UNIT 4

SUPPLY CHAIN MANAGEMENT

 SUPPLY CHAIN
lIn its simplest form a supply chain is the activities required
by the organisation to deliver goods or services to the
consumer. A supply chain is a focus on the core activities
within our organisation required to convert raw materials or
component parts through to finished products or services.
lA supply chain is a network between a company and its

suppliers to produce and distribute a specific product to the

final buyer.
• Supply chain management focuses on how firms utilize their supplier’s processes, technology,capability to
enhance competitive advantage, and the coordination of the manufacturing, logistics and materials
management functions within an organization
• Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and
stores so that merchandise is produced and distributed:
– In the right quantities
– To the right locations
– At the right time
• In order to
– Minimize total system cost
– Satisfy customer service requirements
– face global competition
– Improve standardization
Supply chain -Introduction
SUPPLY CHAIN MANAGEMENT
lSupply chain management is the management of the flow of goods and
services and includes all processes that transform raw materials into
final products.
lIt involves the active streamlining of a business's supply-side activities to

maximize customer value and gain a competitive advantage in the

marketplace.
lSupply chain management (SCM) is the centralized management of the

flow of goods and services and includes all processes that transform raw
materials into final products.
l
FEATURES OF SUPPLY CHAIN MANAGEMENT
1. Integrated behavior- SCM incorporates integrates integration of stakeholders from supplier to customers.
2. Mutually sharing information- For effective SCM mutually sharing information among channel members is
required, especially for planning and monitoring processes.
3. Risk and reward sharing should happen over the long term focus and cooperation among the supply chain
members.
4. Co-operation- Co-operation among channel members is required for effective SCM. Co-operation refers to
similar or complimentary co-ordianted activities performed by firm in a business relationship to produce
superior mutual outcomes or singular outcomes that are mutually expected over time.
5. Focus on serving customers – Supply chain succeeds if all the members of supply chain have the same goal
and the same focus serving customers. Establishing the same goal and same focus among Supply chain
members is a form of policy integration.
6. Integration of Processes – The implementation of SCM needs the integration of
processes from sourcing to manufacturing and to distribution across the supply
chain. The integration can be accomplished through cross functional terms, in plant
supplier personnel and third party service provide.
7. Partners to Build and Maintain Long Term Relationship – Successful
relationships aim to integrates channel policy to avoid dismissal and disagreement
while seeking a level of co- operation that allow participants to be more effective at
lower cost levels. Policy integration is possible if there are compatible cultures and
management techniques among the chain members.
Objectives of Supply Chain
Management
OBJECTIVES OF SUPPLY CHAIN
MANAGEMENT
1. Minimizing the time-efficient supply chain is an organization that reduces the time required for converting
orders into cash. So there is a minimal time lag and increase in productivity of the organization.
2. Minimizing Work in Progress- supply chain minimizes total work in process in supply chain
3. Improving visibility Demand- Efficient supply chain improves the visibility of demand by each one of the
partners.
4. Improving Quality- Efficient supply chain management helps in improving the quality of operation of the
organization. TQM has become a major commitment throughout all side of the industry. Overall commitment to
TQM is one of the major commitments throughout all sides of the industry.
5. Service Orientation – (i.e services to customers) the very basis of supply chains has been to provide superior
customer service. Service is all about the value that the customer gets, which in turn depends upon his own
perception about what constitutes value. The design, the alignment, the integration of the companies on the
supply chain and the co-ordination between them are all for the customer- the ultimate customer, and these are
performed as such.
•
6. System Orientation- system orientation is at the existence of any
supply chain. Synergy due to co- operation and coordination is the main
gain of a supply chain. This entails that while getting optimal results for
the chain as a whole, results for the partners on the chain may not
necessarily be optimal, these could be less than optimal.
•
7. Competitiveness and Efficiency – Supply chain is a business
organization. It provides value to the customers while being
competitive. Competitiveness is essential for it to healthy sustain itself
in order to be able to provide increasing value to its customer.
Efficiency is an important element of competitiveness
CONCEPTUAL MODEL OF SUPPLY CHAIN
•We can say that SCM works in a demand-driven situation, encourages flow-type production with small
batches, reduces idle inventory and idle time in any business by improving overall customer-centric approach.

•The conceptual model of SCM is based on the five basic elements called Pillars of SCM which include:

❖Customization Philosophy

❖Outsourcing of items in which the supplier has competency

❖Multi-tier supplier partnership

❖Third or Fourth Party Logistics

❖Use of modern IT systems

•Primary activities are those that go directly into the creation of a
product or the execution of a service, including:
•Inbound logistics: Activities related to receiving, warehousing, and
inventory management of source materials and components
•Operations: Activities related to turning raw materials and
components into a finished product
•Outbound logistics: Activities related to distribution, including
packaging, sorting, and shipping
•Marketing and sales: Activities related to the marketing and sale of a
product or service, including promotion, advertising, and pricing
strategy
•Secondary activities help primary activities become more efficient—
effectively creating a competitive advantage—and are broken down
into:
•Procurement: Activities related to the sourcing of raw materials,
components, equipment, and services
•Technological development: Activities related to research and
development, including product design, market research, and process
development
•Human resources management: Activities related to the recruitment,
hiring, training, development, retention, and compensation of
employees
•Infrastructure: Activities related to the company’s overhead and
management, including financing and planning.
What is a Push System?
• In manufacturing, a push system means that a company produces
goods according to a demand forecast. This is also called make-to-
stock manufacturing and it is often used to produce goods that have a
low chance of unforeseeable demand fluctuations, e.g. food,
pharmaceuticals, household chemicals, electronic devices, etc.
• A push system, therefore, starts production in order to anticipate
future demand that has been estimated according to historical data.
In this supply chain system, goods are “pushed” through the supply
chain, with the demand forecast triggering production, and with
finished goods being dispatched to distributors or retailers that will
then market the products and wait for customers to make the
purchase.
• A great example of using a push system would be a bakery where the
decision on which goods and which quantities to bake is done
according to how much is expected to be sold. As people are not
willing to wait an hour for their morning bagel after they put in an
order, a push system is used.
What is a Pull System?
• The pull system is a lean manufacturing strategy where goods are
produced according to actual demand as opposed to forecasts. In this
kind of system, companies only keep as much inventory and produce
as much as is needed to respond to existing customer orders.
• In a pull system, goods are therefore “pulled” through the supply
chain, with a customer order triggering a sequence of events where
the required quantity of products are made, and raw materials used
in the production of said products are replenished.
• A great example of a pull system is just-in-time manufacturing. The
core idea of JIT is to schedule the process so that materials would
reach the facility exactly when production is scheduled to start, and
production is scheduled so that it would be finished just as the goods
should be dispatched to the customer.
DRIVERS OF SUPPLY CHAIN MANAGEMENT
• The five drivers are illustrated below

• 1. Production – This driver can be made very responsive by building factories that have a lot of excess
capacity and use flexible manufacturing techniques to produce a wide range of items. To be even more
responsive, a company could do their production in many smaller plants that are close to major groups of
customers so delivery times would be shorter.
• 2. Inventory – Responsiveness can be enhanced by stocking high levels of inventory for a wide range of
products. Additional responsiveness can be gained by stocking products at many locations so as to have the
inventory close to customers and available to them immediately
• 3. Location/Warehousing – A location decision that emphasizes responsiveness would be one where a
company establishes many locations that are close to its customer base. Efficiency can be achieved by
aggregating its inventory to a central location.
• 4. Transportation – Responsiveness can be achieved by a transportation
mode that is fast and flexible such as trucks and airplanes. Efficiency can be
emphasized by transporting products in larger batches and doing it less
often. The use of transportation modes such as ship, railroad, and pipelines
can be very efficient.
• 5. Information – The power of this driver grows stronger each year as the
technology for collecting and sharing information becomes more wide
spread, easier to use, and less expensive. Information, much like money, is a
very useful commodity because it can be applied directly to enhance the
performance of the other four supply chain drivers.
Performance Measurement Dimensions
• Supply chain performance measure can be defined as an approach to judge
the performance of supply chain system. Supply chain performance
measures can broadly be classified into two categories:
• Qualitative Measures: For example, customer satisfaction and product
quality.
• Quantitative Measures: For example, order-to-delivery lead time, supply
chain response time, flexibility, resource utilization, delivery performance.
• Here, we will be considering the quantitative performance measures only.
The performance of a supply chain can be improvised by using a multi-
dimensional strategy, which addresses how the company needs to provide
services to diverse customer demands.
• Quantitative Measures
• Mostly the measures taken for measuring the performance may be somewhat
similar to each other, but the objective behind each segment is very different
from the other.
• Quantitative measures is the assessments used to measure the performance, and
compare or track the performance or products. We can further divide the
quantitative measures of supply chain performance into two types. They are:
• Non-financial measures
• Financial measures
• Non – Financials Measures
• The metrics of non-financial measures comprise cycle time, customer service
level, inventory levels, resource utilization ability to perform, flexibility, and
quality. In this section
• Cycle Time
• Order-to-delivery lead time
IMPORTANCE OF PERFORMANCE
MEASUREMENT
• Performance measurements help top management to be aware of
the progress that purchasing and supply chain is making in
contributing overall strategic goals of the organization. It will also help
the purchasing department to identify the areas of greatest impact
and focus the effort on it i.e. Identifying products or supplies with the
greatest amount of expenditure incurred and find ways of reducing
the amount.
• The purchasing management unit will be able to intervene and
provide support with the expectation against any particular
performance does not go as planned. It will also ensure that
customers are satisfied by improving the service levels.
The Reverse Supply Chain
• Reverse supply chain states the evolution of products from customer to
merchant. This is the reverse of the traditional supply chain evolution of
products from merchant to customer.
• Reverse logistics is the process of planning, executing, monitoring and
controlling the efficient and effective inbound flow and storage of
secondary goods and information related to the purpose of recovering
value or proper disposal. Some examples of reverse supply chain are as
follows −
• Product returns and handling product displacement.
• Remanufacturing and refurbishing exercises.
• Management and sale of surplus, along with returned equipment and
machines from the hardware leasing business.
• Reverse Supply Chain = It’s the series of activities required to retrieve
a used product from a customer and either dispose of it or reuse it.
• The Reverse Supply Chain
• - Reverse Logistics = Reverse Supply Chain
• In short, you can call "car rental" and "empty container" case a
"reverse logistics/supply chain" if you focus on stuff like Repair,
Repack, Reuse, Refurbish, Resale, Recycle, Return to Vendor, Destroy,
Landfill and Donate. If you don't focus on these things, it's just
inventory management stuff.
• Different types of reverse supply chains occur at different stages of the
product cycle. Basically, the reverse supply chain is designed to perform the
following five main processes:
1.Product purchase - accumulation of used product from the user by an
intermediary or manufacturer due to some manufacturing defect or other
reason. This is mainly seen as the company's growth strategy.
2.Reverse logistics - shipment of products from the final destination for
inspection, sorting and disposal.
3.Inspection and disposal - checking the condition of the returned product
and making the best decision to reuse it in some other way.
4.Restoration or conversion - return the product to the original source from
which it was ordered in the beginning, along with the specifications. This is
done mainly in the presence of defects in the production or configuration
of the product.
5.Marketing - creating secondary markets for items that were returned by
the seller from a customer who originally ordered it at the beginning but
decided to return it.
Core Vs Reverse SCM
• Core and reverse supply chain The core supply chain refers to the main
activities involved in the flow of goods and services from suppliers to
customers. This includes activities such as sourcing, production,
transportation, and distribution. The core supply chain is focused on
delivering products and services to meet customer demand in a timely and
cost-effective manner. The reverse supply chain, on the other hand, refers
to the activities involved in the flow of goods and services from customers
back to suppliers. This includes activities such as returns management,
repair and maintenance, and recycling and disposal. The reverse supply
chain is focused on ensuring that products and materials are effectively
managed at the end of their lifecycle, minimizing waste and reducing
environmental impact.
Examples
• Apple: Apple has a well-established and efficient supply chain that helps it
meet customer demand for its products. Additionally, the company has a
strong reverse supply chain, with programs in place for product recycling,
repair and maintenance, and responsible disposal of electronic waste.
Walmart: Walmart is known for its efficient and cost-effective supply chain,
with a focus on reducing waste and minimizing environmental impact. The
company has also implemented a robust reverse supply chain, with
programs in place for product returns, recycling, and waste management.
Amazon: Amazon has a highly efficient supply chain, with a focus on
delivering products to customers quickly and cost-effectively. The company
also has a strong reverse supply chain, with programs in place for product
returns and recycling, as well as initiatives to reduce waste and minimize
environmental impact.
WHAT IS GLOBAL SUPPLY CHAIN
MANAGEMENT?
• Global supply chain management generally refers to all processes
regarding a product’s lifecycle, from the concept of its creation to
distribution to endpoints. Global SCM is aimed to enhance the
productivity of each stage of this lifecycle, get rid of inefficiencies, and
deliver the products timely and seamlessly.
• The traditional global supply chain comprises four critical
stages: supplier, manufacturer, retailer, and end-user.
• Global supply chain management is becoming a very important issue
for most of businesses. The main reasons of this trend are
procurement cost reduction, purchasing risks control, revenues
increasing and etc.
• For instance, companies may set up overseas factories to benefit
from tariff and trade concessions, lower labor cost, capital subsidies,
and reduced logistics costs in foreign markets.
• Moreover, easy access to abroad markets and close proximity to
customers result in better organizational learning.
• On the other hand, improved reliability can be obtained as a
consequence of a closer relationship with suppliers.
Global Supply Chain Drivers
• Market Drivers
• When considering the globalization process, the homogenization of
customer needs can be considered on the market side. This
frequently means long production runs and centralized
manufacturing and distribution centers in order to generate and
benefit from economies of scale. On the other hand, building
dispersed production facilities that have a lot of excess capacity and
take into account a multitude of local securities are no longer
required and instead replaced by fewer, larger and central production
plants.
• Cost Drivers
• Besides the drivers on the market side there are also variables on the
cost side. The global scale economies are the most apparent of these
drivers. Production processes geographically concentrated for
worldwide delivery require sophisticated logistics operations.
• Government Drivers
• One of important globalization drivers is government regulations.
Favorable trade policies, compatible technical standards, common
marketing regulations, government-owned competitors and
customers and host government concerns are a number of
governmental drivers.
• Competitive Drivers
• The last group of drivers is called competitive drivers. High exports
and imports, competitors from different continents,
interdependency of countries and competitors globalized can be
considered in this category.
Challenges of Global Supply Chains
• Farness: No need to say, worldwide business are associated with
larger geographic distances and more unpredictable disturbances,
implying longer lead times if centralized. Longer lead times in a
supply chain cause “the bullwhip effect”.
• The bullwhip effect is a dynamic in supply chains. This phenomenon
happens when small changes in product demand by the consumer is
translated into wider swings in demand experienced by companies,
going back in the supply chain.
• As a result, companies at different stages in the supply chain will have
different pictures of final-customer’s demand and a breakdown in
supply chain coordination will occur.
• Forecasting complexities: Another feature of global supply chains that
increases the bullwhip effect is forecasting inaccuracy. Increased
geographical distances and communication difficulties result in forecasting
complexities.
• Economical and political worries: Global supply chains carry unique risks,
including variability and doubt in currency exchange rates, economic and
political instability, tariffs and duties changeability, non-tariff trade barriers,
individual income tax and etc.
• Infrastructural insufficiency: Infrastructural shortages in developing
countries in transportation and telecommunications, as well as inadequate
worker skills, supplier availability, supplier quality, equipment and
technology provide challenges normally not experienced in developed
countries.
LOGISTICS
• According to Phillip Kotler, “Market logistics involve
planning, implementing and controlling physical flow of
material and final (finished) goods from the point of origin
to the point of use to meet customer requirements, at a
profit.”
• Logistics management may be defined as follows:
• Logistics management consists of the process of planning, implementing and controlling
the efficient flow of raw-materials, work-in-progress and finished goods and related
information-from point of origin to point of consumption; with a view to providing
satisfaction to the customer
 Classification of Logistical Activities:
Logistics (or Logistical Activities) may be Broadly
Classified into Two Categories:

I. Inbound logistics; which is concerned with the smooth and

cost effective inflow of materials and other inputs (that are
needed in the manufacturing process) from suppliers to the
plant. For proper management of inbound logistics, the
management has to maintain a continuous interface with
suppliers (vendors).

II. Outbound logistics (also called physical distribution

management or supply chain management); is concerned with the
flow of finished goods and other related information from the firm
to the customer. For proper management of outbound logistics, the
management has to maintain a continuous interface with transport
operators and channels of distribution.
 Significance (or Objectives) of
Logistics Management:
)Cost Reduction and Profit Maximization:
(i

Logistics management results in cost reduction and profit

maximization, primarily due to:
1. Improved material handling
2. Safe, speedy and economical transportation
3. Optimum number and convenient location of warehouses etc.
(ii) Efficient Flow of Manufacturing Operations:

Inbound logistics helps in the efficient flow of manufacturing

operations, due to on-time delivery of materials, proper utilisation of
materials and semi-finished goods in the production process and so
on.
• iii) Competitive Edge:
• Logistics provide, maintain and sharpen the competitive edge of an enterprise by:
• 1. Increasing sales through providing better customer service
• 2. Arranging for rapid and reliable delivery
• 3. Avoiding errors in order processing; and so on.
• iv) Effective Communication System:
• An efficient information system is a must for sound logistics management. As such, logistics
management helps in developing effective communication system for continuous interface with
suppliers and rapid response to customer enquiries.
• v) Sound Inventory Management:
• Sound inventory management is a by-product of logistics management. A major headache of production
management, financial management etc. is how to ensure sound inventory management; which headache
is cured by logistics management.
 Bullwhip Effect in SCM

The bullwhip effect on the supply chain occurs when changes in

consumer demand causes the companies in a supply chain to order
more goods to meet the new demand. The bullwhip effect is a
distribution channel phenomenon, rather problem, in which demand
forecasts yield supply chain inefficiencies. This mostly happens when
retailers become highly reactive to consumer demand, and in turn,
intensify expectations around it. This results into inefficient asset
allocations and high inventory fluctuations, moving down in the
supply chain.
•The bullwhip effect usually flows up the supply chain, starting with
the retailer, wholesaler, distributor, manufacturer and then the raw
materials supplier.
•This effect can be observed through most supply chains across
several industries; it occurs because the demand for goods is based
on demand forecasts from companies, rather than actual consumer
demand.
•The bullwhip effect can be explained as an occurrence detected by
the supply chain where orders sent to the manufacturer and
supplier create larger variance then the sales to the end customer.
•These irregular orders in the lower part of the supply chain
develop to be more distinct higher up in the supply chain.
•These irregular orders in the lower part of the supply chain develop
to be more distinct higher up in the supply chain.
How Do we minimize the bullwhip effect?
• Every industry has its own unique supply chain, inventory placements, and complexities.
However, after analyzing the bullwhip effect and implementing improvement steps,
inventories in the range of 10 to 30 percent can be reduced and 15 to 35 percent reduction in
instances of stock out situations and missed customer orders can be achieved. Below are
some of the methods to minimize the bullwhip effect.
• Accept and understand the bullwhip effect
• The first and the most important step towards improvement is the recognition of the
presence of the bullwhip effect. Many companies fail to acknowledge that high buffer
inventories exist throughout their supply chain. A detailed stock analysis of the inventory
points from stores to raw material suppliers will help uncover idle excess inventories. Supply
chain managers can further analyze the reasons for excess inventories, take corrective action
and set norms.
• Improve the inventory planning process
• Inventory planning is a careful mix of historical trends for seasonal demand, forward-looking
demand, new product launches and discontinuation of older products. Safety stock settings
and min-max stock range of each inventory point need to be reviewed and periodically
adjusted. Inventories lying in the entire network need to be balanced based on regional
demands. Regular reporting and early warning system need to be implemented for major
deviations from the set inventory norms.
Lean Supply Chain Management
What is Lean Manufacturing?
• Lean manufacturing (production) was originally developed at
the Toyota Motor Company and was called the Toyota
Production System (TPS). The word lean is used in the sense of
thin, having no waste and taking out elements of the production
process that do not add overall value to the finished product.
Lean thinking is “lean” because it provides a way to do more
and more on less and less. Wastes can be put into perspective in
seven areas:
• Transportation - Unnecessary movements of vehicles, parts, or
the plant of machinery.
• Inventory - Storing too much inventory or components.
• Motion – Movement of people that adds nothing to the
production process.
• Waiting – Inactivity of people or machinery waiting for inputs.
• Overproduction – producing more goods than required.
• Over-processing – Having additional unnecessary steps in the
production process.
• Defects – Faults or errors that need re-work or scrapping.
What are the five principles of Lean Manufacturing?
• The five principles of lean manufacturing are considered a recipe for
improving workplace efficiency.
• Define value: What is the customer willing to pay for the product?
• Map out the value stream: Using the customer value as a reference
point, map out the activities that provide value and the unnecessary
ones.
• Create a flow: After removing waste, ensure the remaining steps run
smoothly.
• Establish a pull: Limit inventory and apply JIT (Just in Time) to synch
with demand.
• Perfect: Continue to fine-tune and perfect processes.
What are the benefits of a Lean supply
chain?
Core principles in the implementation process of lean production
are:
• Waste elimination
• Pull Scheduling
• Multifunctional teams
WHAT IS AGILE MANUFACTURING?
• Agile manufacturing is a manufacturing methodology that places an
extremely strong focus on rapid response to the customer – turning
speed and agility into a key competitive advantage. It represents a
very interesting approach to developing a competitive advantage in
today’s fast-moving marketplace. An agile company is in a much
better position to take advantage of short windows of opportunity
and fast changes in customer demand.
WHY IS AGILE MANUFACTURING EFFECTIVE?
• Agile manufacturing is effective because it acknowledges
the realities of the modern marketplace and transforms
them into a competitive advantage.
• Consumers love instant gratification. They are increasingly
getting used to it and they are often willing to pay for it. For
example, have you ever ordered a product with overnight
shipping…waiting in eager anticipation?
• Consumers love choice. They prefer to get a product exactly
as they want it…without compromise.
• Consumers are fickle. Their interests shift and move in
unpredictable ways.
• Agile is of particular value for manufacturers in countries with large,
well-developed local markets and high labor costs (e.g., the United
States). It leverages proximity to the market by delivering products
with an unprecedented level of speed and personalization, which
simply cannot be matched by offshore competitors. It turns local
manufacturing into a competitive advantage.
4 KEY AGILE MANUFACTURING ELEMENTS
• There are four key elements for agile manufacturing:
1.Modular Product Design: designing products in a modular fashion that
enables them to serve as platforms for fast and easy variation
2.Information Technology: automating the rapid dissemination of
information throughout the company to enable lightning fast response to
orders
3.Corporate Partners: creating virtual short-term alliances with other
companies that enable improved time-to-market for selected product
segments
4.Knowledge Culture: investing in employee training to achieve a culture
that supports rapid change and ongoing adaptation
7 Key Importance of Information
Technology in Supply Chain
1. Effective Information Management
• Effective information management can help ensure that a firm meets the logistical needs
of its customers.
• Firms need to place priorities on logistical elements such as on-time delivery, stockout
levels, order status, shipment tracking and expediting, order convenience, order
completeness, creation of customer pick up, and backhaul opportunities and product
substitution.
2. Useful Combination of Software and Hardware
• Logistics information systems combine hardware and software to manage, control, and
measure logistics activities that occur within specific firms as well as across the overall
supply chain.
• Hardware includes computers and servers, internet technologies, ancillary technologies
such as barcode and RF devices, communication channels, and storage media.
• 3. Helps in Decisions Support Systems- Companies need better
information on their customers (such as customer service
and sales forecasting), information on their suppliers. (such as
production planning and sourcing and purchasing).
• 4. Digital Order Processing System
• The order processing system is the nerve center of the logistics
and supply chain system.
• A customer order provides the communication message to set
the logistics process in motion.
• The cost and efficiency of the entire communication can result
in loss of customers or excessive transportation, inventory,
and warehousing costs together with possible manufacturing
inefficiencies caused by frequent changes in the production line.
5. Computerization of Firm Activities
• Leading-edge organizations are utilizing computers extensively to support logistics activities.
• Computers are used in order entry, order processing, finished goods inventory control, performance
measurement, freight audit/payment, and warehousing.
6. Competitive Advantages
• Computer-based decision support systems (DSS) support the executive decision-making process in
logistics and supply chain management.
• To support time-based competition, firms are increasingly using information technologies as a
source of competitive advantages.
7. Fast Connectivity through WEB
• Today, companies are restructuring their businesses to function in the new era of electronic
commerce.
• Organizations can have a deluge of information on websites, business to business requirements,
and online customer and supplier linkages.
• ERP systems, purchasing databases and data warehouses, electronic data interchange (EDI,
business to business electronic commerce are recent development which applied in logistics and
supply chain management.
Demand forecasting in supply chain
• Demand forecasting is the process of estimating the future demand
for a product or service. In the context of Supply Chain Management
(SCM), demand forecasting is used to anticipate customer demand, to
plan production and inventory levels, and to make decisions about
procurement, distribution, and pricing. Accurate demand forecasting
is critical for companies to manage their supply chains effectively,
reduce costs, and improve customer satisfaction.
methods of demand forecasting
• Qualitative Methods: Qualitative methods use subjective judgment and
expert opinions to estimate future demand. For example, companies can
use focus groups, surveys, and market research to gather information
about customer needs and preferences.
• Quantitative Methods: Quantitative methods use statistical analysis and
data-driven models to estimate future demand. For example, companies
can use regression analysis, time series analysis, and causal models to
analyze historical sales data and to forecast future demand.
• Hybrid Methods: Hybrid methods combine qualitative and quantitative
methods to estimate future demand. For example, companies can use
Delphi methods, which involve a panel of experts, to gather information
about future demand, and then use statistical models to analyze the data.
Simple moving average method Simple
Moving Average (SMA)
• Simple moving average method Simple Moving Average (SMA) is a
commonly used method for demand forecasting in Supply Chain
Management (SCM). The SMA method is a simple time series
forecasting method that calculates the average of a set of past data
points to predict future demand. The method is widely used because
it is easy to understand and implement, and it provides a stable
forecast even when the demand data is highly volatile.
• The formula for Simple Moving Average is: SMA = (X1 + X2 + ... + Xn)
/ n Where: SMA = Simple Moving Average X = Data point for a given
period n = Number of periods used in the calculation
Cont..
• Let's say that a company wants to predict the demand for its product
over the next three months. The company has historical demand data
for the last 6 months, as shown below: Month 1: 10 units Month 2:
12 units Month 3: 8 units Month 4: 9 units Month 5: 11 units Month
6: 14 units To calculate the Simple Moving Average, the company
would take the average of the last three data points: SMA = (11 + 9 +
14) / 3 = 11.67 units
Cont..
• In conclusion, Simple Moving Average is a simple and effective
method for demand forecasting in Supply Chain Management. The
method provides a stable forecast even when the demand data is
highly volatile, and it is easy to understand and implement.
Companies can use the Simple Moving Average method to estimate
future demand and to make informed decisions about procurement,
production, and inventory management.
Weighted moving average method
• Weighted Moving Average (WMA) is a method for demand
forecasting in Supply Chain Management (SCM) that assigns more
weight to recent data points in the calculation of the average. Unlike
the Simple Moving Average (SMA) method, which gives equal weight
to all data points, the WMA method gives more importance to the
most recent data points, which are typically considered to be more
relevant in forecasting future demand. The formula for Weighted
Moving Average is: WMA = (w1 * X1 + w2 * X2 + ... + wn * Xn) / (w1 +
w2 + ... + wn) Where: WMA = Weighted Moving Average X = Data
point for a given period w = Weight assigned to each data point n =
Number of periods used in the calculation
Cont..
• Month 1: 10 units Month 2: 12 units Month 3: 8 units Month 4: 9
units Month 5: 11 units Month 6: 14 units To calculate the Weighted
Moving Average, the company would assign weights to each data
point, with the most recent data point given the highest weight:
WMA = (0.3 * 14 + 0.2 * 11 + 0.1 * 9) / (0.3 + 0.2 + 0.1) = 11.55 units
Cont..
• In conclusion, Weighted Moving Average is a more sophisticated
method for demand forecasting in Supply Chain Management
compared to the Simple Moving Average. The method takes into
account the importance of recent data points in forecasting future
demand, and it is more flexible and customizable than the Simple
Moving Average method. Companies can use the Weighted Moving
Average method to estimate future demand and to make informed
decisions about procurement, production, and inventory
management.
Linear regression
• Linear Regression is a statistical method that is commonly used for
demand forecasting in Supply Chain Management (SCM). The method
is based on the assumption that the relationship between the
independent variable (e.g., time) and the dependent variable (e.g.,
demand) can be modeled as a linear equation. The method is widely
used for demand forecasting because it can handle multiple
independent variables, it is easy to interpret, and it can be applied to
a wide range of demand data, including time-series data. The formula
for Linear Regression is: y = b0 + b1 * x
Cont..
• Where: y = Dependent variable (e.g., demand) x = Independent
variable (e.g., time) b0 = Intercept b1 = Slope
• Let's say that a company wants to predict the demand for its product
over the next three months. The company has historical demand data
for the last 6 months, as shown below: Month 1: 10 units Month 2:
12 units Month 3: 8 units Month 4: 9 units Month 5: 11 units Month
6: 14 units
Cont..
• To calculate the Linear Regression, the company would first plot the
data on a graph, with the independent variable (time) on the x-axis
and the dependent variable (demand) on the y-axis. The company
would then use a statistical software package to fit a line to the data,
which represents the best estimate of the linear relationship between
the independent and dependent variables. The equation for the
Linear Regression line would be: y = b0 + b1 * x Where: b0 = 4.54 b1 =
0.84 So the company would use the equation to estimate the demand
for the next three months: Month 7: y = 4.54 + 0.84 * 7 = 10.18 units
Month 8: y = 4.54 + 0.84 * 8 = 11.02 units Month 9: y = 4.54 + 0.84 *
9 = 11.86 units
• conclusion, Linear Regression is a powerful and widely used method
for demand forecasting in Supply Chain Management. The method
provides a simple and interpretable relationship between the
independent and dependent variables, and it can handle multiple
independent variables and a wide range of demand data. Companies
can use Linear Regression to estimate future demand and to make
informed decisions about procurement, production, and inventory.
Exponential Smoothing
• Exponential Smoothing is a statistical method for demand forecasting
in Supply Chain Management (SCM). It is a time-series forecasting
method that is based on the idea of assigning exponentially
decreasing weights to the past observations. The method is widely
used for demand forecasting because it is simple to implement, it can
handle time-series data, and it can handle data with trends and
seasonality
• The formula for Simple Exponential Smoothing is:
• F(t+1) = α * D(t) + (1-α) * F(t) Where: F(t+1) = Forecast for time t+1
D(t) = Demand for time t F(t) = Forecast for time t α = Smoothing
factor, a value between 0 and 1.
• Alpha close to 0 greater smoothing effect
• More weight to distant past
• Close to 1 we are giving more weight or importance to recent data