Tuesday, December 25, 2012 9:45 AM

1.

2. 3. 4. 5.

What is supply chain? o Planning (Forecasting) o Storage (warehousing, inventories) o Movement (transportation) What are the components of supply chain? Why SCM is important for business? What could be the objectives of any supply chain management? Give some examples of some good supply chain management?

Supply chain costs typically includes the following Transportation cost Warehousing costs Inventory caring costs Order processing costs Loss in damages Loss due to expiries Loss of sales due to stock outs Two reasons why supply chain has been important It offered an opportunity for cost reduction Source of competitive advantage Objectives of supply chain Achieve high levels of productivity Improve profitability through direct cost reduction Improve profitability through capital reduction

Consider two companies A & B. Annual sales of A is 2500 crore. Annual Profit of A is 250 Crores. Annual sales of B is 2500 crore. Annual Profit of A is 150 Crores.

Consider 3 companies A,B,C. Each of them enters the trading business with an investment of 100 Crores. Company A buys stocks worth 100 Crores and sell it for 110 crores. It retained the 10 crores with itself and again buys stocks worth 100 crores. They keep repeating the same process. Each cycle takes 3 months. Company B buys stocks worth 100 Crores and sell it for 102 crores. It retained the 2 crores with itself and again buys stocks worth 100 crores. They keep repeating the same process. Each cycle takes 1 week.

Company B buys stocks worth 100 Crores and sell it for 105 crores. It retained the 5 crores with itself and again buys stocks worth 100 crores. They keep repeating the same process. Each cycle takes 1.5 months. Calculate the following on annual basis for both the companies 1. Annual sales 2. Annual profits 3. Profit margin Find out which company is the most profitable

Company A B C

Buys 400 5200 800

Sells 440 5304 840

Profits 40 104 40

Identify 5 initiatives of how a company can increase the profit margins and five initiatives to improve the capital turnover.

Consider two companies A & B . the annual sales for both is 1 lakh units each. the average cost per unit is rs.1000/-. Average inventory in number of days for A = 60 for B = 30. annual interest rate 10% for both A & B. ware house space heir is for A 5000 sqft. For B 3000 sqft. Warehouse rentals Rs 30/month for both. Ware house operating cost which includes manpower utilities etc Rs.20/Sqft per month for both A & B. Calculate the annual warehousing cost and the annual inventory carrying costs for both the companies. Company Annual Sales Cost per unit Average Inventory Annual interest rates Warehouse Space Warehouse rentals Warehouse operating costs A 100000 units Rs. 1000 60 days 10% 5000 sqft Rs. 30/Sqft/month Rs. 20/sqft/month B 100000 units Rs. 1000 30 days 10% 3000 sqft Rs. 30/Sqft/month Rs. 20/sqft/month

Warehouse cost (A) = 5000*(30+20)*12=3000000 Warehouse cost (B) = 3000*(30+20)*12=1800000 Inventory cost (A) Units = 100000/365*60=16438.3562 Value= 16438*1000=16438000 Inventory carrying cost= 16438000*10%=1643800 Inventory cost (B) 100000/365*30=8219.1781 8219*1000=8219000 8219000*10%=821900 Inventory carrying cost

(Average inventory in units)*(average cost per unit) * (interest rates)

Inventory carrying cost means the opportunity cost of capital lying idle.

Wednesday, December 26, 2012 11:48 AM

Companies generally outsource the transportation 60 days of inventory means the company has got so many units in stock which will come for 60 days of sale In the year 2010-11 the average sales was 1 lakh each for company A & B. the average inventory was 10000 units for A & B. the next year average sales of company A was 1.5 lakhs & for company B 3 lakhs. The average inventory was 20000 for A and 20000 for B. calculate the average inventory in number of days for both A & B. Company Annual Sales Year-1 Average Inventory Annual Sales Year-2 Average Inventory A 100000 units 10000 units 150000 20000 units B 100000 units 10000 units 300000 20000 units

Number of days of inventory for Year-1 Company(A) 365/100000*10000=36.5 days Company(B) 365/100000*10000=36.5 days

Number of days of inventory for Year-2 Company(A) 365/150000*20000=48.6667 days Company(B) 365/300000*20000=24.3333 days Inventory turn over time

Or

Or

Transportation costs impacts the profit margin Inventories impact both profit margin and the capital turn over

Reason: inventory appears as assets in balance sheet inventory appears as interest in P&L statements.

Warehousing impacts profit margin Order processing impacts both profit margin and capital turnover Loss due to damages appears in the profit margin and capital turnover Opportunity loss due to profit margin to stock outs
How are the 3 objectives of supply chain are related to each other? Objectives of supply chain

Achieve high levels of productivity Improve profitability through direct cost reduction Improve profitability through capital reduction

All the three objectives are contradictory to each other or inversely related.

Assume that you have joined a summer internship in a company. The project is to reduce the supply chain cost. Currently the supply chain cost is 100 crores of which transportation cost 30 crores, inventory carrying cost 50 crores, warehousing cost 10 crores and others 10 crores. Your project objectives is to identify the initiatives to reduce the supply chain cost. How will you go about this project. What data you will collect? What analysis you will do and how will you identify the cost reduction opportunities? Demand supply match Mode of transportation 1. Transportation cost is inversely related to the size of the vehicle. Drivers would reduce Toll charges would reduce Fuel consumption would reduce Transportation cost significantly changes with mode. Inventory lot size per order Transportation cost Material costs Stock outs

2. 3. 4. 5. 6.

A company is following the procurement process as below. They order 1000 units on first day of the month. They receive the same 1000 units the same day. These are sold through out the month. On the first day of the next month they again order 1000 units and this process continues. The company wants to change the procurement process. Instead of ordering 1000 units on the first day they want to order 100 units every 3 days. Calculate the inventory in both the processes. What would be the other impact because of this change? Average 521.5 Average 70

What factors decide the average inventory of any industry? Inventories uncertainties lead time reorder interval product availability poor information systems demand Lot size Demand How to reduce the lead time Develop a local supplier

Monday, December 31, 2012 11:46 AM

A company currently has the manufacturing plant in Pune and they have four warehouses across the country in Mumbai, Delhi, Calcutta and Bangalore. The company transfers the products from its manufacturing plants to each of the four ware houses. Each warehouse cater to the demand of that particular region for eg. Delhi warehouse will cater to the demands of northern region. The annual total sales of all region put together is 1 lakh units. The average inventory of all units put together is 10000 units. The company want to increase the number of ware houses from 4 to 30 one in each state. The products would be transferred from the plants to each of the 30 warehouses which will cater to the demand of the particular states. What will happen to the sales and the inventory. Assume the product availability is constant in both the cases.

. Annual sales Warehouses Average inventory Average inventory days Inventory turnaround Product availability

Current 100000 4 10000 36.5 10 95%

Proposed ? Remain same as it depends on the product availability and not the warehouse location 30 ? ? ? 95% (constant)

Inventory number of ware houses. If the company increases the warehouses they may have to carry much higher levels of inventory A company made the annual forecast for the year 2011-12 in the following manner. It made weekly forecast for each of the 52 weeks in the year. It didnt make separate monthly or annual forecast. The summation of every four weeks forecast became the monthly forecast and the summation of monthly forecast became the annual forecast. The company measures the forecasting accuracy at the end of the year. They found that the annual forecasting accuracy was 90%, forecasting accuracy was 80%, weekly accuracy was 65%. How is this possible because the company hadn't separately made the monthly and the annual forecast. Weeks Forecast Actual Error= W1 100 68 32% W2 100 129 29% W3 100 72 38% W4 100 141 41%

What will happen to the transportation cost with the reduction in the number of warehouses. Transportation cost is inversely related to the number of ware houses. The decision to have more or less ware houses depends on two factors. 1. The value of the item 2. Nature of the demand Value of the item If the value of the item is high the company should have less number of warehouses as the focus would be to reduce the inventory carrying cost and vice-versa.

The demand in each of the other regions is low. 0.5 truck loads per week and unpredictable. For which region you will suggest a warehouse and for which region you wont

If the nature of demand is high regular and predictable its better to have a ware house. If its low and predictable then there is no point in having a warehouse in that particular location.

Tuesday, January 01, 2013 2:45 PM

WHAT will happen to the supply chain if the number of variants or the number of models increases? A Annual sales Number of variants Inventory 1 Lakh units 4 Low B 1 lakh units 25 High

Increase in variety increases the supply chain complications which means higher inventories, higher forecasting error higher stock outs and overall reduction in the supply chain performance.

Maruti currently manufactures 500 units of swift crank shaft before moving to SX4 crank shaft. Cost per setup is Rs.1 lakh. They want to now produce 50 units per setup. What would be the cost implications. Current scenario Setup cost Units Cost per unit 100000 500 200 Changed scenario 100000 50 2000

If the batch quantity is increased from 500 to 5000 the unit cost will come down but the inventory will go up. Consider 2 companies C1 & C2. C1 produces 4 models m1-m4. the average sales per month for each model is 500 units. Company 2 produces 10 models. M1-M10. the average sales per month for each model is 200 units. The minimum batch quantity is 500 units for both the units . The companies marketing department give the requirement to the production department. The production

department will start producing only of the quantity is more than the minimum batch quantity. What would be the average inventory for each model of company 1 and company 2. . Models Average sales Average invenory Average inventory days 500/30=16.6667 Company 1 M1-M4 500/model 250 30/500*250=15 Compnay 2 M1-M10 200/model 250 30/200*250=37.5

Model-1 How can companies provide high variety to the market and at the same time have high levels of operational efficiency?

If commonizations exist then Batch size would increase and hence reduce the unit cost Launch time for a new product would reduce.

Consider two companies Asian paints and nerolac. Following are the process details for nerolac. Nerolac Paints Process Steps Duration 1 Week 2 weeks 1 week

Procurement of 5 colors of raw material Mixing of 5 colors into 26 colors of paints Transportation of paints to different warehouses across the country

Inventory of paints at the warehouses before sales Asian Paints Process Steps

2 weeks Duration 1 Week 1 week 4 weeks 2 weeks

Procurement of 5 colors of raw material Transportation of paints to different warehouses across the country Inventory of paints at the warehouses before sales Mixing of 5 colors into 26 colors of paints

Both companies manufacture 26 colors of paints from p1-p26 from 5 base colors. Each of them forecasted a demand of 10 units for each color of paints. They had also procured the raw material accordingly. But the actual demand turned out to be 20 units p1-p13 and zero units for p14-p26 1. Draw the process of the two companies in the form of line graph. x-axis time in weeks, y-axis number of variants. 2. Calculate the sales, loss of sales and excess stock for both the companies.

Nerolac

Asian Paints

Postponement means keeping the number of variants low as long as possible and adding customization as late as possible.

Communization and postponement are used together.

Wednesday, January 02, 2013 11:46 AM

Implied demand uncertainty Responsive supply chain Efficient supply chain Zone of strategic shift

An auto component supplier has two customer segments for his components. 1. OEM 2. After sales service The supplier has got 4 OEM customers located in Delhi, Ahmedabad, Bangalore, and Pune. The supplier also supplies to the after market. If the component fails in the field the supplier had to directly replace it. Should the supplier has the same supply chain for both the segment or should the supply chain be different. If its different then how.

. Demand fluctuations Unpredictability No of delivery locations Time to respond to a customer order Lot size per order Variance Emergencies

OEM Low Low Low High High Low Low

ASS High High High Low Low High High

A business is said to have high IDU if the supply chain planning is difficult for that business. The following could increase the IDU of a business. Demand fluctuations Unpredictability Short time to respond to an order. Higher variety Sort product life cycles Frequent emergencies

Responsive supply chain can manage the business with high implied demand uncertainties. i.e. they can manage Demand fluctuations Unpredictability Short time to respond to an order. Higher variety Sort product life cycles Frequent emergencies Efficient supply chain cant manage IDU business. They are efficient because of their low cost High IDU business should have a responsive supply chain. Low IDU business should have an efficient supply chain How 7 Eleven configure different elements of supply chain effectively How 7 Eleven manage to keep the inventory low How they reduce the transportation and warehousing cost How they manage their sourcing Big Bazzar operates two distribution centers. One in Bombay another in Kolhapur. Bombay distribution center caters to 40 stores. Kolhapur distributes to 5 stores. Hul will sell a minimum batch of 200 shampoos. The average sales per day per store is 5 units. Which of these 2 DC's can manage without inventory? 7 elevens elements of supply chain

Combine distribution system Market dominance strategy Good information system Local sourcing

In following scenarios 7 eleven type of supply chain doesnt work Unpredictable demand fluctuation If the local sourcing is not possible If market dominance is not possible If the suppliers are not dependable If there are not many stores in one area then combine distribution system is not possible.

Monday, January 14, 2013 11:42 AM

3000 cases 100$ per case

By air Transport Fair Mode Rail Truck Air $2.5/case $6.00/Case Delivery Quantity Time 7 days 4 Days 1500 Total Cost 1500*2.5=3750 Margin Profit

1500*100*20%=30000 300003750=2625

1500+3000*3*5%=1950 1950*6=11700

1950*100*20%=39000 3900011700=273

$10.35/Case 2 Days

1500+3000*5*5%=2250 2250*10.35=23287.5 2250*100*20%=45000 4500023257.5=21

So transport by Road (Truck) is the cheapest.

Week- 19970 1

17470

11316

26192

20263

100+.01*19970=299.7 100+.01*17470=274.7 100+.01*26192=361.92 100+.01*26192=361.92 100+.01*2026 Week- 39171 2 Day-1 Week- 19970 1 Cost 100+.01*19970=299.7 2158 Day-3 17470+11316=28786 20633 Day-5 26192+20263=46455 23370 Day-7 8381+25377=33758 24100

100+.01*28786=387.86 100+.01*46455=564.55 100+.01*33758=437.58 2158+20633=22791 23370+24100=47470 19603+18442=38045 100+.01*38045=480.45

Week- 39171 2

100+.01*39171=491.71 100+.01*22791=327.91 100+.01*47470=574.7 100+.01*19970=299.7 120000*120=14400000 rupees 120000*10=1200000 kg 365/240=1.5208 4/1.5*500=1,333.3333 1,333.3333/4=333.3333 Golden carriers 100+.01*17470=274.7 100+.01*26192=361.92

120000/500=240 500*10*.08*240=96,000.0 cost of transportation 225*20%*120*4=21,600 inventory carrying cost Total cost= 1600+21600=23200 Indian Railway 2000*10*.065*60=78000.0 1000*20%*120=24000 Total cost = 1300+24000=25300 In real world companies have 3 components of inventory Cycle inventory is the average Safety inventory In transit inventory = transit time in days/ 365 * annual demand Total inventory = cycle inventory + safety inventory + in transit inventory In case of Golden carriers Cycle inventory = 250 Safety inventory = 657.53 Intransit inventory = 3/365*120000=986.3014 Total inventory= 250+657.53+986.30=1,893.83 Total inventory cost = 1893.83*120*20%=45451.92 Transportation cost = 500*10*.08*240=96,000.0 Total cost = 96000+45451.92=141451.92 In case of Indian Railways Cycle inventory = 1000 Safety inventory = 6/365*120000*50%=986.3014 Intransit inventory = 5/365*120000=1643.8356 Total inventory= 1000+986.30+1643.83=3630.13 Total inventory cost = 3630.13*120*20%=87123.12 Transportation cost = 2000*10*.065*60=78000.0 Total cost = 87123.12+78000=165123.12 The daily average sales per day for a company is 100 units. But the range could be between 70-150 units per day. The normal lead time for the purchases is 3 days. But the delay could be anywhere between 1-3 days. The companies cycle inventory takes care of the normal demand and the normal lead time. How much safety inventory do you purpose to manage the demand and supply uncertainties.

The annual demand is 120000 the transit time is 3 days. The company is considering two scenarios. Whether to order in a lot size of 120000 or in a lot size of 10000 units. Calculate the intransit inventory without applying the formula. 120000* =986.3014

10000*

*12=986.3014

Sub day_3() If (flag_3<1) then Flag_3 = 0 R=3 a: If(r<last_cell) then If(cells(r,).value - cells(r,1).value )>1) then Cells(r,8).value = cells(r,5).value*1.03 endif r=r+1 Goto a End if Flag_3=1 Sell End if End sub

Class Missed on 15-jan-2013

Wednesday, January 16, 2013 4:48 PM

Case Study: Problem-1

Wednesday, January 16, 2013 4:57 PM

Consider two warehouses Mumbai and Bangalore. Each warehouse receives 100 T/ day from the local suppliers. Mumbai warehouse receives 100T through 20 consignments. Bangalore warehouse receives 100Tonnes through 200 Consignments. Each of them are planning to implement the milk run system. They are looking at 3 options. 1. A 10 T truck which can pick up 5 consignments a day, the cost is 1.5 Lakhs/month. 2. A 5 Tonne truck which can pick up 5 consignments a day the cost is 1 Lakh/month.

3.

2.5 T truck which can pick up 5 consignments a day cost being 75000/month. Which option is suitable for each of the warehouses.

Options 1 2 3

Mumbai 2*1.5=3 4*1=4 .75*8=6.0

Bangalore 2*1.5=3

Logic to design the number of trucks in the Milk Run system. 4. Decide the number of trucks based only on weight 5. Decide the number of trucks based on the number of consignment 6. Choose the higher of the two options. Options-1 Step-1: Based on Weight Step-2: Based on Consignments Step-3: Choose the higher of the two Cost Mumbai 10 4 10 10*1.5=15 Bangalore 10 40 40 40*1.5=60

If the lower is taken then 4 trucks would be chosen for Mumbai then only 40 Tons can be delivered. Options-2 Step-1: Based on Weight Step-2: Based on Consignments Step-3: Choose the higher of the two Cost Options-3 Step-1: Based on Weight Step-2: Based on Consignments Step-3: Choose the higher of the two Mumbai 20 4 10 20*1=20 Mumbai 40 4 10 Bangalore 20 40 40 40*1=40 Bangalore 40 40 40

Cost

40*.75=30

40*.75=30

So option 1 is cheaper for Mumbai (15 Lakhs) and option 3 is cheaper for Bangalore(30 Lakhs)

Milk run system

Total number of warehouses Monthly merchandise Local vendors 450 Tons Through conventional @ 1.35/Kg 25 T through Express @ 4.5/Kg Daily receipt at the warehouse Number of Shipments Local Suppliers 5% consignment/month 3-5 Consignment/Month 1-2 Consignments/Month Monthly rent for dedicated truck 4.5 Tons, 4000 KMs 5 consignments/day; 25 working days a month 4000/125=32

39 950 tons 950*50%=475 450*1000*1.35=607500 25*1000*4.5=112500 20 Ton 35/day 200 200*8%=16 200*20%=40 200*72%=144 50000

Total cost now Rate per kg Step -1: By weight Step-2: By consignment Step-3: Take the higher of the both So the cost Carrying capacity Capacity used 7*4.5*25=787.5

607500+112500=720000 720000/475000=1.5158 20/4.5=5 trucks/day 35/5=7 trucks/day 7*50000=350000 7 7*50000=350000

475 Tons= 475/787.5%=60.3175

Data to be collected for the milk run system. 1. Number and location of the suppliers 2. The weight received per day and the number of consignment received. 3. The truck options possible for that city. 4. The cost of each truck 5. With the help of all these things we can easily implement the milk run system.

Problem-2
Packaging Costs July-Nov Cartons & BOPP Average number of cartoons New Cartons Cost/Carton Cost for cartons Recyclable plastic crates number of times Real 1.1 70% 1.1*70%=0.77 80000-120000 units 30000-40000 units 55 30000*55=1650000 to 40000*55=2200000 400 Estimated .5

Cost of Recyclable plastic crates Use of plastic crates/month

500 10

1 Recyclable Plastic Crate = 500 Cost of 1 cartoon = 55 Payback times = 500/55=9.0909 So in one month the money is recovered. So 400-9.09=390.91 times the money is saved. = 390.91*55=21,500.05 Spending on Cartons Number of new Cartons Number of Cartons/month 1 Crate can replace 10 Cartons Money saved on one Crate Total Money Saved 14 Crore/ 3 Years 14 Crore/55 =2544000 2544000/36=70666.6667 70666/10=7066.6 21500 21500*7066.6=151931900

14/3=4.6667 4.6667/55=0.0848 0.0848 *10000000=848000.0 848000.0 *3=2544000