OPER3208-001 Supply Chain Management

1. OPER3208-001Supply Chain Management Fall 2006 Instructor: Prof. Setzler

2. Taylor, Chapter 7

3. Chapter 7: Meeting Demand (Taylor) • Daily operations of SCs • The most basic operation is fulfillment • The process of satisfying the immediate demand for products • Figure 7.1 shows the fulfillment cycle • It begins with an order from a customer • It ends when payment is received for the delivered goods • Fulfillment represents a complete cycle of demand, supply, and cash flow across a single link of the chain

4. Chapter 7: Meeting Demand (Taylor) • Daily operations of SCs

5. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Demand is communicated through orders • A order answers the “W” questions • Who is doing the buying and selling • What is being requested • Where is it to be delivered • When is it supposed to arrive

6. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • An order can cover multiple products • Specifying the what of an order can also become complicated • A single order usually requests a variety of different products • Off-the-shelf goods must be specified using unique identifiers such as part numbers, universal product code (UPCs), or stock-keeping unit (SKU) numbers • Many identifiers are unique to each organization, requiring one or both parties to perform a translation between 2 identification systems

7. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • An order can cover multiple products • Orders for customized goods must contain very detailed specifications regarding dimensions, composition, material quality, etc • Specifying the quantities—normally a matter of specifying a number and a unit • It can be challenging when 2 companies measure the same good in different ways • Pounds vs. bales • Or use different measurement systems • Metric vs. customary

8. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Deliveries can go to multiple locations • The answer to “where” can also be complex • It may be a single location, or it may be multiple locations, with a different mix of products going to each destination • Destinations are more than just addresses • Each can have its own receiving capabilities, hours of operation, etc

9. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Deliveries can go to multiple locations • For companies that operate multiple plants, products can come from multiple locations, so shipments of these products may need to be split or merged in transit • Products would have to go by way of a common intermediate destination such as a cross dock or distribution center • See Figure 7.2

10. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Deliveries can go to multiple locations

11. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • The delivery time is usually an interval • Even “when” can introduce complications • Usually specified as a simple date • Delivery targets are actually intervals of time • Historically, the date indicated the last acceptable day for delivery • Currently, the date often specifies an actual day on which delivery should occur (no earlier, no later) • Emphasis is on minimizing inventory

12. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • The delivery time is usually an interval • With JIT operations, the interval is usually specified more precisely by adding a time to the date • Question: Do all goods have to meet the same delivery date? • Customers can stipulate that the order is ship complete • All the items must arrive in a single delivery • No option to backorder items that are currently out of stock • Customers may allow for each item to have its own schedule of deliveries • A single order could be spread out over many deliveries

13. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Orders can also address how and why • How Questions: • How the goods are to be packaged • How they are to be shipped • Their form and quality on receipt • Etc • Why Information (not usually included) • Becoming increasingly important to maintaining synchronization in a SC • Many manufacturers now share their production schedules with their suppliers

14. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Orders have a common structure • See Figure 7.3 • An order consists of 3 basic parts • A header • Specifies generic information such as the parties involved, critical dates for transactions, and terms of payment • A body • Contains the line items, each of which has a quantity of product to be delivered together with the price per unit and extended price for the quantity requested after any discounts • A footer • Contains financial information that depends on the content of the line items, such as total price, taxes, and delivery charges

15. Chapter 7: Meeting Demand (Taylor) • Communicating Demand

16. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Orders are created interactively • Customer orders usually take the form of a purchase order, which doesn’t normally include prices and other financial terms • This information is added by the supplier and returns to the customer in the form of a sales order, which represents a commitment on the part of the supplier • If the customer agrees, the order becomes binding on both parties • If not, it becomes the subject of negotiation

17. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Orders can be nested for multiple deliveries • The most common form of extension is to add another level of structure underneath the line items to specify separate deliveries • See Figure 7.4 • Figure 7.4 (Right panel) shows nesting with line item below delivery date • Commonly known as a customer schedule • Usually found in JIT environments where it is important to see at a glance what items are arriving in each delivery

18. Chapter 7: Meeting Demand (Taylor) • Communicating Demand • Orders can be nested for multiple deliveries

19. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Orders can arrive in many forms • Orders can be transmitted in many forms and can use different media (See Figure 7.5) • Historically, orders were either sent in the mail or dictated over the phone • With the invention of Fax machines, paper orders could be sent over phone lines • The development of the EDI protocol allowed companies to transmit orders in seconds over private networks • EDI technology is expensive, and only large companies were able to afford it • Now, the Internet makes electronic orders easy and affordable for all companies

20. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Orders can arrive in many forms

21. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Manual entry is still a common practice • Companies must be able to handle orders in most if not all modes • 1st challenge: Get all orders into a common form • Handled by order management software • For mail, phone, and fax orders, orders must be manually entered (See Figure 7.5) • EDI orders can go directly into the order management software • Internet orders are not yet sufficiently standardized to permit full automation

22. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Order processing can be slow and complex • Figure 7.6 illustrates the major steps in order processing shown in the sequence they would most normally be carried out • This sequence could vary from company to company, and even within a company

23. Chapter 7: Meeting Demand (Taylor) • Processing an Order

24. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Validation checks the individual entries • 1st step: Check all entries to make sure they are reasonable and valid • Many checks are handled automatically by the order management system • Filters out basic errors such as letters in fields that require numbers, and values that lie outside of typical ranges • The system can make sure the customer is already known to the supplier and has a line of credit • Most systems can review individual line items to make sure that all products are properly identified and quantified • Once automatic validation is complete, orders are usually given a “reasonableness” check

25. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Configuration checks product compatibility • 2nd step: Configuration • Required only if the mix of products is intended to be used together • This process typically involves 2 different checks • Compatibility—makes sure that the components will work together properly • Completeness—ensures customer receives everything necessary for the assembled system to function as expected

26. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Pricing requires its own sequence of steps • Pricing can involve considerable time and effort, and it’s a source of many errors and complaints • The major tasks are: • Determining the correct unit price • Applying appropriate discounts • Computing the extended price • Calculating additional charges

27. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Pricing requires its own sequence of steps • Determining the correct unit price • Selecting the price could require multiple rules if the supplier prices products according to region, market, and other factors • Applying appropriate discounts • Discounts might apply based on company policies, customer contracts, product promotions, and other considerations • Multiple discounts may apply, and some discount can be combined, while others are mutually exclusive

28. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Pricing requires its own sequence of steps • Computing the extended price • This step can be simply multiplying the discounted price by the quantity ordered • It usually requires 1 or more quantity discount schedules • Discounts might be applied to all units, or just those beyond each price-break quantity • Order total might also be subject to another discount

29. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Pricing requires its own sequence of steps • Calculating additional charges • Determining the appropriate shipping fees, taxes, tariffs, and other charges can also be complex • Especially for international sales • Determining shipping mode may require checking the cost of several transportation options and picking the one the best conforms to company policies and customer contracts

30. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Credit checks may be limited by software • 3rd step: Make sure that customer has enough credit to cover the purchase • In a full-featured credit management system, each customer is assigned a maximum amount of credit (See Figure 7.7) • This requires an integration of accounting and order management systems (the exception rather than the rule)

31. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Credit checks may be limited by software • 3rd step: Make sure that customer has enough credit to cover the purchase

32. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Availability checks can use ATP or CTP • Most companies like to be sure they can deliver an order before committing to it • For products made to stock, current and planned inventory may be checked to make sure the product is available to promise (ATP) • For products made or assembled to order, the plant is checked to ensure that it is capable to promise (CTP)

33. Chapter 7: Meeting Demand (Taylor) • Processing an Order • APS systems offer good availability checks • The best tools for performing real-time ATP and CTP checks are the advanced planning and scheduling (APS) systems discussed in Ch6 • APS can evaluate sources for a product and determine the best source based on business rules • Not only does real-time ATP and CTP capability keep companies from defaulting on commitments, it also allows them to make aggressive commitments when there is spare capacity, improving their ability to win bids against competitors that lack this information

34. Chapter 7: Meeting Demand (Taylor) • Processing an Order • Customer confirmation is the final step • 4th step: Getting the order approved • Depending on the size of the order, it may go through an internal review and approval before being sent to the customer for approval • Once the order has been confirmed by the customer, the demand phase is complete, and the process of filling the order begins

35. Chapter 7: Meeting Demand (Taylor) • Processing an Order • The goal is fully automated processing • Even with a good order processing system, the sequence of events is often slow, labor intensive, and prone to errors • Goal for product companies • To fully automate order processing, reducing time, cost, and mistakes

36. Chapter 7: Meeting Demand (Taylor) • Processing an Order • The goal is fully automated processing • With the Internet and the use of a standard XML format, it will soon be possible to perform may tasks by sending the order to existing systems and requesting services for them • For example, an order could be sent simultaneously to • an inventory management system for an ATP check • an accounting system for a credit check • a contracts system for a compliance check • a pricing system for appropriate unit and volume pricing • XML allows any application to read the order directly

37. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Orders go to fulfillment locations • The supply side of the fulfillment cycle begins with the selection of 1 or more facilities to fill the order • Ship goods from storage facility closest to customer • Variations: • Make-to-order products—are created on demand, so they won’t be found waiting in a warehouse • Centralization of management, a company provides a single order point for 2 or more of its operating divisions • --an order might be given to several locations, each of which ships its portion independently • --if the customer has requested that the order be shipped complete, it may be necessary to merge the various shipments in transit and combine into a single delivery

38. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Supply activities follow a standard sequence • A complex sequence of activities are required to ship an order (described here from warehouse perspective) • The same activities occur when pulling inventory, from factories, stockrooms, and other storage locations • All activities are supported electronically by warehouse management systems

39. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Warehouses are laid out by product flow • The layout of a typical warehouse is illustrated in Figure 7.8 • Most warehouses are organized into 5 different areas • A receiving dock • A bulk storage area • A picking area • 1 or more assembly areas • A shipping dock • Each area is dedicated to a different function • The most important consideration in the layout is maintaining a high rate of flow among the areas

40. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Warehouses are laid out by product flow

41. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Warehouses push stock in and pull it out • See Figure 7.8 • Warehouses use both push and pull dynamics to control the flow of stock from the receiving dock to the shipping dock • Push-pull boundary is located at the picking area • When stock arrives, most is unloaded and placed in bulk storage, but a portion may be unpacked and placed in trays, shelves, or bins in the picking area • These are push activities because they queue up product in advance of demand • Other activities are pull-based because they do not occur until an order is received

42. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • The first operation is picking the order • The warehouse management system generates a pick list indicating the quantities of each item • A picker (employee) retrieves the items on the list in the sequence listed • Sequence of items is designed to take the picker on the shortest path • This is an important optimization: Picking can account for as much as half (50%) the labor cost in a warehouse, and pickers spend up to 70% of their time moving from one location to another

43. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Picking can be manual or automated • With relatively small, lightweight items, picking is usually done by hand • For large products, pickers use hand trucks, motorized loaders, or other equipment to gather and move stock • Some facilities use conveyor systems that automatically route packages to their destinations • Some facilities use a carousel-style dispensing system • Outcome: • Picked stock is deposited with the picking slip in its designated assembly area

44. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Order assembly follows picking • Workers perform any final operations need prior to shipment • These operations are usually minor • Visual inspection and addition of labels • However, it is becoming increasingly common to perform final product assembly at warehouses • In which case, the assembly area looks more like a miniature plant than a staging area

45. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Orders are packaged in three levels • Depending on the product, there may be up to 3 levels of packaging (Figure 7.9) • The primary package • The box, can, blister pack, or other container of the actual product • The secondary packaging • Usually a carton that groups a standard number of primary packages together for convenient handling • The transport packaging • Usually a pallet in combination with a protective covering

46. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Orders are packaged in three levels

47. Chapter 7: Meeting Demand (Taylor) • Assembling the Goods • Orders are packaged in three levels • Large shipments of a product are normally loaded onto full pallets • Contain only 1 kind of product • Small shipments of various products going to a single destination are loaded onto mixed pallets

48. Chapter 7: Meeting Demand (Taylor) • Shipping the Order • Shipping is simple if carriers are used • What happens next depends on whether a carrier is used or the supplier owns its own fleet of vehicles • If a carrier is used, there is nothing to do once the vehicles are loaded • For a private fleet, a lot of planning is done even before loading begins • This section describes how a supplier operates its own vehicles, and the vehicles are trucks • Trucking accounts for 70% of all shipping in the U.S. by dollar value • Trucking presents some interesting problems

49. Chapter 7: Meeting Demand (Taylor) • Shipping the Order • The core problem is choosing a route • For full truckload (FTL) quantities, routing is usually a simple matter of finding the shortest path between two points • However, with deliveries in metropolitan areas slightly longer routes can sometimes yield shorter driving times • The main problem with FTL shipments, is figuring out what to do with the truck once it has made its delivery • Driving an empty truck back to the warehouse is a waste of fuel and driver time • Companies are constantly looking for backhauls, which are shipments in the opposite direction • In absence of a backhaul, truck usually go to the nearest distribution center

50. Chapter 7: Meeting Demand (Taylor) • Shipping the Order • Cross docking merges shipments in transit • A special problem arises when orders require shipments from multiple facilities • The simplest solution: make the shipments independently but coordinate them so that they arrive on the same day • Many customers don’t like this • The alternative is a merge in transit • Multiple shipments are sent to a distribution center, reloaded onto a single truck, and sent on as a single delivery • The most cost effective way is called cross docking • Goods are moved directly from a receiving dock to a shipping dock without intermediate storage • Originally developed by Wal-Mart (See Figure 7.10)