http://www.msm-kuwait.

com

Supply Chain Management

(Supplementary material to reference book: Simchi-Levi D.

Operations Rules. Cambridge, Massachusetts: MIT Press, 2010)

Vassilis Moustakis

drvassilism@gmail.com

vmoustakis@msm-kuwait.com

Spring 2016


Table of Contents

Overview of lectures ......................................................................................................................... 4

1. The basics .......................................................................................................................................... 5
1.1 The material flow ................................................................................................................... 7
1.2 The information flow ........................................................................................................... 7
1.3 The money (funds) flow ..................................................................................................... 8
1.4 The value – added flow ....................................................................................................... 8
1.5 Re-use, maintenance, after sales flows .................................................................... 10
1.6 An integrated view ............................................................................................................. 10
1.7 The petroleum supply chain .......................................................................................... 11
1.8 Examples ................................................................................................................................ 12
2. Supply Chain Management .................................................................................................. 14
2.1 The challenges ...................................................................................................................... 15
2.2 The enemies .......................................................................................................................... 16
2.3 Supply chain dynamics ................................................................................................... 17
2.4 Meditech case study ......................................................................................................... 18
What is the problem? .......................................................................................................... 21
Solution or what to do? ...................................................................................................... 24
The solution agenda ............................................................................................................ 26
2.5 Product selection and availability .............................................................................. 27
2.6 Price and brand ................................................................................................................... 28
2.7 Value – Added Services ................................................................................................... 29
2.8 Relationships and experiences ................................................................................... 30
2.9 Summary ................................................................................................................................ 31
3. Matching products, markets and strategies ................................................................. 32
3.1 Push, Pull and Push – Pull Strategies ...................................................................... 32
Push-Based SC ........................................................................................................................ 32
Pull – based SC....................................................................................................................... 34
Push – Pull boundary ......................................................................................................... 35
3.2 Forecasting Ι ......................................................................................................................... 36
Forecasting errors ................................................................................................................. 37
Forecasting methods ........................................................................................................... 39
Examples of forecasting methods ................................................................................. 40
Forecasting – comments and caution ........................................................................ 44
3.3 Implementing a Push – Pull Strategy ...................................................................... 45
Postponement ......................................................................................................................... 48
3.4 The effect of Lead Time .................................................................................................. 49
3.5 Strategies for innovative and functional products ............................................ 50
3.6 Summary ................................................................................................................................ 51
4. Inventory management .......................................................................................................... 53
4.1 The basics ............................................................................................................................... 53
4.2 The management ............................................................................................................... 55
4.3 Many orders per year ....................................................................................................... 56
4.4 Positioning the inventory in the SC .......................................................................... 65
4.4 Service level and inventory management .............................................................. 67
4.5 Single period inventory systems ................................................................................. 69
Review problem ..................................................................................................................... 73
4.6 Inventory policy and management procedures .................................................. 74

Periodic review policy ......................................................................................................... 74

Continuous review policy .................................................................................................. 76
Consignment practice ......................................................................................................... 78
4.7 Inventory management: best practices – strategies ......................................... 78
4.8 Risk pooling .......................................................................................................................... 84
4.9 The bullwhip effect ............................................................................................................ 86
5. Supply contracts ......................................................................................................................... 93
5.1 Drivers of procurement strategies ............................................................................. 94
5.2 Reducing exposure to supply risk .............................................................................. 95
5.3 Mitigating exposure to Price Risk .............................................................................. 96
5.4 Risk sharing contracts ..................................................................................................... 96
Buy – Back contracts ......................................................................................................... 103
Revenue – Sharing contracts ........................................................................................ 109
Global optimization ........................................................................................................... 111
5.5 In summary ......................................................................................................................... 113
Exercise .................................................................................................................................... 115
5.6 Strategic items: Make to Stock MTS) – Symmetric Forecast .................... 115
5.7 Contracts with asymmetric information .............................................................. 117
5.8 Non-strategic items ........................................................................................................ 117
6. Risk mitigation strategies .................................................................................................... 125
6.1 Capacity redundancy ...................................................................................................... 126
6.2 Managing global risks .................................................................................................... 126
6.3 Network design ................................................................................................................. 127
6.4 Third Part Logistics (3PL or TPL) ........................................................................... 135
6.5 Role of Information Technology (IT) ..................................................................... 138
6.6 Distribution strategies ................................................................................................... 144
7. Flexibility ..................................................................................................................................... 149
7.1 System flexibility ............................................................................................................... 149
7.2 Process Flexibility ............................................................................................................ 149
7.3 Product Design Flexibility ........................................................................................... 151
7.4 Key Performance Indicators (KPI) .......................................................................... 152
Critical Key Performance Indicators ......................................................................... 152
Other KPI's ............................................................................................................................. 153
7.5 Key Performance Predictors (KPP) ......................................................................... 154
8. Barriers to Success .................................................................................................................. 157
8.1 Supply Chain Management and Industrial Excellence ................................. 158
APPENDIX – EXPECTED VALUE ...................................................................................... 160

Overview of lectures

Lecture Subject Reference from

the book and
Handout

1 Introduction to Supply Chain Management Chapters 1 and 2.

Sections 1 and 2
of handout

2 Matching products, markets and strategies and Chapter 3.

Forecasting Section 3 of
handout

3 Inventory management – risk pooling, Section 4 of

bullwhip effect handout and
Appendix A of the
book

4 Inventory management (continued) – Supply Chapter 4 and

Contracts section 5 of
handout

5 Supply contracts (continued) Chapter 4 and

section 5 of
handout

6 Risk Mitigation – Network design – Third Chapters 5 and 6

Party Logistics – Role of Information and section 6 of
Technology – Distribution strategies handout

7 Flexibility: systems, process and product. Key Chapters 7, 8 and

performance indicators (KPI) – Key 9. Section 7 of
Performance Predictors (KPP) - handout

8 Overview: Barriers to success Chapter 12 and

section 9 of
handout

1. The basics

Supply chain (SC for short) is a chain in which most of the links or joints,
which participate on it give and take to each other something. This means to
say that there exist transactions between the links. Figure 1.1 presents the
supply chain of a cup of tea.

Figure 1.1. The supply chain of a cup of tea1.

The far right part of Figure 1.1 includes the “End Consumer”. The far left of the
chain includes the “Suppliers”. From product supply in the left we end up to
customer demand on the right.

Definition: Supply chain is defined as a group of inter-connected

participating companies that add value to a stream of transformed inputs
from their source of origin to the end products or services that are demanded
by the designated end-consumers2.

The definition incorporates three key characteristics:

1 Adapted from: Scott C., Lundgren H. and Thompson P. (2011). Guide to Supply

Chain Management, Heidelberg: Springer, p. 2.

2Lu, D. (2011). Fundamentals of Supply Chain Management. Available for free from:
http://bookboon.com (p. 8).

1. A SC is formed and can only be formed if there are more than one
participating companies.
2. The participating companies normally do not belong to the same
business ownership (or participating companies are legally
independent).
3. The companies are connected on the common commitment to add
value to the stream of material flow that runs through the supply chain.

Figure 1.2 displays the coexistence of the five main flows in a SC. The
subsections, which follow overview each of the five flows.

Figure 1.2. The five flows of a SC. Material and value – added services move
primarily from left to the right. Information, demand and funds move
primarily from right to the left. Re-use, maintenance and after sales support
flow left to the right and from right to the left (both ways). OEM stands for
Original Equipment Manufacturer and OBM stands for Original Brand
Manufacturer.

1.1 The material flow

As an example of supplier of the supplier (or supplier’ supplier) we may

consider the provider of raw materials. The supplier collects raw materials
(from one or more suppliers) and either passes them to the OEM (or OBM) as
they are or passes them after processing. The OEM (Original Equipment
Manufacturer) or the OBM (Original Brand Manufacturer) process the raw
material and produces the final product. The final product is then passed to a
Distributor (for instance there may just one Distributor for a certain clothing
product in Kuwait). The Distributor passes the product to one or more
Retailers. Retailers pass the product to the Consumers (these are us !!!)

1.2 The information flow

Information flow is about:

− Demand
− Customer Needs and
Satisfaction
− Competition

Usually information about demand is

used to prepare forecasts.

As we move upwards (or in the

“opposite” direction) every company
makes decisions using a forecast it
develops.

Information flow and forecasting are

very important.

1.3 The money (funds) flow

Customer is the only source of any

money flowing to the left or upwards.

There exist more than one ways to split money that flows upwards between
the companies, which receive it.

Profit and cost for each company involved in the flow is subject to
uncertainty and risk.

1.4 The value – added flow

− Adding value is the reason for

the existence of any supply
chain.
− Cotton becomes fabric and
fabric becomes cloth!!!
− Crude oil becomes gasoline!!!
− The addition of value in
material flow means that the
material flow joins with the
Design or the Research and
Development flow – or the
Development Chain.

The development chain mingles with the SC. Mingling is depicted in Figure
1.3. The development chain and the SC intersect at the production point.

Figure 1.3. The development chain and the SC3

The development chain encompasses all the activities that are associated with
new product or service development:

− Idea for a new product or for how to improve an already existing

product (or service).
− Who will produce what?
− How components will be integrated to form the final product?
− Example: a computer consists of three main components:
1. Motherboard,
2. Disk
3. Box (simple view).
4. Who does each component? At which and
geographical place do we integrate? How do we
customize?

3 From Simchi-Levi, D. (2010). Operations Rules, MIT press (p. 162)

1.5 Re-use, maintenance, after sales flows

− The customer has bought the

product.
− What kind of support do we
provide?
− Are we involved in the
maintenance?
− Do we have a plan, or what are
the legal constraints related to
re-use (recycling)?

− It is a flow that goes both ways.

− It can be complicated and critical to commercial product success.
− It associates with manufacturing, marketing, pricing policy etc.

1.6 An integrated view

The first view of a SC is rather simple. Figure 1.4 presents a more complicated
view.

Figure 1.4. A more realistic view of a SC.

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1.7 The petroleum supply chain

We use petroleum as an example to demonstrate the importance of three SC

terms, namely:

1. Upstream (early stages)

2. Midstream (in-between)
3. Downstream (customer end)

The three terms are further demonstrated in Figure 1.5.

Figure 1.5. The upstream, midstream and downstream stages of the

petroleum SC4.

Each stage signifies different characteristics.

4 From: http://www.internationaltaxreview.com/Article/3057682/Transfer-pricing-Transfer-
pricing-in-the-oil-and-gas-sector-A-primer.html (visited 4 February 2016)

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− Upstream is finding economically viable sources of hydrocarbons and

bringing them to the surface. Performed by Exploration and Production
(E&P) companies.
− Midstream is gathering, processing, storage and transmission of
petroleum. Typically stored in bulk terminals, refinery tanks, pipeline
tanks, underground salt domes, barges, or inland ship bunkers.
− Downstream consists of refining and marketing activities. Refining
of crude oil into various products like gasoline, jet fuel and diesel. Once
the oil products are refined, they are sold to wholesale distributors,
who sell to retailers and industrial users. Gasoline may also be sold to
gas stations, which bear the company brand name (BP, Shell, etc.)

1.8 Examples

An indicative supply chain for finished goods that come to the Gulf area from
China, Japan, the USA, Europe, South America, etc. Kuwait serves as an
overall Distribution center.

Qatar serves as an overall Distribution center. Rough in 2013 statistics show

that about 4% of Kuwait imports come from UAE.

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The countries, which absorb about 70% of total oil exports from Kuwait: the
oil industry of Kuwait.

Source: http://en.wikipedia.org/wiki/Economy_of_Kuwait (visited 4

February 2016)

13


2. Supply Chain Management

Supply chain management (SCM) is a set of approaches utilized in order to

efficiently integrate everybody involved:

− The suppliers
− The manufacturers,
− The distributors; and,
− The retail stores.

So that merchandise is produced and distributed at the right quantities, to the

right locations, and at the right time.

Main objectives are:

And at the same time to

− To maximize value to the consumer
satisfy service level
− To minimize system wide costs
requirements.

There exist system wide effects:

Every facility, which is part of the SC

affects:

− Overall cost, and

− Service level responsiveness.

Service level think about it as, for

instance: delivery time can not be
more than 30 days or 30 minutes, or,
the chance to loose a customer
because I don’t have the product he or
she asks is no more than 1%.

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Via the SC every company seeks to find the best way to compete in the market.
The company tries to achieve a customer value proposition. See for instance,
indicative value propositions in as listed in Table 2.1.

Table 2.1. Five ways to compete in the market5

2.1 The challenges

At the heart of the problem is the question:

What drives operations and SC strategies?

Three challenges:

1. Before strategy Managers often find that some

identification: There product attributes push the
may be an existence of operations strategy in one direction
mismatches between while other attributes pull the strategy
the strategies in a different direction.
suggested by different
product characteristics.

5 From Simchi-Levi, D. (2010). Operations Rules, MIT press (p. 6)

15


2. After strategy
identification:
executives often
discover that different A single SC or multiple. Should the SC
products, channels, or change?
even customers require
different types of
supply chains.

3. What are the drivers

for a better
performance?

Cost, time or service level?

The efficiency frontier6

2.2 The enemies

1. Uncertainty with respect to:

− Demand from the end consumer

− Availability of supply (raw materials, components, etc.)
− Transportation time and transportation conditions
− Production capacity (problems may occur)
− Panicking behavior

2. Failure to understand the dynamics of the supply chain:

6 From Simchi-Levi, D. (2010). Operations Rules, MIT press (p. 9)

16


− All supply chains change with time (air tickets, books, music, food
delivery, etc.)
− Competition (market, technological)

Figure 2.1 summarizes all enemies and consequences.

Figure 2.1. Summary of enemies and likely consequences.

2.3 Supply chain dynamics

When situation is everybody can predict with accuracy what will happen in the
near future.

Trouble starts when stability no longer exists because something happens.

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1. Retailers will be the first to

notice (but they will not notice
immediately).
2. Distributors will notice a bit
later.
3. Manufacturer(s) will learn
even later.

All they can enter into a series of

activities that will end up in wasting
Bullwhip effect
money and effort and ultimately to
customer dissatisfaction.

2.4 Meditech case study7

An American company, which specializes in endoscopic equipment. Medical,

“high-tech” devices used in surgical operations. The Company has a good
innovative profile and is respected in the market. Currently, it offers about
200 end-products and it generates about 10 – 12 new products per year (this
means that the Company its continuously obsoleting its own products).

This is a key characteristic of all companies involved in “high-tech”.

The “high tech” or “innovative” product profile is a critical parameter.

7 From Simchi-Levi, D., Kaminksy, P and Simchi-Levi, E. (2008). Designing and Managing
the Supply Chain 3rd ed., McGraw-Hill

18


This gives us the opportunity to introduce the 1st rule (Rule 2.1, p.208).

Who are the customers of Meditech? Let’s have a look at the external SC of
the company.

The customers are the

Regional Warehouses
and the International
Affiliates (outside the
USA).

8 Such type references are from the Operations Rules book.

19


Customers are always after value.

Meditech is in product innovation9.

The company should have known that (p. 52 of the book):

9 See Table 2.1, in p. 22 of the book.

20


Product identity is important:

− Is important in SC design and management.

− In “innovative” birth and death of a product is much faster than in
“functional” products.
− The SC must respect the product life-cycle. Product life cycle marks the
period between product “birth” (time of product introduction to the
market) and product “death” (time of product removal from the
market).
− For global business “birth” and “death” may not be the same across all
markets.

What is the problem?

− The customers complaint that they have to wait a lot (six or more
weeks) to receive a new endoscopic device.
− As a result the customers are ordering like crazy! (this is panic
ordering – order more than you need in order to have it on time; and,
at the end if you see that you do not really need it, then cancel your
order).
− Such practice can cause a lot of problems in the Company (this is
Meditech).
− Before we continue we need two more pieces of information:
1. Who are the customers?
2. What is the SC?

We have seen the external SC. Let us now have a look at the internal SC of
Meditech. The way internally the product is manufactured is important
because there may be “hidden” imbalances.

21


First view of the problem: the Company holds too much inventory10. Too
much inventory does not mean that customers are satisfied!

10 Figure 1.8, page 23 of the Simchi-Levi et al. (2008) book mentioned earlier in this section

22


To proceed we take the typical profile of weekly orders for a new product. We
see that the profile (or the pattern) fits with what we have already discussed.
We start thinking that the “way too much Finished Goods (FG) inventory”
may be the result of the mistake we make to believe that the “many” orders
we normally receive between weeks 4 and 5 (or 6) will last forever!

23


As a consequence:

1. We loose money.
2. We may also customers.

What’s Wrong? What is Going on?

1. Poor service for new product 1. Demand is quite predictable.

introductions. 2. Usage in hospitals is quite

2. Poor forecasting? stable.

3. Panic ordering? 3. Market share moves slowly

4. And high FG inventory. over time.

4. With each new product, dealer
must build inventory to fill
pipeline.

Solution or what to do?

1. Recognize that demand is stable and predictable

2. Establish accountability for forecast
3. Eliminate planning delays and/or reduce time bucket
4. Alternatively, put assembly within pull system and eliminate bulk
inventory.

Moving the “push – pull” boundary means that:

24


Use history:

1. Go back and examine what happened with some products that were
introduced in the past.
2. Focus on big failures and keep asking yourself “what should I have
done to save myself at that time?”
3. Create case stories from the past and try to learn from successes
and mistakes.

Where should we search for solution?

1. In organization and management.

2. Obvious that company does not have an integrated forecasting
system.
3. Integrated means that forecasting system should be able to include
all. From demand to ordering of components for Assembly.
4. Integrate forecasting!!!

See what happens with forecasting!

25


The solution agenda

1. Start we the most difficult problem. This is what to do when we plan to

introduce a new product.
2. We have seen that after a while (something like 4 to 6 months after the
product is introduced) the situation becomes stable.
3. Internally:
− Try to connect all databases. This is not difficult. With
the technology available today is relatively easy to make all
data talk to themselves!
− Develop a common terminology for all physical
components.
− This is easy if a standard vocabulary is developed.

While applying the agenda don’t forget that:

1. Starting point must be the orders received from Hospitals.

2. Hospitals must know that we are involved in this corrective process.

26


3. Dealers must also know. Best would be to establish connection with

the information systems that dealers use to process orders from
Hospitals.
4. Suppliers must also be involved. Again best would be to connect with
their information systems.
5. Make clear the assumptions that are used to produce forecasts.
6. Align the forecasts. It is certain that one forecast will not be sufficient.
However, the forecasts should talk to each other.
7. To determine objectives. By when should I have done what?

2.5 Product selection and availability

Many products come in a large variety of options, styles, colors and shapes.

Styles 5

Exterior Colors 10
1,000 different cars!
Interior Colors 10

Transmission Automatic – Manual

Product proliferation is also a function of the sales channel.

Retailers:

− Online: large variety

− Brick and mortar: limited selection. Focus is on price.

Long – tail phenomenon:

The phenomenon says nothing about profit

margin. When online retailer sells
downloadable products (applications
software, books, movies, etc.) the long tail
represents both revenue and profit margin.

27


SC challenges and opportunities are quite different, depending on whether the

firm sells its product online or in traditional (brick and mortar) retail stores.

2.6 Price and brand

The price of products is an essential dimension of customer value.

Company Profit margin Revenue Calculation

(2008) increase (per
1% decrease in
operating cost)

ACER 2.94% 34.00% 0.01 / 0.0294

Dell 5.69% 17.60% 0.01/ 0.0569

28


HP 9.18% 10.90% 0.01 / 0.0918

Lenovo 9,80% 10.20% 0.01 / 0.0980

Clorx 17.22% 5.80% 0.01 / 0.1722

P&G 20.11% 5.00% 0.01 / 0.2011

Colgate 20.91% 4.80% 0.01 / 0.2091

2.7 Value – Added Services

Companies are now paying attention to the ability of the service-parts SC to

add value for their customers as well as increase their revenue and profit.

29


Flexibility is important for traditional SC, but it is critical for service-parts SC.

2.8 Relationships and experiences

v Customer experience versus customer relationships

Businesses tend to measure customer satisfaction but they don’t measure

customer experience.

For customer experience see (indicative):

https://en.wikipedia.org/wiki/Customer_experience

https://www.youtube.com/watch?v=TBfCmRyIkFU

All of the above lead to the formation of the rule:

30


2.9 Summary

Critical is the value the SC provides to customers: the customer value.

Presented the push – pull boundary (analytical discussion follows in section

3.1).

Discussed a case study.

In summary SCM encompasses the following:

1. Inventory management
2. Forecasting
3. Transportation
4. Contracts
5. Warehousing

Reference: Chapters 1 and 2 of the book.

31


3. Matching products, markets and strategies

Main emphasis:

1. Customer value, product and channel characteristics significantly affect

operations and SC strategies.
2. Different portions of the SC may require different strategies, and
identifying the appropriate strategy requires a holistic, global view of
the entire chain.

3.1 Push, Pull and Push – Pull Strategies

1. The Push strategy and the Pull strategy.

2. The hybrid strategy of Push–Pull.
3. Framework for matching products and industries with supply chain
strategies
4. The effect of the internet on SC strategy

Push-Based SC

1. Means that you are pushing products downstream in the Supply Chain.

32


2. Traditional model.
3. Production and distribution decisions are based on long-term
forecasts.
4. Manufacturer demand forecasts are based on orders received from the
retailer’s warehouses.
5. It takes longer time to respond to changes in the marketplace:
− Inability to meet changing demand patterns.
− Obsolescence of supply chain inventory as demand for certain
products disappears.

What do you think about forecasting, inventory levels, lead times, demand
variability and bullwhip?

Push – based SC:

1. Lead to inefficient resource utilization

2. Planning and managing are much more difficult.
3. Not clear how a manufacturer should determine production capacity
and/or Transportation capacity.
− Peak demand
− Average demand
4. Result to:
− Higher transportation costs
− Higher inventory levels and/or higher manufacturing
costs

33


− High manufacturing costs due to the need for

emergency production changeovers

Pull – based SC

1. Production and distribution demand driven:

− Coordinated with true customer demand rather than forecast
demand
− Firm does not hold any inventory and only responds to specific
orders.
2. Intuitively attractive because of:
− Reduced lead times through the ability to better anticipate
incoming orders from the retailers.
− Reduced inventory since inventory levels increase with lead
times
− Less variability in the system
− Decreased inventory at the manufacturer due to the reduction
in variability.

Implementation of Pull-Based Systems means that:

34


1. Often difficult to implement

− when lead times are long
• impractical to react to demand information.
− more difficult to take advantage of economies of scale
2. Advantages and disadvantages of push and pull supply chains:
− new supply chain strategy that takes the best of both.
− Push–pull supply chain strategy

Push – Pull boundary

1. Some stages of the supply chain operated in a push-based manner.

− Typically in the initial stages.
2. Remaining stages employ a pull-based strategy.
3. Interface between the push-based stages and the pull-based stages is
the push–pull boundary.

Identifying the Appropriate Supply Chain Strategy:

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3.2 Forecasting Ι

− Forecast: (verb) to predict or estimate (a future event or trend).

− Forecast: (noun) a calculation or estimate of future events, especially
coming weather or a financial trend.
− Forecasting is the process of making statements about events whose
actual outcomes (typically) have not yet been observed. A
commonplace example might be estimation of some variable of interest
at some specified future date.
− Prediction is a similar, but more general term.
− Forecasting leads to a forecast about something (such as sales or
demand for an item). The forecast is used to make a decision today
about something tomorrow.

Use forecasting of sales as example.

36


We see that Data are mixed with Assumptions (about the nature of the data or
the general environment) to support Data Analysis. Data Analysis supports
the forecast, which in turn supports Decision Making about the future (this is
planning).

Dashed lines indicate testing and feedback.

Forecasting errors

Any forecast can prove wrong. Why? There is a number of reasons that answer
the “why”, such as:

1. There may be changes in the systems, which we have failed to take into
consideration or may have been almost to take into account. For
instance, take the forecasting of sales for a specific model for a TV set in
2015. What kind of dynamics are involved, which can cause forecast to
go wrong?
2. Analysis may have not appropriate. Assumptions (for instance) about
market growth might have been unrealistic.
3. Testing may not have been sufficient and dangerous “spots” in analysis
have not been revealed.
4. The organization was not able to adapt rapidly to change and was help
“hostage” to the initial forecast. You should always have a “plan B”
ready in order to “escape” from a forecast, which looks that it is in the
wrong direction.

37


5. Time horizon was long. The shorter the time reference the better the
chances for the forecast to prove accurate.
6. We failed to aggregate either at market level or at product level or at
both levels.
− In supply chain a key term is SKU, which means Stock
Keeping Unit. What is SKU? Take an example. A cloth
manufacturer produces a shirt for men. Shirt comes in
different colors and sizes. Let us say that it comes in three
colors (black, white, green) and in four sizes (small,
medium, large and extra large). The shirt corresponds to a
product with (3 X 4) 12 SKUs.
− Forecasting with respect to each SKU may prove less
accurate rather forecasting with respect to the product
family (which includes all 12 SKUs).
− The shirts are to be sold in the Gulf area. Then it is better to
forecast with respect to all Gulf states (GCC) rather than
with respect to each GCC member (Bahrain, Kuwait, Oman,
Qatar, KSA, UAE).

Forecasting should follow a progressive deepening pathway. Start from

aggregate products or markets and then try to decompose to specifics and
finally to the SKU level. For example, Sultan Centers may at first easily

38


develop a forecast for all its stores and then try to decompose it to each store
location.

7. We develop our own forecast by using forecasts developed by others

without testing the “imported” forecasts for accuracy or even reality.
This is extremely serious and may cause a plentiful of problems (even
disasters).

Forecasting methods

− Judgment methods11, which involve judgment from experts (Delphi

method).
• For instance, you ask several experts about their opinion
regarding the automotive market in Kuwait for the next 2 –
4 years
− Market research methods. They involve qualitative studies of
consumer behavior.
• Coca Cola may inquiry about the level sweetness of the
beverage in the Oman market and how this level may differ
from another country or region.
− Time-series methods. These are mathematical – statistical methods via
which we try to induce future performance based on past performance.
• Coca Cola may forecast sales for 2016 in Kuwait using the
sales of years 2012, 2013, 2014 and 2015.
− Causal methods. These are mathematical models in which we establish
a variable of interest (for instance this may be “sales”) and then try to
associate its behavior using the behavior of other variables.
• A company may try to forecast sales based on the money
spent on TV advertising. In this instance, ‘sales’ represents
the dependent variable and ‘money spent on TV advertising’
represents the independent variable. We try to forecast
‘sales’ because we believe that the ‘amount spent on TV

11 Often Judgment and market research methods are put together and called qualitative
methods.

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advertising’ affects (positively) ‘sales’; that is, the more we

spend on advertising the higher the sales.

Examples of forecasting methods

1. Qualitative techniques (Judgment – Market Research)

Used primarily when data are scarce – for example, when a product is first
introduced into a market.

They rely on human judgment and rating schemes to turn qualitative

information into quantitative estimates.

Tables that follow provide an overview of 5 qualitative methods:

1. Delphi method
2. Market research
3. Panel consensus
4. Visionary forecast
5. Historical analogy (or case based)

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2. Time series

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3. Causal methods

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Forecasting – comments and caution

All forecasting methods hide a secret. They are based on induction.

Induction means that result can only be guaranteed for the data that were
used to derive it. For example, a different pair of (Spend) – (MilImp) data may
yield a different forecasting equation.

This means that every time we use a forecasting method – and there are
many, we should be careful.

Best thing to do is to test the result. Testing is critical.

For example, if we use time series to predict sales in 2016 and our data
include sales from years 2012, 2013, 2014 and 2015, then it is advisable to use
years 2012, 2013 and 2014 to predict sales of 2015. Since we already know
year 2015 we can check whether the method we are using performs well.

Never take for granted a forecast. Do it. Then keep it in mind. And,
continuously check whether it performs well. If necessary revise it!

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3.3 Implementing a Push – Pull Strategy

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Achieving the appropriate SC design depends on many factors:

v product complexity
v manufacturing lead times
v supplier–manufacturer relationships.

Many ways to implement a push–pull strategy:

v location of the push–pull boundary.

• Dell locates the boundary at the assembly point
• Furniture manufacturers locate the boundary at the
production point

Impact of the Push-Pull Strategy:

v Push portion:
− Low uncertainty
− Service level not an issue
− Focus on cost minimization.
− Long lead times
− Complex supply chain structures
− Cost minimization achieved by:
1. better utilizing resources such as production and
distribution capacities
2. minimizing inventory, transportation, and production
costs.
v Pull portion
− High uncertainty
− Simple supply chain structure
− Short cycle time
− Focus on service level.
− Achieved by deploying a flexible and responsive supply chain

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Postponement

Benetton Postponement

− Why the change?

The change enables Benetton to start manufacturing before color choices are
made

− What does the change result in?

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1. Accommodation of delayed forecasts of specific colors

2. Still use aggregate forecasts to start manufacturing early
3. React to customer demand and suggestions
− Issues with postponement
1. Costs are 10% higher for manufacturing
2. New processes had to be developed
3. New equipment had to be purchased

3.4 The effect of Lead Time

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3.5 Strategies for innovative and functional products

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3.6 Summary

In section 3 we discuss the following critical SC issues:

1. Push – Pull strategies, boundary point and implementation.

2. Forecasting (initial overview)

3. Postponement

4. Effect of Lead Time

5. Strategies for innovative and functional products.

6. Except for forecasting discussion draws from Chapter 3 of the book.

Discussion centers around four operations rules.

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Operations rules:

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4. Inventory management

1. Inventory is necessary because:

2. Uncertainty in customer demand
− Shorter product lifecycles
− More competing products
3. Uncertainty in supplies
− Quality/Quantity/Costs/Delivery Times
4. Delivery (lead) times
5. Incentives for larger shipments

4.1 The basics

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4.2 The management

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4.3 Many orders per year

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4.4 Positioning the inventory in the SC

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4.4 Service level and inventory management

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4.5 Single period inventory systems

When ordering takes place once or twice per year (single period model).
Examples: spare parts in an oil exploration site, fashion clothing (ordered at
the start of the season), etc.

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Review problem

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4.6 Inventory policy and management procedures

Periodic review policy

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Continuous review policy

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Consignment practice

4.7 Inventory management: best practices – strategies

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4.8 Risk pooling

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4.9 The bullwhip effect

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5. Supply contracts

Procurement represents a competitive weapon that distinguishes highly

profitable companies from others within the same industry.

We introduce a framework that can help organizations determine an

appropriate procurement strategy. The framework emphasizes the associated
capabilities required for a successful implementation.

Procurement strategy must integrate with the firm’s operations and align with
its value proposition.

Operations:

Innovative products and functional products need quite different SC

strategies.

Appropriate strategy for functional products is push. Focus is on efficiency,

cost reduction and SC planning.

Appropriate strategy for innovative products is pull because of high profit

margins, fast innovation speed and unpredictable demand.

Customer value proposition:

When a retailer procures functional products, the focus should be on

minimizing total landed cost (cost of purchase + cost to deliver the product
to its final destination).

Total landed cost includes:

− Unit cost
− Transportation cost
− Inventory handling cost
− Handling cost (non inventory)
− Duties and taxation (when apply)
− Cost of financing

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When procuring innovative products focus on total landed cost is not

appropriate.

Because of fast innovation speed, high margins and high forecast error the
objective is:

To reduce lead times and to improve SC responsiveness.

5.1 Drivers of procurement strategies

Five criteria:

1. Forecast accuracy
2. Supply risk
3. Price risk
4. Innovation speed
5. Financial impact

A qualitative approach for evaluating component source strategy

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5.2 Reducing exposure to supply risk

Supply risk refers to a potential disruption of supply due to a supplier’s

financial stability, a supply shortage because of a supplier’s production or
distribution problems, product quality problems, or other sources of less
predictable risks such as hurricanes or earthquakes.

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5.3 Mitigating exposure to Price Risk

5.4 Risk sharing contracts

We examine two risk-sharing contracts:

1. Buy – back
2. Revenue sharing

Both apply to strategic materials.

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Strategic items: Make to Order (MTO). Symmetric forecast.

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Buy – Back contracts

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Revenue – Sharing contracts

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Global optimization

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5.5 In summary

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Exercise

5.6 Strategic items: Make to Stock MTS) – Symmetric

Forecast

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5.7 Contracts with asymmetric information

5.8 Non-strategic items

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6. Risk mitigation strategies

Risk can be everywhere! Difference between uncertainty and risk?

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6.1 Capacity redundancy

6.2 Managing global risks

Speculative strategies

Hedge strategies

Flexible strategies – enable the company top take advantage of different

scenarios. Critical is the estimation of total cost.

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6.3 Network design

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6.4 Third Part Logistics (3PL or TPL)

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6.5 Role of Information Technology (IT)

Five core capabilities demand undertaking a deep

and thorough analysis of a firm’s IT infrastructure:

1. SC collaboration and integration

2. Centralized an decentralized decision making

3. Synergies across multiple SCs

4. SC visibility:
− Efficiency – drive down cost
− Responsiveness – ability to focus on speed,
order fulfillment, and customer satisfaction
(customer experience)
− Regulations – conformance.

5. Performance monitoring and optimization

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IT Systems are like the national roads. Both are very

expensive. In both you need to know in advance where
they are going to wind up?

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6.6 Distribution strategies

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7. Flexibility

7.1 System flexibility

7.2 Process Flexibility

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7.3 Product Design Flexibility

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7.4 Key Performance Indicators (KPI)12

The effectiveness of a company's supply chain management can be measured

in different ways, and the measurements chosen by a company are usually
specific to the kind of business being done, so they will include those aspects
of effectiveness which are most important to the business. For instance, a
company focused on transportation would probably want to measure it on-
time deliveries, and a company focused on sales might prefer to measure
inventory against customer service. In general though, the key performance
indicators (KPI's) established by a company illustrate the gap between
planning and execution in the supply chain, and are metrics set up to monitor
one or more of the following: cost, value, service, and waste.

Within these broad categories, there are more than 200 KPI's identified by the
Supply Chain Council as being critical to supply chain management and
having a direct bearing on how well the company is performing. Here are
seven of them that are among the most commonly used KPI's, and are
relatively independent of the kind of business being conducted.

Critical Key Performance Indicators

Total Delivered Cost. This is one of the two enterprise-level KPI's (the
other being Customer Service) that helps determine overall profitability for a
company. Factored into this high level metric are operating costs, demand
variability, supply variability, and inventory. One of the ways to support total
delivered cost measurements are with a complementary metric on total cycle
time, which measures the total amount of time it takes for a product to pass
through the supply chain.

Customer Service. This KPI is also monitored at the enterprise level and is
comprised of demand variability, supply variability, and performance to plan.
The favoured approach to measuring customer service in its broadest sense is
with metrics for on-time full deliveries or line item fill rate, which are the most

12 From: Stephanie Davies, 7 critical KPIs for the best supply chain management process,
available at: https://www.linkedin.com/pulse/7-critical-kpis-best-supply-chain-
management-process-stephanie-davies - visited 12/2/2016

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meaningful aspects of customer service. The overall goal of the two enterprise-
level KPI's is to manage total delivered cost and customer service against the
strategic goals of the company.

Supply Variability. Supply variability KPI's measure the status of Inventory

against conformance to lead times and promise dates. Included are metrics for
performance to the production plan, schedule attainment, asset utilisation,
capacity utilisation, vendor deliveries, and item availability at all stocking
locations (including the customer's location).

Demand Variability. Demand variability is comprised of measurements for

inventory, lead times, adherence to process capability, improvement to
process capability, conformance to plan, actual demand versus forecast
demand, forecast accuracy, and forecast error.

Operating Costs. All departmental costs are rolled up in this metric,

including distribution costs, procurement costs, warehousing costs,
transportation costs, and manufacturing costs. From these, it is possible to
calculate cost of goods sold, cost per unit, or cost per kilogram,which are all
useful KPI's relative to total cost.

Performance to Plan. Within Performance-to-Plan are measurements for

how well the company has adhered to the procurement schedule, the
distribution schedule, the warehousing schedule, the transportation schedule,
and the manufacturing schedule.

Inventory. Metrics which support the Inventory KPI are in the areas of total
inventory, inventory turns, record accuracy, obsolete inventory, working
inventory, non-working inventory (along with working inventory, this
measures the quality of your inventory), and item availability.

Other KPI's

A whole catalogue of KPI's can be used to measure performance, but as stated

above the whole purpose of using them is to shine a light on the difference
between what is planned by a company and what is really executed in its

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supply chain management. Making best use of these indicators should help a
company to improve on and correct weaknesses identified in the supply chain.

7.5 Key Performance Predictors (KPP)13

A recent study14 by Aberdeen Group explored best-in-class practices amongst

companies applying advanced analytics for strategic sourcing. The study
found that amongst these companies the best-in-class have twice the amount
of savings than low performers, and an on-time delivery that is 40% better
than competition. The report ratified a trend where increasing number of
companies are looking to move away from descriptive analytics alone, and
towards predictive and prescriptive analytics during both the planning and the
execution phase.

To break into the top echelon of companies that successfully leverage

advanced analytics, an organization-wide change in mindset is required.
Organizations need to move away from thinking only in terms of Key
Performance Indicators (KPIs) and also start relying on Key Performance
Predictors (KPPs). Rule 6.2 in David Simchi-Levi’s book, Operations Rules,

13 From: Sumeet Mahajan and Dinesh Natarajan, Enhancing Supply Chain Performance with
KPPs, available at: http://www.opsrules.com/supply-chain-optimization-blog/enhancing-
performance-with-kpps - visited 12/2/2016
14 See at: http://www.aberdeen.com/research/10397/10397-RR-strategic-sourcing-
prescriptive.aspx/content.aspx (visited 12/2/2016)

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states that ‘IT should be used not only to monitor current supply chain
performance but also to predict what is likely to happen if no corrective action
is taken.’

While KPIs are vital, they only describe what has already happened. By the
time an organization learns from the KPIs and takes any action, a lot of the
business value is already lost. On the contrary, KPPs predict something that
might happen, elevating us from an ‘event driven’ supply chain to one that
identifies risks and trends early, thus ensuring a healthy performance. It is
akin to receiving a flu shot before the onset of the flu season, and not waiting
till you come down with one!

Using KPPs does not just involve monitoring trends in KPIs, but instead
encompasses identifying causal relationships between performance indicators
(e.g., fill-rates, lead times, quality) and factors such as order quantities, time
of the year, and relationship with supplier/customer, etc. Both KPIs and KPPs
should be monitored for deviations to confirm both adverse and advantageous
performance trends early. Identifying these trends early allows your supply
chain to take preventive actions or lock-in quantities and prices based on the
nature of these trends.

Linking supply side predictive analytics with predictive analytics on the

demand side would be an impactful step towards attaining supply chain zen. A
descriptive end-to-end view of not only the current supply and demand but
also a predictive end-to-end view of the next cycle’s supply and demand can
help in efficient procurement, effective inventory positioning and reduce the
cost of lost sales or lost margins. For instance, inventory shortages or overages
can be predicted by observing trends in demand and supply variability.
Identifying drifts in changing transportation mode mixes will allow for
improved vehicle utilization and more meaningful freight price negotiations.
Monitoring KPPs around customer complaints and queries is another useful
example of leveraging predictive analytics to improve overall performance.

There is no debating that advanced analytics just by itself is an exercise in

futility. One example of forward looking analysis is looking at the Risk
Exposure Index a method of determining the risk points in the supply chain

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through analysis of the ability to survive a disruption. Ford Motor Company

has adopted this expanded approach and now uses REI not only for strategic
risk management but also for tactical and operational risk management. This
is an example of the use of prescriptive analytics to assess risks.

An effective way of making the most out of analytics is through the

deployment of a Control Tower - a set of processes and technology that
enables flawless execution through visibility. Visibility of incidents assures
continuity of supply while visibility of performance drives corrective action. A
Control Tower with various analytics capabilities enables detecting present
interruptions through and predicting future disruptions. As you can see in the
illustration below the short term can use descriptive analytics to determine
what is happening, predictive to determine inventory needs and prescriptive
to plan for capacity that will match demand and risk.

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8. Barriers to Success

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8.1 Supply Chain Management and Industrial Excellence

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APPENDIX – EXPECTED VALUE15

The example is from the book: Simchi-Levi D., Kaminsky P., and Simchi-Levi E. (2008).
15

Designing and Managing the Supply Chain. McGraw-Hill.

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