Overview of Operations & Supply

Chain Management
Part 2
.

Opera 16

Revision
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

Difference between SCM and Operations?

What is logistics?
1PL, 2PL, 3PL & 4PL?
Push & Pull SC?
Types of Manufacturing Processes?
Strategies to Respond to Demand?
What is JIT?
Cycle, Safety, Seasonal, Pipeline Inventory?
Takt Time, Lead time, Throughput time?
ABC, FSN & VED?
Bullwhip effect?
5S?
Lean Management?
7 Wastes of Lean?
6 sigma? DMADV & DMAIC?
Kaizen?
Kanban?
Poka Yoke?
Jidoka?
Heijunka?

Forecasting Techniques
Qualitative methods (Subjective)
Quantitative methods (objective)
mathematical models of relationships between variables
Types of quantitative models
1. Time series methods: analyze the pattern in past demand to
project demand in future period
2. Causal model: Forecast by Regression/Causal methods
estimates sales on the basis of values of other independent
factors.

Demand Patterns (Base)

It represents long term average
components have been removed.
Data cluster about a horizontal line.

after

the

remaining

Demand Patterns (Trend)

Long term shift in periodic sales.
Data consistently increase or decrease.

Demand Patterns (Seasonal)

Recurring upward/downward trend repeated within a year.
Data consistently show peaks and valleys.

Demand Patterns (Cyclical)

Data reveal gradual increases and decreases over extended
periods.

Product Demand over Time

Demand for product or service

Trend component
Seasonal peaks

Yea
r
1

Rando
m
variatio
n Yea
r
2

Actual
demand line
Yea
r
3

Yea
r
4

Quantitative Method: Time-Series

Methods
Naive approach
Moving averages
Exponential smoothing
Trend projection (linear regression)
Seasonal influences
Combined seasonal and trend

Simple Moving Average

Perio
d
1
2
3
4
5
6

Sale
s
(000
4
)6
5
3
7
?

Moving
Average
(n=3)
NA
NA
NA
(4+6+5)/3= 5
(6+5+3)/3=4.66

Weighted Moving Average

with weights 3/6, 2/6, 1/6
Ft 1 = w1D t + w 2 D t-1 + w 3 D t-2 + ... + w n D t-n1

Perio
d
1
2
3
4
5
6

Sale
s
(000
4)
6
5
3
7

Weighte
d
Moving
N
Average
A
N
A
N
31/6 =
A
25/6 =
5.167
32/6 =
4.167

Quantitative Approach: Causal

Method/Regression Model
(Linear Regression)

Dependent variable

Deviation,
Estimate of or error
Y from
regression
equation

Regression
equation:
Y = a + bX
Actual
value
of Y
Value of X
used to
estimate Y

X
Independent variable

Causal Methods Linear

Regression

Month

Sales
(000 units)

Advertising
(000 $)

264

2.5

2
3
4
5

116
165
101
209

1.3
1.4
1.0
2.0

a
b
r
r2

=
=
=
=

8.137
109.23
0.98
0.96

Causal Methods - Linear

Regression
Sales (thousands of units)

300
250

Sales Advertising
Month (000 units)
(000 $)
200

2.5
150

1.3
100

1.4

50

1.0
2.0

264

116

165
Y3= 8.137
+ 109.23X
4

101

209

a
b
r
r2

=
=
=
=

8.137
109.23
0.98
0.96

Forecast for Month 6

X = $1750, Y = 183.015, or 183,015 units

INEVNTORY MANAGEMENT
Inventory or Stock is the stored accumulation of
the resources, mostly material
Inventory occurs in operations because the timing of
supply and the timing of demand do not always
match.
Inventory planning and control: Planning and
controlling the rate (quantity and timing) of supply of
the material.
Typical Inventory decisions:
How much to order?
When to order?

Type of Costs in Inventory Models

Holding Costs (Carrying costs): HC
These costs depend on the order size
Cost of capital
Storage space rental cost
Costs of utilities
Labor
Insurance
Security
Theft and breakage
Deterioration or Obsolescence

Type of Costs in Inventory Models

Order/Setup Costs - OC
These costs are independent of the order size.
Order costs are incurred when purchasing
a good from a supplier. They include costs
such as
Telephone
Order checking
Labor
Transportation
Setup costs are incurred when producing
goods in a plant. They may include costs of
Cleaning machines
Calibrating equipment
Training staff

Basic EOQ Model:

How Much To Order?
Total Relevant Cost, TC (Q) = Annual Holding
Cost+ Annual Ordering Cost+ Annual Procurement
Cost

TC(Q)

= (Q/2)Ch + (D/Q)Co + DC

Minimize TC (Q) with respect to Q,

d(TC)/dQ= Ch/2 Dx C0/(QxQ) + 0 = 0

Q2 = [2D Co/Ch]

The optimal order Size

2DC
o

Ch

NOTE
D and Ch MUST be
specified for the same
time length (yearly,
monthly, daily)

Basic EOQ model

Annual cost (dollars)

Two types of costs are relevant in determining Q*,

(as procurement cost is not influenced by Q). At Q*,
HC=OC
(Q*/2)C = (D/Q*)C
Annual (holding+ inventory) costs
= HC + OC

Q*2 = [2D Co/Ch]

2DC

Ch

Holding cost (HC)

Ordering cost (OC)

EOQ(Q*)

Lot Size (Q)

26

When to Order Decision ??

Periodic Review System (P Model)

Project Management
Three goals:1.
2.
3.

Schedule
Resource
Scope

.5 steps of Project Management:1.

2.
3.
4.
5.

Work Breakdown Structure (WBS)

Diagramming the network (2 techniques: PERT & CPM)
Developing the schedule
Analysing cost time trade offs
Assessing risks

Project Management...
PERT/ CPM
(Programme Evaluation and Review Technique/ Critical Path Method)
1.
2.

Precedence Relationships: Sequence for undertaking activities. Specify that any given activity
cannot start until a preceding activity has been completed.
AON (Activity on Node) Approach: Circles represent Activities, Arrows represent Relationships

Project Management...

Example!!
Project: A new Hospital !!
1. WBS:

Example...
2. NETWORK DIAGRAM

Example...

Example...

Example...

Schedule is developed after this by taking into consideration Float.

Cost Time Trade-off Analysis
Risk Assessment: Time estimates of Activities
1. Optimistic time
2. Most likely time
3. Pessimistic time
The expected time of activity then becomes:-

FMCG Supply Chain

Facts, Opportunities and Concerns

Characteristics of FMCG industries

Major Costs in FMCG Supply Chain:

FMCG Supply Chain Performance Indicators:

SCOR Model:

Inventory Turnover and DOS

Inventory Turnover Ratio = COGS/ Average Inventory
Days of Supply = 365/ Inventory Turnover Ratio

Hub and Spoke Model

Distribution Model

Advantages:
- Easy to add new spokes
- Complex Operations can be carried out at hub
Drawbacks:
- Delay in hub causes delay in whole network
- Cargo should pass through hub during its journey
- Two trips are required to reach most of the destinations

Milk Run Model

Logistics Distribution Model

Benefits: Higher Utilisation of Trucks

Reduction of Transportation costs by 30%
Pollution reduction
Disadvantages: Increased dependence on roads
Poor planning leads to extra trips and thus more transportation cost

Indian SC Challenges
Taxation Structure Drives Location Decisions
Poor State of Logistics Infrastructure
Complex Distribution Set Up (FMCG)
Working with Smaller Pack Sizes (FMCG)
3PL unable to provide economies of scale to FMCG industries

Evolution of SCM
Ford SC (1910-1920) : Integrated, inflexible. Mass Production of single colour cars
Toyota SC (1960-1970): Tightly held supplier relationships, Lean Production Systems
Dell Supply Chain (1995-2000): medium term relationships with suppliers, EDI with suppliers,
Assemble to order
Ikea Integrated SC, Minimum Manpower, Flat packed furniture, Lasting relationship with
Suppliers
Walmart High Volume purchases from suppliers, Largest IT infra of any private company in the
world, EDI for procurement, Cross docking, GPS System in trucks, RFID (helps in enhancing JIT
System)
HUL Distribution system
Amazon Supply Chain Analytics

PESTEL Analysis
Political

Tata Nano

Labour Laws
Land and Building Approvals
Speed of Environmental
Clearances
Taxation
Approval for Infrastructure

FDI in Retail
FDI in Defence
FDI in Insurance

Haryana
Gujarat
Madhya Pradesh
Odhisa
Madhya Pradesh

PESTEL Analysis
Economic

Inflation

GDP

Currency

Interest
Rates

Demand
Competitiveness
FMCG
Employment
Crude Oil
IT Sector
Real Estate
Automobile

PESTEL Analysis
Social
Population

Ethics

Career
Attitudes

Demography

Culture

PESTEL Analysis
Technological

Cost

Barriers to
entry

Innovation

Quality

Outsourcing

PESTEL Analysis
Environmental

Climate

Agriculture

Location

Tourism

Weather

Insurance

Climate Change

Energy

PESTEL Analysis
Legal

Labour Laws

Antitrust Laws

AntiDiscrimination
Laws

Consumer
Laws

Safety and
Health
Standards

Taxation

Taxes (Central Govt)

Custom
Duty

Service
Tax

Excise
Duty

Corporate
Tax

Taxes (State Govt)

Central
Sales Tax

VAT

Professional
Tax

Impact of GST on Supply Chain in India

Current State: CST Sales to Distributor
Point

Cost

Margin

Tax
Credit

PBT

VAT

CST

Total Tax

Final Price

Firm

100

25

125

0%

2%

2.5

127.5

Warehouse

0%

0%

Distributor

127.5

10

137.5

4%

0%

5.5

143

Retailer

143

7.5

5.5

145

4%

0%

5.8

150.8

Future State: Eliminate CST charged on Interstate Sales Distributor

Point

Cost

Margin

Tax Credit

PBT

GST

Total Tax

Final Price

Firm

100

25

125

0%

125

Warehouse

0%

Distributor

125

10

135

4%

5.4

140.4

Retailer

140.4

7.5

5.4

142.5

4%

5.7

148.2