EHS402: OPERATIONS AND SUPPLY CHAIN

MANAGEMENT (Elective)

VIII Semester B.Tech CSE

Section B4,B5,B6/D,E,F

Lecture Notes

in

O&SCM

****
Prepared and Compiled
by

Dr. Smt. Padmini.R*

Sri.S.Hemanth Kumar*
Sri.K.Suresh*

*Assistant Professor
Department of Industrial Engineering
GITAM Institute of Technology
GITAM (Deemed to be University)
Visakhapatnam-530045

with
Sincere acknowledgements
to
authors of the prescribed textbooks as per syllabus
and
online content

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 Module III
………………………………………………………………………………………………………………
Impact of Uncertainty in Network:
 Globalization and supply chain,
 Risk management in global supply chain
 Demand forecasting in supply chain
 Role of information technology in forecasting.
………………………………………………………………………………………….…..………………

The primary purpose of a supply chain network design is to assess company policies and
programs and to meet targets to accomplish long‐term strategic objectives, and most business
units or functional areas within a company are impacted by a network design project.

When designing a supply chain the following steps must be followed:

1) Define the business objectives,

2) The project scope must be defined,
3) The form of analyses to be done must be determined,
4) Determine what tools will be used,
5) Finally, Project completion, the best design.

What Creates Real Economic Value?

Business and operations strategy - the formulation of strategies that drive investment,
operations, and competitive positioning - is where all value begins.There are five strategic
questions that need to be answered:

1. What business is the CPG company in and why?

2. How should value be added to the business?
3. What are the target markets?
4. What are the products and why will customers buy from the CPG company?
5. What capabilities are needed to assure that the company adds value and differentiates?

How has Globalization impact to supply chain management?

Supply chain management: In commerce, supply chain management, the management of the
flow of goods and services, involves the movement and storage of raw materials, of work-in-
process inventory, and of finished goods from point of origin to point of consumption. It’s the
broad range of activities required to plan, control and execute a product's flow, from acquiring
raw materials and production through distribution to the final customer, in the most
streamlined and cost-effective way possible.

With the advent of globalization, managing supply chain activities has become more complex.
Today a company operating in the United States may have its manufacturing facilities in China,
Mexico or Taiwan and its customers throughout the world. Many companies in order to
manage its global operations may outsource their supply chain activities to third-party
organizations around the globe. Outsourcing reduces the supply chain operating cost but when
not managed effectively proves otherwise.

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Globalization has dramatically changed how manufacturers operate, offering an opportunity to
reach new customers in new markets while at the same time exposing firms to greater
competition. Meanwhile, raw materials and supplier relationships must now be managed on a
global scale. Just as there are benefits and costs of globalization, there are similar pros and cons
of a global supply chain. In particular, companies need to manage the related risks.

The Four Driving Forces of the Globalization Process:

a) Global Market Forces
b) Technological Forces
c) Global Cost Forces
d) Political and Macroeconomic Forces

Benefits of a Globalized Supply Chain:

1. Expanded sourcing opportunities: A world market offers businesses

opportunities to secure a diverse selection of workers, materials, and products.
This larger selection of goods and services often means the opportunity to
select higher-quality or lower-cost options.
2. The opportunity to reach new customers in new markets: Just as
globalization offers more materials and laborers, it also offers new customers
in new locations with new needs.
3. More room to grow: New technologies and a shrinking globe mean that it is
easier for companies to grow generally: to produce more, offer more, and sell
more. Expanding borders also means expanding businesses and corporations.
4. More opportunities to save money: Globalization’s biggest benefit is that
increases options: options for source materials, options for workers, and
options for transportation. More options mean more chances to save on
spending and increase profits.

Supply chain risk management (SCRM):is the process of taking strategic steps to
identify, assess and mitigate the risk in your end-to-end supply chain. A comprehensive
approach to SCRM involves the management of all types of risk, for all tiers of supply
and for all risk objects (suppliers, locations, ports and more).

Risk is often defined as : RISK = f (Probability, Consequences).

Hence, risk is the combination of the probability of an event and its
consequences/impacts.

Risk in the context of supply chains may be associated with the

production/procurement processes, the transportation/shipment of the goods, and/or
the demand markets.

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The five steps
The five steps of global supply chain risk management follow in the footsteps of the
classic circular risk analysis paradigm: Identify > Assess and Evaluate > Mitigate >
Monitor and Re-assess.

In their world they call it:

 Risk Identification
 Risk Assessment and Evaluation
 Selection of Risk Management Strategies
 Implementation of Risk Management Strategies
 Mitigation of Supply Chain Risks

Types of Risks
 Supply Risks – disruption of supply, inventory and schedules
 Operational Risks – breakdown of operations, changes in technology
 Demand Risks – variations in demand
 Security Risks – theft, sabotage, terrorism, counterfeiting, infrastructure
breakdown
 Macro Risks – economic shifts, recession, hike in wages, variation in exchange
rates
 Policy Risks – actions and sanctions of governments, shifts in legislation
 Competitive Risks – uncertainty about competitors’ moves and actions
 Resource Risks – uncertainty about resource availability

SUPPLY CHAIN RISK MANAGEMENT- DRIVERS OF RISKs

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Risk Management – Drivers of Risk
Risk Management Strategies

 Avoidance – exiting a market (or product) or delay entering a market (or

product)
 Postponement – delay commitment of resources to maintain utmost flexibility
 Speculation – assuming risk to gain competitive advantage
 Hedging – globally dispersing your portfolio of suppliers, customers and
facilities
 Control – vertical and lateral integration of suppliers and business partners
 Transferring/sharing risk – outsourcing, offshoring, contracting
 Security – identifying unusual movements and protecting against unwanted
penetration

Following best practices for supply chain risk management:

1. Automate processes involved in supplier risk management (SRM) to collect,
analyze and manage supplier information.
2. Include supplier performance information in your analysis for insight into
potential financial issues.
3. Identify red flags that may indicate problems and use technology to automate
their early detection.
4. Integrate SCRM platforms with procurement and supply chain management
(SCM) software systems including software for spend visibility, e-
sourcing, purchase-to-pay, contract management and compliance.
5. Provide dashboards that track and report on supply risk metrics to give the
executive team access to real-time observations into risk factors.
SCRM may require collaboration and coordination among an organization’s sales,
marketing, production, development, procurement, finance and IT departments.

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Forecasting
A integrated approach is driven by a stakeholder organization that is chartered with
driving commitment and accountability to “single number”consensus-based forecasts

•Forecast administration driven by a stakeholder

•Stakeholder responsible for getting input from others
•Responsible for driving to a reconciled consensus forecast
•Less important which function is stakeholder, but usually marketing or operations

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 After gathering information about various aspects of the market and demand from
primary and secondary sources, an attempt may be made to estimate future demand. A wide
range of forecasting methods are available to the market analyst. These may be divided into
three categories: qualitative methods, time series projection methods, and casual methods.

1. Qualitative methods
The important qualitative methods are as follows.

1. Jury of executive opinion method: Very popular in practice, this method calls for
the pooling of views of a group of executives on expected future sales and combining
them into a sales estimate.
2. Delphi method: This method involves converting the views of a group of experts,
who do not interact face – to – face, into a forecast through an iterative process.

2. Time series projection methods

These methods generate forecasts on the basis of an analysis of the historical time series. The
important time series projection methods are as follows:

1. Trend projection method: Very popular in practice, the trend projection method
involves extrapolating the past trend onto the future.
2. Exponential smoothing method: In exponential smoothing, forecasts are
modified in the light of observed errors.
3. Moving average method: According to this method, the forecast for the next
period represents a simple arithmetic average or a weighted arithmetic average of the
last few observations.
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3. Casual methods:

More analytical than the preceding methods, causal methods seek to develop forecasts on
the basis of cause – effect relationships specified in an explicit, quantitative manner. The
important methods under this category are as follows:

1. Chain ratio method: A simple analytical approach, this method calls for applying a series
of factors for developing a demand forecast.
2. Consumption level method: Useful for a product that is directly consumed; this
method estimates consumption level on the basis of elasticity coefficients, the important
ones being the income elasticity of demand and the price elasticity of demand.
3. End use method: Suitable for intermediate products, the end use method develops demand
forecasts on the basis of the consumptions coefficient of the product for various uses.
4. Leading indicator method: According to this method, observed changes in leading
indicators are used to predict the changes in lagging variables.
5. Econometric method: Perhaps the most sophisticated forecasting tool, the econometric
method involves estimating quantitative relationship derived from economic theory.

Quantitative Approaches of Forecasting

Most of the quantitative techniques calculate demand forecast as an average from the
past demand. The following are the important demand forecasting techniques.
 Simple average method: A simple average of demands occurring in all previous
time periods is taken as the demand forecast for the next time period in this
method. ( Example 1 )
 Simple moving average method: In this method, the average of the demands
from several of the most recent periods is taken as the demand forecast for the
next time period. The number of past periods to be used in calculations is
selected in the beginning and is kept constant (such as 3-period moving average).
(Example 2 )
 Weighted moving average method: In this method, unequal weights are assigned
to the past demand data while calculating simple moving average as the demand
forecast for next time period. Usually most recent data is assigned the highest
weight factor. (Example 3 )
 Exponential smoothing method: In this method, weights are assigned in
exponential order. The weights decrease exponentially from most recent demand
data to older demand data. (Example 4 )
 Regression analysis method: In this method, past demand data is used to
establish a functional relationship between two variables. One variable is known
or assumed to be known; and used to forecast the value of other unknown
variable (i.e. demand). (Example 5 )

Error in Forecasting
Error in forecasting is nothing but the numeric difference in the forecasted demand and
actual demand. MAD (Mean Absolute Deviation) and Bias are two measures that are

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used to assess the accuracy of the forecasted demand. It may be noted that MAD
expresses the magnitude but not the direction of the error.

Example 1
Simple Average :
A XYZ television supplier found a demand of 200 sets in July, 225 sets in August & 245
sets in September. Find the demand forecast for the month of October using simple
average method.
The average demand for the month of October is

Example 2
Simple Moving Average :
A XYZ refrigerator supplier has experienced the following demand for refrigerator
during past five months.

Find out the demand forecast for the month of July using five-period moving average &
three-period moving average using simple moving average method.

Example 3
Weighted Moving Average Method :
The manager of a restaurant wants to make decision on inventory and overall cost. He
wants to forecast demand for some of the items based on weighted moving average
method. For the past three months he experienced a demand for pizzas as follows:

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Find the demand for the month of January by assuming suitable weights to demand
data.

Example 4
Exponential Smoothing :
One of the two wheeler manufacturing company experienced irregular but usually
increasing demand for three products. The demand was found to be 420 bikes for June
and 440 bikes for July. They use a forecasting method which takes average of past year
to forecast future demand. Using the simple average method demand forecast for June
is found as 320 bikes (Use a smoothing coefficient 0.7 to weight the recent demand most
heavily) and find the demand forecast for August.

Example 5
Regression Analysis :
Farewell Corporation manufactures Integrated Circuit boards(I.C board) for electronics
devices. The planning department knows that the sales of their client goods depends on
how much they spend on advertising, on account of which they receive in advance of
expenditure. The planning department wish to find out the relationship between their
clients advertising and sales, so as to find demand for I.C board.
The money spend by the client on advertising and sales (in dollar) is given for different
periods in following table :

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Role of information technology in forecasting:
Without information technology, it would not be possible to plan demand for
hundreds and thousands of product items and communicate the demand plan to the
supply organization. Most was simply too time-consuming to gather information on
customers’ buying intentions, integrate this information with marketing and sales
plans, and perform statistical forecasting.

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 Information technology, in the words of cultural has the power to change the
world with unexpected speed and in unprecedented detail. Speed and detailed
information are just what is needed for demand management. Today, software
applications can statistically forecast hundreds of items in minutes. Sales orders and
demand schedules can be communicated via electronic data interchange (EDI) and the
Internet in real time. Retail companies can share point-of-sale information with their
trading partners—daily, if desired. Salespeople can sit in their customers’ offices and
look up product availability, specifications, and pricing on their companies’ information
systems, using hand-held devices known as personal data acquisition (PDA) tools.

The increasing usage of demand forecasting for businesses can largely be

attributed to the advancing application of computational technology. Unlike the
conventional statistical practices for demand forecasting, the new IT driven technique
have come to bear greater accuracy, increased productivity, and posses greater
potentiality in uncovering market opportunities, with an efficient synchronization of
demand and supply.

Examples of some firms which provide demand and forecasting solutions

Blue Ridge  Blue Ridge unique forecasting solution helps

retailers and distributors capitalize on richer,
customer transaction data to generate precise
supply chain planning recommendations
Causometrix  Provides cloud-based SaaS applications for
demand planning and inventory replenishment
and the necessary tools for the associated
collaborative planning
Demand Foresight  Helps optimize inventory, increase customer
satisfaction, reduce capital investment, and
increase profits by using their own forecasting
technology
Demand Management  Delivers the powerful demand planning and
inventory planning functionality that an
organization needs to increase their visibility
into their supply chain processes
Demand Link  Provides next-generation demand planning and
high accuracy forecasting systems for retailers
E2open  Enables supply chains to better plan, execute
and collaborate

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