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Basics of Supply Chain Management

Manufacturer

Distributor

Retailer

Supplier

Customer

Time is Money
Dr. Attia Gomaa
Industrial Engineering Professor & Consultant
Engineering and Science Services - American University in Cairo
2010
SCM

Supply Chain Management for Engineers

Supply Chain Management

Content:

1. Supply Chain Overview


2. Supply Chain Management
3. Key Indicators of SCM
4. Inventory Management
5. Material Requirement Planning
6. Demand Forecasting
7. Procurement Management
8. Enterprise Resource Planning
9. Value Chain analysis
10. Supply Chain Design
11. Case Studies

SCM

Supply Chain Management for Engineers

Supply Chain Overview

SCM

Supply Chain Management for Engineers

SUPPLY CHAIN (Idea 1950 Practice 1980 More 1990)


flow of materials, information, payments, and services from raw material
suppliers, through factories and warehouses, to the end customers.

Suppliers

Company
(Internal Supply
Chain)

Customers

Integration of Supply and Demand Chains


What is a Supply Chain ?
A system or network consisting of organizations and their
business processes.
What is a Global Supply Chain ?
A supply chain developed in a global scale
SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Vertical Integration
Initial Suppliers

End Users

Tier 2
Suppliers
Raw
Material
Suppliers

Tier 1
Suppliers

Company
XYZ

Customers

Manufacturing

Supply Chain
SCM

Supply Chain Management for Engineers

TIER THREE
SUPPLIERS

TIER TWO
SUPPLIERS

TIER ONE
SUPPLIERS
SERVICE &
SUPPORT

SUPPLIERS

PRODUCER

DISTRIBUTORS

CUSTOMERS

RECYCLERS/
DISPOSERS

SCM

Supply Chain Management for Engineers

Supply Chains
Cross Functional vs. Departmental
Customer Focused vs. internal process focused

Customer
Service

Suppliers

Manufacturing

Customers

Distribution
Warehouses
Logistics
Inventory

SCM

Supply Chain Management for Engineers

Vertical Integration
(2)

(1)
(3)

(4)
(5)

(6)
(7)

SCM

Supply Chain Management for Engineers

Supply Chain - Cost Analysis


(2) $0.33
(1) $0.25
(3) $0.48
(4) $0.56
(5) $1.0

(6) $1.08
(7) Bread
$1.25
SCM

Supply Chain Management for Engineers

Initial
Suppliers

Supply Chain Vertical Integration

End
Users

Tier 4

--

Tier 3

Tier 2

Tier 1

Manufacturer - XX
Egypt
Tier 1
Tier 2
SCM

--

Assembly
-

Egypt

Supply Chain Management for Engineers

Supply Chain - Vertical Integration


Tier 4

--

Tier 3

Australia

Tier 2

USA

Germany

Tier 1

Malaysia

Tier 2
SCM

USA

--

Major
subassemblies

USA

Assembly
Distribution
centers

Egypt

Raw
materials
Components

China

Manufacturer - XX
Egypt
Tier 1

Suppliers

Supply Chain Management for Engineers

Retail

What Is a Supply Chain?


A supply chain is a network of companies that
provides goods or services.
Tier 2
Suppliers

Tier 1
Suppliers

Tier 1
Customers

Tier 2
Customers

Initial Suppliers

1
2
n

1
2

3
n

Tier 3 to
Consumers/
End-users

Consumers/End-users

Tier 3 to
Initial
suppliers

n
1

2
1
n

SCM

Focal Company

Members of the Focal Companys Supply Chain

Supply Chain Management for Engineers

Global supply chain

Plan

Suppliers

Material Costs

SCM

Source

Manufacturers

Make

Deliver

Warehouses &
Distribution Centers

Buy

Customers

Transportation
Transportation
Costs
Transportation
Costs
Manufacturing Costs
Inventory Costs
Costs

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SC Management Processes
PLAN

PLAN

SOURCE
RETURN

MAKE

SOURCE

DELIVER

RETURN

RETURN

DELIVER
RETURN

PLAN

SOURCE
Supplier
Internal or External

MAKE

MAKE

RETURN

DELIVER
RETURN

Customer
Internal or External

Your Company
SCM

Supply Chain Management for Engineers

Inventory

Production
scheduling

Finance,
labor

Purchasing

1980

MRP II

Major
Manufacturing
Resources

MRP II

All internal
resources

ERP

Coordinated
Manufacturing
and Service
Transactions

1990

MRP

MRP

Production
Management

ERP

Internal customers
and suppliers

Internal
SCM

Extended
ERP/SCM

2000

1970

1960

The Evaluation of Computerized Aids

Internal
ERP/SCM

External suppliers
and customers

Extended
SCM

Extreme/
Integration

SCM

Supply Chain Management for Engineers

Enterprise Resource Planning


Evolution of ERP
Electronic
Commerce

Supply Chain
Management
Sales Force
Automation

MRP II ERP
Enterprise

MRP
mrp
Material Manufacturing
Requirement
Planning

Resource
Planning
(+Capacity)

Manufacturing Resource
Resource
Planning
(+BPRHR
Planning
Logistics
(+Cash flow)
Service..)

Knowledge
Management

SCM

ERP II

Internet
Integration

Business
Intelligent

Customer
Relationship
Management

Supply Chain Management for Engineers

Information, product, service, financial and knowledge flows


Material Flow
Information Flow

Supplier Network
Integrated Enterprise

Materials

Procurement

Market
Distribution

Manufacturing

End Consumers

Distribution Network

Capacity, information, core competencies, capital, and human resource constraints

SCM

Supply Chain Management for Engineers

Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier
SCM

Supply Chain Management for Engineers

Supply Chain Management


SCM

SCM

Supply Chain Management for Engineers

Supply Chain Management

SCM

Supply Chain Management for Engineers

Attempt to balance resources and demand

Resources

Demand

Production Management
SCM

Supply Chain Management for Engineers

Attempt to balance supply and demand

Supply

Demand

Procurement Management
SCM

Supply Chain Management for Engineers

Attempt to balance inventory and cost

Inventory

Cost

Inventory Management
SCM

Supply Chain Management for Engineers

Attempt to balance price and cost

Price

Cost

Market Management
SCM

Supply Chain Management for Engineers

Optimize the
Production-Inventory System

Suppliers

Fabrication

(1)
Raw materials
inventory

SCM

Distribution
and sales

Assembly

(2)
Component parts
inventory

(3)
Finished goods
inventory

Supply Chain Management for Engineers

Attempt to balance
demand , inventory, and cost

Demand

Inventory

SCM

Costs

Supply Chain Management for Engineers

Supply Chain Management (SCM)


SCM is A Systematic Approach to achieve the customer request

Supplier
Management

Production
Management

Customer
Management

SCM Objectives 6 Rights


Right
Information
Right
Quantity
SCM

Right
Quality

Right
Time

Right
Location

Supply Chain Management for Engineers

Right
Cost

SCM

Supply Chain Management for Engineers

Supply Chain Management (SCM)


SCM is A Systematic Approach to achieve the customer request

Supplier
Management

Production
Management

Customer
Management

SCM Objectives 6 Management Integration

Information
Management

Cost
Management

Quantity
Management

SCM

Quality
Management

Location
Management

Time
Management
Supply Chain Management for Engineers

Supply Chain Management (SCM)


SCM is A Systematic Approach to achieve the customer request

Supplier
Management

Production
Management

Customer
Management

SCM Objectives 6 Management Integration

Information
Management

Cost
Management

Quantity
Management

SCM

Quality
Management

Location
Management

Time
Management
Supply Chain Management for Engineers

Supply Chain Management (SCM)


Right Cost
Right
Inventory
Right
Order
Right
Resources

Right
Material
Handling

Right
Price

Right
Productivity

SCM

Supply Chain Management for Engineers

Supply Chain Management


SCM is A Systematic Approach to achieve the customer request
Information
Procurement

Supplier
Management
Quality
Material
Time
Financial

Production
Management
Process
Quality
Material
Time
Financial

Market

Customer
Management
Quality
Material
Time
Financial

Through:
1.
Information Flow Analysis
2.
Market Flow Analysis
3.
Procurement Flow Analysis
4.
Process Flow Analysis
5.
Quality Flow Analysis
6.
Material Flow Analysis
7.
Time Flow Analysis
8.
Financial Flow Analysis
SCM

Supply Chain Management for Engineers

Supply Chain - Cost Flow Analysis

Suppliers

Company
(Petrojet)

Warehouses &
Distribution Centers

Material
Costs
Transportation
Costs

Customers

Manufacturing
Costs
Transportation
Costs
Inventory
Costs

Transportation
Costs
Cost / Price

+?

+?

+?

+?

+?

30%

5%

50%

5%

5%

5%

100%

Cost Management Methodology Min. Total Cost


SCM

Supply Chain Management for Engineers

Supply Chain - Time Flow Analysis

Suppliers

Company
(Petrojet)

Warehouses &
Distribution Centers

Lead
time
Transportation
time

Customers

Manufacturing
time
Transportation
time
Inventory
duration

Transportation
time
Total Time

+?

+?

+?

+?

+?

10%

5%

60%

5%

5%

5%

100%

Schedule Management Methodology Min. Total Time


SCM

Supply Chain Management for Engineers

Supply Chain - Quality Flow Analysis

Suppliers

Company
(Petrojet)

Supplier
Defect %

Warehouses &
Distribution Centers
Customers

Transportation
Defect %
Manufacturing
Defect %
Transportation
Defect %
Inventory
Defect %

Transportation
Defect %
Total Defect %

+?

+?

+?

+?

+?

5%

1%

10%

1%

1%

1%

19%

Quality Management Methodology Min. Total Defect %


SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Multi Dimensional Pareto Analysis


S T O C K T U R N O V E R

V
O
L
U
M
E

F R E Q U E N C Y

ABC based on Volume


ABC based on Frequency
ABC based on Turnover
SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Organization
Structure

Enterprise Chairman

Upstream
Top
Policy

Key Indicators

Middle
Supply Chain Management
Operational

Downstream

Day-to-Day Work Orders

Site Implement
SCM

Supply Chain Management for Engineers

Data

Main Supply Chain Drivers

SCM

Supply Chain Management for Engineers

Production
Management

SCM

Supply Chain Management for Engineers

SUPPLY CHAIN MANAGEMENT (SCM)


to plan, organize, and coordinate all the supply chains activities.
Materials

Manufacturers

Suppliers

5
Products

Distributors

Products

Customer

Products
Demand

Demand

Information

Improve operations
Increasing levels of outsourcing
Increasing transportation costs
Competitive pressures
SCM

Demand

Increasing globalization
Increasing importance of e-commerce
Complexity of supply chains
Manage inventories

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Optimization of A Supply Chain

Customer needs, demand, quality, etc.

Resources (Material, Machines, Manpower)

Procurement

Inventory levels

Lot size

Lead time

Product variety

Customer service

Information & documentation

Tools (H/w & S/w)

Total Cost

SCM

Supply Chain Management for Engineers

The stream flows between the operation and the customer

Upstream

Downstream

Supply side

Demand Side

Parts, information, Services

Customers

Relevant tier (stage)

SCM

Supply Chain Management for Engineers

Process Steps for a Production Order

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Products are processed, stored and


transported by different operations in the chain
SUPPLIES

MANUFACTURE

DISTRIBUTION

The pipeline - total pipeline time


Time is spent at each, process (storage) point
Time compression
Reduce time along the whole process by reducing
stored inventory (stock) at beginning

SCM

Supply Chain Management for Engineers

Elements of Supply Chain Management


Element

Typical Issues

Customers

Determining what customers want

Forecasting

Predicting quantity and timing of demand

Design

Incorporating customer wants, mfg., and time

Processing

Controlling quality, scheduling work

Inventory

Meeting demand while managing inventory costs

Purchasing

Evaluating suppliers and supporting operations

Suppliers

Monitoring supplier quality, delivery, and relations

Location

Determining location of facilities

Logistics

Deciding how to best move and store materials

SCM

Supply Chain Management for Engineers

Key Components of Supply Chain Management


1.
2.
3.
4.
5.
6.

Location
Transportation and logistics
Inventory and forecasting
Marketing and channel restructuring
Sourcing and supplier management
Information and electronic mediated environments

7.
8.
9.
10.
11.
12.

Product design and new product introduction


Service and after sales support
Reverse logistics and green issues
Outsourcing and strategic alliances
Metrics and incentives
Global issues.

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Computerized Supply Chains


The supply chain process is intertwined with the computerization of
its activities. People have wanted to automate the processes along
the chain to reduce cost, expedite processing, and reduce errors.

Material requirements planning (MRP) essentially


integrates production, purchasing, and inventory
management of interrelated products.
Manufacturing resource planning (MRP II), enhanced MRP
methodology by adding labor requirements and financial
planning.
Enterprise resource planning (ERP) further integrates the
transaction processing as well as other routine activities in
the entire enterprise.
Integrations continues along several paths

SCM

functional areas
Combining transaction processing and decision support
Business intelligence
CRM software

Supply Chain Management for Engineers

Computerized Supply Chains

SCM

Supply Chain Management for Engineers

Effort

SCM Outline
Supply Demand
Planning Process
Inventory Management Methodology
Network Design
Training
Performance Measures

Current Performance

Time
SCM

Supply Chain Management for Engineers

Action Plan
What Should
be done?
Activities
- Scope
- Specific
- Measurable

SCM

When?
Schedule
Duration
Start
Finish

How?
Resources:
- Manpower
- Machines
- Materials
- Method
- Management
- Money

Where?
Location
Indoor
Outdoor
Subcontractor

Supply Chain Management for Engineers

Key Indicators of SCM

SCM

Supply Chain Management for Engineers

Supply Chain Performance Measurement Framework

The supply chain performance measurement discussed in


this study are classified into:
1. Market performance measures,

2. Customer service measures,


3. Quality measures,
4. Cost measures,
5. Productivity measures,
6. Composite profitability measures; etc.

SCM

Supply Chain Management for Engineers

Productivity Analysis

Material
Productivity

Management
Productivity

Manpower
Productivity
Machine
Productivity

Money
Productivity
Method
Productivity

Total Productivity Analysis


Customer Satisfaction Final Product Quality
SCM

Supply Chain Management for Engineers

Material Productivity
Root Cause Analysis
Skills

Method
Machine

Material
Environmental

Working
Conditions

Actions
Corrective
Policy
SCM

Prevention
Policy
Supply Chain Management for Engineers

Proactive
Policy

Inventory and Supply Chains

Input flow of materials


Types of Inventory:

Raw materials

Work-in-process

Finished goods

Inventory level

Balance the
advantages and
disadvantages

Scrap flow
Output flow of materials

SCM

Supply Chain Management for Engineers

Inventory
& Supply
Chains

SCM

Supply Chain Management for Engineers

Inventory and Supply Chains

SCM

Supply Chain Management for Engineers

Inventory and Supply Chains


Balance the advantages and disadvantages

Pressures for small inventories


Inventory holding cost
Cost of capital
Storage and handling costs
Taxes, insurance, and shrinkage

SCM

Pressures for large inventories


Customer service
Ordering cost
Setup cost
Labor and equipment utilization
Transportation cost
Payments to suppliers

Supply Chain Management for Engineers

Q = Average lot size (unit)


d = Average demand per period (unit/period)
L = Average Lead time (period)

Cycle Inventory
Q+0 Q
Average cycle inventory = 2 = 2
Pipeline inventory
Pipeline inventory = DL = dL
Safety Stock inventory
One week supply
Average lot size
Average demand
Average Lead time
SCM

350
70
2

Cycle inventory
Pipeline inventory
Safety Stock

350/2 = 175
70*2 =140
1*70 = 70

Supply Chain Management for Engineers

Cycle inventory
Reduce the lot size
Reduce ordering and setup costs and allow Q to be reduced
Increase repeatability to eliminate the need for changeovers

Pipeline inventory

Reduce lead times

Find more responsive suppliers and select new carriers

Change Q in those cases where the lead time depends on the lot size

Safety stock inventory

Place orders closer to the time when they must be received

Improve demand forecasts

Cut lead times

Reduce supply chain uncertainty

Rely more on equipment and labor buffers

SCM

Supply Chain Management for Engineers

Inventory
Level

Product Code
SCM

Supply Chain Management for Engineers

Work In Process (WIP)

Process A

SCM

Process B

Supply Chain Management for Engineers

Measures of Supply Chain Performance


Inventory measures:
Average
Number of
Number of
Value of
aggregate
units of item
units of item
each unit +
=
inventory
A typically
B typically
of item A
value
on hand
on hand

Value of
each unit
of item B

Average aggregate inventory value


Weeks of supply =
Weekly sales (at cost)

Annual sales (at cost)


Inventory turnover = Average aggregate inventory value

SCM

Supply Chain Management for Engineers

Inventory measures:
Case Study
The XYZ Company averaged $2 million in inventory last year, and the cost of
goods sold was $10 million.

Weeks of supply =

Inventory turns =

SCM

$2 million
($10 million)/(52 weeks)

$10 million
$2 million

= 10.4 weeks

= 5 turns/year

Supply Chain Management for Engineers

Inventory measures:

SCM

Supply Chain Management for Engineers

Case Study:

Average demand = 50 units /week


Product Price = $650 /unit.
Average lot size = 350 units.
Average lead time = 2 weeks.
Working conditions = 52 weeks per year
Safety stock = One-week supply

Solution:
Type of Inventory
Cycle
Safety stock
Pipeline

Calculation of Average Inventory

Q
350
=
2
2

= 175 units

1-week supply = 50 units


dL = (50 units/week)(2 weeks) = 100 units
Average aggregate inventory = 325 units
Value of aggregate inventory = $650(325)
= $211,250

SCM

Supply Chain Management for Engineers

Case Study:
Cost of goods sold last year
= $3,410,000,
Working conditions
= 2 weeks per year.
Inventory Items
= 7 item
(3 raw materials, 2 work-in-process items, and 2 finished goods)
Category
Raw materials

Work-in-process
Finished goods

SCM

Part Number

Average Level

Unit Value

15,000

$ 3.00

2,500

5.00

3,000

1.00

5,000

14.00

4,000

18.00

2,000

48.00

1,000

62.00

Supply Chain Management for Engineers

Part Number

Average Level

Unit Value

15,000

$ 3.00

$ 45,000

2,500

5.00

12,500

3,000

1.00

3,000

5,000

14.00

70,000

4,000

18.00

72,000

2,000

48.00

96,000

1,000

62.00

62,000

$360,500

Average aggregate inventory value

Total Value

Average weekly sales at cost = $3,410,000/52 weeks

= $65,577/week

Average aggregate inventory value


$360,500
Weeks of supply =
=
= 5.5 weeks
Weekly sales (at cost)
$65,577

Annual sales (at cost)


Inventory turnover =
Average aggregate inventory value
$3,410,000
=
= 9.5 turns
$360,500
SCM

Supply Chain Management for Engineers

Case Study:

The following information is an extract from DELL companys 1999 annual report. All amounts are expressed
in millions:
Net Income (Year 1999)
18,243
Cost of Revenue (Year 1999)
14,137
Cost of Production Materials (Year 1999)
6,423
Production Materials on Hand (25 January 1999)

234

Work-In-Process and Finished Goods on Hand (25 January 1999)

39

Production Materials Days of Supply

6 days
14,137

Inventory Turnover =

234 + 39

= 51.78 Turns per year

For a high-tech company this is a tremendous performance demonstrating the financial success of this direct
selling business.
The corresponding weeks of supply calculation is:
234 + 39
Weeks of Supply =

SCM

14,137

x 52

= 1 week.

Supply Chain Management for Engineers

ROI = Rate On Investment

We must maximize the rate of return


per our investment dollar!
Net Profit /Investment = ROI
$

Inventory Equipment Facilities

SCM

$
Labor

$
Overhead

Supply Chain Management for Engineers

Tactical Objectives for ROI


Strategy
Inventory Quality

Sales

Cost

OTD

But dont these things often come into conflict


with each other?
SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Time Analysis

Time Productivity = Productive time / Total time


SCM

(60 to 70%)

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Non-Productive Time
Time Losses

Planned
downtime
(t1)

Quality
losses
(t5)
Unplanned
downtime
(t2)

SCM

Speed losses
(t4)
Waiting time
(t3)

Supply Chain Management for Engineers

Root Cause Analysis


Planned d.
(t1)

Unplanned d.
(t2)

Waiting time
(t3)

Speed losses
(t4)

Quality l.
(t5)

Supply Chain Management for Engineers

Internal Factors I Can Control


External Factors I Can Impact
SCM

Time Analysis for the Job / Equipment / Crew

Total (calendar) time (T0)


Planned (target) time (T1)

t1
t2

Available time (T2)


Operating (used) time (T3)

t3

Net operating time or uptime (T4)

Productive time (T5)

t4
t5
Non-productive time (TL)
Total time losses

Time Productivity = Productive time / Total time


SCM

(60 to 70%)

Supply Chain Management for Engineers

Time Analysis for the Job / Equipment / Crew


Total (calendar) time (T0) 8.0
Planned (target) time (T1) 7.25

t1= 0.75
t2=1.0

Available time (T2) 6.25


Operating (used) time (T3) 5.75

t3=0.5

Net operating time or uptime (T4) 5.5

Productive time (T5) 5

t4=0.25

t5=0.5
Non-productive time (TL)

Start 8 Finish 16

Total time losses

Time Productivity = Productive time / Total time


SCM

Supply Chain Management for Engineers

(60 to 70%)

Time Analysis for the critical Job / Equipment / Crew


Total (calendar) time (T0)
A

Planned (target) time (T1)

t1

R
t2

Available time (T2)

Operating (used) time (T3)

Up
EP

t3

Net operating time or uptime (T4)

QR

Productive time (T5)

t4

t5
Non-productive time (TL)
Total time losses

A= Availability = T2/T0

R= Reliability = T2/T1

U= Utilization = T3/T2

Up= Uptime ratio= T4/T3

QR= Quality rate = T5/T4

EP= Equipment Productivity = T5/T0 > 80%

SCM

Supply Chain Management for Engineers

Modern KPIs
Overall Equipment Effectiveness (OEE)
OEE = Equipment Availability Performance efficiency Quality rate
(60 to 70%)
Total effective equipment productivity (TEEP)
TEEP =Utilization Availability Performance efficiency Quality rate

Net Equipment Effectiveness (NEE)


NEE = Uptime ratio Performance efficiency Quality rate

SCM

Supply Chain Management for Engineers

Resource Capacity Analysis


Resource Productivity Analysis

Resources:
Machines / Equipment / Tools
Manpower / Staff
Materials
Method Knowhow / Standard
Money

SCM

Supply Chain Management for Engineers

What is Capacity?
Capacity

is the Rate at which output can be produced by an


operating unit, a machine, a process, a facility, a company
During a period of Time.
It is expressed as

the number of units of output produced per unit time


Examples:
No. of cars assembled per day
No. of students taught per semester
No. of computers assembled per month
No. of customers in a restaurant per day

SCM

Supply Chain Management for Engineers

Capacity Analysis:-

Labor A Labor B
(hr/day) (hr/day)

- Design capacity =Maximum capacity


maximum output rate or service capacity an
operation, process, or facility is designed for.

- Effective capacity = Standard = Available


Design capacity minus allowances such as
personal time, maintenance, and scrap.

- Planned capacity = Planned


- Actual output = Used capacity
rate of output actually achieved--cannot
exceed effective capacity.
SCM

Supply Chain Management for Engineers

Capacity Analysis:- Design capacity =Maximum capacity


maximum output rate or service capacity an
operation, process, or facility is designed for.

Crane
1200 ton

- Effective capacity = Standard = Available


Design capacity minus allowances such as
personal time, maintenance, and scrap.

1000

- Planned capacity = Planned

800

- Actual output = Used capacity


rate of output actually achieved
Can not exceed effective capacity.

700

SCM

Supply Chain Management for Engineers

Capacity Analysis:- Design capacity =Maximum capacity


maximum output rate or service capacity an
operation, process, or facility is designed for.

Consultant
10 hr/d

- Effective capacity = Standard = Available


Design capacity minus allowances such as
personal time, maintenance, and scrap.

- Planned capacity = Planned

- Actual output = Used capacity


rate of output actually achieved
Can not exceed effective capacity.

SCM

Supply Chain Management for Engineers

Capacity Analysis:- Design capacity =Maximum capacity


maximum output rate or service capacity an
operation, process, or facility is designed for.

Excavator
40 m3/hr

- Effective capacity = Standard = Available


Design capacity minus allowances such as
personal time, maintenance, and scrap.

35

- Planned capacity = Planned

30

- Actual output = Used capacity


rate of output actually achieved
Can not exceed effective capacity.

25

SCM

Supply Chain Management for Engineers

Capacity Analysis:- Design capacity =Maximum capacity


maximum output rate or service capacity an
operation, process, or facility is designed for.
- Effective capacity = Standard = Available
Design capacity minus allowances such as
personal time, maintenance, and scrap.

Boiler
5 ton/hr

- Planned capacity = Planned

3.6

- Actual output = Used capacity


rate of output actually achieved
Can not exceed effective capacity.

3.5

SCM

Supply Chain Management for Engineers

Capacity Analysis:- Design capacity =Maximum capacity

Benchmarking

- Effective capacity = (Best Capacity)

Target

- Planned capacity = (Demand)

Planned

- Actual output = Used capacity

Actual

SCM

Supply Chain Management for Engineers

Capacity Analysis:- Design capacity =Maximum capacity

Benchmarking
2000 Car /month

- Effective capacity = (Best Capacity)

Target
1500 Car /month

- Planned capacity = (Demand)

Planned
1200 Car /month

- Actual output = Used capacity

Actual
1000 Car /month

SCM

Supply Chain Management for Engineers

System Capacity Evaluation:

Data
Process Job Work order Center Department Sector Company
Site Manager
Performance = Actual Capacity / Planned capacity
Quality Rate = (Total units Rejected) / Total units

80 to 100%
90 to 100%

Project Manager
Efficiency
Load ratio

= Actual output / Effective capacity


= Planned Capacity / Effective capacity

70 to 90%
70 to 90%

General Manager
Utilization
= Actual output / Design capacity
Effectiveness = Effective Capacity / Design capacity

60 to 80%
60 to 80 %

Overall Capacity Performance =


{ w1(P) + w2(Q) + w3(E) + w4 (L) +w5 (U) + w6 (E)} / Sum W
SCM

Supply Chain Management for Engineers

KPI

> 80%

Utilization
Measure of planned or actual capacity usage of a
facility, work center, or machine

Utilization =

SCM

Expected capacity
Capacity
Planned hours to be used
Total hours available

Supply Chain Management for Engineers

Efficiency
Measure of how well a facility or machine is
performing when used

Actual output

Efficiency =
Effective capacity
=

=
SCM

Actual output in units


Standard output in units
Average actual time
Standard time

Supply Chain Management for Engineers

For example:
Design capacity = 10 worker * 8 Hour / day = 80 man day
Effective capacity = 10 worker * 7 Hour / day = 70 man day
Standard Labor rate = 2 unit / man-day
Planned Quantity = 35 unit/day
Actual Production = 30 unit/day
Capacity used = 2 * 30 = 60 man-day

Efficiency

= 60 / 70 = 86 %

Utilization

= 60 / 80 = 75%

Performance

= 30 / 35 = 86 %

SCM

Supply Chain Management for Engineers

Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Efficiency =
Utilization =

Actual output

36 units/day

Effective capacity
Actual output
Design capacity

SCM

40 units/ day
=

36 units/day
50 units/day

Supply Chain Management for Engineers

= 90%

= 72%

Case:
Scope of work Excavation Process
Design Capacity = 30 m3/hr
Effective Capacity = 25 m3/hr
BOQ = 30,000 m3
Duration = 10 day
Working Condition = 10 hr/day
Planned Performance:
Number of Excavator = 30,000 m3 / (10 day * 10 hr/day * 25 m3/hr)
= 30,000 / 2500 = 12 +2 factor of safety = 14 Equipment

Actual Performance:
Number of Excavators = 14 Eq.

Duration = 12 day

Based on this information, discuss the capacity analysis


Site Manager
Project Manager
General Manager
SCM

Supply Chain Management for Engineers

Case:
Scope of work Excavation Process
Design Capacity = 30 m3/hr
Effective Capacity = 25 m3/hr
BOQ = 30,000 m3
Duration = 10 day
Working Condition = 10 hr/day
Planned Performance:
Number of Excavator = 30,000 m3 / (10 day * 10 hr/day * 25 m3/hr)
= 30,000 / 2500 = 12 +2 factor of safety = 14 Equipment

Actual Performance:
Number of Excavators = 14 Eq.

Capacity Evaluation
1.
Design capacity
2.
Effective capacity
3.
Load
4.
Actual output

Duration = 12 day

= 30 m3/hr
= 25 m3/hr
= 30,000/ (14 * 10 d* 10 h) = 21.4 m3/hr
= 30,000/ (14 * 12 d* 10 h) = 17.8 m3/hr

KPIS

Performance
Efficiency
Load
Utilization
Effectiveness
SCM

= 17.8 / 21.4 = 83 %
= 17.8 / 25
= 71 %
= 21.4 / 25
= 85 %
= 17.8 / 30
= 59 %
= 25 / 30
= 83 %
Supply Chain Management for Engineers

Production Data:
Product:

Process :

Planned:
- Design capacity =
- BOQ
=
Actual:
BOQ
=
Rejected Units
=

Effective capacity =
Duration
=
Duration
(Rework)

Calculation:
Design capacity
Effective capacity
Planned capacity
Actual output

Variance Limits:
Daily
Weekly
Monthly
3 Monthly
6 Monthly
Annual

=
=
=
=

Capacity Performance
Performance
Quality Rate
Efficiency
Load
Utilization
Eq. Effectiveness
Overall Performance
SCM

Data
Analysis

=
=
=
=
=
=
=

1%
2%
3%
5%
7%
10%

Evaluation
Root Cause
Remedy
Target

Supply Chain Management for Engineers

System Capacity Evaluation:

Data
Process Job Work order Center Department Sector Company
Performance

= Actual Capacity / Planned capacity

80 to 100%

Quality Rate

= (Total units Rejected) / Total units

90 to 100%

Efficiency

= Actual output / Effective capacity

70 to 90%

Load ratio

= Planned Capacity / Effective capacity 70 to 90%

Utilization

= Actual output / Design capacity

Effectiveness = Effective Capacity / Design capacity

60 to 80%
60 to 80 %

Overall Capacity Performance =


{ w1(P) + w2(Q) + w3(E) + w4 (L) +w5 (U) + w6 (E)} / Sum W
SCM

Supply Chain Management for Engineers

KPI

> 80%

Production Data:
Product: Car Manufacturing

Process : Assembly

Planned:
- Design capacity = 150 Car/month
Effective capacity = 140 Car/month
- BOQ
= 300 Car
Duration
= 3 Month
Actual:
BOQ
= 240
Duration
= 3 Month
Rejected Units
= 10
(Rework)
Calculation:
Design capacity
Effective capacity
Planned capacity
Actual output
Capacity Performance
Performance
Quality Rate
Efficiency
Load
Utilization
Eq. Effectiveness
Overall Performance
SCM

=
=
=
=

150 C/m
140 C/m
300/3=100
240/3=80

Variance Limits:
Daily
Weekly
Monthly
3 Monthly
6 Monthly
Annual

1%
2%
3%
5%
7%
10%

= 80/100 = 80%
= 230/240 = 96%
= 80/140 = 57%
= 100/140= 71%
= 80/150 = 53%
= 140/150= 93%
=

Supply Chain Management for Engineers

Case:
Product: Transformer Manufacturing

Process : Low Voltage winding Machine

Planned:
- Design capacity = 8 coil/ day
Effective capacity = 6 coil / day
- BOQ = 60 coil
Duration = 10 day
QR (92-95)%
Actual:
BOQ
= 60 coil
Duration = 12 day
Rejected units
= 5 coil (Rework)
Variance Limits:

Calculation:

Design capacity
Effective capacity
Planned capacity
Actual output
Capacity Performance
Load ratio
Efficiency
Utilization
Process Effectiveness
Performance
Quality rate

Weekly

= 8 coil /day
= 6 coil /day
= 60 / 10 = 6 coil day
= 60 / 12 = 5 coil /day
= 6 / 6 = 100 % E
= 5 / 6 = 83 % G
= 5 / 8 = 63 % VB
= 6 / 8 = 75 % E
= 5 / 6 = 83 % VB
= (60-5)/60 = 92% N

Evaluation:
Excellent
Good
Normal
Bad
Very Bad

2%

> 5%
+3 to 5%
2%
- 3 to 5%
> - 5%

Weight (0 to 3)
2
3
1
0
3
2
Total 11

Overall Performance =
{2(1.0) + 3(0.83) + 1(0.63) + 0(0.75) +3(0.83) + 2(0.92)} / 11= 9.45/11
= 85.9 % >80% Good
SCM
Supply Chain Management for Engineers

Week
Load
Normal
capacity

10

11

12

13

14

15

16

380

275

200

265

225

175

160

140

120

300

300

300

300

300

300

300

300

300

Insufficient
capacity

400
Weekly 300
work
200
load
(hours) 100

16

14

12

10

Week
Load
SCM

Normal capacity

Supply Chain Management for Engineers

Resource Productivity Analysis


(Critical Resources)
Total View

Outputs
Quantity
Quality
Cost / Revenue

Inputs
Working Conditions
Critical Resources

Actual Performance
Period #1
Period %
Period

Planned Performance
Period #1
Total %
Cumulative (up to date)

KPIs Report (one page) for each managerial level:

Scope of work
SMART

Key Indicators
(3, 5, or 10) Cost variance, Time Variance, Quality Rate

Strength Points (3, 5, or 10)

Weakness Points (3, 5, or 10)

Recommendations Analysis Why-Why? Root Causes

Future Work
Remedy Corrective / Preventive Actions

Conclusion
SCM

Supply Chain Management for Engineers

Management Skill: The Key to Management Success

SCM

Supply Chain Management for Engineers

Performance Management Information System (PMIS)


PMIS is a systematic approach for long term continuous improvements.
A Computerized systematic approach .

2.

Standard ratios

3.

Internal examples

4.

External examples

Reference Internal & External

Target Performance

Planned Performance
Documented information
(Database & Reports)
Standard Information

GAP Analysis
Proactive policy
Actual Performance

SCM

Supply Chain Management for Engineers

Relative
Good Excellent

International standards

Normal

1.

Benchmarking

Bad

References:

Performance Management Information System (PMIS)


PMIS is a systematic approach for long term continuous improvements.
A Computerized systematic approach .

3. Internal Benchmarks
4. External Benchmarks
Monthly Target Improve 10 %

(25 man-hour/car)

Documented information:
(Database & Reports)
Standard Information

GAP Analysis
3 man-hour/unit, 12 %
Actual Monthly Average
( 28 man-hour/unit)

SCM

Supply Chain Management for Engineers

Relative
Good Excellent

2. Standard ratios

External (10 man-hr/car)


Internal (22 man-hr/unit)

Normal

1. International standards

Benchmarking Labor Productivity

Bad

References:

1) Scope

3) Quality

7) Documentation

6) Critical
Resources

5) Cost

Bad

4) Time

8)
Relations

Normal

Good

2) Safety

Excellent

Total Performance Management


(Total View)

Main SMART Indicators + Root Cause Analysis


SCM

Supply Chain Management for Engineers

Organization
Structure

Enterprise Chairman

Upstream
Top
KPIs Report

Key Indicators

Middle
Productivity Analysis
Operational

Downstream

Performance Report (Actual / Planned)

Site Follow-up (Q/Q/T)


SCM

Supply Chain Management for Engineers

Data

Company: xxxx

Scope of Work: Spare Parts Manufacturing

Organization Chart (Key persons)

General
Manager
Top

Design
Manager

Procurement

Manager

Cost
Manager

Planning
Manager

Production

Manager

Middle

Operational

Operational management (engineers, etc.)


SCM

Supply Chain Management for Engineers

Site

Production Productivity Analysis

Outputs:

Scope of Work: Spare Parts Manufacturing

Item
Production Quantity
Total Revenue

Unit
1000 ton
M$

2009
10
60

2010
12
80

78

83

Unit
hour
1000 ton
1000 M-h
1000 E-h
1000 Kwh

2009
3000
13
1200
600
1500

2010
2700
14
1500
800
2000

Comment

Unit
M$
M$
M$
M$

2009
30
10
12
58

2010
35
12
12
70

Comment

Quality Rate

Comment

Inputs Main Resources:


Item
Working Hours
Raw Materials
Labor
Machines
Energy

Inputs Cost Elements:


Item
Total Materials Cost
Total Labor Cost
Total Machine Cost
Total Cost

Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM

Supply Chain Management for Engineers

Operational Level Follow-up Report Standard rates


(Average / ton final product)
Outputs:
Item
Production Quantity
Total Revenue

Unit
1000 ton
$/ton f

2009
10
6000

2010
12
6667

2010/2009
1.2
1.11

Performance
VG
G

78

83

1.06

Unit

2009

2010

2010/2009

Performance

Performance rate

Ton/hour

3.33

4.44

1.33

EX

Raw Materials

ton/ton f

1.3

1.67

1.28

NC

Labor

M-h/ ton f

120

125

1.04

Machines

E-h/ ton f

60

66.6

1.11

Energy

Kwh/ ton f

150

166

1.106

Unit
$/ ton f
$/ ton f
$/ ton f
$/ ton f

2009
3000
1000
1200
5800

2010
3500
1200
1500
7000

2010/2009
1.166
1.2
1.25
1.2

Performance
VB
VB
VB
VB

Quality Rate

Inputs Main Resources:


Item

Inputs Cost Elements:


Item
Materials Cost
Labor Cost
Machine Cost
Total Cost

( 3% N-Normal) (10%: Good/Bad)


SCM

(20%: V.Good / Fail) (>20%: Ex./ Not Capable)

Supply Chain Management for Engineers

Middle Level Production Productivity Analysis

Physical Units
Index

Calculation

Unit

Period
#1

Perio
d #2

Material Productivity

Output/ Mat. Input

TF/TM

0.769

0.85

Labor Productivity

Output/ Lab. Input

TF/MH

0.00833

Unit

Period
#1

Ratio
(P2/P1)

Perf.

????

Machine Productivity Output/ Mac. Input


Energy Productivity

Output/ Energy

Monetary Units
Index

Calculation

Material Productivity

Output/ Mat. Input

Labor Productivity

Output/ Lab. Input

Perio
d #2

Ratio
(P2/P1)

Perf.

Machine Productivity Output/ Mac. Input


Total Productivity

Output/ Input

Overall
( 3% N-Normal) (10%: Good/Bad)
SCM

(20%: V.Good / Fail) (>20%: Ex./ Not Capable)

Supply Chain Management for Engineers

Middle Level Production Productivity Analysis

Physical Units
Index

Calculation

Unit

Period
#1

Period
#2

Material Productivity

Output/ Mat. Input

TF/TM

0.769

0.85

Labor Productivity

Output/ Lab. Input

TF/100Mh

or

Ratio
(P2/P1)

TF/1000 Mh

or

Perf.

MH/TF

Machine Productivity Output/ Mac. Input


Energy Productivity

Output/ Energy

Monetary Units
Index

Calculation

Material Productivity

Output/ Mat. Input

Labor Productivity

Output/ Lab. Input

Unit

Period
#1

Period
#2

Ratio
(P2/P1)

Perf.

Machine Productivity Output/ Mac. Input


Total Productivity

Output/ Input

Overall
( 3% N-Normal) (10%: Good/Bad)
SCM

(20%: V.Good / Fail) (>20%: Ex./ Not Capable)

Supply Chain Management for Engineers

Middle Level Production Productivity Analysis

Physical Units
Index

Calculation

Unit

Period
#1

Period
#2

Ratio
(P2/P1)

Yield

Output/ Mat. Input

TF/TM

0.769

0.59

1.28

Labor Productivity

Lab. Input/ Output

Mh/TF

120

125

1.04

Machine Productivity Mac. Input/ Output

Mh/TF

60

66.6

1.11

Energy/ Output

Kwh/TF

150

166

1.106

Calculation

Unit

Period
#1

Period
#2

Ratio
(P2/P1)

Material Productivity

Output/ Mat. Input

$/$

2.0

1.9

Labor Productivity

Output/ Lab. Input

$/$

6.0

5.5

Machine Productivity

Output/ Mac. Input

$/$

5.0

4.4

Revenue/ Cost

$/$

1.03

0.85

Energy Productivity

Perf.

Monetary Units
Index

TP = Profitability

Perf.

Overall
( 3% N-Normal) (10%: Good/Bad)
SCM

(20%: V.Good / Fail) (>20%: Ex./ Not Capable)

Supply Chain Management for Engineers

Short description:

KPI Report for Operational Level


Annual Performance Report for xxxxxxx

Key Indicators

Unit

2009

2010

2010/2009

Strength Points:
-

Weakness Points:
-

Area of Concern:
-

Recommendations:
-

Performance

Conclusion:

------------------------------------------------------------------------------------------------------------------SCM

Supply Chain Management for Engineers

Case Study:

Consider the XYZ Spare Parts Company, the data for output produced and
inputs consumed for January 2010 & February 2010 are given below:

Outputs:
Unit
ton
$/ton

Feb. 2011
1000
1900

Jan. 2011
1200
1800

Comment

Unit
day
worker
ton
k.w.h.

Feb. 2011
22
300
1300
200,000

Jan. 2011
25
310
1600
250,000

Comment

Unit
$/man-day
$/ton
$
$/ k.w.h.
$

Feb. 2011
11
1000
9,000
0.5
5,000

Jan. 2011
10
900
10,000
0.5
6,000

Comment

Item
Production volume
Unit Price

Inputs Main Resources:


Item
Working days
Number of workers
Direct material quantity
Energy consumption

Inputs Cost Elements:

Item
Average labor rate
Direct material cost
Total Machining Cost
Energy cost
Overhead Cost

Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM

Supply Chain Management for Engineers

Production Productivity Analysis

Outputs:

Scope of Work: Reinforcement Concrete

Item
Production Quantity
Unit Price

Unit
m3
LE/m3

Actual
900
2000

Planned
1000
2000

97

> 98 %

Unit
Day
Ton
Ton
Man-day
M3/hour

Actual
12
450
110
80
30

Planned
10
400
100
70
40

Comment

Unit
LE/ton
LE/ton
LE/man-day
LE/day
1000 LE

Actual
420
4600
80
900
1500

Planned
450
5000
75
800
1600

Comment

Quality Rate

Comment

Inputs Main Resources:


Item
Working Days
Cement
Steel
Labor
Concrete Pump

Inputs Cost Elements:


Item
Cement Cost Rate
Steel Cost Rate
Total Labor Cost
Concrete Pump Cost
Total Cost

Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM

Supply Chain Management for Engineers

Case Study: Scope of Work:

Product: Car Manufacturing

Process : XXX Car Assembly

1) Capacity Information:
Item

Unit

Design capacity
Effective capacity
Planned quantity
Total Actual quantity
Rejected quantity (rework)

Car/month
Car/month
Car/Quarter
Car/Quarter
Car/Quarter

Period 2009
First Quarter
Second Quarter
150
140
300
360
240
270
9
12

Total View?
Critical Resources ?
Cost ?
Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM

Supply Chain Management for Engineers

Case Study: Scope of Work:

Product: Car Manufacturing

Process : XXX Car Assembly

1) Capacity Information:
Item

Unit

Design capacity
Effective capacity
Planned quantity
Total Actual quantity
Rejected quantity (rework)

Car/month
Car/month
Car/Quarter
Car/Quarter
Car/Quarter

Period 2009
First Quarter
Second Quarter
150
140
300
360
240
270
9
12

2) Critical Resource Information:


Item

Unit

Technical Labor X
Ass. Line working hours

Man-hour
Hour

Period 2009
First Quarter
Second Quarter
10000
9000
600
750

3) Actual Assembly Cost Information:


Item

Unit

Total Internal Resource cost


Total External Resource cost
Assembly Price

M.LE
M.LE
LE/Car

Period 2009
First Quarter
Second Quarter
1.440
1.460
0.360
0.438
7000
7500

Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM

Supply Chain Management for Engineers

Operational Level:
Scope of Work: Product: Car Manufacturing
1) Capacity Indicators:

Process : XXX Car Assembly

Unit

First Quarter

Second Quarter

Variance
(Q2 Q1)

Evaluation
(Q2 to Q1)

Design capacity

Car/3m

450

450

Effective capacity

Car/3m

420

420

Planned quantity

Car/3m

300

360

+ 60

Good

Total Actual quantity

Car/3m

240

270

+ 30

Good

Rejected quantity (rework)

Car/3m
%

9
3.8%

12
4.4%

+ 0.6%

Bad

Performance= Actual / Planned

80%

75%

- 5.0%

Bad

2) Productivity Indicators:
Labor X Productivity
Ass. Line Productivity

Unit

First Q.

Second Q.

Variance

Evaluation

Man-hr/car

33.33

25.00

- 8.33

Good

Hour/car

2.50

2.78

+ 0.28

Bad

Strength Points

SCM

First Quarter

Second Quarter

Rejected quantity

Planned quantity

Performance

Total Actual quantity

Line Productivity

Labor X Productivity

Supply Chain Management for Engineers

Operational Level:
Scope of Work: Product: Car Manufacturing
1) Capacity Indicators:

Process : XXX Car Assembly

Unit

First Quarter

Second Quarter

Variance
(Q2 Q1)

Evaluation
(Q2 to Q1)

Design capacity

Car/3m

450

450

Effective capacity

Car/3m

420

420

Planned quantity

Car/3m

300

360

+ 60

Good

Total Actual quantity

Car/3m

240

270

+ 30

Good

Rejected quantity (rework)

Car/3m
%

9
3.8%

12
4.4%

+ 0.6%

Bad

Performance= Actual / Planned

80%

75%

- 5.0%

Bad

2) Productivity Indicators:
Labor X Productivity
Ass. Line Productivity

Unit

First Q.

Second Q.

Variance

Evaluation

Man-hr/car

33.33

25.00

- 8.33

Good

Hour/car

2.50

2.78

+ 0.28

Bad

Unit

First Q.

Second Q.

Variance

Evaluation

LE/Car

6000

5470

- 530

Good

LE/Car

1500

1622

+122

Bad

LE/Car

7500

7092

- 408

Good

LE/Car

7000

7500

+ 500

Good

LE/Car

- 500

+ 408

+ 908

Good

3) Cost Indicators:
Internal Resource cost
External Resource cost
Unit Cost
Assembly Price
Profit (+) / Losses (-)
SCM

Supply Chain Management for Engineers

Middle Level:
Scope of Work: Product: Car Manufacturing
1) Capacity Indicators:

Process : XXX Car Assembly

Unit

First Quarter

Second Quarter

Variance
(Q2 Q1)

Evaluation
(Q2 to Q1)

Performance = Actual / Planned

80.0%

75.0%

- 5.0%

Bad

Quality Rate =(Total-Rej.)/Total

96.3%

95.6%

- 0.7%

Bad

Efficiency =Actual / Effective

57.1%

64.3%

+ 7.2%

Good

Load = Planned / Effective

71.4%

85.7%

+ 14.3%

Good

Utilization = Actual / Design

53.3%

60.0%

+ 6.7%

Good

Effectiveness= Effective / Design

93.3%

93.3%

0.0%

Normal

Overall Performance (Average)

75.23%

78.98%

+ 3.75%

Good

2) Productivity Indicators:
Labor X Productivity
Ass. Line Productivity

Unit

First Q.

Second Q.

Variance

Evaluation

Man-hr/car

33.33

25.00

- 8.33

Good

Hour/car

2.50

2.78

+ 0.28

Bad

Unit

First Q.

Second Q.

Variance

Evaluation

LE/Car

6000

5470

- 530

Good

LE/Car

1500

1622

+122

Bad

LE/Car

7500

7092

- 408

Good

LE/Car

7000

7500

+ 500

Good

LE/Car
%

- 500
- 6.7 %

+ 408
+ 5.8%

+ 908
+12.4 %

Good

LE/Car

5000

5878

+ 878

Good

3) Cost Indicators:
Internal Resource cost
External Resource cost
Unit Cost
Assembly Price
Profit (+) / Losses (-)
Value Added = Price ER
SCM

Supply Chain Management for Engineers

3) Top Level KPI report One Page Management


1) Subject Description:
Scope of Work: Product: Car Manufacturing

Process : XXX Car Assembly

Global Trend: Second Quarter First Quarter


Overall Performance = + 3.75% & Profit = + 408 LE/car
2) Analysis:
Strength
points
Weakness
points
Area of
Concern

1- Efficiency =Actual / Effective


2- Labor Productivity = Man-hr/car
3- Profit = Price TC
1- Performance = Actual / Planned
2- Ass. Line Productivity
3-

7.20 %
8.33 %
12.40 %
5.0 %
0.28 Hour/car

1- Worker training & motivating to improve the performance ratio


2- Line balancing to improve the line productivity
3- Value engineering to improve the value added
45-

3) Recommendation:
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SCM

Supply Chain Management for Engineers

Up-Stream Performance Management


Enterprise
Chairman
Monthly KPI Report:
Main Indicators

Standard Forms?
(Performance Evaluation Forms)

Standard Forms?
(Follow-up Forms)

Top

Middle

Operational

Site / Process
SCM

Supply Chain Management for Engineers

Case Study:
Consider XYZ Spare Parts Company, the monthly KPIs for Up-Stream
Performance Management are given below:

Monthly KPIs:
Profitability ratio

(%)

Cost Variance ratio

(%)

Schedule Variance ratio (%)


Labor Productivity
Material Productivity
Quality Rate

(man-hr/unit)
(ton/unit)
(%)

Based on this information; Design the performance evaluation forms for each managerial
level:

1) Operational level

SCM

2) Middle level

3) Top level (KPI report)

Supply Chain Management for Engineers

Up-Stream Performance Management

Monthly KPIs:
Scope of work: RF Concrete
Profitability ratio
(%)
Cost Variance ratio
(%)
Schedule Variance ratio (%)
Labor Productivity (man-hr/unit)
Material Productivity (ton/unit)
Quality Rate
(%)

Standard Forms?
(Performance Evaluation Forms)

Standard Forms?
(Follow-up Forms)

Enterprise
Chairman

Top

Middle

Operational

Site / Process
SCM

Supply Chain Management for Engineers

Up-Stream Performance Management

Profitability

(%) = Price / Total Cost

Enterprise
Chairman

Top
Price

Total Cost
Material Cost
Labor Cost
Equipment Cost
Overhead ratio

Material Cost rate

Material Quantity

Labor Cost rate

No. of Workers

Equipment Cost rate

No. of Equipment
Duration

SCM

Middle

Operational

Site / Process

Supply Chain Management for Engineers

Up-Stream Performance Management

Profit (%) = Price / Total Cost

Enterprise
Chairman

Top
Price

Total Cost
Material Cost
Labor Cost
Equipment Cost
Overhead ratio (30%)

Middle

Material Cost rate


($1000/ton)

Material (100 ton)

Labor Cost rate


($ 100/man-day)
Equipment Cost rate
($500/Eq-day)

Labor (5 workers)

SCM

Equipment (3 M/c)
Duration (10 days)

Operational

Site / Process

Supply Chain Management for Engineers

Up-Stream Performance Management

Profitability(%) = Price / Total Cost

Enterprise
Chairman

= 170/156 = 1.09 109 % Profit 9%

Top
Price
$170000

Total Cost = (120000)*1.3 = 156000


Material Cost = $1000*100 = 100000
Labor Cost = $100*5* 10 =5000
Equipment Cost = $500*3*10=15000
Overhead ratio (30%)

Middle

Material Cost rate


($1000/ton)

Material (100 ton)

Labor Cost rate


($ 100/man-day)
Equipment Cost rate
($500/Eq-day)

Labor (5 workers)

SCM

Equipment (3 M/c)
Duration (10 days)

Operational

Site / Process

Supply Chain Management for Engineers

Up-Stream Performance Management

Cost Variance ratio (%) =


(Actual Cost Planned Cost ) / Planned Cost

Enterprise
Chairman

Top
x

x
x

Middle

Operational

Site / Process
SCM

Supply Chain Management for Engineers

Up-Stream Performance Management


Enterprise
Chairman

Schedule Variance ratio (%) =


(Actual Duration Planned Duration ) /
Planned Duration

x
x

Top

Middle

Operational

Site / Process
SCM

Supply Chain Management for Engineers

Up-Stream Performance Management


Enterprise
Chairman

Labor Productivity (man-hr/unit) =


(No. of workers * Duration) /
Production Quantity

Top
x

x
x

Middle

Operational

Site / Process
SCM

Supply Chain Management for Engineers

Up-Stream Performance Management

Material Productivity (ton/unit) =


Material quantity / Production Quantity

Enterprise
Chairman

Top
x

x
x

Middle

Operational

Site / Process
SCM

Supply Chain Management for Engineers

Production Productivity Analysis

Outputs:

Scope of Work: Spare Parts Manufacturing

Item
Production Quantity
Total Revenue

Unit
ton
M$

Actual

Planned

Comment

Defect Quantity

ton

Unit
hour
Ton
Man-hr
M/c-Hr

Actual

Planned

Comment

Unit
M$
M$
M$
M$
M$

Actual

Planned

Comment

Inputs Main Resources:


Item
Working Hours
Raw Materials
Labor
Machines

Inputs Cost Elements:


Item
Total Materials Cost
Total Labor Cost
Total Machine Cost
Total Overhead Cost
Total Cost

Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM

Supply Chain Management for Engineers

Operational Level Follow-up Report Standard rates


(Average / ton final product)
Outputs:
Item
Production Quantity
Total Revenue

Unit
1000 ton
$/ton f

Quality Rate

Inputs Main Resources:


Item

Actual

Planned

Ratio (A/P)

Performance

Actual

Planned

Ratio (A/P)

Performance

Actual

Planned

Ratio (A/P)

Performance

%
Unit

Performance rate

Ton/hour

Raw Materials

ton/ton f

Labor

M-h/ ton f

Machines

E-h/ ton f

Inputs Cost Elements:


Item
Materials Cost
Labor Cost
Machine Cost
Total Overhead Cost
Total Cost

Unit
$/ ton f
$/ ton f
$/ ton f
$/ ton f
$/ ton f

( 3% N-Normal) (10%: Good/Bad)


SCM

(20%: V.Good / Fail) (>20%: Ex./ Not Capable)

Supply Chain Management for Engineers

Middle Level Production Productivity Analysis

Physical Units
Index

Calculation

Unit

Yield

Output/ Mat. Input

TF/TM

Labor Productivity

Lab. Input/ Output

Mh/TF

Machine Productivity Mac. Input/ Output

Mh/TF

Actual

Planned

Actual

Planned

Ratio
(A/P)

Performan
ce

Monetary Units
Index

Calculation

Unit

Material Productivity

Output/ Mat. Input

$/$

Labor Productivity

Output/ Lab. Input

$/$

Machine Productivity

Output/ Mac. Input

$/$

Revenue/ Cost

$/$

TP = Profitability

Ratio
(A/P)

Performa
nce

Overall
( 3% N-Normal) (10%: Good/Bad)
SCM

(20%: V.Good / Fail) (>20%: Ex./ Not Capable)

Supply Chain Management for Engineers

KPI Report for Top Level

Short description:

Monthly Performance Report for xxxxxxx


Key Indicators
Profitability ratio
Total Cost

Unit
%
M$

Duration (Working hours)


Labor Productivity
Material Productivity
Quality Rate

hour
%
%
%

Actual

Planned

Ratio (A/P)

Strength Points:
-

Weakness Points:
-

Area of Concern:
-

Recommendations:
-

Performance

Conclusion:

------------------------------------------------------------------------------------------------------------------SCM

Supply Chain Management for Engineers

Case Study:
Consider XYZ Spare Parts Company, the monthly KPIs for Up-Stream
Performance Management are given below:

Monthly KPIs:
1. Profitability ratio

(%)

2. Cost Variance ratio

(%)

3. Schedule Variance ratio

(%)

4. Labor Productivity

(man-hr/unit)

5. Material Productivity

(ton/unit)

6. Cycle Time

(min/ton)

7. Performance Rate

(ton/hr)

8. Quality Rate

(%)

9. Efficiency

(%)

10. Effectiveness

(%)

11. OEE

(%)

Based on this information; Design the performance evaluation forms for each managerial
level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM

Supply Chain Management for Engineers

Case Study:
Consider a construction project, the monthly KPIs for Up-Stream
Performance Management are given below:

Monthly KPIs:
Efficiency (%) = Actual quantity / Planned quantity
Cost Variance ratio (%) = (Actual cost Planned cost) / Planned cost
Schedule Variance ratio (%) = (Actual duration Planned duration) / Planned cost
Margin Factor (%) = Price / Direct cost
Labor Productivity (man-hr/m3) = (No. of workers * Working hours) / Quantity
Based on this information; Design the performance evaluation forms for each managerial
level:

1) Operational level

SCM

2) Middle level

3) Top level (KPI report)

Supply Chain Management for Engineers

Inventory Management

SCM

Supply Chain Management for Engineers

Inventory / Materials management


MM is the planning and control of the material flow to:
Minimize the material wastes
Minimize the material shortage
Maximize the material productivity
Reduce the material costs
Reduce the manufacturing

Why the Material Management is very important?


1) Material budget ratio is very high (30 to 70%) ~ 50%
2) Shortage Cost is very high
SCM

Supply Chain Management for Engineers

Distribution of Costs
Type

Electrical

Mechanical

Construction
& Asphalt

Labor

40%

35%

15%

Material

35%

40%

55%

Equipment

10%

15%

25%

Overhead

15%

10%

5%

Total Cost

100%

100%

100%

Type

Power stations &


Compressors

Gas PL off

Gas PL on

Labor

15%

15%

15%

Material

60%

40%

60%

Equipment

15%

20%

15%

Overhead

10%

25%

10%

Total Cost

100%

100%

100%

SCM

Supply Chain Management for Engineers

Inventory / Material Management


1.Right Quality

Min. Defect ratio or Max. Quality rate

2.Right Quantity

Min. Shortage ratio or Max. Service level

3.Right Delivery time

JIT (Min. Early or Late) Min. Time variance

4.Right Location

Warehouse, Site, Area, Coding system

5.Right Method

Standard (Secure , Safety conditions, Handling)

6.Right Cost

Min. Over-run or Under-run Min. Cost variance

7.Right Supplier

Agent, Documentation, Inboard or Outboard

8.Right Database

Documentation, Standards, Information system

9.Right Communication Site & Warehouse & Main office


10.Right Leadership
SCM

Managerial activities (Targets, Planning, .. etc.)

Supply Chain Management for Engineers

Inventory Management =
Targets + Planning + Organizing + Leading + Controlling

Inventory
Strategy
Inventory
Strategy
Forecasting

Transport
Strategy
Transport
Strategy

Inventory decisions

Storage decisions

service goals
The product
Logistics service
Ord . proc. & info. sys.

Location
Strategy
Location
Strategy

CONTROLLING

Storage fundamentals

Transport decisions

ORGANIZING

scheduling decisions

Customer

PLANNING

Purchasing and supply

Transport fundamentals

Location decisions

The network planning process

SCM

Supply Chain Management for Engineers

Inventory / Material Performance Measures


Inventory utilization factors:
Capacity utilization Max. Used capacity & Min. Unused capacity
= Available Inventory limit / Maximum Inventory limit
Material utilization Min. Overstock
Used Material Volume / Available Material Volume
For Example:
Maximum Inventory limit = 8000 unit
Available Inventory limit = 6000 unit
Used Material volume = 4000
Capacity utilization = 6000 / 8000 = 75 %

>80% Critical items

Material utilization = 4000 / 6000 = 67 %

>80%

SCM

Supply Chain Management for Engineers

For Total # of Items:


Maximum # of items

= 45,000 item

Available # of items

= 27,000 item

Used # of items

= 9,000 item

Capacity utilization = 27000 / 45000 = 60 %

80%

Material utilization = 9000 / 27000 = 33 %

80%

For Each Item Critical items


Maximum Inventory limit = 8000 unit
Available Inventory limit = 6000 unit
Used Material volume = 4000
Capacity utilization = 6000 / 8000 = 75 %

80%

Material utilization = 4000 / 6000 = 67 %

80%

SCM

Supply Chain Management for Engineers

Inventory / Material Performance Measures


Revenue Value

Inventory Turnover

Average Inventory Cost


Sales Value

Inventory Turnover

Average Inventory Cost


Outputs

Inventory Turnover

Average Inventory

Service Level

1-

Number of out of stock items


Total Demand

SCM

Supply Chain Management for Engineers

Trade-off Between Inventory


Costs and Service Level

Service
Level

Amount of inventory

SCM

Supply Chain Management for Engineers

Main Activities of Material Management Purchasing Department


1.

Design & maintain the material reports & forms

2.

Prepare the material list for each department / discipline

3.

Design & maintain a database of each material

4.

Design & maintain a database of available suppliers

5.

Needs, market & cost analysis Risk analysis

6.

Evaluate & select the best suppliers to supply each material

7.

Negotiate supply contracts with supplier

8.

Establish material criticality analysis (A, B and C)

9.

Establish the standard rates for all items

10. Prepare the material budget , material program & schedule


11. Receive, inspect the materials & payment request
12. Control the inventory levels especially for critical items
13. Prepare the material performance evaluation report (Monthly & Annual)
14. Design & maintain the material management information system (MMIS)
15. Act as the interface between the company and its suppliers
SCM
Supply Chain Management for Engineers

Key Inventory Terms

Item criticality: item classification (A, B, C)

Lead time: time interval between ordering and receiving the order

Holding (carrying) costs: cost to carry an item in inventory for a length


of time, usually a year

Ordering costs: costs of ordering and receiving inventory

Shortage costs: costs when demand exceeds supply

Order quantity: Order size (unit)

Reorder Point - When the quantity on hand of an item drops to this


amount, the item is reordered

Safety Stock - Stock that is held in excess of expected demand due to


variable demand rate and/or lead time.

SCM

Supply Chain Management for Engineers

Inventory Control Decisions:


What decisions are involved in inventory control?
How should I track inventory?
Continuously versus periodically
When do I place an order?
Safety stock
Reorder point
How much should I order?
Order quantity

SCM

Supply Chain Management for Engineers

Simple Two-Bin Pull Method (Q,R)


Quantity on-hand
plus on-order

Q
Reorder
point, R
Safety Stock
0

SCM

Lead
time
Order
Order
Placed Received

Lead
Time
time
Order
Order
Placed
Received

Supply Chain Management for Engineers

9-22

Main Parameters:
Right Order Quantity
Right Reorder Level
Right Safety Stock

Right Service Level

SCM

Supply Chain Management for Engineers

Inventory Control Systems:


Class A Fixed-order-quantity system (Continuous)
Constant amount ordered when inventory declines to
predetermined level
Class B Fixed-time-period system (Periodic)
Order placed for variable amount after fixed passage
of time
Class C Mixed Fixed Quantity & Fixed Time

SCM

Supply Chain Management for Engineers

Fixed-order-interval Model

Periodic Control for a Single Item

Quantity on hand

Q2

Q1

Stock
level
reviewed

Order
received

LT

LT

Time

T = review interval
M = maximum level
q = quantity on hand
M - q = replenishment quantity
Qi = order quantity
LT = lead time
SCM
Supply Chain Management for Engineers

A Min-Max System of Inventory Control

SCM

Supply Chain Management for Engineers

A Min-Max System of Inventory Control


Quantity on hand

M
Q3

Q2

Q1

Stock
order

Order
received

Safety Stock
0

LT
M = maximum level
CR (2004) Prentice Hall, Inc.

SCM

Time

LT

Qi = order quantity
LT = lead time

Supply Chain Management for Engineers

9-60

Inventory Classifications
Inventory

Process
stage

Raw Material
WIP
Final Products
Spare Parts

Number
& Value

A Items
B Items
C Items

Demand
Type

Independent
Dependent

Disciplines

Maintenance
Operating
Safety

WIP: Work In Process


SCM

Supply Chain Management for Engineers

Material Types control the processes a material can go through

1. Raw materials

2. Operating
supplies
SCM

3. Semi-finished products

Examples of material types:


Raw materials
Operating supplies
Semi-finished products
Finished products

4. Finished products

Supply Chain Management for Engineers

Types of Inventory Items


Raw materials and purchased parts from outside suppliers.
Components: subassemblies that are awaiting final assembly.
Work in process: all materials or components on the production floor
in various stages of production.
Finished goods: final products waiting for purchase or to be sent to
customers.
Supplies: all items needed but that are not part of the finished
product, such as paper clips, duplicating machine toner, and tools.

SCM

Supply Chain Management for Engineers

Independent vs. Dependent Demand


Dependent demand
items used to produce final products

Independent demand
items demanded by external customers

Independent Demand

Dependent Demand

A
C(2)

B(4)

Drives MRP
D(2)

E(1)

D(3)

F(2)

Independent demand is uncertain.


Dependent demand is certain.
SCM

Supply Chain Management for Engineers

Demand Characteristics
Independent demand

Dependent demand

100 x 1 =
100 tabletops

100 x 4 = 400 table legs

100 tables
Continuous demand

Discrete demand
400

300
No. of tables

No. of tables

400

200
100
1

SCM

3
Week

300
200
100

5
M T W Th F

M T W Th F

Supply Chain Management for Engineers

Inventory Classification Analysis


Rule 80/20:
Level description

Total Value %

Total Item %

Level
A

Critical

>= 80

<= 20

Medium

15

30

Non-critical

50

Important matrix:
Important
Not important

Urgent
(due soon)

Not urgent
(not due soon)

A
B

B
C

Top (10, 5, or 3) items; based on the project size (>= 80%

Value)
SCM

Supply Chain Management for Engineers

ABC Classification System

P e rc e n ta g e o f D o lla rs

120
100
80
60
40
20
0
0

10

20

30

40

50

60

70

80

90

100

Percentage of Items
SCM

Supply Chain Management for Engineers

ABC Classification System


A - Very important
B medium important
C - least important

High

Annual
$ value
of items

C
Low
Few

Many

Number of Items
SCM

Supply Chain Management for Engineers

ABC Classification
A - Receive tight control
(Continuous Control) Daily feedback
Top 10-20%

-Critical activities
-Critical materials
-Critical labor
-Critical equipment

B - Receive relaxed control


(Periodic Control) I Weekly feedback
Next 30%

-Critical tools

C- Receive minimal control


(Periodic Control) II Monthly feedback
Last 50-60%
SCM

Supply Chain Management for Engineers

Part
classification
(Rule 80/20)

Top 2 Parts

Based on this information,


classify & discuss these
parts.

SCM

Part list:
Item
Code

Unit price
($)

Annual Demand
(unit)

S11

10

1000

S12

40

100

S13

100

10

S14

30

200

S15

20

500

S16

200

600

S17

100

40

S18

55

950

S19

80

30

S20

100

20

Supply Chain Management for Engineers

Item
Code

Unit
price ($)

Annual
Demand
(unit)

Annual
Value $

Cumulative
value $

Cumulative
%

S16

200

600

120000

120000

56.7%

A1

S18

55

950

52250

172250

81.4%

A2

S11

10

1000

10000

182250

86.1%

B1

S15

20

500

10000

192250

90.8%

B2

S14

30

200

6000

198250

93.7%

B3

S12

40

100

4000

202250

95.6%

C1

S17

100

40

4000

206250

97.4%

C2

S19

80

30

2400

208650

98.6%

C3

S20

100

20

2000

210650

99.5%

C4

S13

100

10

1000

211650

100.0%

C5

Total
SCM

Item
Level

211650

Supply Chain Management for Engineers

Inventory Cost Elements:


Constant Price

Carrying
Costs
Expected
Stockout
Costs

SCM

Order/
Setup
Costs

Supply Chain Management for Engineers

Inventory Costs:
Carrying Cost
cost of holding an item in inventory

Ordering Cost
cost of replenishing inventory

Shortage Cost
temporary or permanent loss of sales when demand
cannot be met

SCM

Supply Chain Management for Engineers

Annual cost

Order / Setup Cost

Size of order (units)


Note: Order / setup cost reflects:
Fixed costs (e.g., information and communications technology)
Variable costs (e.g., reviewing stock levels, order processing/
preparation expense, etc.)
SCM

Supply Chain Management for Engineers

Ordering Costs
Cost
($)

Ordering
=
Costs

D
(
) Co
Q

Order Size (units)


SCM

Supply Chain Management for Engineers

Order Quantity:
Inventory
Level
(units)
Order
Quantity
Q

Average Inventory =
Order Quantity Q
2
2

Time
SCM

Supply Chain Management for Engineers

Carrying Costs
Cost
($)

Q
Carrying Costs = ( 2 ) Cc

Ordering
=
Costs

D
(
) Co
Q

Order Size (units)


SCM

Supply Chain Management for Engineers

Stock out = 0
Annual
cost ($)

Shortage cost =0

Qopt

Total Cost

Carrying Cost =

Minimum
total cost

C cQ
2

CoD
Ordering Cost = Q
Optimal order

Qopt

SCM

Order Quantity, Q

Supply Chain Management for Engineers

Economic Order Quantity


How much to order?

Stock out = 0
Shortage cost =0

We want to balance the

Ordering cost
Carrying cost
cost of keeping
goods in inventory

SCM

cost of placing
an order

Supply Chain Management for Engineers

How much to order?


We can calculate the optimal order quantity using the
Economic Order Quantity, also known as the.

SCM

Supply Chain Management for Engineers

EOQ: Economic Order Quantity


EOQ balances the cost of placing an order against
the cost of storing product in inventory
The cost of storing a product in inventory can
include warehouse costs, shipping costs, and cost
of capital tied up in inventory
Notice that nowhere did the cost of the
merchandise being sold enter into the equations
EOQ is vitally important in any retail business and
most businesses where stocked items are
managed
SCM

Supply Chain Management for Engineers

Inventory Management

Stock out = 0
Shortage cost =0

Determining Optimal Inventory


Economic Order Quantity (EOQ)

Total
Total
Inventory = Carrying +
Costs
Costs

SCM

Total
Ordering
Costs

Supply Chain Management for Engineers

EOQ Cost Model


Annual
cost ($)

2CoD

Qopt =

Cc

Total Cost

Carrying Cost =

Minimum
total cost

C cQ
2

CoD
Ordering Cost = Q
Optimal order

Qopt

SCM

Order Quantity, Q

Supply Chain Management for Engineers

Deriving Qopt

EOQ Cost Model

CoD
CcQ
TC =
+
Q
2

CoD
Annual ordering cost =
Q
Annual carrying cost =

-CoD
Cc
TC
=
2 +
Q
2
Q

CcQ

-C0D
Cc
0=
+
Q2
2

CoD
CcQ
Total cost =
Q + 2
Optimal Time Between Orders or
Order Cycle time
Number of orders per year:

Qopt =
*
Q
T*
D

Cc

D
N *
Q

Co - cost of placing order


Cc - annual per-unit carrying cost
SCM

2CoD

D - annual demand
Q - order quantity

Supply Chain Management for Engineers

Reorder Point Method Under Certainty for a Single Item


Quantity on-hand
plus on-order

Q
Reorder
point, R
0

Lead
time
Order
Order
Placed Received

Lead
Time
time
Order
Order
Placed
Received

Reorder point = R = d (LT)


LT = Lead time
SCM

Constant demand rate & Constant Lead time


Supply Chain Management for Engineers

Lead Time

Input

SCM

Wait
Time

Move
Time

Queue Setup Run


Time
Time Time

Supply Chain Management for Engineers

Output

Basic Tradeoffs:
(EOQ) increases:
Annual inventory
carrying cost also
increases

Annual cost

As order quantity

Minimum cost
reorder quantity

Total Costs
Carrying
Cost

Shortage
Cost

Annual ordering
cost decreases
Order/Set-up
Cost

Annual shortage
cost decreases
SCM

Size of order quantity

Supply Chain Management for Engineers

Simple Two-Bin Pull Method (Q,R)

Quantity on-hand
plus on-order

Q
Reorder
point, R
Safety Stock
0

(Uncertain conditions)

Lead
time
Order
Order
Placed Received

Lead
Time
time
Order
Order
Placed
Received

The reorder point = ROP = d(LT)


SCM

Supply Chain Management for Engineers

9-22

EOQ:
Cost of placing order = $6.40 / order
Annual per-unit carrying cost = $0.24/year
Annual demand = 52 unit/year
Calculate the Optimal order quantity ?

Qopt =

2CoD

Cc

2*6.4*52

0.24

= 52 unit/order

One trip/year is optimal


SCM

Supply Chain Management for Engineers

If the storage costs increase from $0.24/year to


$10/year, what is the new optimal order quantity?
Cost of placing order = $6.40
Annual carrying cost = $10/year
Annual demand = $150/week = $7,500/year
Calculate the optimal order quantity?
Qopt =

SCM

2CoD

Cc

2*6.4*7500

10

= $98/trip

Supply Chain Management for Engineers

Example:
Qopt =

- Cost of placing order =$15


- Annual per-unit carrying cost = $ 0.1

2CoD

Cc

- Annual demand = 300 unit


Calculate the optimal order quantity?

Qopt =

2*$15*300

$0.10

300*300

= 300 unit

Order once-per-year

SCM

Supply Chain Management for Engineers

If the storage costs increase from $0.10/year to


$1/year, what is the new optimal order quantity?
- Cost of placing order = Co =$15
- Annual per-unit carrying cost = Cc = $ 1.0
- Annual demand = D = 300 unit
- Order quantity = Q ?

Qopt =

Qopt =

2*$15*300

$1

30*300

2CoD

Cc

~ 95 boxes

Order three time/year


SCM

Supply Chain Management for Engineers

Example:

Co - cost of placing order = $3.50 per order


Cc - per-unit carrying cost = $0.30 per unit
D - weekly demand = 160
Q - order quantity

Optimal Order Quantity


Qopt =

2CoD

Cc

2($3.50)(160)

$0.30

= 61.1 unit

Order cycle time = Q/D = (61.1/160) = 0.38 weeks

CoD
CcQ
= ($3.50)(160) + ($0.30)(61.1)
Inventory cost =
+
Q
2
61.1
2
Inventory cost = $18.33
SCM

Supply Chain Management for Engineers

Reduced Order Cost ($3.50 $0.35)


Co = $0.35 per order
Cc = $0.30 per pizza
D = 160
Optimal Order Quantity?
Qopt =

2CoD

Cc

2($0.35)(160)

$0.30

= 19.3 unit
(down from 61.1)

Order cycle time = Q/D = (19.3/160) = 0.12 weeks


(down from 0.38 weeks)

CoD
CcQ
= ($0.35)(160) + ($0.30)(19.3)
Inventory cost =
+
Q
2
19.3
2
Inventory cost = $5.80 (down from $18.33)
SCM

Supply Chain Management for Engineers

Brain Storming:
Annual Demand = 12,000 per year,
Order Cost = $10 per order
Holding Cost = $1 per unit per year
Lead time = 4 weeks
Calculate:
1. Economic order quantity
2. Order cycle time
3. Number of orders per year
4. Total inventory cost
5. Reorder level
SCM

Stock out = 0
Shortage cost =0
Fixed order cost
Variable Carrying cost
Certain demand rate
Certain lead time
Variable order cost
Fixed carrying cost
Variable lead time
Variable demand rate

Supply Chain Management for Engineers

Brain Storming:
Annual Demand = 12,000 per year,
Order Cost = $10 per order
Holding Cost = $1 per unit per year
Lead time = 4 weeks

Qopt =

Calculate:
1. Economic order quantity

2CoD

Cc

2. Order cycle time


3. Number of orders per year
4. Total inventory cost
5. Reorder level
SCM

Supply Chain Management for Engineers

Co = $ 10 per order
d= 12000/52 = 231 unit/week
Cc = $ 1.0 per order
LT= 4 weeks
D = 12000 unit/year
Optimal Order Quantity?
Qopt =

2CoD

Cc

2(10)(12000)

= 490 unit

Order cycle time = Q/D = (490/12000) = 0.04 year *365 day = 15 day

CoD
CcQ
= (10)(12000) +
Inventory cost =
Q + 2
490
Inventory cost = $

(1)(490)
2

490.0 /year

The reorder point = ROP = d(LT) = 231 * 4 = 924 unit


SCM

Supply Chain Management for Engineers

Safety Stock & Re-Order Level


4 Cases:
Constant demand &
Constant lead time
Variable demand &
constant lead time
Constant demand &
variable lead time
Variable demand &
variable lead time

SCM

Supply Chain Management for Engineers

Variable Demand with a Reorder Point

Inventory level

Reorder
point, R

LT

LT
Time

SCM

Stock-out

Supply Chain Management for Engineers

Inventory level

Reorder Point with


a Safety Stock

Q
Reorder
point, R

Safety Stock

LT

LT
Time

SCM

Supply Chain Management for Engineers

Determining the Reorder Point for


Constant demand rate & Constant Lead Time
Reorder Point (ROP)
= [Lead time length (in days)] X [Demand per day (in units per day)]

Annual Demand
Operation condition
Lead time length
Safety Stock

= 600 unit
= 300 days per year
= 12 days
= 20 unit by default (1.5%)

Then Demand per day = 600 / 300


= 2 units/day
ROP = ( 12 days) ( 2 units/day) + Safety Stock (20 unit)
ROP =

SCM

44 units
Supply Chain Management for Engineers

Reorder Point

SCM

The ROP based on a Normal


distribution of lead time demand

Supply Chain Management for Engineers

Reorder Point:

SCM

Supply Chain Management for Engineers

Mean & Standard Deviation:

Data:
1)
2)
3)
4)
5)
6)

10.3
4.9
8.9
11.7
6.3
7.7

Mean = the calculated average of the values


= 8.3

Variance = S

Standard Deviation =
SCM

n 1

= 6.368

= 2.523

Supply Chain Management for Engineers

Mean & Standard Deviation

From:http://www.gifted.uconn.edu/siegle/research/Normal/instructornotes.html
SCM
Supply Chain Management for Engineers

Reorder Point Model:


Variable demand and variable lead time
R= d x LT + Z(LT 2 d2 + d 2 2LT )
Constant demand rate
d = 0
Constant lead time
LT = 0
Where d= average daily or weekly demand,
d = standard deviation of demand per day or week,
LT = standard deviation of lead time per day or week
SCM

Supply Chain Management for Engineers

Item Criticality Analysis


Application

Description

A Major effect on HSE

Service level %

99.99966

Near Zero
Stock-out
(3.4 PPM)

B Major effect on Process


= High down time cost

99.73

C Normal effect on HSE


Normal
effect
on
process
Without standby

95.46

D Normal effect on HSE


Normal effect on process
With standby

68.26

SCM

Supply Chain Management for Engineers

Criticality Analysis Rule 80/20


Level

HSE
effect

Duration
effect

Performance
effect

Cost
effect

I- Constraint
(limited)
2- Enhance

3- Accept
(Normal)

Priority: (A) High (B) Medium (C) Low

SCM

Supply Chain Management for Engineers

Reorder Point with Variable Demand


(Leadtime is Constant)

R d L z , where
d = average daily demand
L = lead time

d standard deviation of daily demand


standard deviation of demand during lead time
z = number of standard deviations for desired service level
z safety stock

SCM

Supply Chain Management for Engineers

Fixed-order-interval order quantity


Given information:
Annual Demand= D=520 units,
Order Quantity = EOQ=62 units,
Item Criticality is Medium:
Service level = 99%, (Z=3)
Demand Standard Deviation = d = 8 units/wk,
Lead time = LT=3 wk

Required:
Number of Orders = n = D / EOQ = 520/62 = 8.4 order / year
Reorder Interval = 52 Week / n = 6.2 or 6 wk
Safety stock= Z(LT d2 ) = 3 . (3*64) =
Demand rate = D / No. of periods = 520/52 = 10 unit/week
ROP = d x LT + Safety Stock = 10 * 3 +
SCM

Supply Chain Management for Engineers

Determining the Reorder Point for


Constant demand rate & Variable Lead Time
Reorder Point (ROP)
= [Lead time length (in days)] X [Demand per day (in units per day)]
+ Safety Stock

Annual Demand
= 600 unit
Operation condition
= 300 days per year
Average Lead time
= 12 days
Standard deviation of lead time = 2
Z
=3

Safety Stock ?
ROP?

SCM

Supply Chain Management for Engineers

Case Study: Gas Station


You manage a gas station:
Tank size = 10,000 gallon (underground tank)
Annual tank cost = $50,000
Demand rate = 1,000 gallon/day
Demand standard deviation = 50
Fixed order cost $100 / order
Variable order cost = $ 0.1 /gallon
Standard order quantity is 3000, 4000, or 5000 gallons.
Average lead time = 2 days (Certain)
Calculate & Discuss the following:
1. EOQ & SOQ
2. No. of orders per year
3. Order cycle time
4. Safety Stock
5. Reorder level
6. Annual Inventory Cost
7. Sketch the inventory transaction
8. Is the tank larger than you need?
SCM
Supply Chain Management for Engineers

Optimal Time Between Orders or


Order Cycle time

Number of orders per year:

Co - cost of placing order


Cc - annual per-unit carrying cost

SCM

*
Q
T*
D

D
N *
Q
*

D - annual demand
Q - order quantity

Supply Chain Management for Engineers

Simple Two-Bin Pull Method (Q,R)

Quantity on-hand
plus on-order

Q
Reorder
point, R
Safety Stock = f (uncertain demand & uncertain LD)
Safety stock= Z(LT d^2 ) (Certain LT & uncertain demand)

SCM

Lead
time
Order
Order
Placed Received

Lead
Time
time
Order
Order
Placed
Received

Supply Chain Management for Engineers

9-22

Periodic Review
Estimate Q* from the EOQ formula as if under demand
certainty conditions. Recall that this is Q* = 322 units.
Now,

T* = Q*/d = 322/50 = 6.4 weeks


Construct the demand-during-lead-time-plus-ordercycle-time distribution.
T is order
review time

SCM

CR (2004) Prentice Hall, Inc.

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Case #1:
Car Maintenance Center
Part
A
B
C
D
E
F
G
H
I

Number of
Failures
1
8
3
5
0
0
44
0
0

Part
J
K
L
M
N
O
P
Q
R

Number of
Failures
38
0
1
31
1
1
0
16
1

Based on this information, discuss


Pareto Chart and Rule 80/20.
SCM

Supply Chain Management for Engineers

Pareto TableErrors on Parts


Part
G
J
M
Q
B
D
C
A
O
R
N
L
I
E
H
K
F
P
Total
SCM

Number of Failures

Percent of Total

44
38
31
16
8
5
3
1
1
1
1
1
0
0
0
0
0
0
150

29
25
21
11
5
3
2
0.67
0.67
0.67
0.67
0.66
0
0
0
0
0
0

Cumulative percent of Total


Prob. (<=x)
29
54
75
86
91
95
97
98
98
99
99
100
100
100
100
100
100
100

Supply Chain Management for Engineers

NUMBER OF FAILURES

-86

100-50
50403020100-

-0

Q B

O R

I E H K F P

ORDER FORM ITEM


SCM

Supply Chain Management for Engineers

CUMULATIVE PERCENT OF TOTAL

-100

150-

Pareto Table Part Frequency


Part

Number of Failures

Cumulative percent of
Total

Classification

G
J
M
Q
B
D

44
38
31
16
8
5

29
54
75
86
91
95

A
(Continuous Review)
FOQ Approach
B
(Periodic Review)
POQ Approach
Weekly

C
A
O
R
N
L
I
E
H
K
F
P
Total

3
1
1
1
1
1
0
0
0
0
0
0
150

97
98
98
99
99
100
100
100
100
100
100
100

SCM

C
(Non-critical)

(Periodic Review)
POQ Approach

Supply Chain Management for Engineers

Monthly

Turbine Failure list during three years

Case #2:
Failure
classification
(Rule 80/20)
Top 4 failures

Based on this information,


classify & discuss these
items.

SCM

Part
Code
P11
P12
P13
P14
P15
P16
P17
P18
P19
P20

Number of
failures
2
2
19
11
2
12
17
10
11
4

MTTR
(hour)
4
15
1
14
21
12
1
5
12
3

other

Supply Chain Management for Engineers

Part
Code

Number
of
failures

MTTR
(hour)

Total
downtime
hours

Cum.
DT

P14

11

P16

14

154

154

25.3%

A1

12

12

144

298

49.0%

A2

P19

11

12

132

430

70.7%

A3

P18

10

50

480

78.9%

A4

P15

21

42

522

85.9%

B1

P12

15

30

552

90.8%

B2

P13

19

19

571

93.9%

B3

P17

17

17

588

96.7%

C1

P20

12

600

98.7%

C2

P11

608

100.0%

C3

Total

Cum. %

Item
Level
Level

608

Recommendations:

Short term: (A) Continuous review & Safety stock


Long term: (A) Improve material quality & reliability through changing types
SCM

Supply Chain Management for Engineers

Standby & Change over = 10 min


Number of failures 60% & MTTR (hours) 40%
Part
Code

Number of
failures
60%

MTTR
(hour)
40%

Value

Level

P14

11

14

11*0.6 + 14*0.4 = 12.2

P16

12

12

12*0.6 + 12*0.4= 12.0

P13

19

19*0.6 + 1*0.4= 11.8

A1
A2
A3
A4

P19

11

12

11*0.6 + 12*0.4= 11.4

P17

17

17*0.6 + 1*0.4= 10.6

P15

21

2*0.6 + 21*0.4= 9.6

P18

10

10*0.6 + 5*0.4= 8.0

P12

15

2*0.6 + 15*0.4= 7.2

P20

4*0.6 + 3*0.4= 3.6

P11

2*0.6 + 4*0.4= 2.8

SCM

Supply Chain Management for Engineers

B1
B2
B3
C1
C2
C3

Case #3:

Part
Code

Number of
failures
80%

MTTR
(hour)
20%

HSE
effect
(1 to 3)

Repair
cost
(1 to 3)

Delivery
type
(1 to 3)

P11

P12

15

P13

19

P14

11

14

P15

21

P16

12

12

P17

17

P18

10

P19

11

12

P20

(L) Low , (M) Medium, (H) High


Based on this information, classify & discuss these parts.
SCM

Supply Chain Management for Engineers

Standby & Change over = 3 min


Number of failures 80% & MTTR (hours) 20%
Number of
failures
80%

MTTR (hour)
20%

P13

19.0

P17

Part
Code

Value

Level

1.0

15.4

A1

17.0

1.0

13.8

A2

P16

12.0

12.0

12.0

A3

P14

11.0

14.0

11.6

A4

P19

11.0

12.0

11.2

B1

P18

10.0

5.0

9.0

B2

P15

2.0

21.0

5.8

B3

P12

2.0

15.0

4.6

C1

P20

4.0

3.0

3.8

C2

P11

2.0

4.0

2.4

C3

SCM

Supply Chain Management for Engineers

Part
Code
P11

Process
efect
L

HSE
effect
L

Repair
cost
L

Delivery
type
L

P12

P13

P14

P15

P16

P17

P18

P19

P20

(L) Low , (M) Medium, (H) High

SCM

Supply Chain Management for Engineers

Part
Code

HSE
effect

Process efect

Repair cost

Delivery type

P13
P16
P20
P14
P17
P19
P18
P15
P11
P12

3
3
3
2
2
1
1
1
1
1

3
3
1
3
3
2
2
2
1
1

3
3
1
2
2
3
2
1
1
1

3
3
2
2
1
3
1
1
1
2

SCM

Supply Chain Management for Engineers

Case #3:

Part
Code

Number of
failures

MTTR
(hour)

HSE
effect
(1 to 4)

Repair
cost
(1 to 4)

Delivery
type
(1 to 3)

P11

P12

15

P13

19

P14

11

14

P15

21

P16

12

12

P17

17

P18

10

P19

11

12

P20

(1) Low (4) High


Based on this information, classify & discuss these parts.
SCM

Supply Chain Management for Engineers

Part Code

(1)
HSE effect
(1 to 4)

(2)
Process
effect
(A,B,C)

(3)
Repair
cost
(1 to 4)

(4)
Delivery
type
(1 to 3)

P11

C3

P12

B2

P13

B3

P14

A1

P15

B1

P16

A2

P17

C1

P18

A3

P19

A4

P20

C2

4: Critical

3: Major

2: Medium

Level

1: Minor

Based on this information, classify & discuss these parts.


SCM

Supply Chain Management for Engineers

Part
Code

(1) 50%
(2) 25%
HSE effect
Total
(1 to 4)
Downtime
(A,B,C)

(3) 15%
Repair
cost
(1 to 4)

(4) 10%
Delivery
type
(1 to 3)

P11

P12

P13

P14

P15

P16

P17

P18

P19

P20

RPN

Level

Based on this information, classify & discuss these parts.


SCM

Supply Chain Management for Engineers

Part
Code

(1) 50%
HSE effect
(1 to 4)

(2) 25%
Total
Downtime
(A,B,C)

(3) 15%
Repair cost
(1 to 4)

(4) 10%
Delivery
type
(1 to 3)

RPN

Level

P16

3.9

A1

P13

3.4

A2

P14

3.15

A3

P20

2.6

B1

P19

2.15

B2

P15

1.9

C1

P12

1.85

C2

P17

1.8

C3

P18

1.8

C4

P11

1.15

C5

A: Major

SCM

B: Medium

C: Minor

Supply Chain Management for Engineers

Case #4:

Turbine Failure list


during three years

Failure
classification
(Rule 80/20)
Top 4 failures
Based on this information,
classify & discuss these
items.

SCM

Part
Code

Number of
failures
(40%)

MTTR
(hour)
(60%)

P11

P12

15

P13

19

P14

11

14

P15

21

P16

12

12

P17

17

P18

10

P19

11

12

P20

Supply Chain Management for Engineers

Case #5:
Item Criticality is Very High
History for 2000:
Month #
1
2
3
4
5
6
7
8
9
10
11
12
Required:

Reorder Interval

Number of orders

EOQ

Safety stock

Demand rate

ROP
SCM

Lead time = LT = 2 month


Demand rate
140
150
155
140
155
145
150
140
160
140
145
150

Stock-Outs
0
0
44
0
0
50
0
0
35
0
55
0

Supply Chain Management for Engineers

Variable demand rate & Constant Lead Time


Item Criticality is Very High

Lead time = LT = 2 month

History for 2000:


Month #
Demand rate
Stock-Outs
1
140
0
2
150
0
3
155
44
4
140
0
D = 1770
5
155
0
6
145
50 Mean = 147.5
7
150
0
d = 6.9
8
140
0
9
160
35
10
140
0
11
145
55
12
150
0
Required:
Reorder Interval (>= 1.5 LT by experience) = 1.5 * 2 = 3 month
Number of orders = 12 / 3 = 4 orders
EOQ = 1770 / 4 = 442.5 = 500 unit
Safety stock= Z(LT d2 ) = 6 (2*47.61) = 59
unit
Demand rate = D / No. of periods = 1770/12 = 147.5
unit
ROP = d x LT + Safety Stock = 147.5 *2 + 59 = 354
unit
SCM
Supply Chain Management for Engineers

Case #6:
You manage a gas station:
Tank size = 8,000 gallon

(Max

Carrying Cost:
Fixed carrying cost = $5,000 / year
Variable carrying cost = $ 1/gallon/year
Order Cost:
Fixed order cost $100 / order
Variable order cost = $ 0.1/gallon
Shortage Cost:
Direct shortage cost rate = $ 0.1/gallon
Indirect shortage cost rate = $ 0.2/gallon
Current order quantity 6000 gallon
Standard order quantities are: 4000 or 6000 gallons
Lead time = (1 to 3) days (Uniform Dis.)
SCM

Supply Chain Management for Engineers

Demand History for 2007:


Open Inventory 8,000 gallon (1/1/2007)
Finish Inventory 5,000 gallon (31/12/2007)
Month
1
2
3
4
5
6
7
8
9
10
11
12

SCM

Actual Sales
34,000
29,000
28,000
28,000
35,000
24,000
35,000
26,000
29,000
24,000
28,000
25,000

Target W. days Actual W. days


30
29
28
28
30
30
30
29
30
28
30
30
30
30
30
30
30
29
30
30
30
30
30
28

Supply Chain Management for Engineers

Shortage
2,000
1,000
1,000
3,000
4,000
1,000
1,000
2,000
4,000
1,000
1,000
4,000

Calculate & Discuss the following:


1.
2.
3.
4.
5.
6.
7.

Average demand rate (gl/day)


Average stock out rate (gl/day)
Average shortage losses ($/day)
Current inventory cost
Sketch the current inventory transaction
Capacity utilization
Your analysis & recommendations

8. EOQ & SOQ


9. Planned No. of orders per year
10.Planned order cycle time
11.Planned reorder level
12.Planned service level
13.Planned inventory cost
14.Sketch the planned inventory transaction
15.How to manage your plan? Long term Continuous Improvement
SCM

Supply Chain Management for Engineers

Basic Tradeoffs:
(EOQ) increases:
Annual inventory
carrying cost also
increases

Annual cost

As order quantity

Minimum cost
reorder quantity

Total Costs
Carrying
Cost

Shortage
Cost

Annual ordering
cost decreases
Order/Set-up
Cost

Annual shortage
cost decreases
SCM

Size of order quantity

Supply Chain Management for Engineers

Demand History for 2007:


Open Inventory 8,000 gallon (1/1/2007)
Finish Inventory 5,000 gallon (31/12/2007)
Month Actual Sales Target days Actual days
1
34,000
30
29
2
29,000
28
28
3
28,000
30
30
4
28,000
30
29
5
35,000
30
28
6
24,000
30
30
7
35,000
30
30
8
26,000
30
30
9
29,000
30
29
10
24,000
30
30
11
28,000
30
30
12
25,000
30
28

Total
Average
SCM

345,000
28750

358
29.8

351
29.25

Shortage
2,000
1,000
1,000
3,000
4,000
1,000
1,000
2,000
4,000
1,000
1,000
4,000

25,000
2083

Supply Chain Management for Engineers

Required Dem.
36,000
30,000
29,000
31,000
39,000
25,000
36,000
28,000
33,000
25,000
29,000
29,000

370,000
30833

Annual Actual demand = 345,000 unit


Target working days = 358 day
Actual working days = 351 day
Annual Shortage = 25,000 unit
Ratio (25/370 = 6.8%)
Annual Required demand = 345,000 + 25,000 = 370,000 unit
1) Average demand rate = d =
Total annual demand / Actual working days
= 370000 /351 = 1054.1 = 1054 unit/day
2) Average stock out rate (gl/day) =
Annual shortage / Actual working days
= 25,000 / 351 = 71.2 = 71 unit/day
3) Annual shortage losses
Annual shortage * shortage cost rate
= 25000 * (0.1 + 0.2) = 7500 $ / year
Average shortage losses = 7500 / 351 = 21.4 $/day
SCM

Supply Chain Management for Engineers

4) Current Inventory Costs:

Carrying Cost = Fixed + Variable * Q/2


Ordering Cost = D/Q {Fixed + Variable * Q }
Shortage Cost = Annual shortage * shortage cost rate

Carrying Cost = 5,000 + 1 * 6000/2

Ordering Cost = (345,000/6000) *(100 + 0.1 * 6000}


= 57.5 * (100+600)
= 40,250 $ / year

Shortage Cost

= 8,000 $ / year

= 7500 $ / year

Current Inventory Costs = 8,000 + 40,250 + 7500


= 55,750 $/year
(Without material price)
SCM

Supply Chain Management for Engineers

5) Sketch the current inventory transaction

6) Capacity utilization =
Available Inventory limit / Maximum Inventory limit
Available Inventory limit = Q = 6000 unit
Capacity utilization = 6000/8000 = 75 %
Material utilization =
Used Material / Available Material
= 100% (shortage Zero Overstock)
SCM

Supply Chain Management for Engineers

Bench Marking (Reference indicators):


Shortage ratio

<5%

Shortage cost ratio

< 10

Capacity utilization

> 80%

Working efficiency = Actual days / Target days

> 99%

SCM

Supply Chain Management for Engineers

7) Your analysis & recommendations Change Management


Analysis:
Shortage unit ratio = 25,000 / 370,000 = 6.8 %
> 5 % Bad
Service level = 1 (Total shortage / Total demand) = 93 % >= 95.46
Shortage cost ratio = 7500 / 55750 = 13.5 %
< 10
Bad
Capacity utilization = 6000 / 8000 = 75 %
< 80% Normal
Working efficiency = Actual days / Target days = 351 / 358
= 98 %
< 99% Normal
Conclusion:
High shortage ratio (unit & cost) and No safety stock
Insufficient planning effort
Small tank
Recommendations:
Improve the current inventory system by using:
Demand forecasting tool
& Root cause analysis tool
Inventory planning tool (EOQ, Reorder level, safety stock)
Training programs (material planning, forecasting, cost analysis, ..)
In long term, Increase the tank size to 10,000 or 12,000 gallon
SCM

Supply Chain Management for Engineers

8) EOQ & SOQ


Carrying Cost = Fixed + Variable * Q/2
Ordering Cost = D/Q {Fixed + Variable * Q}
Shortage Cost = Annual shortage * shortage cost rate

= Ccf + Ccv * Q/2


= D/Q {Cof + Cov *Q}
= Neglect (planning)

TC = (Ccf + Ccv * Q/2) + (Cof * D/Q + Cov *D)


0 = 0 + Ccv /2 - Cof * D/Q2 + 0
EOQ = {2 Cof D / Ccv } *

EOQ = {2 * 100 * 370,000 / 1 } *


EOQ = {74,000,000} * = 8602 ~ 8000 unit
SOQ = 2 * 4000 = 8000 unit
9) Planned No. of orders per year =
D / SOQ = 370,000 / 8000 = 46.25 ~ 47 order
10) Planned order cycle time =
SOQ / D = 8000 / 370,000 = 8/370 year
* 365 day = 7.89 day ~ 8 day
SCM

Supply Chain Management for Engineers

11) Planned reorder level


Variable demand and variable lead time
R= d x LT + Safety Stock
Safety Stock = Z(LT 2 d2 + d 2 2LT )
= 3(2 2 131.52 + 1054 2 12 ) = 3,003 unit
d = 1054

LT = (1+3)/2 = 2 day

d = 131.5 unit

LT = 1 day

R= 1054 x 2 + 3003 = 5111 = 5000 unit

12) Planned service level


Service level = 99.73 % at Z = 3
Shortage ratio = 100 99.73 = 0.27 %

Shortage ratio (at Z=2)


SCM

<= 4.54 %

Supply Chain Management for Engineers

13) Planned Inventory Costs:

Carrying Cost = Fixed + Variable * SOQ/2


Ordering Cost = No. of orders (Fixed + Variable * SOQ)
Shortage Cost = Annual shortage * shortage cost rate

Carrying Cost = 5,000 + 1 * 8000/2 = 9,000 $/year


Ordering Cost = 47 (100 + 0.1 * 8000) = 47 * 900 = 42,000 $/year
Shortage ratio = 100 99.73 = 0.27 % (at Z=3)
Expected Annual shortage = 0.0027 * 370,00 = 999 unit / year
Expected Shortage Cost = 999 * (0.1 + 0.2) = 89.91 = 90 $/year

Planned Inventory Costs = 9,000 + 42,000 + 90


= 51,090 $/year
Note:
Current Inventory Costs = 8,000 + 40,250 + 7500 = 55,750 $/year
Cost Saving = 4660 $/year = 8.4 %
SCM
Supply Chain Management for Engineers

14) Sketch the planned inventory transaction

Quantity on-hand
plus on-order

Max = 8000 unit


Q=
8000
Reorder
point, R
SS
Safety Stock = SS = 3000 unit
0

LT =2

Order
Placed

Order
Received

LT =2

Order
Placed

Time
Order
Received

The reorder point = R = SS + d(LT) = 5000 unit


SCM

Supply Chain Management for Engineers

9-22

15) How to manage your plan


Continuous Review
Standard forms & reports
Data Documentation
Training Program
Motivation system
Preventive maintenance program

SCM

Supply Chain Management for Engineers

Case #7 : Gas Station


You manage a gas station:
Tank size = 10,000 gallon (underground tank)
Annual tank cost = $50,000
Demand rate = 1,000 gallon/day
Demand standard deviation = 50
Order cost $100 / order
Supplier: Standard order quantity is 3000, 4000, 5000, or 6000 gallons.
Average lead time = 2 days (Certain)
Calculate & Discuss the following:
1. EOQ & SOQ
2. No. of orders per year
3. Order cycle time
4. Safety Stock
5. Reorder level
6. Annual Inventory Cost
7. Sketch the inventory transaction
8. Is the tank larger than you need?
SCM

Supply Chain Management for Engineers

Case #8 : Gas Station


You manage a gas station:
Tank size = 10,000 gallon (underground tank)
Annual tank cost = $50,000
Order cost $100 / order
Standard order quantity is 3000, 4000, 5000, or 6000 gallons.
Average lead time = 2 days (Certain)
Average weekly demand:
Sat. Sun. Mon. Tu.
W.
Th.
Fr.
900 1500 1200 1000 1300 1500 800
Calculate & Discuss the following:
1. EOQ & SOQ
2. No. of orders per year
3. Order cycle time
4. Safety Stock
5. Reorder level
6. Annual Inventory Cost
7. Sketch the inventory transaction
8. Is the tank larger than you need?
SCM
Supply Chain Management for Engineers

Case #9 : Gas Station


You manage a gas station:
Tank size = 10,000 gallon (underground tank)
Annual tank cost = $50,000
Demand rate = 1,000 gallon/day
Demand standard deviation = 50
Fixed order cost $100 / order
Variable order cost = $ 0.1 /gallon
Standard order quantity is 3000, 4000, or 5000 gallons.
Average lead time = 2 days (Certain)
Calculate & Discuss the following:
1. EOQ & SOQ
2. No. of orders per year
3. Order cycle time
4. Safety Stock
5. Reorder level
6. Annual Inventory Cost
7. Sketch the inventory transaction
8. Is the tank larger than you need?
SCM
Supply Chain Management for Engineers

Case #10 : Gas Station


You manage a gas station:
Tank size = 10,000 gallon (underground tank)
Fixed carrying cost = $5,000 / year
Variable carrying cost = $ 1/gallon/year
Demand rate = (500 to 1,500) gallon/day
Fixed order cost $100 / order
Variable order cost = $ 0.1 /gallon
Standard order quantity is 3000, 4000, 5000, or 6000 gallons.
Average lead time = (1 to 3) days
Calculate & Discuss the following:
1. EOQ & SOQ
2. No. of orders per year
3. Order cycle time
4. Safety Stock
5. Reorder level
6. Annual Inventory Cost
7. Sketch the inventory transaction
8. Is the tank larger than you need?
SCM
Supply Chain Management for Engineers

Case #11 : Gas Station


You manage a gas station:
Tank size = 10,000 gallon (underground tank)
Open inventory level = 8,000 gallon
initial level
Fixed carrying cost = $5,000 / year
Variable carrying cost = $ 1/gallon/year
Demand rate = (500 to 1,500) gallon/day
Fixed order cost $100 / order
Variable order cost = $ 0.1 /gallon
Standard order quantity is 3000, 4000, 5000, or 6000 gallons.
Average lead time = (1 to 3) days
Calculate & Discuss the following:
1. EOQ & SOQ
2. No. of orders per year
3. Order cycle time
4. Safety Stock
5. Reorder level
6. Annual Inventory Cost
7. Sketch the inventory transaction
8. Is the tank larger than you need?
SCM
Supply Chain Management for Engineers

Case #12 :
You manage a gas station:
Tank size = 10,000 gallon
Fixed carrying cost = $5,000 / year
Variable carrying cost = $ 1/gallon/year
Fixed order cost $100 / order
Variable order cost = $ 0.1/gallon
Standard order quantity is:
3000, 4000, 5000, or 6000 gallons.
Average lead time = (1 to 3) days
Uniform distribution

Calculate & Discuss the following:


1. EOQ & SOQ
2. No. of orders per year
3. Order cycle time
4. Safety Stock
5. Reorder level
6. Annual Inventory Cost
7. Sketch the inventory transaction
8. Is the tank larger than you need?
SCM

Demand History for 2007:


Month Demand Working days
1
34,000
25
2
29,000
25
3
28,000
25
4
28,000
25
5
35,000
25
6
24,000
25
7
35,000
25
8
26,000
25
9
29,000
25
10
24,000
25
11
28,000
25
12
25,000
25

Supply Chain Management for Engineers

Material Requirement Planning


(MRP)

SCM

Supply Chain Management for Engineers

Material Requirement Planning (MRP)


MRP is a scientific technique, concerned with Planning,
Organizing & Control of flow of materials, from their initial
purchase to destination.
To get: 6 Rights
1. The Right quality
2. Right quantity
3. At the Right time
4. At the Right location
5. For the Right cost
6. From the Right supplier
SCM

Supply Chain Management for Engineers

Materials Requirements Planning (MRP)

Dependent demand
Dependent Inventory Model
SCM

Supply Chain Management for Engineers

Bill of Material is a structured list of components of a product

Power Train

Motor
SCM

Gear

Chassis

Motorcycle

Exhaust

Front
Wheel

Rear
Wheel

Frame

Supply Chain Management for Engineers

Brake

Master
Production
Schedule
(MPS)

MRP Model

Product
Structure
Record
(BOM)

Material
Requirement
Planning
(MRP)

Inventory
Status
Records

Purchase &
Production
Plans

Work
orders
SCM

Purchase
orders

Rescheduling
notices

Supply Chain Management for Engineers

Elements of MRP
Inputs
Service-Parts
Orders and
Forecasts

Inventory
Transaction Data

Inventory
Status File

Order Changes
Order
Planned
Order
Schedule

Master
Production
Schedule
Bill of
Materials File
SCM

Outputs

MRP
System

Planning
Report
Performance
Exception
Reports

Supply Chain Management for Engineers

MRP Structure
Data Files
BOM

Output Reports
MRP by
period
report

Master
production
schedule

MRP by
date
report

Lead times
(Item master file)

Planned
order report

Inventory data

Purchasing data

Material
requirement
planning
programs
(computer and
software)

Purchase advice

Exception reports
Order early or late
or not needed
Order quantity
too small or too
large

SCM

Supply Chain Management for Engineers

MRP Formulae
Available = On-hand - Safety stock Allocated
On-hand is inventory physically present
Allocated is inventory reserved for special orders
On-hand = Prior period's on-hand + Scheduled receipts
Net requirement = Gross requirement - Available

SCM

Supply Chain Management for Engineers

Net Requirements Plan

The logic of net requirements


Gross
requirements + Allocations
Total requirements

On
Scheduled
+
hand
receipts

Net
= requirements

Available inventory
SCM

Supply Chain Management for Engineers

10) Lot sizing techniques used in MRP systems

Lot-for-lot (L4L) most used


Economic order quantity (EOQ)
Period order quantity (POQ)

SCM

Supply Chain Management for Engineers

Lot-for-lot (L4L) example

Period

Net requirements

35

10

Planned order

35

10

Total

40

20

10

30

150

40

20

10

30

150

(Assume LT)

The L4L technique:


Minimizes carrying costs
Is certainly the best method for
- highly discontinuous demand
- expensive purchased items
SCM

Supply Chain Management for Engineers

EOQ example
Setup cost, S = $100
Unit price, C = $50
Holding costs, HR = .24 per annum
HP = .02 per period
Annual demand, D = 200
Q = (2DS / CHR)1/2 = 58
Period

Net requirements

35

10

Planned orders

58

Remnants

23

SCM

40

20

10

30

58
13

13

31

10

58
31

11

54

Supply Chain Management for Engineers

24

24

Period order quantity example


Technique:
1. Compute EOQ to determine number of orders per year
2. Divide number of periods in one year by number of orders to get
ordering interval
EOQ = 58
Number of periods in one year = 12
D = 200
200 / 58 = 3.4 (orders per year)
12 / 3.4 = 3.5 (ordering interval)

Period

Net requirements

35

10

Planned orders

85

SCM

4
40

20

10 30

35

Supply Chain Management for Engineers

Total
150

30

Case Study :
A Blast em, dude audio kit (A) is made of 2 small tweeter
boxes (B) and 3 large woofer boxes (C). Each tweeter is made
of two speakers (D) and two shipping boxes (E). Each woofer
consists of two boosters (F) and two shipping boxes (E). Each
booster is made of one circuit board (G) and one speaker (D).

Lead times
A
1 wk.
B
2
C
1
D
1
E
2
F
3
G
2

Bills of Material (BOM):


Level
Product structure for Awesome (A)
A
0

E(2)

2
3

C(3) Std. 12 Speaker kit w/

B(2) Std. 12 Speaker kit

D(2)

amp-booster

F(2) Std. 12 Speaker

E(2)
Packing box and
installation kit of wire,
bolts, and screws

booster assembly

G(1)

D(2)

Amp-booster
12 Speaker

12 Speaker

Assume we need 50 Blast em, dude speaker kits in eight weeks.


We need to calculate when and how many of each component we need to start making.
SCM

Supply Chain Management for Engineers

Called an exploded product structure.


Items above a level are PARENTS;
items below a level are COMPONENTS or CHILDREN.

4 levels here.
A

Level 0
2B

level 1
level 2
level 3
SCM

2D

3C
2E

2F
G

2E
D

Supply Chain Management for Engineers

Low-level coding
Necessary for identical items existing at diff. levels in
the BOM.
An item is coded at the lowest level at which it is
used.

Level 0
2B

level 1
level 2
level 3
SCM

2D

3C
2E

2F
G

2E
D

Supply Chain Management for Engineers

MRP: worked example:


Product Structure Thinking Challenge
The demand for product A is 50.
How many of each component is needed to satisfy demand?

A
B(2)

C(3)
E(3)

D(2)
SCM

E(1)

F(2)
G(1)

Supply Chain Management for Engineers

D(2)

Product Structure Solution

50

50 x 2 = 100

50 x 3 = 150

B(2)

C(3)
E(3)

D(2)
100 x 2 = 200

SCM

100 x 3 =
300

E(1)
150 x 1 =
150

150 x 2 =
300

F(2)
G(1)

300 x 1 = 300

Supply Chain Management for Engineers

D(2)
300 x 2 = 600

Product A
Part B: 2 x number of As =
Part C: 3 x number of As =
Part D: 2 x number of Bs
+ 2 x number of Fs =
Part E: 2 x number of Bs
+ 2 x number of Cs =
Part F: 2 x number of Cs =
Part G: 1 x number of Fs =

SCM

50
(2)(50) =
(3)(50) =

100
300

(2)(100) + (2)(300) = 800


(2)(100) + (2)(150) = 500
(2)(150) =
300
(1)(300) =
300

Supply Chain Management for Engineers

Time-Phased Product Structure


Must have D and E
completed here so
production can
begin on B

Start production of D
1 week

2 weeks to
produce

2 weeks

2 weeks

1 week

1 week

2 weeks

3 weeks

1 week

SCM

4
5
Time in weeks

Supply Chain Management for Engineers

Figure 14.4

Net Requirements Plan

SCM

Supply Chain Management for Engineers

Net Requirements Plan

SCM

Supply Chain Management for Engineers

Case :
Clipboard
Top clip (1)

Bottom clip (1)

Pivot (1)
Finished clipboard

Pressboard
(1)

Top Clip
(1)
SCM

Rivets (2)

Pressboard (1)

Product Structure:

Spring (1)

Level 0

Clipboard

Clip
Assembly (1)

Bottom Clip
(1)

Rivets
(2)

Pivot
(1)

Level 1

Spring
(1)

Supply Chain Management for Engineers

Level 2

Case :
Bill-of-Material - Product Structure Tree
Bicycle(1)
P/N 1000
Handle Bars (1)
P/N 1001

Frame Assy (1)


P/N 1002

Wheels (2)
P/N 1003

SCM

Frame (1)
P/N 1004

Supply Chain Management for Engineers

Case :

SCM

Bill of Materials

Supply Chain Management for Engineers

Case :

Bill of Materials

Back
legs

SCM

Front
legs

Back slats

Seat cushion

Leg supports

Seat-frame
boards

A
Ladder-back chair

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Demand Forecasting

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Procurement Management

SCM

Supply Chain Management for Engineers

Typical Supply Chain for a Manufacturer


Delivery

Production

Procurement

Sales

Inventory

One man show, everything is connected

Supplier
Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

Supplier
SCM

Supply Chain Management for Engineers

Business Operations:
Early Stage, with independent functions

Sales

Inventory
Barrier

SCM

Barrier

Delivery

Production

Procurement

Barrier

Barrier

Barrier

Supply Chain Management for Engineers

Barrier

Input
Sales

Production

Delivery

Output

No integration across functions


SCM

Supply Chain Management for Engineers

Objective
Input
Delivery

Sales
Production

Output

Functional integration
SCM

Supply Chain Management for Engineers

Internal Functional Integration

Material
Management

Barrier
SCM

Production
Manage
ment

Barrier

Logistics
Manage
ment

Barrier

Supply Chain Management for Engineers

Barrier

Internal Integration

Material
Management

Production
Management

Logistics
Management

Barrier
SCM

Barrier
Supply Chain Management for Engineers

Procurement Cycle

SCM

Supply Chain Management for Engineers

1. Procurement
Strategy

2. Supplier
Identification

7. Supplier
Review

Procurement
Cycle

3. Establish
Supplier
Relationship

4. Finalize
Business
Negotiations

6. Supplier
Development
5. Monitor
Supplier
Performance

SCM

Procurement Strategy
Platform
Company
Commodity
Product
Supplier Identification
Search based on Strategy
Strategic, Integrated, Tactical
Selection Process
Classification
Desire to do Business with them
Establish Supplier Relationship
Capabilities
Commitment
Qualification
Audits
Finalize Business Negotiations
Contracts
POs
1st Articles
Logistics
Monitor Supplier Performance
QDC Metrics
Performance Scorecards
Supplier Development
QDC Metrics
DBS Tools
Continuous Cost Improvement
Process
Supplier Review
Review Process
Basic Reviews
Advanced Reviews
Reporting Performance

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Organizational Levels in
the Procurement Process

SCM

Supply Chain Management for Engineers

Stock Overview

SCM

Supply Chain Management for Engineers

Logistics is a part of supply chain process

Materials
management

Supplier

Market
management

Manufacturer

Customer

Logistics Management

SCM

Supply Chain Management for Engineers

Supplier Identification
Risk Sharing / Trust

Present Snapshot

High
Outsourced
Partnerships

60%

Aggregated
Requirements

30%

Strategic

Integrated

Buy-Sell

10%

Tactical

Low
SCM

Supply Chain Management for Engineers

Value Analysis
Offers

1.
2.
3.

Procurement

Project

Supplier & Vendor

Main Contractor / Contractor / Subcontractor


1.
2.
3.
4.
5.

Price
Technical Specs
Lead Time

Price
Technical Specs
Duration
Management Approach
Past Experience

1.
2.
3.
4.
5.

Price
Technical Specs
Duration
Grade (1 to 7)
Past Experience

Relative Weight
Criticality Level (A, B, C, D) Safety, Process Effect, or Daily Rate
A Super Critical
SCM

B Critical

C Medium

Supply Chain Management for Engineers

D Normal

Criticality Analysis
Safety
Effect

Process
Effect

Major Effect

or

Financial
Effect

Minor Effect

(A) Super Critical,


(B) Critical,
(C) Medium,
(D) Normal.
Local effect, System effect, Plant effect
SCM

Supply Chain Management for Engineers

Spare Parts Criticality Analysis

Criticality

(System level)

HSE Effect

Major
(A)

Centrifugal Pump

Minor
Process
Effect

Major
(B)

Drain system

Water system

Crud oil system

Steam system

Fire-fighting system

Critical Equipment (Planned)


Minor

Non-Critical
Equipment

Standby
Availability
Without
(C)
SCM

With
(D)

Supply Chain Management for Engineers

Project Criticality Analysis

- Safety effect
- Process effect
- Daily Rate ($/day)

Safety Effect

Major
(A)

Minor

Critical Project

Process
Effect
Major
(B)
Minor

Non-Critical
Project

Daily Rate
High
(C)
SCM

Low
(D)

Supply Chain Management for Engineers

Class (C)
Parameter
1.

Price

20

2. Technical Specs
3. Duration

SCM

Weight (point)
65%

4
(Fixed) ----

4. Grade (1 to 7)

5. Past Experience

6. Reputation

Supply Chain Management for Engineers

Supplier or Vendor Evaluation


Relative Weight Point Evaluation System:
Total Index = Price Points * F1 + Technical Points * F2
Max. Total Index
Most Common:
Level
F1= Price or Cost
F2= Technical
A= Catastrophic

A
10
90

Criticality Level
B
C
D
20
35
50
80
65
50
or Min. Cost Rule

B = Critical

C= Medium

D= Normal

Technical Relative Weight


SCM

Supply Chain Management for Engineers

Contractor Evaluation Project Duration

Total Index
Price

Technical
Approach

Management
Approach

Past
Performance

A 10
B 30
C 50
D 70

50
40
30
20

20
15
10
5

20
15
10
5

A= Catastrophic

B = Critical

C= Medium

D= Normal

Total Index = PR*F1 + TA* F2 + MA*F3 + PP*F4


PR, TA, MA & PP Point system (1 to 10)
SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Main Requirements:
Technical Proposal
Price Proposal
Management Approach Report
Past Experience Report
Submit a hard copy original with the signatures and one
copy for each
SCM

Supply Chain Management for Engineers

Case Study:

Power Station Project


A Catastrophic

Total Index
Price

Technical
Approach

Management
Approach

Past
Performance

A 10

50

20

20

Total Index = PR*0.1 + TA* 0.5 + MA*0.2+ PP*0.2


PR, TA, MA & PP Point system (1 to 10)
SCM

Supply Chain Management for Engineers

Case Study:

Gas Pipe Line Project


A Catastrophic

Total Index
Price

Technical
Approach

Management
Approach

Past
Performance

A 10

50

20

20

Total Index = PR*0.1 + TA* 0.5 + MA*0.2+ PP*0.2


SCM

Supply Chain Management for Engineers

Case Study:

Oil Pipe Line Project


B Critical

Total Index
Price

Technical
Approach

Management
Approach

Past
Performance

B 30

40

15

15

Total Index = PR*0.3 + TA* 0.4 + MA*0.15+ PP*0.15


SCM

Supply Chain Management for Engineers

Case Study:

Water Pipe Line Project


C Medium

Total Index
Price

Technical
Approach

Management
Approach

Past
Performance

C 50

30

10

10

Total Index = PR*0.5 + TA* 0.3 + MA*0.1+ PP*0.1


SCM

Supply Chain Management for Engineers

Case Study:

Office Building Project


D Normal

Total Index
Price

Technical
Approach

Management
Approach

Past
Performance

D 50

30

10

10

Total Index = PR*0.5 + TA* 0.3 + MA*0.1+ PP*0.1


SCM

Supply Chain Management for Engineers

Parameter Description:
Parameter

Technical
Approach

Management
Approach

Past
Performance

Evaluation (Scale 010 )


6
8

10

Bad

Accepted

Good

Very Good

6 Minimum Requirements
SCM

Supply Chain Management for Engineers

Management Approach Evaluation:


Parameter

Weight

0
Bad

Organization
Structure

Project Manager
Experience

Project Manager
is Certified

Project Team
Experience

Presentation On
Management
Approach

Evaluation
6
8
Accepted

Good

10
Very Good

6 Minimum Requirements
SCM

Supply Chain Management for Engineers

Past Performance Evaluation


Parameter

Weig
ht

0
Bad

Experience

None

Field

None

Scale

None

Evaluation
6
8
Accepted

Good

10
Very Good

6 Minimum Requirements
SCM

Supply Chain Management for Engineers

Technical Approach Evaluation


Parameter

Weight

0
Bad

Evaluation
6
8
Accepted

Good

10
Very Good

6 Minimum Requirements
SCM

Supply Chain Management for Engineers

Honda Insight

Toyota Prius

Honda Civic Hybrid


Toyota Scion XA

Honda Civic

VW Deisel

Toyota Corolla
SCM

Toyota Echo

Toyota Scion XB

Toyota Celica

Supply Chain Management for Engineers

Business Expenditure of R&D in Japan


Toyota
6%

Matsushita
5% Sony
5% Honda
4%
Nissan
3%

Rest of firms
44%

Hitachi
3%
Toshiba
3%
NEC
3%
Other top 30
firms
19%
SCM

Cannon
2%

NTT
3%

Supply Chain Management for Engineers

Supplier / Vendor
Case Study:
Assume you have to buy 10 new similar car for oil company, and the
offers are as follows:
Item
Price (1000 LE)
Model / Year

BMW

Merc

Honda

Matrix

Opel

Toyota

260

400

140

100

130

140

Lancer Chery
110

50

2008

Based on this information, discuss & select the best Car.


By Experience Toyota
But there is no evidence (Ref.?)

Incomplete Information
Technical evaluation Policy?
SCM

Supply Chain Management for Engineers

Case Study:
Assume you have to buy 10 new similar car for oil company, and the
offers are as follows:
Item
Price (1000 LE)

BMW

Merc

Honda

Matrix

Opel

Toyota

260

400

140

100

130

140

110

50

100

92

82

Model / Year
By Experience
Technical Weight %

Lancer Chery

2008

110

120

98

90

97

Based on this information, discuss & select the best Car.


Toyota

But there is no evidence (Ref.?)

Technical Evaluation Policy?


SCM

Supply Chain Management for Engineers

Case Study:
Assume you have to buy 10 new similar car for oil company, and the
offers are as follows:
Item
Price (1000 LE)
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style
Model / Year

BMW
260

Merc
400

Honda
140

9
10
9
10
10
10

10
10
9
10
10
10

9
8
9
8
9
9

Matrix Opel
100
130
Ref. # 123
7
9
7
8
9
9
8
8
7
8
7
9
2008

Toyota
140
8
8
10
9
8
9

Lancer Chery
110
50
7
7
8
8
8
7

5
6
9
4
7
5

Incomplete Information
Relative weights?

Equal weight?

Max. Budget ?
Based on this information, discuss & select the best Car.
SCM

Supply Chain Management for Engineers

Case Study:
Assume you have to buy 10 new similar car for oil company, and the offers are as follows:
Item
BMW Merc Honda Matrix Opel Toyota Lancer Chery
Price (1000 LE)
260
400
140
100
130
140
110
50
Technical par.
Safety/Stability
9
10
9
7
9
8
7
5
10
Options
10
8
7
8
8
7
6
Fuel consumption
9
9
9
9
9
10
8
9
Maintainability
10
10
8
8
8
9
8
4
Engine Capacity
10
10
9
7
8
8
8
7
Brand & Style
10
10
9
7
9
9
7
5
Model / Year
2008

Weight matrix (relative priority from 1 to 3):


Parameter

Safety

Options

Weight

Fuel
con.
3

Maintainability
3

Engine
capacity
1

Brand &
Style
1

Technical weight 80%


Price weight 20%
Evaluation rules:
Maximum budget = 2,000,000 LE
Accepted Technical points > 7
Based on this information, discuss & select the best Car.
SCM

Supply Chain Management for Engineers

Item
Price (1000 LE)
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style

BMW
260

Merc
400

Honda
140

Matrix
100

Opel
130

Toyota
140

9
10
9
10
10
10

10
10
9
10
10
10

9
8
9
8
9
9

7
7
9
8
7
7

9
8
9
8
8
9

8
8
10
9
8
9

Lancer Chery
110
50
7
7
8
8
8
7

5
6
9
4
7
5

Weight matrix (relative priority from 1 to 3):


Parameter

Safety

Options

Weight

Fuel
con.
3

Maintainability
3

Engine
capacity
1

Brand &
Style
1

Technical weight 80%


Price weight 20%
Evaluation rules:
Maximum budget = 200,000 LE/car
Accepted Technical points > 7
Based on this information, discuss & select the best Car.
SCM

Supply Chain Management for Engineers

Points

Item
Price (1000 LE)

Price points
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style

100
Weight
3
2
3
3
1
1

Tech. points
100
Proposal Evaluation:
0.5 *Tech. +0.5 * Price
0.6 *Tech. +0.4 * Price
0.7 *Tech. +0.3* Price
0.8 *Tech. +0.2 * Price
SCM

Honda
140

Opel

Toyota
140

130/140
= 93

130
130/130
=100

130/140
=93

9
8
9
8
9
9
112

9
8
9
8
8
9
111

8
8
10
9
8
9
114

112/114
= 98.2

111/114
= 97.4

114/114
=100

95.8
95.6
96.6
95.1

98.7
98.7
98.2

96.5
96.5
97.8

97.9

98.6

Supply Chain Management for Engineers

Conclusion: One Page Management


1) Subject Description:
Buy 10 new similar car Model/year 2008

2) Analysis:
Item

Accepted offers

Rejected offers

Honda

Opel

Toyota

Price (1000LE)

140

140

Technical index %

98.2

130
97.4

Value Index %

95.1 %

97.9 %

98.6 %

100

Over budget
BMW
Merc.

Technical
Matrix
Lancer
Chery

Strength
points

Weakness
points

3) Recommendation:
SCM

The best options are:


1) Toyota
2) Opel

Supply Chain Management for Engineers

3) Honda

Technical Evaluation Policy


Scope of work Buy a Car
Technical Parameters:
Scale ( 0 10 )
Scale

Parameter
Safety/Stability

10

Options

10

Fuel consumption

10

Maintainability

10

Engine Capacity

10

Brand & Style

10

Rejected

Fair

Good

Excellent

10

Specific
Measurable

Relative Weights:
Parameter

Safety

Options

Weight

SCM

Fuel
con.
3

Maintainability
3

Engine
capacity
1

Supply Chain Management for Engineers

Brand &
Style
1

Case Study: Technical evaluation 0, 6, 8, 10


Assume you have to buy 10 new similar car for oil company, and the offers are as follows:
Item
BMW Merc Honda Matrix Opel Toyota Lancer Chery
Price (1000 LE)
260
400
140
100
130
140
110
50
Technical par.
Safety/Stability
8
10
8
6
8
8
6
0
10
Options
10
8
6
8
8
6
6
Fuel consumption
10
10
10
10
10
10
8
8
Maintainability
10
10
8
8
8
10
8
0
Engine Capacity
10
10
10
8
8
8
8
8
Brand & Style
10
10
8
8
8
8
6
0
Model / Year
2008

Relative Weight matrix (relative priority from 1 to 3):


Parameter

Safety

Options

Weight

Fuel
con.
3

Maintainability
3

Engine
capacity
1

Brand &
Style
1

Technical weight 80%


Price weight 20%
Evaluation rules:
Maximum budget = 2,000,000 LE
Accepted Technical points > 6
Based on this information, discuss & select the best Car.
SCM

Supply Chain Management for Engineers

Item
Price (1000 LE)
Technical par.
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style
Model / Year

BMW
260

Merc
400

Honda
140

Matrix
100

8
10
10
10
10
10

10
10
10
10
10
10

8
8
10
8
10
8

6
6
10
8
8
8

Opel
130

8
8
10
8
8
8
2008

Toyota
140

Lancer Chery
110
50

8
8
10
10
8
8

6
6
8
8
8
6

0
6
8
0
8
0

Weight matrix (relative priority from 1 to 3):


Parameter

Safety

Options

Weight

Fuel
con.
3

Maintainability
3

Engine
capacity
1

Brand &
Style
1

Technical weight 80%


Price weight 20%
Evaluation rules:
Maximum budget = 2,000,000 LE
Accepted Technical points > 6
Based on this information, discuss & select the best Car.
SCM

Supply Chain Management for Engineers

Points

Item
Price (1000 LE)

Price points
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style

Toyota
140

130/140
= 93

130/140
=93

8
8
10
8
10
8

8
8
10
8
8
8

8
8
10
10
8
8

112

110

116

100

112/116=
96.5

110/116=
94.8

116/116=
100

100
100

93
96.5

100
94.8

100

95.80

95.84

93
100
98.6

100

Tech. points

SCM

Opel

130
130/130
=100

R. weight
3
2
3
3
1
1

Proposal Evaluation:
Price points
Tech. points
0.8 *Tech. +0.2 * Price

Honda
140

Supply Chain Management for Engineers

Conclusion: One Page Management


1) Subject Description:
Buy 10 new similar car Model/year 2008

2) Analysis:
Item

Accepted offers

Rejected offers

Honda

Opel

Toyota

Price (1000LE)

140

140

Technical index %

96.5

130
94.8

Over budget

Technical
Matrix
Lancer
Chery

BMW
Merc.

100

Value Index %
Strength
points

Weakness
points

3) Recommendation:
SCM

The best options are:


1)

2)

Supply Chain Management for Engineers

3)

Contractor Evaluation Policy


Scope of work Project xxxxx
Technical Parameters:
Scale ( 0 10 )
Scale

Parameter
Price $M

10

Technical Approach

10

Management Approach

10

Past Performance

10

Rejected

Fair

Good

Excellent

10

Specific
Measurable

6 Minimum Requirements

SCM

Supply Chain Management for Engineers

Project / Contractor
Case Study:

Project overview: 7 MW Power Station for X-Petroleum Site

5 Proposals
B
C

Price $M

7.0

7.5

8.0

9.0

10.0

Technical
Approach

8/10

8/10

8/10

10/10

10/10

Management
Approach

6/10

6/10

8/10

8/10

10/10

Past
Performance

0/10

6/10

8/10

8/10

10/10

Parameter

Evaluation rules:

6 Minimum Requirements

Maximum budget = $ 9 M

Accepted parameters > = 6/10

Based on this information, discuss & select the best proposal.


SCM
Supply Chain Management for Engineers

Management Approach:
0
Bad
CRITERION
1) Organisation Structure
2) Leader Skills (CVs)
3) Worker Skills (CVs)
4) QC/QA Management
5) Safety Management
6) Resources Mobilisation
7) Documentation Quality
8) Quality Manual
9) Quality of the Co-ordination
10) Quality of the Support Action
Overall score 100 Points
10 Points
SCM

6
Fair

8
Good

10
Very Good

A
6
6
10
8
6
6
6
6
0
6
60

B
8
6
6
6
6
6
6
10
0
6
60

C
6
8
10
8
8
8
8
8
8
8
80

D
10
8
8
8
8
6
10
8
6
8
80

E
10
10
10
10
10
10
10
10
10
10
100

10

Supply Chain Management for Engineers

Past Experience:
0
Bad
Non

SCM

6
Fair
Ok
but not in the
same field
Different Scale

8
Good
Ok
& in the same
field
Different Scale

10
Very Good
Ok
& Petroleum
contractor
Same Scale

Supply Chain Management for Engineers

Project overview: 7 MW Power Station


Parameter

Price $M

7.0

7.5

Technical
Approach

8/10

Management
Approach
Past
Performance

Proposals
C

8.0

9.0

10.0
(over $)

8/10

8/10

10/10

10/10

6/10

6/10

8/10

8/10

10/10

0/10
(not)

6/10

8/10

8/10

10/10

Evaluation rules:
Maximum budget = $ 9 M

Accepted parameters > = 6/10

Based on this information, discuss & select the best proposal.


SCM

Supply Chain Management for Engineers

Relative Weight :

Power Station Project


A Catastrophic

Total Index
Price

Technical
Approach

Management
Approach

Past
Performance

A 10

50

20

20

Total Index = PR*0.1 + TA* 0.5 + MA*0.2+ PP*0.2


All indicators (PR, TA, MA & PP) from (1 to 10) Scale Relative
SCM

Supply Chain Management for Engineers

Project overview: 7 MW Power Station


Parameter

Proposals
C

Price $M

Best price 10/10


10*7.5/7.5 = 10

10*7.5/8.0=
9.375

10*7.5/9.0=
8.333

Technical
Approach

8/10

8/10

10/10

Management
Approach

6/10

8/10

8/10

Past
Performance

6/10

8/10

8/10

Total Index

Total Index = PR*0.1 + TA* 0.5 + MA*0.2+ PP*0.2


SCM

Supply Chain Management for Engineers

Project overview: 7 MW Power Station


Parameter

Proposals
C

Price $M

10

9.375

8.333

Technical
Approach

10

Management
Approach

Past
Performance

Total Index

7.4

8.14

9.03
The best offer

Total Index = PR*0.1 + TA* 0.5 + MA*0.2+ PP*0.2


SCM

Supply Chain Management for Engineers

Conclusion: One Page Management


1) Subject Description:

2) Analysis:
Item

Description

Strength
points
Weakness
points

3) Recommendation:

SCM

Supply Chain Management for Engineers

Exam: Assume you have to buy a new crane 300 ton, and the offers are as follows:
Item
A
B
C
D
E
Initial cost (M $)
1.5
1.8
1.4
1.0
1.2
Life, year
12
12
10
8
10
Salvage (% initial cost)
15%
15%
12%
10%
12%
Technical parameters
Safety/Stability
10
10
8
6
8
Options
8
10
8
6
8
Fuel consumption
10
10
10
8
8
Maintainability
10
10
8
8
8
Engine Type
10
10
8
6
8
Brand & Style
8
10
8
0
0
Weight matrix (relative priority from 1 to 4):
Parameter
Safety
Options
Fuel
con.
Weight
4
2
2
Evaluation rules: Maximum budget = 1.5 M$
Technical weight 80%

Maintainability
3

Engine
type
2

Brand &
Style
1

Accepted Technical points > = 6


Price weight 20%

Based on this information, discuss & select the best crane.


SCM

Supply Chain Management for Engineers

B is over budget

D,E are technical rejected (Brand & style <6)


Points

Item
Annual Depreciation (SL)

Price points
Technical parameters
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Type
Brand & Style

0.1063

0.1232

100

100

86.24

4
2
2
3
2
1

10
8
10
10
10
8
134

8
8
10
8
8
8
116

100

100
100

86.57
86.5

Tech. points
0.8 *Tech. +0.2 * Price

D E

Offer (A) is the best one


SCM

Supply Chain Management for Engineers

Or

B is over budget

D,E are technical rejected (Brand & style <6)


Points

Item
Annual Present Worth

Price points
Technical parameters
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Type
Brand & Style

D E

100

4
2
2
3
2
1

10
8
10
10
10
8
134

8
8
10
8
8
8
116

100

100

86.57

Tech. points
0.8 *Tech. +0.2 * Price

Offer (A) is the best one


SCM

Supply Chain Management for Engineers

Conclusion: One Page Management


1) Subject Description:
Buy a crane 300 ton

2) Analysis:
Item

Accepted offers

Rejected offers
Over budget

Technical

Initial cost (M$)


Technical index %
Total Value Index %
Strength Points

Weakness Points

3) Recommendation:
SCM

The best options are:


1) A

2) C

Supply Chain Management for Engineers

Conclusion: One Page Management


1) Subject Description:
Buy a crane 300 ton

2) Analysis:
Item

Accepted offers

Initial cost (M$)


Technical index %
Total Value Index %

A
1.5

C
1.4

100
100

86.57
86.5

Rejected offers
Over budget

Technical

B
1.8 M$

D,E
(0) Brand
& Style

Strength Points

Weakness Points

3) Recommendation:
SCM

The best options are:


1) A

2) C

Supply Chain Management for Engineers

Enterprise Resource Planning


ERP

SCM

Supply Chain Management for Engineers

Example: order-to-delivery of copy machine


Customer

Sales rep.

Supplier

Order
Customer info
Quote

ERP

Purchase order

Plant
Production order

Accounting

General ledger
SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Value Chain Analysis

SCM

Supply Chain Management for Engineers

Value Chain
SCM

Supply Chain Management for Engineers

SCM

First-Tier Supplier

Service/Product Provider

Support Processes

Support Processes

New Service/
Product
Development
Process

Supplier
Relationship
Process

Business-toBusiness
(B2B)
Customer
Relationship
Process

OrderFulfillment
Process

New Service/
Product
Development
Process

Supplier
Relationship
Process

Business-toCustomer
(B2C)
Customer
Relationship
Process

OrderFulfillment
Process

Supply Chain Management for Engineers

External Consumers

External Suppliers

External Value-Chain Linkages

Supply Chain Design

SCM

Supply Chain Management for Engineers

Step #1

Supply Chain
Initial Suppliers

Tier 4

--

Tier 3

Tier 2

Tier 1

Manufacturer - XX
Egypt
Tier 1
Tier 2
SCM

--

Assembly
-

Egypt

Supply Chain Management for Engineers

End Users

Customer

Step #1

Customer

Customer

Distribution
center

Distribution
center

Supply Chain

Customer

Manufacturer

Tier 1

Tier 2

Tier 3

Supplier of services
SCM

Supplier of materials

Supply Chain Management for Engineers

Step #2

Supply Chain Design


Current

Inefficient
supply chain
operations

Area of
improved
operations

Total costs

Benchmarking

Reduce costs
New supply chain
efficiency curve with
changes in design
and execution

8
Supply chain performance
(Inventory Turnover)

Figure Supply Chain Efficiency Curve


SCM

Improve
performance

Current
Situation

10
Internal
Benchmark

Supply Chain Management for Engineers

15

External
Benchmark

SCM Outline

Step #3
Tier 2

Tier 1

Suppliers

Suppliers

Tier 1

Company

Tier 2

Customers Customers

(1) INFORMATION FLOW

(2) ORDER FLOW


(3) PRODUCT / MATERIAL FLOW

(4) PAYMENTS FLOW

SCM

Supply Chain Management for Engineers

SCM Outline

Step #4: Management Methodology

Tier 1

Tier 2

Tier 1

Suppliers

Suppliers

Company

Tier 2

Customers Customers

(5) CUSTOMER RELATIONSHIP MANAGEMENT


(6) CUSTOMER SERVICE MANAGEMENT
(7) DEMAND MANAGEMENT
(8) MANUFACTURING MANAGEMENT
(9) PROCUREMENT MANAGEMENT
(10) PRODUCT DEVELOPMENT MANAGEMENT
SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Supply Chain - Vertical Integration

Information Flow

Tier 2

Tier 1

Suppliers

Suppliers

Tier 1

Company

Tier 2

Customers Customers

Site
SCM

Supply Chain Management for Engineers

Supply Chain
Suppliers
Vendors

Company
Contractor

Customer
Client

Site
SCM

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Project Supply Chain

Suppliers

Company

Customer

Vendors

Contractor

Client

SCM

Supply Chain Management for Engineers

Project Supply Chain


Information

Information

Suppliers
Vendors

Orders
Materials

Company

Orders
Customer

Contractor

Product

Client

Payments

Payments

SCM Integration of Supply Chains


SCM

Supply Chain Management for Engineers

Supply Chain Information Flow Data Flow Diagram


02

03 Information
04
Suppliers

09

Vendors
Materials

05
08

Orders

10

01Information
06
07

Company
Contractor

Product

15

Payments

14

12

Client
MainContractor

11

Subcontractor

Customers

Orders

13

Payments

SCM Integration of Supply Chains


SCM

Supply Chain Management for Engineers

Report List
ID

Report / Form

Description

Responsibility

Information
01

Customer Needs

02

Product Analysis

03

Price Quotation

04

Supplier Offers

05

Estimation & Analysis

06

Offer

Orders
07

Customer order

08

Order Analysis

09

Material Orders

Materials & Products


10

Material Orders Receive

11

Production Orders

12

Product

Payments
13

Customer Payments

14

Cost Analysis

15

Supplier Payments

SCM

Supply Chain Management for Engineers

03

SCM

02

01

Supply Chain Management for Engineers

Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM

Report / Form

Description

Responsibility

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM

Report / Form

Description

Responsibility

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM

Report / Form

Description

Responsibility

Supply Chain Management for Engineers

SCM

Supply Chain Management for Engineers

Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM

Report / Form

Description

Responsibility

Supply Chain Management for Engineers

Process Chart
Inputs:

Request

The order fulfillment process

Departments:

Enterprise Applications

Reports:
Order
SCM

Supply Chain Management for Engineers

Invoice

Process Chart
Inputs:

Request

The order fulfillment process

Departments:

Enterprise Applications

Reports:
Order
SCM

Supply Chain Management for Engineers

Invoice

Form / Report List:


#

ID

Form/report

Responsibility

1
2
3
4
5
--

Form / Report Description


Form/
Report

SCM

Who

Target /
Purpose

When/
Frequency

Type/
Method

Supply Chain Management for Engineers

Reference

SCM - Outline
Main Information:
1.

Coding System

2.

Product Information

3.

Product Structure

4.

Process Information

5.

Material Information

6.

Manpower Information

7.

Machines Information

8.

Operating Information

9.

Cost Information

10. Market Information


11. Customer Information
12. Supplier Information
SCM

Supply Chain Management for Engineers

Estimation & Analysis:


1. Time Estimation & Analysis
2. Material Estimation & Analysis
3. Manpower Estimation & Analysis
4. Machine Estimation & Analysis
5. Cost Estimation & Analysis
6. Price Estimation & Analysis

SCM

Supply Chain Management for Engineers

Planning Process:
1. Master Plan
2. Material Plans
3. Resource Plans
4. Cost Plan
5. Production Plans
6. Work Orders

SCM

Supply Chain Management for Engineers

Control Process:
1. Actual Performance
2. Quantity Analysis
3. Cost Analysis
4. Productivity Analysis
5. Capacity Analysis
6. Time Analysis
7. Quality Analysis
8. KPIs report
SCM

Supply Chain Management for Engineers

Forecasting Process:
1. Market Forecasting
2. Capacity Forecasting
3. Resource Forecasting
4. Quantity Forecasting
5. Time Forecasting
6. Procurement Forecasting
7. Cost & Budget Forecasting

SCM

Supply Chain Management for Engineers

SCM

Block Diagram
Tools & Approaches

Inputs Information
1.

General information

2.

Coding Information

3.

Customer Information

4.

Supplier Information

5.

Market Information

6.

Product Information

7.

Product Structure

8.

Process Information

9.

Material Information

10. Manpower information


11. Machine information
12. Operating conditions
13. Overhead Information
14. Feedback

SCM

1.

Material Flow
Analysis
2. Material Req.
Planning
3. Manpower Req. Pl.
4. Machine Req. Pl.
5. Cost Price
Estimation
6. Cost Analysis
7. Production
Schedule
8. Productivity
Analysis
9. Capacity Analysis
10. Performance
Evaluation
11. Forecasting

Outputs Information
1.

Master Plan

2.

Material Flow Diagram

3.

Material Plan

4.

Manpower Plan

5.

Machine / Tools Plan

6.

In/out House Service Plan

7.

Procurement Plan

8.

Cost Estimation

9.

Budget Plan

10.

Cost Analysis

11.

Action Production Plans

12.

Planned Productivity Analysis

13.

Planned Capacity Analysis

14.

Planned Material Analysis

15.

Work Orders / Forms

16.

Implementation & Feedback

17.

Control (Actual / Planned)

18.

KPIs report

19.

Demand / Quantity Forecasting

20.

Cost / Budget Forecasting

Supply Chain Management for Engineers

Case Study
Supply Chain Management
For a Manufacturing Company

SCM

Supply Chain Management for Engineers

Case Study
Supply Chain - Estimation & Planning Module

The production information for cast iron parts manufacturing


are as follows:
1) Market Information
Product: Cast Iron Spare Parts
Duration: Annual
2) Material Structure

Product
X

Material
A1 (80%)
A1 Cast Iron Scrap
SCM

Production Quantity = 4000 ton


Unit Price = 5000 LE/ton

Material
A2 (15%)
A2 Steel Scrap

Material
A3 (5%)
A3 Special Scrap

Supply Chain Management for Engineers

3) Supplier Information:
Mat.
ID

Supplier
ID

Unit price
(LE/ton)

Raw
Material
Defect %

Standard
Lot Size
(ton)

Lead
time
(day)

Transportation
cost
(LE/order)

A1
A2
A3

A11111
B11111
C11111

1000
1500
3000

15%
10%
5%

50
30
20

2
3
4

500
400
300

4) Raw Material Inventory Information:


Mat.
ID

Open
Inventory
(ton)

Safety
Stock

Schedule
Receipt
(ton)

Maximum
Inventory Level
(ton)

Average
Holding Cost
(LE/ton/year)

A1
A2
A3

20
15
10

One week
One week
One week

50
30
20

150
100
50

200
200
200

5) WIP Inventory Information: None


6) Final Product Inventory Information: None
SCM

Supply Chain Management for Engineers

7) Process Information:
Process
ID

Process
description

Defect
ratio
%

Crew
Size
(man)

Effort
Max. No.
Man-hour of Crew
Per Ton

Process
Cost rate
LE/ton

Melting Process

10%

13

10

300

Molding Process

15%

20

10

200

Machining Process

10%

45

20

350

Finishing Process

2%

20

10

100

8) Working conditions:
Process
ID

Process description

No. of
Shifts / day

Hour /
Shift

Time
Tolerance
%

Melting Process

10

Molding Process

10

Machining Process

10

Finishing Process

10

20

SCM

Supply Chain Management for Engineers

9) Other cost Information:


Technical overhead
= 25% direct cost
Office overhead
= 5% manufacturing cost
Scrap (defect, .. etc.) cost (return rate) = 800 LE/ton
Based on this information, discuss & analysis the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
SCM

Process Chart
Standard rates based on 100 ton final product
Material Estimation & Analysis
Material Cost Estimation & Analysis
Process Cost Estimation & Analysis
Total Cost Estimation & Analysis
Re-order Level Analysis
Weekly Material Plan based on Lot-for-Lot rule
Weekly Material Plan based on Reorder level rule
Process Crew Plan
Weekly Production Schedule
Work In Process (WIP) Analysis
Chain Time Analysis
Chain Cost Analysis
Key Indicators & KPIs Report
Supply Chain Management for Engineers

1- Process Chart:

Process

Input

Output

Suppliers

A1
x

A2
x

A3
x
SCM

Final
Product

B
x

C
x

D
x

E
x

Process Scrap Store


Supply Chain Management for Engineers

Customers

Raw Materials

2- Standard rates based on


100 ton final product

Input

Process

Output

Losses

Material Analysis:

L%

Standard Quantity = 100 ton

Suppliers

A1(0.8)
15%

A2(0.15)
10%

A3(0.05)
5%
SCM

Final
Product

B
10
%

C
15
%

D
10
%

E
2
%

Process Scrap Store


Supply Chain Management for Engineers

Customers

Raw Materials

Material Flow Diagram

Input

Process
Losses

Standard Quantity = 100 ton

L%

I = O / (1-L)

xx

A1(0.8) xx
15%
xx

xx

A2(0.15) xx
10%
xx

xx

Output

Losses

xx

B
10
%

xx

xx

C xx
15
%

D
10
%

xx

xx

E 100 ton
2
%

xx

xx

A3(0.05) xx
5%
xx
SCM

Process Scrap Store


Supply Chain Management for Engineers

Material Flow Diagram

Input

Process
Losses

Standard Quantity = 100 ton

L%

I = O / (1-L)

Output

X=I-O

A1(0.8) x
15%

Losses

A2(0.15) x
10%

B
10
%

C x
15
%

D
10
%

102.
04

E 100 ton
2
%

A3(0.05) x
5%

2.04

x
SCM

Supply Chain Management for Engineers

Material Flow Diagram

Input

Process
Losses

Standard Quantity = 100 ton

L%

I = O / (1-L)

Output

X=I-O

A1(0.8) x
15%

Losses

A2(0.15) x
10%

B
10
%

C 113.
15 78
%

D
10
%

102.
04

E 100 ton
2
%

A3(0.05) x
5%

11.33

2.04

x
SCM

Supply Chain Management for Engineers

Material Flow Diagram

Input

Process
Losses

Standard Quantity = 100 ton

L%

I = O / (1-L)

Output

A1(0.8) x
15%

Losses

20.92

A2(0.15) x
10%

148.
19

B
10
%

133. C 113.
37 15 37
%

D
10
%

102.
04

E 100 ton
2
%

2.47

A3(0.05) x
5%
0.39
SCM

14.82

20.0

11.33

2.04

Process Scrap Store


Supply Chain Management for Engineers

Material Flow Analysis

Input

Process
Losses

Standard Quantity = 100 ton

L%

I = O / (1-L)
139.47

Output

A1(0.8) 118.55
15%

Losses

20.92

24.7

A2(0.15 22.23
)
10%

148.
19

B
10
%

133. C 113.
37 15 37
%

D
10
%

102.
04

E 100 ton
2
%

2.47

A3(0.05 7.41
)
5%

7.8

0.39
SCM

14.82

20.0

11.33

2.04

Process Scrap Quantity = 48.19 ton/100 ton final


Supply Chain Management for Engineers

Standard Quantity = 100 ton

Yield Analysis

Total yield = Final product weight / Total input weight

Gross
Requirements
A1 139.47
A2 24.7

A1 80

A3 7.8
A1 59.47
A2 9.7
Yield %:

100 ton

Prod. System
Losses

A2 15
A3 5

A3 2.8

A1 57.36
A2 60.72
A3 64.10
SCM

Total yield = 100/(139.47+24.7+7.8)


= (100 / 171.97 ) = 58.14 %
Supply Chain Management for Engineers

Standard rates based on


100 ton final product

Process

Input

Output

Time

Time Analysis:

Suppliers

A1
x

A2
x

A3
x
SCM

Final
Product

B
x

C
x

D
x

E
x

Process Scrap Store


Supply Chain Management for Engineers

Customers

Standard Quantity = 100 ton


Raw Materials

Standard rates based on


100 ton final product

Process

Input

Output

WIP

WIP Analysis:

Standard Quantity = 100 ton

Suppliers

A1
x

A2
x

A3
x
SCM

Final
Product

B
x

C
x

D
x

E
x

Process Scrap Store


Supply Chain Management for Engineers

Customers

Raw Materials

Standard rates based on


100 ton final product

Process

Input

Output

WIP

Crew Analysis:
Standard Quantity = 100 ton

Suppliers

A1
x

A2
x

A3
x
SCM

Final
Product

B
x

C
x

D
x

E
x

Process Scrap Store


Supply Chain Management for Engineers

Customers

Raw Materials

Standard rates based on


100 ton final product

Process

Input

Output

Cost

Direct Cost Analysis:


Standard Quantity = 100 ton

Suppliers

A1
x

A2
x

A3
x
SCM

Final
Product

B
x

C
x

D
x

E
x

Process Scrap Store


Supply Chain Management for Engineers

Customers

Raw Materials

Material Flow Analysis

Input

Output

Losses

Planned Quantity = 4000 ton


I = O / (1-L)
5579.57

Process

A1(0.8) 4742.64

L%
Losses

15%
836.93
988.05

A2(0.15) 889.25 5928.3


B 5335.46 C 4535.14 D 4081.63 E
10%
10%
15%
10%
2%

4000

98.81
312.02

A3(0.05) 296.42

592.84

800.32

453.51

81.632

5%
15.6
SCM

Process Scrap Quantity =

ton/4000 ton final

Supply Chain Management for Engineers

3- Material Estimation & Analysis


Standard Quantity = 100 ton
A1 139.47

ton

A2 24.7

ton

A3 7.8

ton

Total

= 171.97 ton

Production Quantity = 4000 ton


A1 139.47 * 40

A2 24.7

* 40

= 988.04

A3 7.8

* 40

= 312.00

Total
SCM

5579.44

ton
ton
ton

= 6879.48 ton

Supply Chain Management for Engineers

4- Material Cost Estimation & Analysis


Standard Quantity = 100 ton
A1 139.47 * 1000

= 139470 LE/100 ton final

A2 24.7 * 1500

= 37050 LE/100 ton final

A3 7.8 * 3000

23400 LE/100 ton final

Total = 199920 LE/100 ton final

Production Quantity = 4000 ton


A1 139470 * 40

5,578,800 LE

A2 37059 * 40

1,482,000

A3 23400 * 40

936,000

Total =

7,996,800 LE / 4000 ton final

Process Scrap Quantity = 48.19 ton/100 ton final *40 = 1927.6 ton
SCM

Supply Chain Management for Engineers

Material Cost Estimation


Standard Quantity = 100 ton
A1 139.47 * 1000

= 139470 LE/100 ton final

A2 24.7 * 1500

= 37050 LE/100 ton final

A3 7.8 * 3000

23400 LE/100 ton final

Total = 199920 LE/100 ton final

Production Quantity = 4000 ton


A1 139470 * 40

5,578,800 LE

A2 37059 * 40

1,482,000

A3 23400 * 40

936,000

Material Cost =

7,996,800 LE / 4000 ton final

Process Scrap Cost = 1927.6 ton * 800 LE/ton =


SCM

Supply Chain Management for Engineers

Transportation Cost Estimation


= Number of orders * Transportation cost rate
Number of orders
= Gross quantity / standard lot size

Number of orders:
A1 5579.44 / 50 = 111.5 = 112 order * 500 = 56,000 LE
A2 988.04 /30

= 32.93 = 33 order * 400 = 13,200

A3 312.00 /20

= 15.6 = 16 order * 300 =

4,800

Transportation Cost =74,000 LE

SCM

Supply Chain Management for Engineers

Total Material Cost Estimation


Total Material Cost =
Material cost + Transportation cost Process Scrap cost

Material Cost

7,996,800 LE

+ Transportation Cost =

74,000 LE

- Process Scrap Cost= 1927.6 ton * 800 = 1,542,080 LE

Total Material Cost = 6,528,720 LE

SCM

Supply Chain Management for Engineers

5- Process Cost Estimation & Analysis


Process
ID

Process
description

Process Inputs
Ton /100 final

Ton/4000

Process
Cost rate
LE/ton

Melting Process

148.19

300

Molding Process

133.37

200

Machining
Process

113.37

350

Finishing Process

102.04

100

SCM

Supply Chain Management for Engineers

Total
Process
cost

Process Cost Estimation


Process
ID

Process
description

Process Inputs
Ton /100 final

Ton/4000

Process Total Process


Cost rate
cost
LE/ton

Melting Process

148.19

5927.6

300

1,778,280

Molding Process

133.37

5334.8

200

1,660,960

Machining
Process

113.37

4534.8

350

1,587,180

Finishing Process

102.04

4081.6

100

408,160

Total Processing cost

SCM

Supply Chain Management for Engineers

4,884,580

6- Total Cost Estimation & Analysis


Direct cost:
Material cost
Labor cost

Total direct
cost

Machine cost
Subcontractor cost

Manufacturing
cost

Total cost

Or

+
+

Technical
overhead
Office
overhead
Profit

Price
Price Total Cost = Profit

SCM

Supply Chain Management for Engineers

Total Cost Estimation & Analysis


Total Material Cost = 6,528,720 LE
1632.18 LE/ton
+ Total Processing cost = 4,884,580
Direct Cost = 11,413,300 Per Unit 11,413,300/4000 = 2853.3 LE/ton
Technical overhead
= 25% direct cost

Manufacturing cost = Direct cost + Technical overhead


= 11,413,300 * 1.25 = 14,266,625
Office overhead

= 5% manufacturing cost

Total cost = Manufacturing cost + Office overhead


= 14,266,625 * 1.05 = 14979956
Unit cost = 14979956 / 4000 = 3744.98 = 3745 LE/ton
Profit ratio = (price-cost) / cost = (5000-3745)/3745
= 33.5%
Margin ratio = (price direct) / direct = (5000 2853.3)/2853.3
= 75.75 %
Value Added ratio = (price External) / External = (5000 1632.18)/1632.18 = 206%
SCM

Supply Chain Management for Engineers

Inventory level

7- Reorder Level Analysis

Q
R

d*LT
SS

LT

LT
Time

R = Reorder Point
LT = Lead Time
SCM

SS =Safety Stock
d = Demand rate

Q = Order Quantity

Supply Chain Management for Engineers

Re-order Level = SS + d*L


R = Reorder Point
LT = Lead Time

Mat.
ID

SS =Safety Stock
d = Demand rate

Open
Annual Standard Lead
time
Inventory
quantity Lot Size
(ton)
L (day)
(ton)
(ton)

Safety
Stock
(SS)

A1
A2
A3

5579.44
988.04
312.00

Mat.
ID

Annual
quantity
(ton)

Average
weekly
demand
(ton/week)

Average
Daily
Demand
d (ton/day)

Safety
Stock
(SS)

A1
A2
A3

5579.44
988.04
312.00

107.29
19.00
6.00

21.45
3.80
1.20

107
19
6

SCM

50
30
20

2
3
4

20
15
10

Q = Order Quantity

One week
One week
One week

Schedule Maximum
Receipt
Inventory
(ton)
Level (ton)
50
30
20

150
100
50

d*L

Reorder
level

End
Inventory
(ton)

42.9=43
11.24
4.8

150
31
11

Supply Chain Management for Engineers

Reorder Point with a Safety Stock Material A1


Average Inventory level = SS + Q/2
Inventory level

= 107 + 50/2 = 132


Max. Inventory level = SS + Q - d*L = 107+50-43
= 114 < 150 o.k.

R =150

Q= 50
d*L = 43

SS = 107

LT=2

LT=2
Time

SCM

Supply Chain Management for Engineers

8- Weekly Material Plan based on Lot-for-Lot rule


MRP Terms

Part A1

Duration unit

Daily

Planning Period

10 days

Gross Requirements

Total Daily Demand

Schedule Receipt

Open Orders

Project on Hand

Open Inventory

Net Requirements

Daily Demand Open Inventory

Order Receipt

Receipt date =

Order Release

Release date = Receipt date lead time


=

SCM

Supply Chain Management for Engineers

Material Requirement Plan


Day
Part A1

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

20

22

22

22

22

22

22

22

Net Requirements
Order Receipt
Order Release

Lead time = L = 2 day

Reorder level = 150 ton

Average Daily Demand = d = 21.45 ton/day


Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton

SCM

Open Inventory = 20 ton


Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Lot-For-Lot

Material Requirement Plan


Day
Part A1

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

70

22

22

22

22

22

22

22

48

26

Net Requirements

18

Order Receipt
Order Release

Lead time = L = 2 day

Reorder level = 150 ton

Average Daily Demand = d = 21.45 ton/day


Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Open Inventory = 20 ton


Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Lot-For-Lot

Material Requirement Plan


Day
Part A1

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

70

22

22

22

22

22

22

22

48

26

Net Requirements

18

Order Receipt

50

Order Release

Lead time = L = 2 day

Reorder level = 150 ton

Average Daily Demand = d = 21.45 ton/day


Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Open Inventory = 20 ton


Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Lot-For-Lot

Material Requirement Plan


Day
Part A1

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

70

22

22

22

22

22

22

22

48

26

Net Requirements

18

Order Receipt

50

Order Release

50

Lead time = L = 2 day

Reorder level = 150 ton

Average Daily Demand = d = 21.45 ton/day


Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Open Inventory = 20 ton


Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Lot-For-Lot

Material Requirement Plan


Day
Part A1

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

70

22

22

22

22

22

22

22

48

26

54

32

10

Net Requirements

18

12

Order Receipt

50

50

Order Release

50

50

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Lot-For-Lot

Weekly Plan

Material Requirement Plan

Day
Part A1

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

70

22

22

22

22

22

22

22

48

26

54

32

60

38

16

Net Requirements

18

12

Order Receipt

50

50

Order Release

50

50

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

9- Weekly Material Plan based on Reorder level rule


Day
Part A1

-3

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

20

22

22

22

22

22

22

22

Net Requirements
Order Receipt
Order Release

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Reorder Level

Weekly Plan

Material Requirement Plan

Day
Part A1

-3

-2

-1

Gross Requirements
Schedule Receipt

50

Project on Hand

70

Net Requirements

80

Order Receipt

100

Order Release

22

22

22

22

22

22

22

100

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Reorder Level

Weekly Plan

Material Requirement Plan

Day
Part A1

-3

-2

-1

Gross Requirements

22

22

22

22

22

22

22

Schedule Receipt

50

Project on Hand

170

148

Net Requirements

80

Order Receipt

100

50

Order Release

100

50

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Reorder Level

Weekly Plan

Material Requirement Plan

Day
Part A1

-3

-2

-1

Gross Requirements

22

22

22

22

22

22

22

176

154

132

Schedule Receipt

50

Project on Hand

170

198

Net Requirements

80

18

Order Receipt

100

50

50

Order Release

100

50

50

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Reorder Level

Weekly Plan

Material Requirement Plan

Day
Part A1

-3

-2

-1

Gross Requirements

22

22

22

22

22

22

22

176

154

182

160

138

Schedule Receipt

50

Project on Hand

170

198

Net Requirements

80

18

12

Order Receipt

100

50

50

50

Order Release

100

50

50

50

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

Reorder Level

Weekly Plan

Material Requirement Plan

Day
Part A1

-3

-2

-1

Gross Requirements

22

22

22

22

22

22

22

160

188 166

Schedule Receipt

50

Project on Hand

170

198 176

Net Requirements

80

18

12

Order Receipt

100

50

50

50

Order Release

100

50

154 182

50

50

Average Daily Demand = d = 21.45 22ton/day


Lead time = L = 2 day
Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM

Reorder level = 150 ton


Open Inventory = 20 ton
Schedule Receipt = 50 ton

Supply Chain Management for Engineers

10- Process Crew Plan:


Process Information:
Process
ID

Process
description

Defect
ratio
%

Crew
Size
(man)

Effort
Max. No.
Man-hour of Crew
Per Ton

Melting Process

10%

13

10

Molding Process

15%

20

10

Machining Process

10%

45

20

Finishing Process

2%

20

10

Working conditions:
Process
ID

Process description

No. of
Shifts / day

Hour /
Shift

Time
Tolerance
%

Melting Process

10

Molding Process

10

Machining Process

10

Finishing Process
1
10
20
Supply Chain Management for Engineers

SCM

Crew Plan:
Process Information:
Process Process description
ID

Crew
Size
(man)

Effort
Man-hour
Per Ton

Max.
No. of
Crew

Input
Quantity
Ton/4000

Melting Process

13

10

5927.6

Molding Process

20

10

5334.8

Machining Process

45

20

4534.8

Finishing Process

20

10

4081.6

SCM

Supply Chain Management for Engineers

Daily
No. of Crew

Crew Plan:
Process Information:
Process
ID

M=
Crew
Size
(man)

13

10

5927.6

20

10

5334.8

45

20

4534.8

20

10

4081.6

SCM

Z=Effort Max. No.


Input
Man-hour of Crew Quantity
/ Ton
Ton/4000

X= Daily
Quantity
Q/(52*5)
= Q/260

Y=Hourl
y rate
Ton/hr
(X/8 hr)

Supply Chain Management for Engineers

No. of
Crew
Y.Z/M

Time Analysis For 100 ton final

Process
ID

M=
Crew
Size
(man)

13

10

148.19

20

15

133.37

45

30

113.37

20

15

102.04

SCM

E= Effort Max. No.


Man-hour of Crew
/ Ton

Q=Input
Quantity
Ton/100

Duration
Q.E/M
(hr/100)

Supply Chain Management for Engineers

Time Analysis:

Process

Input

Output

Time

Standard Quantity = 100 ton final

Suppliers

A1
x

A2
x

Final
Product

B
x

C
x

D
x

E
x

A3
x
SCM

Supply Chain Management for Engineers

Customers

Raw Materials

Time Analysis
Process Process description
ID

Crew
Size
(man)

Effort
Man-hour
Per Ton

Input
Quantity

Melting Process

13

148.19*40=

Molding Process

20

133.37*40=

Machining Process

45

113.37*40=

Finishing Process

20

SCM

Supply Chain Management for Engineers

Daily
No. of Crew

Time Analysis:

Input

Process

Output

Time

Standard Quantity = 100 ton


A1(0.8) 118.55

139.47

24.7

A2(0.15) 22.23

7.8

A3(0.05) 7.41

SCM

148.
19

133. C
37

113.
37

102.
04

Supply Chain Management for Engineers

E 100 ton

Time Analysis
Must have D and E
completed here so
production can
begin on B

Start production of D
1 week

2 weeks to
produce

2 weeks

2 weeks

1 week

1 week

2 weeks

3 weeks

1 week

SCM

4
5
Time in weeks

Supply Chain Management for Engineers

Figure 14.4

Inventory Analysis

SCM

Supply Chain Management for Engineers

Cost Analysis

SCM

Supply Chain Management for Engineers

Key Indicators

SCM

Supply Chain Management for Engineers

KPI Report One Page Management


Key Performance Indicators for decision making process
Short description: xxxxxxx
Key Indicators

Unit

Strength Points:
-

Weakness Points:
-

Area of Concern:
-

Recommendations:
-

Conclusion:

------------------------------------------------------------------------------------------------------------------SCM

Supply Chain Management for Engineers

Case Study
Supply Chain Management
For a Manufacturing Company

SCM

Supply Chain Management for Engineers

Case Study #1:

Scope of work: Power Tower Assembly

2) Product Structure

1) Process Information:
ID

Process description

Resource
type

A, B

Parts procurement

Outdoor

Product assembly /
construction

Indoor

Product testing

Indoor

Product finishing

Indoor

Process description

B(2)

Part
ID

Open
inventory
(unit)

Lead
time
(day)

Unit price
($/unit)

Standard
lot size
(unit)

Part
defect
ratio %

A
B

14
17

3
2

500
250

15
20

10%
15%

5) Machine information:

4) Manpower information:
ID

A(3)

3) Material Information:

man-hour
/unit

Crew size
(man)

$/
man-day

Welding Process
(Eq-hour/unit)

M/c Cost Rate


($/hour)

Process
defect
ratio %

Product assembly

50

80

80

50

10%

Product testing

30

100

40

60

7%

Product Finishing

10

120

--

3%

6) Operating conditions: 6 day/week


One shift
7) Overhead Information: Technical o. head = 20% direct cost

&

10 hour/shift
Weekend: Friday
Office o. head 10% manufacturing cost

8) Market (or contract ) Information:


Demand Order quantity = 30 unit,
Lot size = 3 unit/day,
Start due date: Sat. 02/01/2010
Finish due date: Thu. 14/01/2010

SCM

Price= 15,000 $/unit


Bonus / Penalty = 1000 $/unit/day

Supply Chain Management for Engineers

Estimation & Analysis:


1. Time Estimation & Analysis
2. Material Estimation & Analysis
3. Manpower Estimation & Analysis
4. Machine Estimation & Analysis
5. Cost Estimation & Analysis
6. Price Estimation & Analysis

SCM

Supply Chain Management for Engineers

Material Estimation & Analysis Material Flow Diagram


ID

Process
description

Defect
%

A,
B

Parts procurement

10
15

Product assembly

10

Product testing

Product finishing

C
A(3)

xx

B(2)

I = O / (1-L)

Process

Output

Defect /
Losses (L)
xx

A(3) xx
10%
xx

xx

Input

B(2)
15%

xx

C xx
10%

D
7%

xx

E
3%

Q=30

xx
xx

xx

xx

xx
SCM

Supply Chain Management for Engineers

120

A(3) 109
10%
11

84

B(2)
15%

36.34

C 33.063
10%

D
7%

30.90

E
3%

30

72
3.3063

2.163

12

A 120
B 84

Prod. System
Losses

0.90
30 Final Product
A 3*30 = 90
B 2*30 = 60

Total yield = Final / Total


A = 90/120= 75.00 %
B = 60/84 = 71.42 %
SCM

A 120 -90 = 30
B 84- 60 = 24

Supply Chain Management for Engineers

120

A(3) 109
10%
11

84

B(2)
15%

36.34

C 33.063
10%

D
7%

30.90

E
3%

30

72
3.3063

2.163

0.90

12
ID

Process description

Defect
ratio %

Input

Output

Yield

Part (A)

10%

120

109

90.83 %

Part (B)

15%

84

72

85.71 %

Product assembly

10%

Product testing

7%

A 109
B 72
33.063

3*33.063
2*33.063
30.90

92.56
91.84
93.47

Product Finishing

3%

30.90

30

97.09

A 120
B 84

3*30
2*30

90/120= 75.00 %
60/84 = 71.42 %

Total

SCM

Supply Chain Management for Engineers

Manpower Estimation & Analysis

BOQ = 30 Final Product


ID

Process description

Duration= 10 day

Man-hour
/unit

Crew size
(man)

Daily
hours

Unit/
day

Product assembly

50

10

Product testing

30

10

Product Finishing

10

10

No. of
crews

No. of
Workers

Total

SCM

Supply Chain Management for Engineers

Manpower Estimation & Analysis

BOQ = 30 Final Product

Duration= 10 day

Manhour
/unit

Crew
size
(man)

Daily
hours

Unit/
day

Product assembly

50

10

Product testing

30

10

Product Finishing

10

10

ID

Process description

Required
daily
hours

Daily
workers

No. of
crews

Actual
daily
workers

Total

ID

Process description

Product assembly

Product testing

Product Finishing

No. of crews

Actual
daily workers

Utilization
> 80 %

Total

SCM

Supply Chain Management for Engineers

Manpower Estimation & Analysis

BOQ = 30 Final Product

Duration= 10 day

Manhour
/unit

Crew
size
(man)

Daily
hours

Unit/
day

Required
daily
hours

Daily
workers

No. of
crews

Actual
daily
workers

Product assembly

50

10

50*3=150

150/10=15

15/4=3.75
=4

4*4=16

Product testing

30

10

30*3=90

90/10=9

9/3=3

3*3=9

Product Finishing

10

10

10*3=30

30/10=3

3/2=1.5
=2

2*2=4

ID

Process description

29

Total

ID

Process description

No. of crews

Actual Daily
workers

Th.
daily
workers

Utilization
> 80 %

Product assembly

16

15

15/16= 94 %

Product testing

9/9= 100%

Product Finishing

3/4=75 %

Total

SCM

29

Supply Chain Management for Engineers

Machine Estimation & Analysis

BOQ = 30 Final Product


ID

Process description

Duration= 10 day

Eq-hour
/unit

Daily
hours

Unit/
day

Product assembly

80

10

Product testing

40

10

Product Finishing

10

Required
daily hours

No. of M/c
Per day

Total

ID

Process description

Product assembly

Product testing

Product Finishing

No. of M/c Per day

Utilization
> 80 %

Total

SCM

Supply Chain Management for Engineers

Machine Estimation & Analysis

BOQ = 30 Final Product


ID

Process description

Duration= 10 day

Eq-hour
/unit

Daily
hours

Unit/
day

Required
daily hours

No. of M/c
Per day

Actual No. of
M/c Per day

Product assembly

80

10

80*3=240

240/10=24

24

Product testing

40

10

40*3=120

120/10=12

12

Product Finishing

10

36

Total

ID

Process description

No. of M/c Per day

Utilization
> 80 %

Product assembly

24

24/24 = 100 %

Product testing

12

12/12= 100 %

Product Finishing

Total

SCM

36

Supply Chain Management for Engineers

Cost & Price Analysis


Direct cost:
Material cost
Labor cost

Total direct
cost

Machine cost
Subcontractor cost

Manufacturing
cost
Total cost
Or

+
+

Technical
overhead
Office
overhead
Profit

Price
Price Total Cost = Profit

SCM

Supply Chain Management for Engineers

Direct cost:
Material cost
Labor cost

Total direct cost

Machine cost
Manufacturing cost

Technical overhead
= -- % direct cost

Office overhead
= -- % manuf. cost

Total cost = C
Unit Cost = Total Cost / Quantity
Unit Price = -- LE/unit

Revenue = Unit Price * Quantity = R

Profit = R C

Value Added = R ER

Margin Factor =R DC

Ratio = Profit/R

Ratio = VA/R

Ratio = MF/R

SCM

Supply Chain Management for Engineers

Cost Estimation & Analysis

Material Cost:
ID

Process description

Unit price
($/unit)

Total units

Material Cost

Part (A)

500

120

500*120 =60000

Part (B)

250

84

250*84=21000

Total

81000

Labor Cost:
ID

Process description

$/
man-day

Actual
daily workers

Daily
Labor cost

Total
Labor cost

Product assembly

80

16

1280

1280*10= 12800

Product testing

100

900

900*10=9000

Product Finishing

120

480

480*10= 4800

2260

22,600

Total

Machine Cost:
ID

Process description

Depreciation
($/hour)

Daily hours

No. of M/c
Per day

Daily
Machine cost

Total
Machine cost

Product assembly

50

10

24

24*10*50= 12000

12000*10=120000

Product testing

60

10

12

12*10*60= 7200

7200*10=72000

Product Finishing

--

10

--

--

36

19200

192,000

Total

SCM

Supply Chain Management for Engineers

Material cost
81000

Labor cost

Total direct cost


295,600

22,600

Machine cost
192,000

Manufacturing cost
295,600*1.2 = 354720

+
+

Technical overhead
= 20% direct cost
Office overhead
= 10% manuf. cost

Total cost = 390,192 LE


Unit Cost = 390,192 /30 = 13006.4 $/unit
Unit Price = 15,000 $/unit
Profit = TR TC
= 450000 390192
= + 59808
= + 15.3 %TC
SCM

Revenue = 15,000 * 30 = 450,000

Value Added = R ER
= 450000 81000
= + 369000
= + 450 %ER

Margin Factor = R DC
= 450000 295,600
= + 154400
= + 52.2 %DC

Supply Chain Management for Engineers

Cost Estimation & Analysis

Total

Per unit

Material cost

= 81000

= 2700 LE/unit

Labor cost

= 22600

= 753 LE/unit

Machine cost = 192000

= 6400 LE/unit

Total direct cost = 295,600 LE


=

9853 LE/unit

Technical overhead = 20% direct cost = 59120


=

1971 LE/unit

Manufacturing cost = 354720


= 11824 LE/unit
Office overhead = 10% manufacturing cost = 35472
= 1182 LE/unit
Total cost = 390192 LE
SCM

= 13006 LE/unit

Supply Chain Management for Engineers

Cost Estimation & Analysis


Item

Calculation

Value

Unit

Unit direct cost

Mat. + Labor + Machine costs

9853

LE/unit

Unit Manufacturing cost

Direct cost + Tech. overhead

11824

LE/unit

Unit overhead

Tech. overhead + Office overhead

3153

LE/unit

Unit External cost

Material cost + Sub-contactor

2700

LE/unit

Unit cost

Manufacturing cost + office overhead

13006

LE/unit

Unit price

Given

15,000

LE/unit

Unit profit

Unit price Unit cost

+ 1994

LE/unit

% Profit / Unit price


Margin factor

Unit price Direct cost


% Margin / Unit price

Value added

Unit price External cost


% Value / Unit price

SCM

Supply Chain Management for Engineers

13.3
+ 5147

LE/unit
%

34.3%
+ 12300

LE/unit
%

82%

Planning Process:
1. Master Plan
2. Material Plans
3. Resource Plans
4. Cost Plan
5. Production Plans
6. Work Orders

SCM

Supply Chain Management for Engineers

Material Requirement Plan

Part A
Gross Requirements

Daily Demand = 120 unit / 10 day = 12 unit

Schedule Receipt

Open Orders = 0

Project on Hand

Open Inventory = 14 unit

Net Requirements

Daily Demand Open Inventory = 12 14 =(-) = 0

Order Receipt

Receipt date

Order Release

Release date = Receipt date lead time

SCM

Supply Chain Management for Engineers

A 120 unit /10 day= 12 unit/day

Material Requirement Plan


Part A
Gross Requirements
Schedule Receipt
Project on Hand
Net Requirements
Order Receipt
Order Release

Day
-3

-2

-1

1
12

14

2
10
15

2
12

3
12

Net Requirements
Order Receipt
Order Release
SCM

5
12

6
12

8
12

9
12

10
12

11
12

10
12

11
12

15
Lead time = 3 day

Part A
Gross Requirements
Schedule Receipt
Project on Hand

4
12

Standard lot size = 15 Unit

Day
-3

-2

-1

1
12

14

2
15
17
10
15

2
12

3
12

4
12

5
12

6
12

8
12

9
12

15

Supply Chain Management for Engineers

Material Requirement Plan

Day/ Month

Part A

30/
12

31/
12

Gross Requirements
Schedule Receipt
Project on Hand
Net Requirements
Order Receipt
Order Release

1/
1

14

15

15
+
15

Lead time = 3 day

SCM

A 120/10 = 12 unit/day
2/
1
12

3/
1
12

4/
1
12

5/
1
12

6/
1
12

7/
1
12

8/
1

2+
15

5+
15

8+
15

11+
15

14

2+
15

17

10

15

15

15

15

15

15

15

9/
1
12

10
/1

11/1

12/1

12

12

12

5+
15

8+
15

14

10

11+
15
1

15

15

15

15

15
+
15

Standard lot size = 15 Unit

Supply Chain Management for Engineers

Material Requirement Plan

B 84/10 = 8.4 = 8.5 = 9 unit/day 9 * 10 = 90 unit


Part B

Day/ Month
31/
12

Gross Requirements
Schedule Receipt
Project on Hand
Net Requirements
Order Receipt
Order Release

1/
1

17

2/
1
9

3/
1
9

4/
1
9

5/
1
9

6/
1
9

7/
1
9

8/
1

6+
20
3

17

8+
20
1

19

10

1+
20
8

20
20

20

20

20

20

Lead time = 2 day

9/
1
9
12

10/
1

11/1

12/
1

3+
20
6

14

10

20

20

Standard lot size = 20 Unit

Material Analysis:
Part
ID

Open
inventory
(unit)

Total quantity
(unit)

Used quantity
(unit)

End
inventory
(unit)

Utilization factor % =
Total / Used

14

14 open + 8 order *15 unit


=134

120

14

120/134= 89.55 %

17

17 open + 4 order *20 unit


= 97

84

10

84/97= 86.6 %

SCM

Supply Chain Management for Engineers

Procurement Plan (unit)


Part
A
B

Day/ Month
30/12

31/12

1/
1

15

30

2/
1
15

20

20

3/
1

4/
1
15

A 500 LE/unit

5/
1

6/
1
15

7/
1
30

20

20

B 250 LE/unit

Material Budget Plan (LE)


Part
A
B
Total

Day/ Month
30/12

31/12

7500

15000

2/
1
7500

5000

5000

20000

12500

7500

1/
1

3/
1

4/
1
7500
7500

5/
1

6/
1
7500

7/
1
15000

5000

5000

12500

20000

Material Budget = 80000 $


SCM

Supply Chain Management for Engineers

Daily Production Plan


ID

Process description

man-hour
/unit

Product assembly

50

Lot size
(unit/day)
3

No. of
crews
4

Cycle time =
(Operating time/day) / (Output rate/day)
50 / ( 3 * 4) = 4.1 hour/unit

Product testing

30

30 / ( 3 *3) = 3.3 hour/unit

Product Finishing

10

10 / ( 3 *2) = 1.5 hour/unit

Total

P
#

(10 hour/day) / (3 unit/day) = 3.33 hour/unit

Day #1
1

Day #2
7

10

10

10

1
2
3
P
#

Day #3
1

Day #4
7

10

C
D
E
SCM

Supply Chain Management for Engineers

Daily Production Plan


ID

Process description

man-hour
/unit

Product assembly

50

Lot size
(unit/day)
3

No. of
crews
4

Cycle time =
(Operating time/day) / (Output rate/day)
50 / ( 3 * 4) = 4.1 hour/unit

Product testing

30

30 / ( 3 *3) = 3.3 hour/unit

Product Finishing

10

10 / ( 3 *2) = 1.5 hour/unit

Total

(10 hour/day) / (3 unit/day) = 3.33 hour/unit

Day #1
1

#1

Day #2
7

10

#4

#5

#1

#2

#3

#4

#2

#3

Day #3
3

#3
#1

#2

#4

Day #4
7

10

#6

#7

#8

#9

#10

#5

#6

#7

#8

#9

#4

SCM

#5

10

#6

#7

#8

Supply Chain Management for Engineers

10

#9

Daily Production Plan


Day #5
1

Day #6
7

10

#11

#12

#13

#14

#15

#10

#11

#12

#13

#14

#9

#10

#11

#12

#13

Day #7
1

#14

Day #8
7

10

#16

#17

#18

#19

#20

#15

#16

#17

#18

#19

#14

#15

#16

#17

#18

Day #9
1

Day #10
7

10

#21

#22

#23

#24

#25

#20

#21

#22

#23

#24

#19

SCM

#20

10

#19

10

#21

#22

#23

Supply Chain Management for Engineers

10

#24

Daily Production Plan


Day #11
1

Day #12
7

10

#26

#27

#28

#29

#30

#25

#26

#27

#28

#29

#24

#25

#26

#27

#28

Day #13
1

10

#31

#32

#33

#30

#31

#32

#29

#30

10

#33

#31

#32

#33

Actual production = 33.063 = 33 unit

Production Plan:
Working Day #

#29

Day #14

10

10 11 12 13 14

30/
12

31/
12

1/
1

2/
1

3/
1

4/
1

5/
1

6/
1

7/
1

8/
1

9/
1

10
/1

11
/1

12
/1

13
/1

14
/1

Final Product

Cumulative production

11

13

16

18

21

23

26

28

31

33

Date

Customer

SCM

Supply Chain Management for Engineers

Daily Production Plan


ID

Process description

man-hour
/unit

Product assembly

50

Lot size
(unit/day)
3

No. of
crews
4

Cycle time =
(Operating time/day) / (Output rate/day)
50 / ( 3 * 4) = 4.1 hour/unit

Product testing

30

30 / ( 3 *3) = 3.3 hour/unit

Product Finishing

10

10 / ( 3 *2) = 1.5 hour/unit

Total

P
#

(10 hour/day) / (3 unit/day) = 3.33 hour/unit

Day #1
1

Day #2
7

10

10

1
2
3
4
5
6

SCM

Supply Chain Management for Engineers

Control Process:
1. Actual Performance
2. Quantity Analysis
3. Cost Analysis
4. Productivity Analysis
5. Capacity Analysis
6. Time Analysis
7. Quality Analysis
8. KPIs report
SCM

Supply Chain Management for Engineers

Short description:

KPIs Report One Page Management

Product: Power Tower Assembly


Lot size: 10 unit

Client: xxxx
Unit Price: $ 15000

Work order #: 12345


Date:

KPIs:

Performance Indicator
Unit Cost
Profit

$/unit
%

Value Added
Time

OEE

13.3%
34.3%
8

10

Day

Capacity Utilization

13006

40

Quality rate

Target

Actual
12500
16.6

97

%
%
%

99

75
65

80
70

Conclusion & Recommendations:


Process is not capable & We need many improvements to maximize the process
performance and productivity.
SCM

Supply Chain Management for Engineers

III- Cost Performance Evaluation for Top Management


KPI report One Page Management

Subject Description:
Scope of work:
Planned Price:

Contract:
Actual Price:

Planned cost:

Client:
Actual cost:

Analysis:
Strength
points

123-

Weakness
points

123-

Area of
Concern

123-

Recommendation:
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SCM

Supply Chain Management for Engineers

Case Study #2:

Scope of work: Assembly Product

2) Product Structure
X

1) Process Information:
ID

Process description

Resource
type

A, B, C

Parts procurement

Outdoor

P1

Product assembly /
construction

Indoor

P2

Product testing

Indoor

P3

Product finishing

Indoor

3) Material Information:

A(3)

B(2)

C(1)

Part
ID

Open
inventory
(unit)

Lead
time
(day)

Unit price
($/unit)

Standard
lot size
(unit)

Part
defect
ratio %

A
B
C

40
120
80

2
3
4

500
300
100

30
40
50

10%
10%
5%

4) Manpower information:

5) Machine information:

ID

Process
description

manhour
/unit

Crew
size
(man)

$/
manday

Bonus
$/
man-hour

Welding M/c
(Eq-hour/unit)

Tools & Welding


depreciation
(LE/hour)

Process
defect
ratio %

P1

Product assembly

60

100

25

40

50

10%

P2

Product testing

40

120

30

20

60

8%

P3

Product Finishing

20

130

35

--

2%

6) Operating conditions: 6 day/week


One shift
7) Overhead Information: Technical o. head = 20% direct cost

&

10 hour/shift
Weekend: Friday
Office o. head 10% manufacturing cost

8) Market (or contract ) Information:


Demand Order quantity = 40 unit,
Lot size = 4 unit/day,
Start due date: Sat. 02/01/2010
Finish due date: Thu. 14/01/2010

SCM

Price= 10,000 $/unit


Bonus / Penalty = 500 $/unit/day

Supply Chain Management for Engineers

Reference Books:

Business Essentials. 4th Edition. Pearson Education, Inc. 2003


Dell to HP: Catch Me If You Can. CRM Buyer. (20 May 2003)

Koch, Christopher. The ABCs of Supply Chain Management. CIO


Magazine.

McGraw-Hill Companies, Inc. 2004


NC State University, Supply Chain Resource Consortium.

http://searchsap.techtarget.com/generic/0,295582,sid21_gci1125310,00.html

Supply Chain Counsel

http://scrc.ncsu.edu/index.html

Pisello, Tom. Quantifying Supply Chain Management Benefits.


SearchSAP.com (15 Sept. 2005)

http://www.cio.com/research/scm/edit/012202_scm.html

Management Information Systems for the Information Age. 4th Edition.

http://www.crmbuyer.com/story/21546.html

http://www.supply-chain.org/index.ww

Supply Chain Management. Wikipedia

http://en.wikipedia.org/wiki/Supply_chain_management

Supply Chain Council, Supply Chain Operations Reference Model, version 7.0,
www.scc.org

SCM

Supply Chain Management for Engineers

Thank you for your attention!

Discussion

Suggestions

Comments

Useful Science For the


Sake of Allah

Questions
Copyrights & More Information:
Dr. Attia Hussien Gomaa
Industrial Engineering Professor & Consultant
attiagomaa@yahoo.com or 0101598@aucegypt.edu
Tel: 0122738497

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Supply Chain Management for Engineers

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Supply Chain Management for Engineers