Final exam Flashcards
Supply chain risks derive from different flows:
Material flows
Financial flows
Information flows
Material flows
▪ Supply
▪ Demand
▪ Production
Supply chains are subject to macro-risks
o Natural risks
o Law and Cultural risks
Supply chain risks (image)
Risks can be classified in two ways from the perspective of
impact severity and frequency
These risks can be classified in two ways from the perspective of impact severity and frequency
Operational risks
Disruption risks
Operational risks
(a.k.a. low-impact, high frequency) → they cause the bullwhip effect
Disruption risks
(a.k.a. high-impact, low-frequency) → they cause the ripple effect
Operational risks and distribution risks (image)
Operational risks are recurrent risks that come
from within the supply chain itself
Operational risks are recurrent risks that come from within the supply
chain itself
- Related to business processes (uncertainty of supply and demand)
- Often involve the bullwhip effect
- Impact operational parameters (e.g. lead time and inventory)
- Require time-efficient coordination to balance demand and supply
- Prevention steps: improving flow of information along the value chain
bullwhip effect
The bullwhip effect occurs when small fluctuations in retail demand cause fluctuations in wholesale, distributor and manufacturer demand, resulting in inefficiency and disorganization throughout the supply chain.
„Bullwhip“ efektas atsiranda, kai nedideli mažmeninės paklausos svyravimai sukelia didmeninės prekybos, platintojų ir gamintojų paklausos svyravimus, dėl kurių visoje tiekimo grandinėje atsiranda neefektyvumas ir netvarka.
BULLWHIP EFFECT (image)
As a result of the bullwhip effect:
Higher manufacturing costs
Higher inventory costs
Higher replenishment lead times
Higher transportation costs
Higher labor costs for shipping and receiving
Lower level of product availability
Lower profitability
Worse relationships across the supply chain
Results of bullwhip effect in an image
There are four main factors contributing to the increase in variability (i.e. bullwhip effect):
- Demand forecasting
- Lead time
- Batch ordering
- Price fluctuations
RECAP on reasons for batch orders:
o Minimize sum holding and ordering costs (EOQ)
o Leveraging discounts (transportation discounts to exploit FTL policy)
Variance amplification ratio
How to measure the bullwhip effect – example
How to measure the bullwhip effect – effect of Forecasting and Lead Time
Disruptive risks are
exceptional risks (rare occurrence and high performance impact)
ripple effect
Ripple effect describes the impact of a disruption propagation on supply chain performance and disruption-based scope of changes in supply chain structural design and planning parameters.
Disruptions have consequences in terms of
- Loss of productivity
- Decrease in customer service
- Loss of revenue
Ripple effect vs. Bullwhip effect
To be resilient, a supply chain needs to possess redundancies:
o Material inventory (risk mitigation inventory)
o Capacity buffers
o Backup facilities
Protect SC against perturbation impacts based on certain reserves →
Supply chain robustness
Amplify the fork variety of SC paths to react quickly and flexibly to changes →
Supply chain flexibility
There are many ways to classify inventories →
one often-used classification is related to the flow of
materials into, through, and out of a manufacturing
organization
Inventory categories:
Raw materials
Work-in-process
Finished goods
Distribution inventories
Maintenance, repair, and operating supplies (MROs)
Raw materials →
purchased items not entered the production process
Work-in-process (WIP) →
raw materials entered the manufacturing process and being worked on or waiting to be worked on
Finished goods →
finished products of the production process ready to be sold as completed items
Distribution inventories →
finished goods located in the distribution system
Maintenance, repair, and operating supplies (MROs) →
items used in production that do not become part of the product (e.g., spare parts)
Based on this, inventories can be classified according to the function they perform
Anticipation inventory
Fluctuation inventory (safety stock)
Lot-size inventory (or cycle stock)
Transportation inventory
Hedge inventory
Maintenance, Repair, and Operating inventory
Anticipation inventory
▪ It is built up in anticipation of future demand (e.g. stock build-up
to fulfil peak season demand)
Fluctuation inventory (safety stock)
▪ It is held to cover random unpredictable fluctuations in supply and demand or lead time
▪ Safety stock is carried to protect against this possibility → its purpose is to prevent disruptions in manufacturing or deliveries to customers
Lot-size inventory (or cycle stock)
▪ It relates to items purchased or manufactured in quantities greater than needed immediately → this is to take advantage of quantity discounts, to reduce shipping, setup costs, …
Transportation inventory
▪ It exists because of the time needed to move goods from one location to another (e.g., from a plant to a distribution center)
Hedge inventory
▪ It is related to the products traded on a worldwide market
Maintenance, Repair, and Operating inventory
▪ It is used to support general operations and maintenance but that do not become directly part of a product
▪ It includes maintenance supplies, spare parts, and consumables such as cleaning compounds, lubricants, pencils, and erasers
The following costs are used for inventory management decisions:
Item costs (or landed costs)
Carrying costs (or holding costs)
Ordering costs
Stockout costs
Capacity-associated costs
Item costs (or landed costs)
▪ They include costs related to purchase, transport, custom duties,
Carrying costs (or holding costs)
▪ They consist of capital, storage and risk costs
Ordering costs
▪ They include purchase order, production control, setup and
teardown, lost capacity, and movement costs
Stockout costs
▪ They are associated to back-order, lost sale, lost customer
Capacity-associated costs
They are associated to the costs encountered to change production level (overtime, hiring, shift, etc.)
Inventories help make a manufacturing operation more productive in
four ways:
- Inventory between operations with different rates allows them to run independently and more economically – decoupling inventory
- Inventory build-up for high selling seasons reduce:
o Overtime costs
o Hiring and firing costs
o Training costs
o Subcontracting costs
o Capacity requirements - Longer production runs → it results in lower setup costs and increased capacity (or higher utilization)
- High quantity purchases of raw material and components leading to reduced transportation and purchase costs
Inventory management deals with:
o Which inventory items are most important
o How items are to be controlled
o How much to order at one time
o When to place an order
The ABC inventory classification system determines the importance of
items and classifies them into three different categories based on their
relative importance:
o A-products
o B-products
o C-products
ABC INVENTORY CONTROL
ABC INVENTORY CONTROL exercise
Two main types of review systems:
o Continuous review system (or continuous review policy)
o Periodic review system (or periodic review policy)
The main difference between continuous and periodic review systems:
o In Continuous review system: the quantity ordered is the same and the time between orders varies
o In Periodic Review System: the time between orders is constant and the order quantity varies
The review system supports in determining:
o How much to order at one time
o When to place an order
Continuous review system_EOQ
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑜𝑡 𝑠𝑖𝑧𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟�
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎�
Ripple effect
Ripple effect is a specific area of SC disruptions and a strong stressor to SC resilience. Research on the ripple effect analyses how one or more disruptive events propagate through the SC and impact its resilience and performance.
In supply chain management, lead time exclusively refers
to the time it takes for a supplier company to have goods ready for delivery. For example, an apparel company may have a 7-day lead time for custom t-shirts. Typically, this measurement does not include shipping time.
Network Optimization (NO)
The objective of the network optimization (NO) is to find the optimal combination
of factories and/or distribution centers in the supply chain
Optimization models
produce notable insights for managers and can be applied where
the probability of disruption can be roughly estimated.
The ABC inventory classification system determines the importance of items and
classifies them into three different categories based on their relative importance:
- A-products
- B-products
- C-products
The ABC inventory classification system determines the importance of items and
classifies them into three different categories based on their relative importance:
1. A-products
2. B-products
3. C-products
It allows different levels of control based on their classification
Usually, ABC analysis is based on
annual dollar usage
Formula of Annual dollar usage
annual usage * unit cost
The ABC principle is based on the observation that a small number of items often
dominate the results achieved in any situation →
Pareto’s law (80% of profit will come from the 20% of products)
Steps in making the ABC analysis:
- Establish the item characteristics that influence the importance of an item (e.g.,
annual dollar usage) - Classify items into groups based on the established criteria (classes A, B and C
according to Pareto’s principle)
a. Determine the annual usage for each item
b. Multiply the annual usage of each item by its cost to get its total annual dollar
usage
c. List their items according to their annual dollar usage
d. Calculate the cumulative annual dollar usage and the cumulative percentage of
items
e. Examine the annual usage distribution and group the items into A, B, and C
groups based on a percentage of annual usage
Be aware: inventory control is exercised through individual items in a particular
inventory →
stock-keeping units (SKUs)
Economic order quantity (EOQ)
is commonly used to specify the quantity
What quantity to order:
Q*
Key trade-off:
- Smaller lot sizes → low inventory carrying cost
- Larger lot sizes → reduction in ordering cost
What is the order point?
An order is placed when the on hand inventory reaches a
predetermined level, that is the order point
OP (Order Point) =
DDLT (Demand During Lead Time)
Therefore, safety stock needs to be used
OP (Order Point) = DDLT (Demand During Lead Time) + SS (Safety Stock)
Safety stock is intended to protect against uncertainty in supply and demand due to
- Quantity uncertainty (fluctuating customer demand, forecast inaccuracy)
- Timing uncertainty (time of receipt of supply or demand differs from what expected)
Safety stock level depends on:
Demand variability during lead time → higher variability, higher SS
Reorder frequency → higher frequency, lower SS
Desired service level → higher service level, higher SS
Length of lead time → longer lead time, higher SS
dealing with demand uncertainty, safety stock protects against
random variation, not bias
Safety factors (z)
are used to determine the number of standard deviation corresponding to a certain service level → SS = σ x z
are used to determine the number of standard deviation
corresponding to a certain service level → SS = σ x z
Material inventory (risk mitigation inventory)
Capacity buffers
Backup facilities
A
forecast for the next year
S
cost of every time an order is placed for more units
c
cost of component
i
estimated carrying cost
Formula of EOQ
Annual ordering cost =
number of orders * cost per order = (𝐴/𝑄)∙𝑆
Annual carrying cost=
average inventory * cost of carrying 1 unit for 1 year = (𝑄/2)∙𝑖∙𝑐
Total annual cost =
(𝐴/𝑄)∙𝑆+(𝑄/2)∙𝑐∙𝑖
Q
quantity
N order =
Forecast for annual demand/ quantity per order
S.L. =
(N order - number of tolerated stockouts) / N order
S.S.
Skaičius iš lentelės pagal S.L. procentą* Standard deviation calculated from weekly demand data * šaknis iš lead time
Weekly demand =
forecast/ savaičių skaičius
OP =
demand during lead time + SS gauname atsaklym1 pcs
Žingsniai, kaip rasti SS ir OP
- N order
- S.L.
- SS
- Weekly demand
- OP
Kaip surasti ABC klasę
- Į lentelę susirašyti visus part numbers nuo didžiausio annual $ usage (annual unit usage * unit cost)
- Suskaičiuoti cumulative % usage
Kaip skaičiuoti cumulative % usage
- Randame Total annual $ usage
- Viršutinės dalies randame padalinę annual usage iš total cumulative usage
- Žemesnių: cumulativeive usage vienos aukščiau dalies + annual usage/ total annual usage
Kaip žinoti kokiai A ar B C
A - 0-80proc
B - 80-96proc
C - 96-100proc
VAR_retailer =
Std. Dev of retailers orders to wholesaler kavdratiš / Std. Dev of customer orders to retailer kavdratiš
VAR wholesaler
Std. Dev of wholesaler orders to producer kavdratiš / Std. Dev of retailers orders to wholesaler kavdratiš
Annual holding cost =
Annual holding cost = average inventory (pcs) * cost (euro/pc) * carrying cost (0.2-0.25…)
