Measure
- Define the CTQ’s

- Validate the measurement procedures
Measure = Make the problem measurable and quantifiable
Toolbox = Techniques to use in projects to measure the value. Questions about them during the exam.
5W2H Investigate the problem by asking 5 questions with a W and 2 with an H : who?,
what?, why?, where?, when?, how much? And how often?
Basic questions for every projets you want to start.
Correlation Quantify the correlation between different types of data. Shows the relation
between an external CTQ and measurements in the process.
Example : divorce/burnout and length of home-work
Example : breakdowns of line and use of line
Pareto analysis Shows the most important influence factors according to frequency. We also cal
this the 20 – 80 rule. 20% of your effort is generating 80% of your profit. 20% of
the products you sell generate 80% of the companies profit. You need to make
sure to reduce the other 80% of products that add complicity.
CTQ flow down Breakdown of the external CTQ’s into internal CTQ’s and influence factors
Gage R&R Roles and responsabilities : if these are not clear, you’ll end up in problem. You
need to add only one responsible, and an accountable (to whom the responsible
communicates). Experiment to assess the random measurement error by means
of repeatability and reproducibility tests.
6. Analyze
- Diagnose the current process

- Identify potential influence factors
Toolbox
Process Capability Analysis (PCA) Analyze if the process is capable in meeting the customer
requirements. Are our employees capable of doing the
processes ? If not, what do you have to do to upscale
these employees ?
Process Activity Map A way to visualize the activities happening in your
company. Visually depicting waste activities in a process
Ishikawa diagram Shows the relation between causes and effects
5x Why For each cause, ask why, verify and ask why again (5
times). Ask yourself why there is a problem. Then you ask
again why, 5 times, to arrive to the rooth, the primary
cause of the problem.

Lead time waterfall Analysis of the lead time of each process step.
Understand the different steps of the process and the
time needed for every step, and work on every substep.
You can than try to reduce the time of the step that takes
the most time.
Overall Equipment Effectiveness (OEE) Measurement of the efficiency of a production line. How
many coffees can I do per hour with these machines. The
machine which can make the most coffees is the most
efficient one.
Ishikawa diagram = fishbone diagram, as it looks like the bone of a fish, also called the Cause and Effect
analysis. It is used to
- compile a list of possible causes

- segment the various causes
- Make the relationships between the causes visible.
- Head of the fish : effect of a process. Example : sometimes, the clients have to wait 5 minutes
but sometimes 15 minutes, which is too long, for their coffee. There is therefore a big variation
during the delivery time.
- Then, you’ll ask yourself why. What are the reasons of the variation of this process ? There can
be multiple causes !
o It can be the machine, that takes more time.
o It can be the barista that is not efficient enough.
o By mother nature we mean that the electricity can be down.
o Sometimes, the one taking the delivery time is more strict.
- Finaly, you need to analyse the correlation between Leadtime and machine used. You can have
subcauses. This can be used to analyze what you can do to delete the variation during the
delivery time.
A structured brainstorming session can further be used to identify the causes. The Fishbone diagram
may also be used in the Measure Phase (determine what to measure).
7. Improve
- Establish the effect of influence factors

- Design improvement actions
Improve : Identify the relationship between Xs and CTQs
Toolbox
Poka Yoke (mistake proofing) Mistake prevention, proofing and detection to
Means error proof, a process without systematically eliminate errors and disturbances. Detect the
errors error than can occur and eliminate the possibility for it to

happen. Find a solution to this problem so that the error is
not made.
Example of the beeper in the classroom of the teacher that
he could not find, so he glued it to the teachingtable
Line balancing Balancing the throughput of a line by removing the bottle
necks. It’s very technical.
5S Sort, Set in Oder (Hots >< cold object), Shine, Standardize,
Sustain
Methodology to organize the workplace/the manufacturing
site. First, you have to sort all the objects. Then, you have to
set them into the right oder. You have to put the hot objects,
objects that you touch a lot, very close to each other. The
cold objects can be a bit further away than the hot objects,
as these are not used as much as the hot objects.
Example of the tools in the box
SMED Single-Minute Exchange of Die.
Methodology to reduce the change-over time. They switch
the production machines for one product to another
product, in a minimum time.
Example of the F1 changing the weels
Cellular production Lay-out to improve the work flow and minimize work-in
progress. How can I organize the different workflows withing
the factory to produce as much as possible ?
8. Control
- Improve process control

- Close the project
Control = Adjust the quality control system and close project
Toolbox
Standard Operating Procedure (SOP) Written document or instruction detailing all steps and
activities of a process or procedure, that has been improved
as much as possible, in production but also in the
administration. The SOP has to be updated if the procedure
is improved again.
Out of Control Action Plan (OCAP) Methodology to look for an assignable cause in case of a
problem (detected by control chart). Action plan if
something is going wrong. What you should do if something
is doing wrong.
RACI Matrix to define roles and responsibilities per task
(Responsible, Accountable, Consulted, Informed)
Statistical Process Control (SPC) Control charts to track the KPI performance in time. For
example, measure the quantity of sigma’s in your process.
Visual management Expectations and current status are clear and visible to
everyone

BOTTLENECK
We watch the movie “The goal” by Eliyahu M. Goldratt. It’s an old movie, but still very relevant, about
the theory of constrains, which we also call the Bottleneck.
If in the first step of your supply
chain, you produce 10 tons/hour,
during the 2e step, you make 8
tons/hourand in the last step, you
make 12 tons/hour. What is the
total throughput of this factory in
tones/hour on average ?
8 tons/hour ! Your are as fast as

your slowest link in your factory.
We call the 2e step the bottleneck of the factory. The only way to improve the troughput of your factory,
is to invest time and money in that bottleneck, in order to increase the capacity of step 2. It’s called the
bottleneck, as there cannot go more water trough the bottle than there can go trough the neck of the
bottle.
Sometimes, the demand is lower than your capacity to produce. In that case, the bottleneck is the
market. Then, you have to increase the demand.
4 DELIVER
TRANSPORTATION IN A SUPPLY CHAIN
Transportation role in a supply chain
Why do we need transportation ? To move products from one location to another, from the place where
it’s produced place to the place where it’s sold. Products rarely produced and consumed in the same
location. Transportation is a significant cost component
Why is transport becoming more important ? Because the distance of where you produce and where
you sell is becoming bigger. We live in a global economy. Nevertheless, this tendency is revercing. Some
companies decide to produce far away for the reduced labour cost. But that labourcost is going up. The
transportation cost and risk are becoming higher too. Outsourcing from the far east is switching to
nearsourcing, where we produce slightly out of Europe, closer to the end customer.
Shipper: requires the movement of the product
Carrier: moves or transports the product (DHL, TNT)
Modes of transportation & characteristics

Truck (71%) Air (5%)
Why is it used ? When is it used ?
- easy § emergency
- flexible § big distances
- small quantities can be transported Cost components
- fast § Fixed infrastructure and equipment
- cheap § Labor and fuel
But some companies go to rail transportation, § Variable depending on passenger/cargo
that have some similarities Key issues
§ Prices and availability
§ Pollution
§ Location/number of hubs
§ Fleet assignment
§ Maintenance schedules
§ Crew scheduling
Rail (3%) Water (5%)
Key issues Key issues
§ Costly to build and entertain § Limited to certain geographic areas
§ Not flexible, as you go from point A to (ocean, inland waterway system, coastal
point B, that are static points waters)
§ High fixed costs in equipment and § Slowest
Warehouses § Risky : ship can be blocked
§ Transportation time can be long Nevertheless
When is it used ? § Dominant in global trade
§ Move commodities over large distances § Big containers
§ Cheap (cost per unit)
Pipeline (7%) Intermodal (9%) or multimodel
Key issues = Use of more than one mode of transportation
§ High fixed cost to move a shipment
When is it used ? § Use of containers on ship – railway –
§ For crude petroleum, refined petroleum truck etc
products, natural gas, oil § Used for global trade
§ Best for large and stable flows § Key issue : exchange of information to
Positive aspects facilitate transfer between different
§ More efficient than trucks modes
§ More sustainable (less CO2 emissions)
§ Pricing structure encourages use for
predicable component of demand
Bycycle
Rather limited
Last mile delivery = small distance can be the
costly past of the distribution, so it should be
management well ! Upcoming with the e-
commerce (Bpost, between the sorting center to
your door)
Transportation Infrastructure & policies
How can policies impact the use of a certain type of transportation ?
§ Taxes on cars/truck for transport of goods

§ costums = taxe à la douane pour les produits qui passent la frontière

§ Night labour regulation for night delivery of goods
§ Subsides on public transport, such as trains, for end-customers
Country or regional regulations impact the transportation mode for companies and end-customers.
Transportation infrastructures often require government ownership or regulation because of their
inherently monopolistic nature. In the absence of a monopoly, deregulation and market forces help
create an effective industry structure.
When the infrastructure is publicly owned, it is important to price usage to reflect the marginal impact
on the cost to society.
If this is not done, overuse and congestion result because the cost borne
by a user is less than the user’s marginal impact on total cost.
Design Options for a Transportation Network
Typical set-ups in the distribution network. Pro and cons at the exam
Direct shipment run Direct shipment + milk run
= basic set-up. Supplier goes to the customer to = one truck that delivers goods from the supplier
give the product. to the customer and that goes back to the
Advantages supplier. Historically the milk men were dropping
§ Easy to coordinate the milk bottles in front of the houses by doing
§ No intermediate warehouse rounds. Example : the last mile delivery.
Drawbacks Advantages
§ Costly as you will send trucks that are not § Reduced costs, as you can do several
totally full customers in one round with a full truck
§ Long distances as you have to drive from § Low inventories
the production site to the end customer Drawbacks
§ High inventory due to large lot size § Complex (constant changing route)
§ Requires a lot of coordination
Distribution center + Cross-docking Distribution center + milk run
= putting a distribution center between the Very big shops need a full truck, but some
supply and the demand, nearby an area where Delhaize are small. A full truck can then do
there are a lot of end-customers. “The different several shops in one time.
products are aggregated in a new truck”. Thanks Advantages
to the DC, we can aggregate what comes in or § Low transport costs
what comes out. Drawbacks
§ Complex coordination

Advantages Tailored network = mix of everything
§ Reduced transportation costs Advantages
§ Small lead times § best match the needs of individual
§ Low inventory product and store
Drawbacks Drawback : highest coordination complexity
§ Complex coordination
§ If inventory storage : inventory costs
§ Increased handling at DC
Example : Delhaize asks the suppliers to bring
products to the distribution center. Delhaize
makes a box with different products, and sends
them to the different Delhaizeshop. You don’t
need 20 different trucks to deliver 20 products to
1 delhaize, but 1 truck with the 20 products.
Trade-offs in Transportation Design
How do you have to determine the transport network required for your company ? Based on some trade-
offs (troque), depending on the inventory and transportation cost, but also responsiveness.
1. Inventory trade-off
Make sure to deliver the products at the lowest cost. We look at the transport costs and the inventory
costs. Inventory aggregation, or central distribution centers, will decrease supply chain costs in some
situations. We look at the type of product and type of customer we have, and then decide if we want a
network with a lot of distribution centers or not a lot of distribution centers.
Central distribution center/inventory agregation Spread distribution centers

Large value-to-weight ration Low value-to-weight ratio
High demand uncertainty (uncertain demand) Low demand uncertainty (certain demand)
Low transportation costs High transport costs
Large customer orders Small customer orders
Why ?
§ Large value-to-weight ratio : If our product is very small and very costly (ex gold), the cost of
the inventory that you don’t mind having high transport, as it will be lower than the inventory
anyways.
§ Low value-to-weight ratio If your product takes a lot of space and not expensive, it’s better to
store your products close to the costumer because you don’t want the product to travel too
much and cost even more
§ High demand uncertainty : You are a multinational company and you sell in different countries
in Europe. Your demand changes a lot over time. It’s complicated to put inventory everywhere.
So it’s more logic to have your products stored centrally and ship very fast the products to your
customers.
§ Low demand uncertainty : you can have inventory in the different regions as you know for sure
what the different shops need when. You don’t need to adapt transportation.
§ Low transportation cost : it’s better to aggregate your inventory as you know it does not cost
that much to transport your products
§ Large transportation costs : If transportation is very high (helicopter), it can be good to store
more products. Therefore, you won’t have to ask for a new helicopter to come.
§ Large customer orders : if the customers order full trucks, it’s better to aggregate your inventory
and send full trucks.

§ Small customer orders : your customers always ask one product, so it’s better to store more
products in the different regions. You don’t want to send a truck with only one product.
2. Customer responsiveness trade-off

You’ll never set up the network only to reduce your costs ! You also need to deliver in time. You need
to optimize the transportation costs and the responsiveness. Link between transportation cost and
aggregation :
§ The higher the responsiveness, the higher the transportation cost. The lower the transportation
cost, the lower the transportation costs.
§ The higher the responsiveness, the less aggregation. The more you aggregate, the more you
combine orders across time, the lower the transportation costs (because you send less trucks
per year and the trucks transport more products), but the lower responsiveness (you’ll only
send a 2-3 trucks a week for low costs).
Tailored transportation
Certain product and customer characteristics will impact the use of your transportation network.
§ Customer density (the number of customers in a certain area)

o High : if you have a lot of customers in a certain area, it makes sense to put a distribution
center in that area and do some milk runs.
o Medium : less sure to put a distribution center in that area
o Low : makes no sens to have a distribution center, so you might outsource the
distribution and ask another company to store your products
§ Customer size
o Transportation cost based on total route distance
o Delivery cost based on number of deliveries
§ Product demand and value
High value Low value

High demand cycle inventory : Dissagregate inventory and
- Disaggregate inventory slow/cheap transport
- Slow/cheap transport
Safety inventory
- Aggregate inventory
- Fast/expensive
transport
Low demand Aggregate inventory and if cycle inventory :
needed use fast/expensive - Disaggregate inventory
transportation - Slow/cheap transport
Safety inventory
- Aggregate inventory
DISTRIBUTION IN SUPPLY CHAIN
Factors Influencing Distribution Network Design
The type of network will impact

The customer service The cost
Elements of customer service influenced by network Supply chain costs affected by network
structure: structure:

• Response time : how long do I want my • Inventories : you need to invest a lot
customer to wait for the product. of cash for a lot of inventory
• Product variety : number of different • Transportation : inbound (receive
products, depending on the regions the products from your suppliers)
• Product availability : a lot of products, some and outbound (sending them to
always available, some out of stock your customer)
• Customer experience : it’s not only about the • Warehouses and handling : you
product but the visibility, tell the client where need to buy/rent the distribution,
we are in the production and transportation price depends on the location. The
• Time to market : not only about the time it handling, people in working in the
takes to get to the customer, but the time to warehouse, cost also.
design the product and bring it to the market. • Information : The more complex the
The goal is to shrink the time to market ! network, the more complex to
• Order visibility : linked to customer manage the information.
experience Information also has value as you
• Returnability : return/reverse flow, which is can analyze it and create value
complex to manage and can cost a lot afterwards !
Response time: Transportation, inventory & factory cots and # of factories
Exam question
DC is a warehouse without a factory next to it.
The more warehouses you have, the less time you need to send
your product to your customer, as there is more chance that the
warehouse is close to the customer, the better your response
time (the smaller the leadtime)
The more the warehouses, the better the response time
Counterintuive, Looks like a hockey stick

Beginning of the curve
the more warehouses you have, the less transportation cost.
Imagine we have a warehouse in brussels and a distribution in
Antwerp. We send full trucks from brussels to the DC in antwerp
and we do small milk runs to the clients in Antwerp while we do
milkruns for the other clients in Belgium We add a distribution
center in Liège, so we send full trucks to the DC in liège and
antwerp and we do small milk runs to the clients in liège and
Antwerp and do big milkruns to other clients. Transportation
goes down as you add DC.
End of the curve
If you have too many DC, it will become counterproductive.
You’ll have to go to too many DC and not optimize your
transportation costs anymore.
You need to find the number of warehouses where the
transportation cost is the lowest.

The more warehouses, the more inventory needed. If you only
have a warehouse in Brussels, you only need a stock of 100. If
you have a warehouse in 4 different cities, you need more stock
for each region, depending on the demand. It’s difficult to more
the stock from a region to another.
The sum of the inventory goes up with the number of

warehouses. Yet, this enables a better service and decrease
transportation cost.
The more warehouses you have, the more money you need to
invest in reale state, the more rent you need to pay.
The more warehouses, the more the facility costs (=rent)
When you make your decision on the number of the DC and their location, you need to find an optimum
on the response time and the sum of the costs (transportation, inventory, and facility costs). Typically,
the more DC you have, the more your distribution costs will decrease. But on the other side, your
inventory cost and facility cost will increase.
What is the impact of one additional warehouse on a company’s cost ? We don’t have 100 DC. Increase
inventory cost and decrease transportation cost.
Design Options for a Distribution Network
When designing the DC, besides cost and service, you need to ask yourself 2 other questions regarding
the distribution the end consumer.
1. Will the product be delivered to the customer location, or will the customer pick his product up
from a prearranged site? Supermarkets don’t deliver but go to the shop. Hello Fresh delivers to
your home
2. If you deliver, will you distribute your product yourself or do you outsource it ? Will your product
flow through an intermediary (or intermediate location, a DC) ?
Impact of Online Sales on Customer Service (read)
Impact of new models, impact on service and costs, for example for Netflix. These new business models
have disrupted the market by delivering new services to the market

1. Response time to customers : deliver in a day
a. Physical products take longer to fulfill than retail store
b. No delay for information goods
2. Product variety: Easier to offer larger selection, example with Amazon BUT high cost and not
sustainable (transport and supply chain)
3. Product availability: Aggregating inventory and better information on customer
preferences improves product availability
4. Customer experience: Improved access, customization, and convenience
5. Faster time to market
6. Order Visibility
7. Returnability
a. Harder with online orders
b. Proportion of returns likely to be much higher
8. Direct Sales to Customers: Social networking channels allow firms to directly pitch products
and promotion
9. Efficient Funds Transfer
10. Flexible Pricing, Product Portfolio, and Promotions
a. Manage revenues from product portfolio more effectively than traditional channels
b. Promotion information can be conveyed to customers quickly and inexpensively
11. Inventory
a. Lower inventory levels if customers will wait
b. Postpone variety until after the customer order is received
12. Warehouses
a. Costs related to the number and location of Warehouses in a network
b. Costs associated with the operations in these Warehouses
13. Transportation
a. Lower cost of “transporting” information goods in digital form
b. For nondigital, aggregating inventories increases outbound transportation
14. Information
a. Share demand, planning, and forecasting information throughout its supply chain
b. Additional costs to build and maintain the information infrastructure
Examples : Amazon: Using Online Sales to Sell Books and Netflix: Using the Internet to Rent Movies
Network models help us come to the most optimal solution within feasible and acceptable
limits
The network option that you select will have an impact on
- The service level

- The cost
o Inventory cost : the more DCs, the more inventory
o Operation costs (real estate of rent and wages of operaters, people working in the
warehouse) : the more DCs, the more operation costs
o transport cost : the more DCs you have, the more the transportation will decrease
Homework
0. What would be the profit if we ignore the cost of secondary transport?

Supplier A : 500 units, 9 €
Supplier B : 500 units, 10 €
Total costs : (500 x 9) + (500 x 10) = 4 500 + 5000 = 9 500

Total revenue : 1000 * 15 = 15 000
Profit : 15 000 – 9 500 = 5 500
1. Would our original solution change if we were to include the cost of secondary transport?
First strategy, we can take products from both suppliers as we want to sell a lot of products. We want to
supply all the demand. Nevertheless, without the secondary transport, we’d have 5000 EUR more profit.
Supplier B : 500 units, 10 €
Total costs : (500 x 9) + (500 x 10) +(1000 x 0,01 x 500) = 4 500 + 5000 + 5000 = 14 500
Total revenue : 1000 * 15 = 15 000
Profit : 15 000 – 14 500 = 500

Second strategy, we don’t want to sell products where we don’t make a profit. So, we won’t sell products
from supplier B. With this, we’ll have a smaller DC resulting to smaller costs.
Total costs : (500 x 9) +(500 x 0,01 x 500) = 4 500 + 2500 = 7 000

Total revenue : 500 * 15 = 7500
Profit : 7 500 – 7 000 = 500
2. What if there could be another DC (DC2) that could also serve the customer?
While using DC2, you can increase the profit !
Supplier A : 500 units, 9,3 €

Supplier B : 500 units, 10,2 €
Total costs : (500 x 9,3) + (500 x 10,2) +(1000 x 0,009 x 500) = 4 650 + 5100 + 4500 = 14 250
Profit : 15 000 – 14 850 = 750

5 INVENTORY
INVENTORY MANAGEMENT – WHAT IS ABOUT?
The different views on inventory
The different people within a company have different views on inventory.
- CEO : what is the RONA (return on net assets) we can have ? He does not care about the
inventory itself, but he cares more about the money invested in the company and the inventory,
and its return.
- Sales: they do a lot to increase the sales. Therefore, they are putting pressure on the operations
to make sure they have the products available.
- Marketing : they like to launch new products, make more sales and increase the market share.
But the more products, the more complex the manufacturing is. It makes the life of the
industrial team more complicated.
ð Decide with sales in forehand when there will be promotions and new products
in order to put that in the planning an prepare the people in the production
- Manufacturing people : They complain about the marketing and sales team, saying that they
sell too much, that they are not able to follow and cannot work efficiently.
- Supply chain : demand planning = forcast or prediction of the future to tell the people on the
production site what and how much they have to produce, how much they have to purchase,
in what DC the products need to be sent.
- CFO : what is the cost of inventory, the working capital ? The CFO does not like inventory, as it
costs a lot.
The different functions are contradicting each other, but you have to work with everyone ! All the
different people need to be aligned. The inventory management should be able to fit with everyones
goals within the company.
The value of inventory

Inventory-to-sales ratio = the level of inventory compared to what they sell.
Here you see the evolution of this ratio in the US. It’s
decreasing, meaning that they have less inventory
compared to the volumes that they sell. This means
that you manage your inventory better.
In 2010, the ratio is increasing a lot. There was a big

financial crisis and the customers stopped buying. The
companies could not sell their inventory and they took
some time to stop producing. When they stopped
producing and they tried to sell their stocks, the ratio
went down.
In companies that don’t manage their inventory, you’ll see big jumps with this ratio. They have too much
inventory compared to what they sell.
Inventory is symptom
Inventory can hide a lot of problems. Companies have a little more inventory in case something is going
wrong. To reduce the inventory of a company, that costs a lot, you have to attack the symptoms, the
root of the problem. This can be

- Lack of training : people don’t know how to manage inventory and they increase inventory to
make the marketing and sales department happy
- Poor product Design Specs : sub-products/raw materials should be rationalised/harmonized,
they should be the same for the different products.
- Lead times : if it takes a lot of time to buy raw materials or to make the final product, you’ll need
a lot of inventory of raw material and final product.
- Lot sizes : if you reduce your lot size, you reduce your lead time. If you produce product A for 5
days, then a client that want product B will have to wait longer. But if you switch every day, the
lead time will be smaller.
- Quality of the product : if you produce products that have a bad quality, you’ll have to hold
some inventory, as you’re not sure about the quality.
- Machine breakdowns : If you know that your machines break down a lot of times, you’ll have to
make more inventory in case they break down
There are a lot of things than can cause a high level of inventory. To be able to sustain low level of
inventory, you have to work on the different symptoms.
Decisions that impact inventory level
Strategic level decisions
- Network configuration : if you have a lot of DC, you’ll need a lot of inventory
- Storage location per item : You can decide what products you store in what DC
- Make-to-order/make-to-stock : The decopeling strategy
o in a make-to-stock environment, you make a forcast and produce on that forcast
o in a make-to-order environment, you wait for the order and make as fast as possible
the product that has been ordered. This option has the lowest stock levels.
Tactical level
- Safety stock levels : You’ll determine the level of safety you want. The more safety stock you
have, the more service you’ll give to the customer, as you have it in case something goes wrong.
There are other tactical and operational level decisions that will impact inventory level, but the 4
decisions stated here impact the inventory level the most.
”Optimum” inventory level
The goal is to find an optimum, the right level of inventory. The whole logic is to optimize the bottom
line, or the profit. You need to find the level of inventory that enables you to have as much revenue as
possible, and to give as much revenue as possible. In the meantime, you need to find the level of
inventory that costs the less possible.
Different types of inventory
Five main types of inventory can be identified : (exam question)

Raw Materials and Components Any material inputs acquired by a company to be used
in manufacturing (purchased or produced). Not for
companies who only distribute.
Work in Process (WIP) Materials in the factory that are in various stages of
completion (during manufacturing/assembly)
Finished Goods An item/product that is ready to be sold and delivered
to a customer, biggest part of the inventory in
companies

Consignment Stock Goods that are placed at a customer’s location without
receiving payment until after the goods are used or
sold. Example : vending machines from snickers and
mars in a hospital. The hospital only pays when the
snickers and mars are sold. Win-win situation.
Maintenance, Repair and Overhaul (MRO) Often low cost goods, but numerous items/parts, used
to repair machines or products fast
The raw materials and components, WIP and finished goods generate the biggest part of the profit of
the company.
Example : approach to inventory management
A methodology that has been proven in the course of many projects, in large and smaller companies.
They analyze the inventory level of the company and compare it with similar companies. They try to
understand why certain levels of inventory are very high. After that, they think of a solution and they
implement it.
THE OPERATIONAL POINT OF VIEW
You can compare inventory management to what you have in your fridge. There are 2 types of people,
2 approaches, 2 inventory policies :
Periodic replenishment Reorder point

I don’t like to take too much risk and I like to be Everyday, I look in the fridge and check what I can
efficient. I go every friday to the supermarket. I eat for the day. If I miss something, I go to the
buy what I need for the week, and I hold it in supermarket. Some weeks, I go every day.
stock in my fridge. Sometimes, I buy a bit too
much and I have to throw it away or give it to the
neighbors.
There is a moment in time where I check the When I have a certain level of inventory, I buy the
inventory and I buy the full stock needed. products needed
Visual representation of the level of inventory

The level of inventory, is the most important. It’s As soon as I have 15 units, which is the reorder
going down. Every 4 days in this case, I replenish point, I will buy a certain quantity, called the order
to my replenishment level. Here, it takes 1 day to quantity (green). Sometimes, the reorder point is
replenish, so I order on day 4 and get the also the safety stock.
products on day 5.
This technique requires heavy IT systems. An easy
way to do this is to determine some areas on the
ground, with a reorder zone. As soon as the stock
zone reaches the reorder zone, the company has
to order the products.
Another system is the two bin system. When a bin

is empty, you have to order the quantity of the
bin.
Limitations Limitations
- You have more stock, which costs a lot - Continuous review system : it’s not very
- You might have to throw away some efficient as you need to check all the time
products the level of inventory you have
- Low variability demand - It does not enable you to aggregate the
products you need to buy, as you need to
go every day to the supermarket, which
costs a lot (fuel)
Advantages Advantages
- Efficient : you don’t need to check the - You have less stock
level of stock every day - You only buy the products you really need
- it can be good if you have low holding So you can deal with a high variability demand
costs as there is a higher level stock and are protected against stock out (= rupture de
- less need of analysis, as you know when stock).
you order the products
Periodic replenishment & reorder point
Some companies use a combination of both. While following a fixed schedule, orders are made to
replenish the stock to a fixed level.
THE FINANCIAL POINT OF VIEW
Inventory costs
Inventory cost can be divided in 3 costs. The ordering and carrying/holding costs are the biggest.
Caryring/holding costs : Costs to keep an amount of inventory in stock during a period of time. This is
why we call inventory sleeping money, as it’s tied up in inventory Therefore, you cannot invest that
money in something else or you’ll have to borrow it to the bank or investors.
Usually, it’s expressed as a % of the cost price of the article.
Another way to quantify the carrying cost, is to calculate

- the WACC. The weighted average cost of capital is a combination of the money you have to pay
the banks (interest rate, which is low currently) and the shareholders (higher). We look at the
cost of the capital and how much does it cost to invest in inventory
- Storage costs : the price of the warehouse, the operators to carry the inventory
- Obsolescence cost = the products that are not good anymore because you did an update or
else. The bigger the inventory, the bigger the obsolescence cost. For example for the milk.
- To a lesser extent :
o Insurance cost
o Tax elements linked to inventory (country dependent)
o Administrative registrations : to register all the products coming in
Ordering costs : Costs of placing a production or a purchase order
- Handling costs (reception, stock intake,…)

- Change-over cost in production (labor, energy, waste,…)
- Administrative costs (system transactions, order follow-up, payments,…)
In a distribution environment : In a production environment :

- Signalling the need of restocking - Administrative issues and technical
- Decision on the order size and preparation of the
searching the data production order
- Shipping, preparation of price o Work order release and order
requests and treatment of tenders preparation
- Placing the order and determination o Material availability checks
of delivery and payment conditions o Verifying and printing routing files
- Order confirmation-treatment o Preparation of picking lists
- Monitoring the fulfilment of agreed o Preparation of technical drawings
conditions - Cost of order fulfilment : Supply of materials,
- Receipt, inspection and storage of semi-finished products, components and
goods tools
- Financial settlement of the - Internal transport
transaction and control of the - Setting up machines (including lead time and
procedure (incl. disputes & material loss)
complaints) - Switching and conversion costs (e.g. cleaning)
- Treatment of customs and freight - Bringing the goods to the warehouse,
matters including remaining material
All the management of the inventory - Accounting costs / post calculation
The time the company takes to produce product A, 1
week or 2 weeks, will have an impact on the efficiency.
The longer the batch, the more efficient the company
can be, as it does not need to do changeovers, during
which they lose production.
Stock-out cost : This cost is complicated to quantify.
- The missed opportunity of not selling certain products. The company can track the cost of not
having the inventory, the product available when required, the penalty cost. They can compare
the forecast the demand and the sold products. They can track the sales that should’ve been
done but weren’t, because there was not enough stock.
- Lost of confidence in the customer
- Negative publicity

HOW MUCH INVENTORY SHOULD WE HOLD?
We’ll discuss 2 things :
- Order quantity : you are in a set-up where you have a reorder-point. You will buy a certain
amount of products. This amount can be quantified mathematically.
- Safety stock : There is also a method to calculate what should be the ideal order-point, based
on the safety stock. We’ll see the theory.
Order Quantity (EOQ)
The whole principal is to find the right balance or the optimum between the holding/carrying cost and
the transaction cost. To do so, we’ll quantify the economic order quantity (EOQ), invented by Ford
Harris. We call this the Wilson Formula. We need to quantify the Holding (how much money does it cost
me to hold inventory ? Warehouse cost, electricity, cost of capital, … ) and Transaction cost (what you
have to pay to replenish : the transporter to bring the products, admin costs, taxes, … )to determine
with both the EOQ. Know the formula and what’s behind it for the exam
𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝑪𝒐𝒔𝒕𝒔 =𝒉 x 𝑸/𝟐 𝑻𝒓𝒂𝒏𝒔𝒂𝒄𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕 = 𝑲 x 𝑫/𝑸

= Holding cost per unit x Average units in stock = Cost of a transaction x Amount of transactions
h = Holding costs for one unit, calculated either K = Fixed cost of a transaction, the cost per unite
as fixed value or % of SKU value D = Demand (on a yearly basis)
Q = Order Quantity (the quantity you order now, Q = Order quantity
that may not be the optimal quantity (the EOQ) D / Q = Amount of transactions
Q / 2 = Stock average
Example : demand is 100 per month. The demand
You only buy when you have no stock anymore. per year is 1200. If every time you order, you
There is no safety stock. The reordering point is order 120 products, the amount of transactions
0. will be 10. If every order cost 100 euros, the total
transaction cost is 1 000.

We end up with this formula for the total Supply chain cost
= Holding + Transaction + Purchasing costs
=ℎ x 𝑄/2 + 𝐾 x 𝐷/𝑄 + c* D
Now, we want to calculate the EOQ, which is the optimal quantity Q we want to buy that will minimize
the supply chain costs.
- The bigger that quantity, the bigger the
holding cost.
- The bigger the EOQ, the smaller the
transaction cost
The sum of the holding and the transaction cost

gives the grey line.
To determine the maximum or the minimum, you need to derive the equation and make it equal to
zero. When we do so, we come to this formula that gives the optimal order quantity.
(exam question)
- K : The numerator is the demand and the transaction cost. The bigger the transaction cost K,
the bigger the quantity Q.
- h : the denominator is the holding cost. If you manage milk, you know that if you have too much
inventory you’ll have to throw away some milk and you’ll have obsolescence costs. Therefore,
you’re going to buy a little milk. If you sell iPhonses h will be high also, because the iPhone is an
expensive product. The bigger the holding cost h, the smaller the quantity Q.
- Purchasing costs don’t change ! It has no impact on the EOQ
Safety stock
On top of the EOQ, you also need to determine the safety stock, as not everything is going perfectly in
the supply chain. You need some inventory to cover the risk.
On the one hand, you need a good lead time, the time to deliver your customers. If the customers don’t
want to wait for the products to be produced or components to arrive from the suppliers, you need that
safety stock.
On the other hand, having a too big safety stock will engender a lot of costs, such as inventory costs,
transportation costs and production costs.
k Standard deviation Lead time + review period

Based on the service level. The Takes into account the forecast Lead time : the more time your
higher the service level, the accuracy. The more accurate suppliers need to send the
higher the safety stock. you are, the less safety stock components, the more safety
you need. stock you need.
Review period : time between 2

replenishment
Homework

Question 1 : What are our yearly holding, transaction, and purchasing costs? (exam question)
- We have an annual demand of 1.000 pieces

- Purchase price : 10€
- We currently order on average 20 pieces per transaction
- It cost us 2€ per year to stock a unit plus 15% of its price (to reflect the cost of capital, the risk
of obsolescence and insurance).
- We have to pay 50 € of administrative cost for each order
Demand D = 1 000 Transaction costs : K x D/Q = 50 x 1000/20 = 2.500 €

Price P = 10 € Holding costs : h x Q/2 = (2 + 0.15 x 10) x 20/2 = 35 €
Order quantity Q = 20 Purchasing costs : D x P= 1000 x 10 = 10.000 €
Holding cost h = 2 + 0.15 x 10€
Fixed cost of transaction K = 50 €
Question 2 (3 questions)
- We have an annual demand of 1.000 pieces

- Purchase price : 10€
- We currently order on average 20 pieces per transaction
- It cost us 2€ per year to stock a unit plus 15% of its price (to reflect the cost of capital, the risk
of obsolescence and insurance).
- We have to pay 50 € of administrative cost for each order
What is the Economic Order Quantity?

!"# ! & '((( ) *(
EOQ = 9 $
= 9(!,(.'* & '() = 169 units
What would our yearly holding, transaction, and purchasing costs be with the Economic Order Quantity?
Transaxtion cost = K x D/Q = 50 x 1000/169 = 296 €
Holding costs = h x Q/2 = (2 + 0.15 x 10) x 169/2 = 296 €
Purchasing costs = D x P= 1000 x 10 = 10.000 €
What is the cost difference between the initial order quantity, and the Economic Order Quantity? (exam
question)
Total cost = Transaction + Holding + Purchasing cost = 1943 €
Transaxtion costs = 2.500 - 296 = 2.204 €
Holding costs = 35 - 296 = - 260 €
Purchasing costs don’t change ! It has no impact on the EOQ

6 DEMAND FORCASTING
Why Do We Forecast Demand? We want to forecast the demand because we want to take action, to
make the right decision.
DEFINITIONS
There is a difference between demand, supply, and sales.

- Demand: the clients’ initially requested quantity,
product, and delivery date. Tomorrow there will be
10 kids in a line waiting to buy an ice cream.
- Supply : the amount of products you decide to put
in your store. I decide to buy 14 ice creams and put
them in the ice cream truck in order to have a safety
margin.
- Sales: how much you sold, because there is a
demand that fits the supply. If there is demand but
no supply than there is no sale
Also, make sure you get the difference between forecast and supply plan.
- Forecast: how much demand you think you will have. I think that tomorrow there will be 10 kids
in a line waiting to buy an ice cream.
- (Supply) Plan: how much you plan to produce, which can be equal to the forecast, but also more
than the forecast.
- (Financial) Budget: how much you planned during the last budget exercise. The financial budget
has a huge political impact. The financial budget is made at the beginning of the year, so
sometimes it’s a bit confusing for the forecast and supply team and difficult to stick to the
budget.
- (Sales) Targets: how you incentivize your team to sell. Some companies give bonuses to their
sales people when they reach a certain target. But this target does not correspond to the
demand forecast. If you sell more than 12 ice creams, you get a bonus.
- Lost sales: how much you could have sold but didn’t due to external factors (ex: lack of supply...)
The demand forecast is the baseline for all other plans
4-DIMENSIONS DEMAND FORECASTING FRAMEWORK
How to set up a demand forcasting process? While going trough this 4-dimension framework, we’re
going to answer ceveral questions about the demand forcasting process. As we answer them, we’ll make
sure we aim to demand forcasting excellence.
Remember that we forecast demand because we want to take action. If you ask yourself all these
questions regarding the demand forcasting, it’s in order to help other people to take decisions.
Granularity and temporality
There are different types of forecast for supply chain.
- Material : If you try to forecast the demand of iPhones, I could do a forecast of all iPhones, but
also try to forecast the blue iPHone 4. You can choose the level of aggregation.

- localization : You can also try to forecast the demand of iPhones in Belgium, or just in Brussels
or Antwerp. You can forecast the demand of iPhone at each possible level.
- Time buckets : You can also forecast the demand of iPhones for the day, the week, the month
or even a year.
- Horizon : 6 months a head or years ahead.
All these forecasts have a link between themselves. If you do a forecast for a day, you can sum it up and
do a forecast for a week. Same goes for a month and a year. If you have the forecast for a store in
Belgium, you can sum it up and you have the forecast for the Belgium level.
You can also divide them. If you have the forecast a week, you can divide it by 5 and you have the
forecast a day. It would not be super accurate, but it would make sense.
You can always zoom in and zoom out to have all different forecast. But what aggregation level should
we focus on ? We forecast demand because we want to take action. Therefore, you need to forecast
based on the type of decision you want to take. The aggregation level that will help to make the right
decision. If you have an ice cream truck and you need to make all the ice cream in the weekend for the
upcoming week, then the only forecast you’re interested in is the forecast for the following week. You
need to take a decision right now for the ice creams of next week. First, analyze the decision that needs
to be made and then make the forecast.
Decisions
What aggregation level should we use to create the forecast ? We need to take the data that is the
most accurate. Indeed, the weather could change, classes could close, there could be a strike, which
will affect the demand in ice cream. By doing a daily forecast, you’re going to be very accurate on a
weekly level. But at the week level, the weather won’t be as accurate, and there is no strike at week
level.
Depending on the people you are trying to help, who you are going to serve in the supply chain, you
might need very different types of forecast.
- Short term, you ask yourself how much you need to ship, to produce or number of extra hours
you need. The people who take these decisions are logistic managers. They take forecasts that
are very granular. They need the number of products (=SKU) per day per store, as they need to
deploy these products in the shops.
- You also hav the people working in the plant, for example the plant manager. They need a
forecast per month, per product and on a worldwide level.
- The people working in marketing, for example the marketing strategist, need a forecast that is
accurate per brand, per market and per quarter.
Who ? Forecast
Logistic manager Product x stores x day Very granular, small horizon
Plant manager Products x global x month not very granular, big horizon
Marketing strategist Brand x market x quarter
Forecasting horizon
Let’s imagine that you are a supply planner in a company. Your job is to purchase raw material for the
production of your plant. Your main supplier is quoting a lead time of 3 months. You make monthly
orders to this supplier. You go to your team that does the forecast. Which month should they focus on
for the forecast?

- You do the order at the start of the first month, when we have an inventory of 150. Let’s imagine
they’ve already forecasted the demand of the first, second and third month, which is 50, 75 and
25. When you do the order, you cannot impact the inventory level of these 3 first months, as
we’ve already ordered the raw materials some months ago and it’s going to be delivered.
- But it’s always possible that a client calls you and wants to order 50 products in the second
month. If that happens, you should update the forecast. Your client will be able to have his
products, but it will reduce the level of inventory of the company. Indeed, the actual demand
during the first 3 months will impact the starting position of the 4th month, its starting inventory
level. Therefore, we’ll have to order more now, so that more raw material will arrive in 3
months, to have a reasonably high level of inventory. The first 3 months are therefore impacting
our decisions.
- I also need to know the forecast of the 4th month, in order to know what the inventory level of
the beginning of that month should be. If the forecast of the 4th month is 0, you don’t have to
order at all.
- It’s the same for the forecast of the 5th month. If the product is going to be outdated or it’s the
end of the season during the 5th month, you need to take this into account now. You don’t want
to order too much for the 4th month, as you’ll have to end up with the least possible inventory
for the 5th month. It can be the other way around. Maybe the 5th month you’ll do a promotion
or it’s the start of the season and the demand is going to be very high. Therefore, you’ll need to
end in the 4th month with a lot of inventory, which is affected by what you ordered now and
arrives the 3rd month.
Any month between the 1st one and the 5th one is equally important. You need to forecast all of them
to have a good forecast. A lot of supply chains focus on a certain month, which is bad.
DEMAND COLLECTION
What is the difference between sales and demand ? (exam question)
- Demand = clients initially requested quantity, product and delivery date. Demand is
unconstrained. That’s what you are going to forecast, to supply as much as possible.
- Sales = constrained by the stock you have. Sales = demand constrained by your supply
In supply chain, it’s very important to forecast demand, and not sales. If you stick to sales forecasting,
you can end up in a vicious circle.
Imagine, you have no chocolate ice cream today. The sales forecast is going to be 0 for the chocolate
ice cream, and the actual sales are going to be 0. You achieve an accuracy of 100%. You get a bonus.
The supply chain manager will see that there is 0 forecast in chocolate ice cream, and that’s great as
there is no chocolate ice cream in the inventory. The manager is satisfied. But the client is not happy as
he did not have his chocolate ice cream and the business is not happy as you made no money.
That is why you don’t want to forecast the sales but the real demand of the clients, even if there is no
chocolate ice cream. But it’s impossible to capture the real demand of the clients. Usually, as long as
there is supply, demand and sales is the same. We have an issue when there is a shortage. Companies
should keep the data when they have been in shortage. Besides, the company has to track what happens
with the client when the product is not available.

METRICS
Accuracy and bias
How do we calculate the accuracy of a demand forecast ? (exam question)
- Bias : you are under or over the demand

- Precision : how accurate are you ?
Forecast looks very easy. If the demand is 100, forecast if 100 and you are 100% accurate. Nevertheless,
it’s more tricky than that.
Bias : tendency to over- or under forecast. When
shooting at the target, you move towards a specific
direction.
Non Accuracy : amplitude of the forecast error. You are
close to the center of the target.
Endessous à droite : you are unbiassed as you are not

always to high or too low, but you are not precise, not
accurate.
When forecasting demand, we want to be accurate.

We don’t want to bias.
We need to align the forecasting metrics with supply

chain objectives. When choosing the metrics, we need
to keep in mind who we are helping and what decision
that person needs to make.
The demand is the bleu line. 2 forcastings
have been made in grey and orange.
The orange forecast is not accurate (only
accurate for 69%), but it’s not biased (-1%).
The grey forecast is more accurate (84%)
but is biased (by -12%).
The orange forecast has huge variances.

Sometimes, the production people will have
to work verry hard, sometimes not. The
grey line is much more closer to the bleu
line, but the forecast is under the demand.
At some point, you’re going to have some
issues with the inventory.
We’ve an issue, as we have 2 forecasts, one that is not accurate and not biased, and another that is
accurate and biased. Which one is the favorite forecast ?
Choosing the best forecasting model is often more relying on choice theory than on straightforward
selection. You just choose a favorite based on some arguments, but none is right.

Overview formulas
Error Difference between the

forecast and the demand
Bias Over- or under- forecasting
Over- or under- forecasting %
MAE Mean Absolute Error Absolute error
Absolute error %
MAPE Mean Absolute Average absolute error %

Percentage Error
RMSE Root Mean Squared Error Square-root of the average
squared error
Square-root of the average
squared error %
Bias
You take the average of the error.

Let’s imagine you get an average bias of -3 a day. You’re not able to say if it’s good or bad because you
don’t have the scale. That’s why we can also express the bias in a %. For a model :
- Very good : 0% to -2%

- Good : -1% to -3%
- Not really good : -5% to -10%
MAE: Mean Absolute Error
We need to know if the forecast is accurate or not. Instead of formulating all the errors, we’re going to
measure the absolute error. The mean absolute error is not complex.
MAPE: Mean Absolute Percentage Error
Compute the absolute error period by period, and for each period you divide the absolute error by
demand. You get a %.
The red columns are the absolute % error per period.
We see that period 8 has the biggest MAPE, so it’s the

worst period. Because during that period, the demand
is very low. So obviously, if you divide the error by a
small demand, you get a high %.
But if you take period 10, which has the same level of
error, you see that the MAPE is not that bad, just
because the demand of period 10 was higher.
When you overforcast the demand, when your forecast are high but the demand is quite low, you get
a massive penalty, because you divide a very large error by a very low number (the small demand). That
makes MAPE a bad KPI.

RMSE: Root Mean Squared Error
RMSE has a very complex formula that is not easy to understand. Basically, RMSE makes sure that bigger
errors have a bigger penalty, as we use the error squared.
We see that period 8, 15 and 16 the errors were very bad.
We also see that in period 6, 9, 12 and 14, the forecast

matched the demand. For these periods, the RMSE is
equal to zero.
Example : You forecast that tomorrow the ice cream consumption will be 100 units. Demand is 99.
Tomorrow, you’ll have an extra ice cream. No one cares, it’s not a bad thing. Let’s imagine you do a
forecast error of 100. You forecast 100 and demand is 100. You are now left with 100 ice creams for the
day after. It’s a very bad error. It’s not just a small error of 1 times 100, it’s very bad.
In supply chain, the cost of error is huge. RMSE is good as it only focusses on the big errors. Small errors
are just safety stocks.
RMSE vs MAE
outlier = a peek in your dataset (see red line)
if in your data you have an outlier, RMSE (average) will put

the importance on this specific outlier, and MAE (median)
won’t.
RMSE : sensitive to outliers

MAE : outlier-proof
MAE is therefore a better KPI than RMSE in case of outliers.

Intermittent demand = when a product experiences
several periods of zero demand, and then other periods of
high variable demand.
RMSE : as it’s the average, it’s going to take into account

the 0s.
MAE : as it’s a medium, it’s going to cut the dataset in half,
which is better.
The grey forecast forecasts 0s all the time. It has an arror

forecast of 33% (MAE). This forecast is the most accurate.
The orange forecast is a bit higher and has a MAE of 43%.
Forecast metrics : which one to choose ?
You oversee a product sales. You are responsible to pick the best forecast. You are comparing 3 forecasts
(#1, #2, and #3) and want to pick the best one based on historical performance. Which is your favorite
forecast, based on different KPIs ?

Here are the facts :
- MAE will aim the median demand (not the same as the average).
- RMSE will aim the mean demand.
- MAPE will aim a conservative value. Avoid it.
You could say your favorite is forecast #2, as you say that MAE is the best KPI and that forecast has the
best MAE. Regarding the bias, it means that you are going to be 32% lower than the average actual
demand, but it could be worse.
If you say your favorite forecast is #1, you can say that MAPE is the worst KPI, so it should not be taken
into account. Besides, RMSE can be considered as the best KPI, and it has the best % compared to the
2 other forecast.
The worst is MAPE. Don’t use it.
The teacher likes to sum up MAE + Bias in order to have a score. Then, you’ll see that forecast #1 is the
best one. It’s not bias and not sensitive to outliers. It’s not the perfect solution, but it’s a good
compromise.
If you want the best, you should use wMAE + Bias. If you really want to push this further or if you get a
dataset with a lot of products, you’ll want to give more importance to some products compared to
others. Therefore, you should weight the item of the MAE based on its importance.
A combination of both KPIs, as no one is perfect. Here is a little recap :
Forecastability & benchmark
Imagine if your supply team did a forecast and gave

you its KPIs. How do you know as a manager if they did
a good job while forecasting ?
The only way to know if the model is good, is to

compare it to something else, to a benchmark (MA6),
a moving average. You should be able to beat this
moving average with 10% to 15% in terms of ?????

DEMAND FORECASTING PROCESS
The demand forecasting process for a company is composed in 4 steps.

Demand forecasting What do they do ? When computing the KPI of
process every step, what do we see ?
You have an The software beat the moving
automated forcast average. They add value to the
baseline, a software forecast.
that generates a
forecast for you every
month.
The demand planners As they are aware of the new products The demand planners beat the
are hired to check that and the big clients, they upgrade the moving average. They add
all these forecasts are forecast and increase the total volume. value to the forecast.
correct.
The sales team want to They just want to secure stock because The sales team over-optimistic
input a few things they don’t want the company to have a (MAE) and they increased the
shortage. So, they increase the total error (Bias). They destroy value
volume again. of the forecast.
During a consensur They change the forecast so it’s aligned The consensus meeting slightly
meeting, everyone in with the budget. improved the bias. We could
the company agrees on actually just go back to what
the numbers the demand planners had. They
destroy value of the forecast.
How do you make sure that all these people do a right job if you manage this process ?
- Efficacy : You want to make sure that if someone changes the forecast, they add value to it.
- Efficiency : You don’t want people to spend too much time adapting the forecast, as you need
to pay them. For example the sales team needs to sell the products.
How do you do this ?
1. You add a first step and add the moving average (benchmark). You need to make sure you beat
this average, otherwise you pay a software and people to do nothing.
2. While computing the KPI of every single step in the process, you analyze if the people who
worked on the forecast really added value to it
What do we do now that we know that the sales team destroys the value of the forecast ? We should
help them to improve the forecast. We should understand why they change the bias.
Not every product has the same importance. Some products are worth nothing, and some are worth a
lot. Therefore, use the weighted error.

If you want to have a product that is efficient and a focus on the important products, you need to track
forecast value added and use weighted metrics. You can be sure that the team works on the right
products and that they add value.

7 STRATEGY & FINANCIAL METRICS
SUPPLY CHAIN STRATEGY
How do we look at the supply chain strategy ? There are 3 levels :

1. Strategical level : we look at the long term and make sure we take the right decisions
2. Tactical level : we take a look at what we should do to stay within the strategical level.
3. Operational level : we take a look at how we can do the things right, as efficiently as possible.
Introduction to Supply Chain Strategy
Supply chain strategy is about the nature of raw materials procurement, transportation, manufacturing
& distribution to the customer, both within the walls of the enterprise as with its supply chain partners
(3PL, suppliers, customers).
Supply chain strategy, like other functional strategies, should be aligned with the business strategy.
We typically see that the competitive environment of companies is changing. There is continuous
pressure on prices for a lot of industries. There is increasing competition, while 50 years ago it was not
the case everywhere. There are more and more demanding customers. They want the companies to
improve current service levels and to provide high quality products or services. This put’s more and
more pressure on companies.
Because of all these parameters, the company’s strategy needs to be adapted, and the Supply Chain
Strategy too.
The three value disciplines have a number of distinct characteristics
As a CEO, you have a long list of possibilities, and you need to make the good choice. There are also a
lot of things you do not want to do. We can put the companies in 3 boxes based on their choices.
Operational Excellence Customer intimacy Product leadership

Offers the product at the Brings the best total solution. Makes the best product on
lowest possible cost. Propose a large variety of the market.
Proposition
Example : Ryanair, Action, products that will give a Example : iPhone

Amazone, Ikea, solution to your customer.
Value
Example : you can find

everything at the Brico)
Variety kills efficiency. The Solve the client’s broader Cannibalize your success
Golden rule
assortment of products is problem. The more the with breakthroughts. Every

very restrictive so you can be products, the bigger the cost, time they put a new product
very efficient in producing and the bigger the price. on the market, they already
your products. think about the next one.

Nevertheless, companies cannot try to be good at everything (as they actually might get bad at
everything). They need to prevent to get stuck in the middle of these 3 competitive strategies. They
need to specialize in one or 2 strategies.
MAKE STRATEGY EXPLICIT
Every company wants to be successful, to be the best. However, choices need to be made on what
competencies does a company want to be the best.
Categorization of critical success factors
How can they look into the competitive strategy of the companies at one level deeper than just those 3
buckets ? Its possible with the critical success factors. The idea is to compare the products of other
companies to yours, and you ask yourself
- Why are customers buying their products instead of mine ?

- Why am I different ?
- How am I doing compared to my competition ?
- What competencies do we want the customer to appreciate compared with competitors?
To do that, we can rank a couple of factors in 3 buckets.
1. The non-issues : For certain customers, certain parameters are not very important. As an
example, a very expensive hotel has an outstanding service. Customers are ready to pay a lot of
money for these services. Therefore, they do not care about the price. It’s not in their strategy
to have low prices.
2. The order qualifiers : If you don’t have that parameters, there is no way you’re going to be able
to compete. For some products, the price is an order qualifier. If your product is too expensive,
there is no way you are going to sell your product.
3. Oder winners : The one making the difference. Yu have 2 products sold at the same price, but a
short leadtime could be a winner, a diffirenciator. Amazone is with this strategy making a
difference.
This is a list with all the critical success factors :
1. Low price : offer low prices on a consistent and sustainable basis, offer lower prices compared
to competitors
2. Fast delivery : deliver orders fast after order receipt
3. Reliable delivery : keep your promises in terms of due date and completeness, important in the
building sector.
4. Quality compliance : offer consistent quality, conforming to design, specs or requirements, for
example in pharmacy.
5. Quality level : deliver a product with high intrinsic value (taste, free of additives, process ability),
important for restaurants
6. Mix flexibility : offer a wide product range, specified by the own organization, ability to offer a
lot of products
7. Product flexibility : offer customer specific products (produce the recipe of the customer,
specific weight & packaging,…), for example flexibility to have leather on your car or not
8. Volume flexibility : respond to unexpected important volume changes, small supplier that
cannot follow with big quantities
9. Innovation : regularly introduce successfully new and innovative products in terms of recipe,
appearance,…

10. Service : offer a range of services besides the physical product, logistics service, trade marketing,
consumer info, etc.
11. Experience : give the customer/consumer the feeling that he is really being cared for
12. Accessibility : make it easy for the customer to get your product, to be approachable
FROM COMPETITIVE STRATEGY TO SUPPLY CHAIN STRATEGY
Through those critical success factors, we can detail a bit more what is important for a company and
what makes the difference, in terms of competitive strategy. Based on that, we can determine what we
need to do in terms of supply chain to fulfill these success factors. If accessibility is a success factor, then
having retail shops close to your customers will be important. If fast delivery a critical success factor,
you need to make sure that your network of DC is close enough to your customer in order to be able to
deliver the products in the lead time that they are asking.
How do we now translate the competitive strategy to the supply chain strategy ? There are different
decisions you need to take in your supply chain.
1. Size : how much capacity do you want in your company? Tight or excess capacity profile? You
need to check with the critical success factors.
a. Excess capacity profile : If one of them is fast delivery, then you need to make sure you
have enough capacity, and make sure you produce enough during the peak periods.
You also need DC than are big enough and close enough to the retail shop to deliver
fast the market.
b. Thight capacity profile : If you are in a set-up where cost is a very important
component, you need to make sure to have just enough capacity. Having excess
capacity will cost you money in assets, in people that sometimes don’t work.
2. Timing : when to increase/decrease capacity? Leading or lagging strategy? Do you want to be
able to increase or decrease your capacity depending on the seasons for example ? Or if you
have a broad variety of products you sell, do you want to produce them all yourself ? Are there
some small runners you want to ask other companies to produce ?
3. Type : what type of resources do we need? Level of automation ? Amazone is very cost efficient
has been able to automate a lot of their processes in their DCs. This required a lot investment,
but as they have a lot of volumes, this investment enables them to deliver at a low cost.
4. Location : where should resources be located? Depending on the DC and manufacturing sites.
There are some processes behind these decisions also :
5. Demand : how do you shape demand to available supply (e.g. dealing with promotions)
6. Supply : sourcing strategy – local or offshore sourcing – supplier relationships
7. Technology : product & process technology, IT-systems, transportation
8. Innovation : what and how to innovate ?
Market characteristics and supply chain segmentation
You can devide that in 2 different supply chains.

More lean /
cost efficient
More agile
/ responsive Lean supply chains : cost driven, wants to be as light
Product variety and as cost-efficient as possible.
low high
Demand variability low high

Supply chain characteristics
Demand uncertainty low high

Agile supply chains : we want to invest in a bit more
Volume
capacity. You want to be close to your customer. You
high low
Delivery reliability high low
Order lead time long short

have the possibility to adapt yourself based on last
Customisation low high minute changes and requirements.
Innovation level low high

This can impact a lot of different variables. But you have to make a decisions : more agile or more lean.
The supply chains of companies are typically one or the other.
THE THEORY OF STRATEGIC FIT
You have the competitive strategy and how you want to operate based on the strategy of your company.
Your supply chain will be determineted by your corporate strategy, it’s competitive strategy, but also
about what lives in the market and what the competitors do.
Uncertainty profiles
Your company is in an environment full of risks and uncertainties, for demand and for supply. Those
uncertainties will also dictate the different supply chain strategy and decisions.
Low (Functional Products) High (Innovative Products)
Low
(Stable Process)
basic apparel Grocery
High
(Evolving Process)
oil and gas vaccines
Basic apparel : low demand and supply uncertainty. Typical example where the uncertainty of the
demand and supply is low. In the zara case, we’ve seen that the demand for very basic product is rather
stable, whereas trendy products has a variable demand. Besides, it’s very straightforward to make this
t-shirt.
Grocery : high demand and low supply uncertainty. The retail sector is a sector where the demand
uncertainty is high. It’s hard to predict what people are going to buy. If you sell sugar and salt, the
demand is stable. But chocolat sells better in the winter than in the summer. The different product in
the shop have different seasonalities. This demand is therefore difficult to forecast. In terms of supply,
grocery is mostly local. The supply chain uncertainty is therefore low.
Vaccine : high demand and supply uncertainty. Demand, as seen on covid, has a lot of pressure. If 3
doses are enough, the demand is high now but will be low the next years. On the other side, the supply
is also very uncertain, as the process is biological, which is very uncertain in terms of outcome.
Oil and gas : low demand and high supply uncertainty. Consumption was increasing before covid but is
overall rather stable. Depending on the fact that you find new sources of oil or gas, that can drastically
change the offer, the supply.
Capabilities and characteristics of your supply chain
Those uncertainty profiles will determine the type of supply chain strategy that you need.
Responsive
Supply Chain Lean supply chain : If you are in a set up where you have no
uncertainties, where your demand and supply are stable,
that is really a company that needs to work as lean as
Responsiveness
spectrum
possible and be efficient.
t eg
ic
fit
t ra
o fs
n e
Zo
Agile supply chain : If you are in a set up where you have a

Efficient
Supply Chain
lot of uncertainties (demand and supply), you cannot have
Low Implied
High
a lean company. You need a bit of responsiveness in your
uncertainty
uncertainty
spectrum
uncertainty
supply chain to cope with these uncertainties.
The more uncertain your environment, the more responsive/agile you need to be.

SALES AND OPERATION PLANNING
General definition for S&OP
Sales and operations planning (S&OP) is a formal monthly process where busines and operations decide
together on a (global) common action plan to balance demand and supply for the next 12 to 18 months
in order to realize the strategic objectives of the company.
- We have to make sure that this is done each month within the company
- Business (sales, marketing, CEO, CFO) meets operations (operation director, supply chain
director and S&OP director) to talk to each other, that sometimes lack in communication
- Goal of the meeting : a common action plan where demand and supply are balanced on the
long terme (12-18 months) as you need time to implement solutions (example : increase supply
by buying another machine or by finding a new supplier)
- Corporate strategy should be met, find an allignement with the supply chain strategy
Link between business planning and operational execution
Let’s look at the different horizon in terms of planning
- strategic planning (3-5y) : done by the CEO and CFO, plan on the long term
- business planning (3y) : strategic plan translated to make it shorter
- S&OP (12-18m): link between the business plan and the operation, translate the strategy in
capacity, in a list of different actions that should be undertaken in the supply chain
- Master planning : translation of the months in weeks
- Detailed planning & execution systems : translation of the weeks in minutes

8 IBPS/SUSTAINABILITY
IBPS = issue-based problem solving, a way to solve issues.

IBS is a hypothesis driven mindset that focuses on delivering client value and insight supported by facts.
It’s divided in 5 different steps (exam question) :
IBPS Approach
1. Define the problem clearly : make sure that you
understand the problem (and its scope) before
coming up with a solution.
2. Identify and prioritize issues : divide the problem in
multiple small issues using an issue tree. Then, trim
this tree by understanding where you have the most
leverage and only keeping these issues.
3. Build a workplan and conduct targeted analysis :
Create a workplan to analyze the different issues and
propose a solution. Base yourself on quantitative
information. You only think about the solution and
this stage. Make sure to give the right accountability
to the right people in your team and determine the
deliverable you want to obtain.
4. Develop insight with the 6 thinking hats to know if
what you’re doing is really good. Are there parts you
should not include, when you answer “so what?”
5. Create impact through structured communications,
make a story. Think early enough in the process how
you can tell the stody around what you are doing.
Make sure to test that story as early as possible.
…centered on client value
PROBLEM DEFINITION
You start with the problem

statement. You must make sure
that you spend enough time
defining the problem. Focus on
your client’s value driver.
Quantifiable objectives and a
timeframe are a good starting
point, by using the SMART
problem statement.
How can General Motors increase

its profit by 15% over the next 3
years ?
Important and tips:
- You do this with a team, work together, everybody should be involved

- Work in iterations : there are not bad ideas, all ideas should be on the table. Repeat the different
interviews to find the most problems possible and then eliminate the less important ones.
ISSUE TREE
Then, we divide that problem statement into different issues with the issue tree.
IBPS starts with hypotheses. You’ll not list an endless amount of issues, but you’ll make hypotheses to
discard certain parts of the problem. You’ll decide, based on your gut feeling, experience and interviews
with people in the company, what issues are the most important and what issues we should focus on,
as they have the most potential.
To increase the profit, we can
- increase the revenue (normally there are more possibilities, but using our hypotheses, we’ve
taken only the 2 most important ones, the biggest opportunities)
o sell existing vehicles that are there for a lot of time
o change the product mix, the types of products we sell on the market
- reduce the cost
o reduce production cost
o reduce G&A
At the end, it’s important to trim the tree. Initially, you’ll list a lot of issues, even if you don’t have that
much issues thanks to your hypotheses. But at a moment in time, you should decide what you want to
focus on because of the big potential. You’ll try to focus on a subset of issues where you believe there
is the biggest potential.
- Sell existing vehicles by decreasing prices on slow-moving models
- Reduce production cost by 10% by improving manufacturing processes.
Tips:
- Begin with problem statement

- No gaps, no overlaps : it’s important to not repeat yourself. 2 different issues should not tackle
the different problems.
- Focus on value measure : you’ll have a lot of ideas in the roots of your idea. To select the most
important ones, analyse the impact of the solutions. What has the biggest impact with the
lowest effort.
- When making the tree, first ask yourself “What”, then “How”, and then “How again”
- Trim to a hypothesis tree by using the pareto analysis, the 80/20 rule and experience. It means
that 20% of the issues/initiatives create 80% of the value.
- Work as a team, revisit often and iterate!

ANALYSIS
Once you made your issue tree and trimmed it

(decided on which issue you want to focus), the
idea is to do a detailed analysis. Instead of
analyzing everything in the company, it’s
important to determine :
- what kind of analysis you want to do
- what kind of data is required to do the
analysis
- the timeframe
- the source
- the responsible person for that type of
analysis
- the end product (the solution)
The analysis should be well-divided and upfront.
Some tips:
- Roles and responsibilities should be clear to avoid the duplication of effort ! Clearly define :
o One, and only one “responsible” per task
o The timing of your task : deadline
o The end deliverable expected : what we expect
STORYBOARD
Out of the problem you’ve received and the

solutions you’ve found, you should be able to tell
a story.
Storyboarding = how to create stories out of your
project.
- Message : Make clear what you want to
tell the audience
- How much time you want to spend
explaining the different parts
- 1st step : number of slides and flow of the
story

INSIGHT
• Take the time to conduct insight

• Step away from de details
• Focus on the “so what?”
• Translate facts into actionable, value-
generative recommendations
• Open work up for challenge and
discussion
• Involve the colleagues who bring new
perspectives
Used during the kick-of of the project. Ask the audience to use the different hats to have their point of
view on the approach of the project :
- The facts : only look at the facts

- Positive : you can only look at the positive aspects
- Creative : We’ve proposed an approach, but do you have other ideas or other people to
interview ? You make sure to capture different ideas and listen to your client
- Critical :
- Feelings : in order to take everything into account, what they like about the approach and what
they dislike about it
If you don’t use the different hats, some people will be very negative or negative. Using the hats, people
have to do both.
IMPACT
A bit the same as storytelling

Tips and tricks :
• Storyboarding early makes

communicating with impact easier
• Keep it clean, keep it simple, keep it
structured
• Emphasize client value
• Convince your audience with logic and
fact
• Tailor it to your audience
• Put yourself in the client's shoes

IBPS WRAP-UP
In a normal project, you’ll make a lot of analysis The idea of IBPS is to use hypotheses, based on
on a lot of data. The problem of that method is your experience and interviews you do with
that you require a lot of time to do all those people of the company, and to make sure that
analyses. you can win some time.
Then, you’ll focus on the problem that has the Making and trimming the issue tree enables you
biggest impact, based on what you’ve found in to focus on what has the biggest impact and
your analysis. spend as much time on the real issues from the
beginning. Then, you analyze. If in this analysis,
you find that there is not that much impact, that’s
not a problem, as you can go to something else.
You have to prove or disprove the hypothesis. If
the outcome is positive, it’s better.

9 S&OP
Revision of the S&OP game
The biggest issues were around people, who work against each other and have different goals.
Therefore, you need to align the objectives of the different people. There may not be secret objectives
in the company, as encountered during the game. Salespeople who have a bonus only based on their
sales are not good. Operation who are only paid on the efficiently of their lines are counterproductive.
They should have a bonus on the ROI. They can have a subbonus on their individual performances, but
a small part, so that they not only focus on their own job. All the people in the company should be
incentivized to work together. Other components that are important are the process and the tools. How
to make good scenarios to facilitate decisions. Tools should be able to show scenarios.
WHAT IS S&OP ?
S&OP stands for sales and operation planning. It’s a process to align different departments in a
company, to balance sales and operation. How much are we going to sell and how are we going to
make it ? It goes through 6 pillars :
1. Segmentation : for which customer, who buys a product, do I want to associate which service
level ?
2. Product management : introducing or removing a new product
3. Demand review : making statistical forecasts and a collaborative forcast within the company to
agree on a certain demand planning
4. Inventory planning : define the level of inventory you want to have
5. Supply planning : how am I going to organize my capacity to fullfill the demand and
inventorylevel that I have as a target
6. Executive S&OP : process about making decisions between different scenarios (increase the
capacity ? outsourcing ?) which is the most profitable for the company.
WHAT IS SUPPLY CHAIN MANAGEMENT ?
Delivering the right product at the right customer in the right quantity at minimal cost and with
minimal inventory.
- = What is not supply chain management !

- Definition for the past decade
To drive value, as measured by ROCE, by better balancing service, cost and capital employed trhought
better integrated and better balanced strategic, financial and operational planning.
FUNDAMENT 1 : THE SC TRIANGLE
The triangle
SCM = balancing the supply chain triangle of service, cost and cash (capital employed)
Imagine a company that can be summarized as a triangle, with the 3 angles:

1. Service
a. product portfolio/assortment : how many different product do you produce ? The
more, the better the service
b. target service level : high is better
c. lead time : time the customer needs to wait for its product. The shorter, the better.
d. Reliability : how reliable is my product in terms of quality
e. Order flexibility : be able to have no minimum order
f. Consignment stocks : when the end customer buys the product, the shop has to pay
the company. Normally, the shop pays for the products to be in their shelves
2. Cost : cost of warehousing, logistics, manufacturing and purchasing
3. Cash : inventory or working capital
Sometimes, ideas look good. But, you need to take a step back and look at the entire picture. Some
decisions will have an impact on different sides. For example :
- Sourcing in the far east : it will reduce the cost, but this will increase the cash, as you will have
more inventory !
- Extending the market portfolio to increase the market share : it is going to increase the
service, but this requires more cash (inventory)
- Lower safety stocks : it will reduce inventory so you’ll need less cash, but higher risk to have
stockout, which has a negative on the service. You’ll have to rush order, which will increase
costs (logistic costs and manufacturing costs, set-up cost)
How come ? Because the different departments have different KPIs, which can be conflicting KPIs.
Everyone is going to put pressure on the triangle, bring imbalance which breaks the triangle.
How do we solve these conflicts ?
How do we balance the triangle ? We should try to look at it like an investor. We should try to not look
at the angles separately, but share it. Indeed, its not only about the topline (the service). It’s also not
about the EBIT, the margin (service – cost), but it’s about the EBIT I generate about the cash I use, the
capital employed, which is the ROCE. Return on capital employed : ROCE = EBIT/capital employed. We
want it to be the biggest possible.
FUNDAMENT 2 : BALANCING
How does strategy impact the balance in the triangle ? Your position in the supply chain triangle is
impacted by the strategy you have.
Different strategies
Companies become market leaders, companies that are outperforming the competition on the long
term, if they make a choice in strategy and stick to that strategy over time. It’s impossible to combine
both and become a market leader.
Operational Excellence Product leadership Customer intimacy

My product/service has the My product/service is the best My product/service is the best
lowest price in the market. one on the market. total solution, as I understand
the market perfectly
Example : Ryanair Example : Apple
Example : IBM

How ? By decreasing How ? maximise the R&D and How ? expertise in experience,
operational costs, optimizing marketing, innovation select the customer segment,
time on the floor, decrease the build loyalty, strengthen
number of different airplanes, relationship
airports where they are etc
We can trace how executive people see the company, what strategy they follow. Sometimes, those
people are not aligned. If the strategy is not clear for the executive people, the strategy won’t be clear
for the employees also, same for the customer. You need to define the strategy but also apply it.
Different strategies lead to a different balance
The strategy that you’ll define has an impact on how

you’re going to position yourself on the triangle.
Liddle : low margin, low cost (small stores and not of

different products) and low capital employed (small
inventory)
Delhaize : high margin, high costs (big shop and a lot of

products) and high capital employed (high inventory)
Both strategies are fine. It’s OK if you have less margin than another company, as you compensate
with less cost and less capital employed. What cares is the ROCE.
REFLECTION 1
Better and more strategic target setting and monitoring of KPI.
The first reflextion is to say “let’s compare companies not only on turnover or EBIT but on operating
income and inventory turns.
- Operating income = EBIT

- Inventory turns = inventory/COGS (cost of good sold) = how many times is my inventory going
to turn in a year. High inventory turns means that my inventory is going to turn more,
meaning that on average you have less inventory to cassy.
Each dot means one year.
Hershey has a lower inventory turn than

Mondelez, but this is compensated by a higher
operating income.

The indifference curve from mondelez shows
that they would have the same result
Therefore, Hershey is actually doing a better job

in overall, as they are further away (à gauche) in
the curve than mondelez.
Hero has lower inventory returns but they do

not compensate with higher EBITDA. Their ROCE
is very poor.
Hero is doing bad.
They can put realistic targets, for example to

have higher margins, but not reduce with 10%
the inventory and be best in class.
REFLEXION 2
The 7 value drivers
It’s an extension on reflexion 1. There are 7 value drivers, what the customer sees as value :
1. Price
2. Psychological acces : how easy is it to find what I am looking for ? Time to you need to search
the product and to buy it.
3. Physical acces : time there is between different stores, example in NY there are a lot of
starbucks
4. Service : help in the store, customization, garantie, return
5. Product portfolio : huge range
6. Product quality : best product
7. Experience : attractivity of the store
You cannot be the best in everything.
To be good, you need to choose. You must go for a profile where one value
driver dominates (5), another one where you are above average (4) and for
the other ones you should be at the average (3).
Your profile will depend on the strategy. There is a link between the 3
strategies and these value drivers.
Supply chain complexity and variability
The supply chain complexity will depend on the chosen strategy and the chosen sector, the market.
1. Product complexity : product leaders have complex supply chains, working with niche players.
Example with apple
2. Portfolio complexity : liddle has fewer products compared to Delhaize.

3. Innovation complexity : a product leader will have difficulties launching new products. If the
launch fails, you are out of the market
4. Market-driven vs strategy-driven :
The complexity of the supply chain will affect the variability.
- Volume variability : a product leader needs to forecast perfectly, which variates a lot
- Mix variability : a company with a big portfolio will have a huge stock but different mixes,
which is difficult
Conclusion : Strategy is about making choices. Companies are bad in strategy.
The triangle gives the value, which is put into 7 drives, and how you can make a profile (how am I
known in the market ?). The strategy and the market you operate in is going to create some
complexity and variability, that you need to factor in the supply chain response (lead time, reliability,
volume flexibility, mix flexibility, innovation flexibility). The supply chain response has an impact on the
cost and capital employed.

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SUPPLY CHAIN MANAGEMENT

Continuous evaluation 20%

activity 30% : participate in the BMC, Brussels Management Challenge

Supply Chain Management 1

Supply Chain Management 2

Supply Chain Management 3

EXAM : Each stage is connected through flows

1. Product (or service) : Material flows, the bottle of water

Often stand Not always under always under SC majority under SC

WHAT ARE THE OBJECTIVES OF SCM ?

The supply chain service = customer value – supply chain cost

- Difficult to quantify the customer value

Supply Chain Management 4

Supply chain decisions are important, as there is a close connection between

- The frequency of each decision : how many times ?

EXAM : give examples of what is done in what phase

Design phase /supply chain strategy decisions - Inhouse or outsource : production,

Supply Chain Management 5

1. Push and Pull view of supply chain processes

- The cigars are stored in different boxes.

Supply Chain Management 6

2 SOURCING AND PROCUREMENT

= buying the primary material

ROLE OF SOURCING IN A SUPPLY CHAIN

Supply Chain Management 7

Definition : supply chain function being performed by a third party

- Reduce costs if you negotiate well and buy at a lower price

3 questions to ask yourself

Supply Chain Management 8

RISKS OF USING A THIRD PARTY

The risks of using a third party depend on the situation !

TOTAL COST OF OWNERSHIP

Supply Chain Management 9

- Reputation : reputation impact of quality problems

SUPPLIER SELECTION – AUCTIONS AND NEGOTIATIONS

SHARING RISK AND REWARD IN THE SUPPLY CHAIN

Supply Chain Management 10

Stronger firms tend to push risk on to supply chain partners

- Produce in-house or outsource to a third party

THE ZARA CASE

Supply Chain Management 11

What’s the result ?

Supply Chain Management 12

Debrief about the negotiation game

1. Hundreds of years ago, most goods were made by individual craftspeople or

Supply Chain Management 13

Il aime bien demander cette définition à l’examen

The lean philosophy is applied in 5 steps

The 8 types of waste

Examples : time, money, raw materials.

Supply Chain Management 14

Supply Chain Management 15

5. Overproduction (and over-procurement) waste : Sometimes people want to produce a lot

Supply Chain Management 16

LEAN SIX SIGMA

- Basic level : yellow

Supply Chain Management 17

DMAIC METHODOLOGY : INTRODUCTION

Six Sigma Methodology : overview