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Certified Professional in Supply Management®
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Supply Management Integration Exam
Exam 2
Exam 2: Categories and Tasks
Supply Chain Strategy
– Task 2-A-1
– Task 2-A-2
– Task 2-A-3
– Task 2-A-4
Sales and Operations Planning —Demand Planning
– Task 2-B-1
– Task 2-B-2
Sales and Operations Planning —Forecasting
– Task 2-C-1
– Task 2-C-2
– Task 2-C-3
– Task 2-C-4
– Task 2-C-5
Sales and Operations Planning —Product and
Service Development – Task 2-D-1 – Task 2-D-2 – Task 2-D-3
Quality Management
– Task 2-E-1 – Task 2-E-2 – Task 2-E-3
Logistics and Materials Management
– Task 2-F-1 – Task 2-F-2 – Task 2-F-3 – Task 2-F-4 – Task 2-F-5 – Task 2-F-6 – Task 2-F-7 – Task 2-F-8 – Task 2-F-9 – Task 2-F-10 – Task 2-F-11 – Task 2-F-12 – Task 2-F-13
Project Management – Task 2-G-1
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TASK 2-A-1
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Task 2-A-1 Task Outline
1) General issues in standardization and simplification
2) Sources of standards
Develop and/ or implement a material or service standardization program.
This task contains bridge and non-bridge exam material.
Full 6Q; Bridge 1Q
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General Issues in Standardization and
Simplification
Standardization: the process of agreeing on a
common specification. This process can take place
at different levels: (1) across an organization; (2)
throughout an industry; (3) across a nation; and (4)
around the world
Simplification: a reduction in the number of sizes
and designs of an item that an organization uses
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General Issues in Standardization and Simplification
Advantages and Disadvantages
Some advantages of standardization and simplification are – Reduction of non-value-added activities
– Decreased total cost of ownership
– Increased profitability
– Decreased cycle time
– Improved quality
– Lower maintenance costs
– More consistency
– Fewer suppliers
– Leverage buying
– Lower inventory costs
– Reduced training costs
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General Issues in Standardization and Simplification
Advantages and Disadvantages – Cont.
Some disadvantages of standardization and
simplification are
– Limited competition, customer choices and opportunities
for new products and services
– Requirements for new contracts and new relationships
with supplier
– Costs of introduction, training, installation, and
development of instructions, procedures and processes
– Increased time and development costs
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General Issues in Standardization and Simplification
Procedures/Steps in Applying Standardization and Simplification
Standardization committees – Typically, a cross-functional team appointed when
organization embarks on standardization program
– Objective: simplification of design and reduction of total cost of ownership
– Duties include • Administer the program
• Develop the standards
• Evaluate requests for standardization (and for exceptions to standardization)
• Set policy
• Participate with suppliers
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General Issues in Standardization and Simplification
Procedures/Steps in Applying Standardization and Simplification – Cont.
Involvement of other departments – In manufacturing environment
• Engineering and supply management likely drive the process
• Others will be primary stakeholders
– In service environment • Program may be driven by supply management, a specific line of
business or business unit, or staff support function such as human resources or marketing
– Finance makes key contributions related to costs, inventory, asset management
– End users often offer best ideas
– All stakeholders should have opportunity to contribute
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General Issues in Standardization and Simplification
Procedures/Steps in Applying Standardization and Simplification – Cont.
Effects on production methods/operations
– In manufacturing environments
• Reduced set up time
• Longer production runs
• Improved efficiency
• Lower operating costs
• Fewer component parts
– In nonmanufacturing or service environments
• Productivity gains
• Reduction in non-value-added activities
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General Issues in Standardization and Simplification
Procedures/Steps in Applying Standardization and Simplification – Cont.
Effects of global operations
– In manufacturing, consider
• Can parts be shipped to all global locations?
• Are there local content laws or buying requirements that
negatively impact program?
– In nonmanufacturing, consider
• Minor variations to a product/service in differing countries may
serve cultural purposes
• Is there a specific local reason for variation to exist?
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General Issues in Standardization and Simplification
Applications
High-use or high-volume items are
– High-volume items good candidates for standardization
– Also consider parts and components that have great
commonality
– Factor in the impact of current contractual obligations
when making plans to standardize high-use or high-
volume items
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General Issues in Standardization and Simplification
Applications – Cont.
Procurement of facilities
– Standardization of facilities can reduce overall costs of
design, construction and training
Procurement of maintenance, repair and operating
(MRO) items
– Good starting point for any standardization program
Procurement of services
– Combine contracts for same/similar services across
organization for better rates and performance
– Standardize the process of outsourcing
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General Issues in Standardization and Simplification
Applications – Cont.
Brand names versus generic names – Interchangeable parts is a higher-level objective for
standardization and simplification
– Specifications should not limit to one brand name when equivalents are available
Cost-benefit analysis pertaining to standardization – Should be one of first steps before pursuing any
standardization project
– Use return on investment (ROI) model to review costs associated with expected cost avoidance and cost savings
– Use total cost of ownership analysis to determine whether benefits outweigh costs
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Sources of Standards
Source Internal
Organization
Government
International
Industry/
Associations
Examples -Internal work
instructions
-Policies and
procedures
-Quality
manuals
-Standards for
behavior,
communication,
dress, etc.
In U.S.
-NIST
-FDA
-FAA
-USDA
-OSHA
In Europe
-CEN
-CENELEC
-ETSI
-United
Nations
(standards
for
transporting
dangerous
goods,
coding
products,
trade, etc.)
-ISO (12
standards)
-ANSI
-UNESCO
-ISM
Here are a few examples of the many sources of standards
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Task 2-A-1 Recall Question #1
Standardization is BEST described as an agreement upon
specific:
(A) Key business performance indicators.
(B) Quality, designs, sizes, types, materials or services.
(C) Forms and methods of manufacture.
(D) Brands and equivalent generic products.
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Task 2-A-1 Recall Question #2
All of the following are advantages of implementing a
standardization and simplification program EXCEPT:
(A) Decreased total cost of ownership.
(B) Decreased cycle time.
(C) Lower maintenance costs.
(D) Reliance on fewer suppliers.
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Task 2-A-1 Case Study #1
Discussion Questions:
1. What are the first steps that Cross might take in order to lay the
foundation for his standardization initiative?
2. What might Cross do in order to improve acceptance of the program
by the stakeholder community?
3. How can Cross decide which areas to attack first for his
standardization efforts?
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Task 2-A-1 Summary and Review
Define standardization and simplification
Describe advantages and disadvantages of
standardization and simplification
Discuss procedures/steps in applying
standardization and simplification
Identify some applications for standardization and
simplification
What are some sources of standards?
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TASK 2-A-2
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Task 2-A-2 Task Outline
1) Key principles of xRP
2) System development life cycle (SDLC)
Implement requirements planning to align supply management activities with
organizational strategy
All of the content in this task is bridge exam material.
Full 8Q; Bridge 5Q
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Key Principles of xRP
xRP: an acronym for “________ requirements
planning” systems where “x” may be
– Materials
– Enterprise
– Distribution
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Key Principles of xRP
Enterprise Integration
Dependent demand planning systems
– Are based on fundamental hierarchal linkages of
materials requirements planning (MRP)
– Use power of computers and communications systems
– Provide highly integrated software that gives high
visibility across supply chains
– Typically integrate systems; e.g., MRP II
• More recent systems include enterprise resource planning (ERP)
• Expand ability to plan areas of supply chain well beyond MRP II
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Key Principles of xRP
Enterprise Integration – Cont.
ERP II
ERP
MRP II
MRP
DRP
DRP II
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Key Principles of xRP
Enterprise Integration – Cont.
Hypothetical MRP System
Demand forecast
Bill of
materials
Order releases Order schedules
Changes
Purchase orders
Inventory transactions
Contract orders
Master schedule
MRP software program
Inventory
records
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Key Principles of xRP
Enterprise Integration – Cont.
MRP II (Manufacturing Resource Planning)
– Links MRP to organization’s financial system and other processes
• Addresses financial planning in dollars
• Addresses operational planning in units
• Has simulation capability to answer “what if”
– Comprised of variety of functions, each linked together
• Business planning
• Sales and operations planning
• Production planning
• Master production planning
• Materials requirements planning
• Capacity requirements planning
• Execution of support systems for capacity and materials
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Key Principles of xRP
Enterprise Integration – Cont.
ERP (Enterprise Resource Planning)
– Integrates all data and processes of various functions
within an organization into single system
– Typically, includes broad-based applications that
eliminate need for external interfaces between multiple
systems
– Focuses on integrating internal functions within one
organization
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Key Principles of xRP
Enterprise Integration – Cont.
E R P
Manufacturing
Engineering, Bills
of Material,
Scheduling,
Capacity, Workflow
Management,
Manufacturing Flow
Supply Management Inventory, Procurement, Supplier Scheduling, Goods Inspection, Supply Chain Planning
Human Resources HR Management, Payroll, Training, Time and Attendance, Benefits Management
Financials General Ledger, Cash Management, Fixed Assets, Accounts Payable, Receivables
Data Warehouse Self-Service Interfaces, Customers, Suppliers, Employees
Project Management Costing, Billing, Activity Management, Time and Expense, Scheduling
Customer Mgmt. Sales and Marketing, Commissions, Service, Customer Contact, Call Center Support
ERP System Applications
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Key Principles of xRP
Enterprise Integration – Cont.
Add-on modules are multiple add-on applications to ERP systems and include – Continuous replenishment program (CRP): an inventory management
program where information is submitted electronically from customer to supplier
– Warehouse management system (WMS): designed for managing movement and storage of materials throughout the warehouse (see Task 2-C-2)
– Customer relationship management (CRM): systems that manage and deal with customer needs via Web access
– Supplier relationship management (SRM): offers ability to source and select materials quickly and monitor quality
– Distribution requirements planning (DRP): time-based demand from distribution center to balance customer fill rate against inventory investment (see Task 2-C-2)
– Distribution resource planning (DRP II): a computerized inventory system for replenishment at multiple warehouse sites (see Task 2-C-2)
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Key Principles of xRP
Enterprise Integration – Cont.
ERP II
– Expands beyond ERP to include
• Customers
• Suppliers
– A source of competitive advantage
– ERP II is a demonstration of knowledge management
and integration
• Traditional ERP business areas are still maintained within the
organization’s enterprise
• Many areas extended to supplier and customer bases
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Key Principles of xRP
Enterprise Integration – Cont.
Order Management
Supply Chain Management
Procurement
Electronic Customers
Customer Service
Interactive Marketing
Demand Forecasting
Inventory
Integrated Forecasting
Quality Systems
Suppliers Customers
HR
Financials
Distribution
Manufacturing
ERP
ERP II – Extension of Traditional ERP Systems
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Key Principles of xRP
Data Source Consolidation
ERP systems often designed to accommodate
– Different languages
– Exchange rates for different currencies
Requires many more data sources
Increases complexity of implementation
When implemented, it is a powerful tool to plan,
schedule and control virtually all aspects of
– Production
– Supply chain
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Key Principles of xRP
Information Sharing
Enterprise-wide systems allow for sharing and use of data
by all business units
In determining what information should be shared, consider
– What information is available?
– How is the information accessed?
– Who should have access to what information?
Sharing information with key suppliers often improves
performance, but requires determining
– What information suppliers need
– What information can be shared
– Under what conditions
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System Development Life Cycle (SDLC)
System development life cycle (SDLC): a
methodology used to develop, maintain and
replace information systems. Typical phases in the
SDLC are
– Analysis
– Design
– Development
– Integration and testing
– Implementation and maintenance
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System Development Life Cycle (SDLC)
Analysis
Conduct analysis to determine system(s) that will
provide optimal level of support at minimal cost
including
– Information output requirements including
• Level of detail
• Frequency of need
• Timing
– Existing data and information support systems
– Extent of integration required
– Capacity available, both labor and hardware
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System Development Life Cycle (SDLC)
Design
Analysis should define what final design should include
Design parameters include – Data requirements including
• Level of detail
• Timing
• Accuracy
– Integration plan based on extent and types of integration required
– Cost
– Implementation plan including responsibilities and timing
– Capacity requirements including labor and hardware
– Training plans
Once a design is developed, evaluate commercial software packages
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System Development Life Cycle (SDLC)
Development
Involves buying/writing code for any software designed
uniquely for the organization
Customization may
– Increase cost of software
– Require retrofitting anytime there is an update
Organizational changes to support new system include
– Any new hardware or communications systems
– Updating policies, procedures, work instructions
– Training programs
– Hiring any new employees needed to support system
– Changing functional relationships as needed
– Implementing any new measurement/evaluation programs needed
to support new system
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System Development Life Cycle (SDLC)
Testing
Properly performed, analysis and design phases of
system development result in explicit measurement
criteria to determine if implemented system is
operating according to design
Testing phase should operate system under all
expected operating conditions
Results should be evaluated against criteria
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Task 2-A-2 Recall Question #1
The computer-based system that utilizes a master
production schedule, bill of materials and current
inventory data to determine current new requirements
and timing is called:
(A) Enterprise resource planning (ERP).
(B) Materials requirements planning (MRP).
(C) Distribution requirements planning (DRP).
(D) Distribution resource planning (DRP II).
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Task 2-A-2 Recall Question #2
When determining an order needs to be released,
materials requirements planning (MRP) considers:
(A) Lot size.
(B) Capacity.
(C) Due date.
(D) Safety stock.
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Task 2-A-2 Case Study
Discussion Questions:
1. What should Jones do now to avoid a shortage in weeks 4 and 5?
2. What options does Jones have to prevent a recurrence of this problem
in the future?
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Task 2-A-2 Summary and Review
Describe and distinguish among MRP, MRP II,
ERP and ERP II
Identify 3-6 add-on modules for ERP
List 3 considerations in sharing information
Explain the 4 phases of a system development life
cycle (SDLC)
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TASK 2-A-3
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Task 2-A-3 Task Outline
1) Forecasting models/methodologies
2) Measures of forecast accuracy
3) Replenishment/priority tools
4) Scheduling processes
5) Capacity utilization techniques
Implement operations planning, scheduling and inventory control processes to ensure
optimum use of Resources.
This task contains bridge and non-bridge exam material.
Full 7Q; Bridge 4Q
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Forecasting Models/Methodologies
Supply managers use forecasts to
– Improve sourcing methods
– Better identify key suppliers for strategic materials and
supplies
– Improve quality and increase supplier performance levels
– Estimate demand
– Determine if supply can meet demand
– Predict technology trends
– Predict prices
– Predict dependent demand
– Estimate the supply management budget
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Forecasting Models/Methodologies – Cont.
Forecasts provide a snapshot of expected future conditions
Conditions can and will change
Conditions that affect forecasts include
– Lead times
– Labor markets
– Global trade
– Money markets
– Technology shifts
– Weather conditions
– Material shortages
Forecasts must be adjusted as conditions change
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Forecasting Models/Methodologies – Cont. Forecasting Process
In general, organizations
go through a five-step
process to create a forecast
Step 1 Select what to forecast Choose time horizon Select forecast model(s)
Step 2 Collect relevant data: (time series, sales projections, executive opinion, market research, other
Step 4 Validate forecast(s)
Step 3 Prepare forecast(s): qualitative/quantitative
Step 5 Implement results
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Term Length Use
Long-term Usually developed for
more than one year
Used as a basis for capacity
planning, making location
decisions, process changes
Medium-term Varies from three
months to one year
Used as a basis for making
decisions about staffing, production
or service delivery, purchasing,
distribution
Short-term Less than three
months
Used as the basis to schedule
workforce, manage inventory, plan
production, develop schedules for
final product assembly
Forecasting Models/Methodologies – Cont.
Length of forecast
– Forecasts can typically be broken down into
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Forecasting Models/Methodologies – Cont.
Quantitative forecasts
– More sophisticated than judgmental
– Based on real data, not opinions
– Frequently involves large amounts of data
– Requires use of statistics and computer programs
– Examples
• Least squares/regression model
• Box-Jenkins
• Winter’s model
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Forecasting Models/Methodologies – Cont. QUANTITATIVE FORECAST METHODS TIME-FRAME
Method Description
Long
term
Medium
term
Short
term
Least
squares/
regression
A straight line is fitted to past
data using a fitting technique
know as the least squares
method
X X
Box-
Jenkins
Complicated yet accurate
method estimates a
mathematical formula that will
approximately generate the
historical demand patterns in
a time series
X
Winter’s
model
Simultaneously considers the
effects of trend and seasonal
factors using the exponential
smoothing technique
X
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Forecasting Models/Methodologies
Judgment Sampling
Judgmental, or qualitative, forecasts are based on
– Opinions of others
– Estimates from sales staff
– Results of market research
Used most often when organization has no
– Background in quantitative forecasting
– Quantitative data available for analysis
Useful in adjusting for specific future events and
incorporating decision-maker’s (CEO or other senior) high
level of experiential knowledge
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Forecasting Models/Methodologies
Judgment Sampling – Cont. QUALITATIVE FORECAST METHODS TIME-FRAME
Method Description
Long
term
Medium
term
Short
term
Sales force
composite
A manager reviews sales best estimate of
expected level of customer demand for region,
then forecasts at district and national levels
X X X
Market
research
Surveys collected from consumers to estimate
interest in product or service
X X X
Jury of
executive
opinion
Executive opinion based on experience,
knowledge, opinions of employees from key
areas and external parties such as customers
and suppliers
X X X
Delphi
method
Moderator collects results from survey sent to
panel of experts, then creates new survey and
sends to panel. Process continues until
consensus is reached
X
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Forecasting Models/Methodologies
Future Sales Based on Past Sales
Future sales based on past sales
– Relatively unsophisticated approach often used when
little other data is available
– Often includes life-cycle analogy, where life-cycle
pattern/demand for one product is thought to translate to
another
– Life-cycle analogy is most appropriate when one product
is replacing another
• For similar use
• By same basic population
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Measures of Forecast Accuracy
Standard error rates: essentially the standard
deviation of the distribution
– Standard deviation: a measure of dispersion of data.
Standard deviation is calculated by finding the difference
between the average and each actual observation,
squaring each difference, summing all squared
differences, dividing that total by n – 1 (where n is the
number of observations) and taking the square root of
the result
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Measures of Forecast Accuracy – Cont.
Mean squared error: the average of the square of
the error, where the error term is the forecasted
value subtracted from the actual value for a given
time period
Mean percentage error: the forecast error divided
by the actual value for a given time period and
expressed as a percentage
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Replenishment/Priority Tool
Supplier-Managed Inventory (SMI)
Supplier-managed inventory (SMI): inventory
management system that holds a supplier
responsible for ensuring that stock is maintained at
appropriate levels in the purchaser’s facility and for
replenishing items when these levels drop.
Sometimes referred to as vendor-managed
inventory (VMI)
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Replenishment/Priority Tool
ABC Analysis/Classification
ABC analysis: application of Pareto’s Law or the 80/20 rule to define three categories: A, B and C. ABC analysis is used to determine the relative ratios between the number of items and the dollar value. For example, the items purchased repetitively for stock; the number of purchase orders and the dollar value; and the number of suppliers and percent of spend – “A” items are of highest importance and are typically those in the top 10-
20% of the total dollars of inventory or spend and account for 70-80% of the investment
– “B” items are of moderate importance and are typically the next 15-25% of the items and account for 10-20% of the investment
– “C” items are of low importance and are the remaining 65-75% of the items and typically account for 5-10% of the investment
ABC classification: a system of categorizing items in decreasing order based primarily on their total annual dollar value
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Replenishment/Priority Tool
Reorder Point Systems
Reorder point: a predetermined inventory level that
triggers an order. This level provides adequate
inventory to meet anticipated demand during the
time it takes to receive the order
Reorder point system: a continuous-review
inventory control system in which an order is
placed whenever a withdrawal brings the inventory
position to a predetermined reorder point level
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Replenishment/Priority Tool
Fixed Order Period
Fixed order period: a fixed order interval inventory
control system in which an item’s inventory position
is reviewed on a scheduled periodic basis, rather
than continuously. An order is placed at the end of
each review, if appropriate, and the order quantity
usually varies. Also called periodic inventory review
system
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Replenishment/Priority Tool
Fixed Order Quantity
Fixed order quantity (FOQ): a material
replenishment system in which the size of the
orders remain fixed, while the time interval
between them changes, depending on how quickly
the items are consumed
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Replenishment/Priority Tool
Kanban
Kanban: a Japanese term meaning “signal.” It is
usually a printed card that contains specific
information such as part name, description,
quantity and so on that signals a cycle of
replenishment for production and materials. It is an
order release mechanism and one of the primary
tools of a just-in-time (JIT) manufacturing system
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Replenishment/Priority Tool
Buffer/Safety Stock
Buffer/safety stock: additional inventory held as a
buffer against uncertainties in demand or in the
supply system
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Replenishment/Priority Tool
Obsolete/Damaged/Slow Moving
Obsolete inventory: not usable to the organization
because the intended use no longer exists
Surplus or slow moving inventory: wastes
organization assets due to lost opportunity costs as
well as incurred carrying costs
Damaged inventory: no longer fit for its intended
purpose
Obsolete and slow moving inventory may be
usable, but damaged inventory is not
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Scheduling Processes
Flow Manufacturing
Term used to describe a “one-piece flow” business strategy
that allows an organization to establish continuous
sequencing of product, within a flow process, that is
replenished either from external suppliers or other internal
processes based on actual customer demand and works
hand-in-hand with just-in-time (JIT)
Individual units of production “flow” directly through
manufacturing process without time delays associated with
batching in traditional manufacturing processes
Lead times and costs are reduced by decreasing or
eliminating batching and unnecessary routing
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Scheduling Processes
Level Scheduling
Part of flow manufacturing
Level scheduling: a technique to balance
production throughput at each workstation to meet
expected cycle time; i.e., level use of capacity
Cycle time: a measure of how frequently each unit
will be produced
To succeed, must convert suppliers to same
business strategy
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Scheduling Processes
Level Scheduling – Cont.
Two approaches to level scheduling
– The use of inventory to absorb demand when it exceeds
production allocated to a given product over a set period
of time
– Produce small lots of product using flexible capacity that
can accommodate the production of a wide range of
product
• Uses lean production methods that enable organization to
economically produce small lots
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Scheduling Processes
Package Optimization
Goal: use the least amount of packaging that
provides an adequate level of protection within the
shipping environment
Benefits
– Waste reduction
– Cost savings in materials
– Savings in shipping costs
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Scheduling Processes
Package Optimization – Cont.
Package optimization process – Begins by understanding product, such as its
• Value
• Physical characteristics (length, height, width, weight)
• Fragility
– Have information on available packaging materials and properties of each along with recommended application
– Be familiar with • Acceptable level of damage to the package
• Modes of transportation that will be used
• Whether packaging will be reused
• Packaging budget
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Scheduling Processes
Package Optimization – Cont.
Important questions to consider – Does the existing/proposed packaging material just meet
or exceed requirements?
– Will less protection still adequately protect product?
– Is any cushioning material required? • If so, will less cushioning still protect product from damage
during shipment?
Testing standards to assess various transport packaging materials developed by – American Society for Testing and Materials (ASTM)
– International Safe Transit Association (ISTA)
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Scheduling Processes
Shared Visibility into Inventory (Your Organization, Customer and Supplier)
Modern supply chain techniques require synchronization of
material production and flow throughout supply chain
Must maximize visibility of
– Customer demand
– Inventory in
– Own organization
– Supplier organizations
– Customer organizations
Enables all in supply chain to
– More effectively plan production and distribution
– Maximize customer service with least inventory, transportation or
other costs
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Scheduling Processes
Bull-Whip Effect
Term refers to fact that small changes in customer demand will increasingly become exaggerated as demand is communicated upstream in supply chain
These exaggerations along with tendency to accumulate safety stock at each point in supply chain amplify/intensify for 3 reasons – Bullwhip effect is exaggerated when organization places
responsibility for meeting demand on supplier, regardless of actual demand fluctuations
– Carrying too much inventory results when organizations continue with functional silo mentality focusing on individual needs rather than on those of supply chain
– When supply managers take advantage of pricing discounts, bullwhip effect is worse because organizations are carrying excess inventory and increasing need for warehouse space
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Scheduling Processes
Bull-Whip Effect – Cont.
Bull-whip effect worsens due to data transfer methods where data is communicated but not necessarily accurately or with regularity
Bullwhip effect – Is wasteful
– Occurs because of a lack of information across the supply chain
– Results in unnecessarily high inventory levels
To minimize, organizations need – More effective inventory management practices
– More collaboration with suppliers
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Capacity Utilization Techniques
Sales Forecasts
Sales forecasts can help organizations plan use of
capacity so that
– Total costs are minimized
– Customer service is maximized
Often done by inputting forecasts into a sales and
operations plan
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Capacity Utilization Techniques
Implementation Schedule
When executing a capacity utilization plan, the
organization must “fine tune” utilization capacity to
determine whether production
– Is ahead of schedule
– Behind schedule
An organization can adjust capacity for short time
periods by
– Tracking order load on capacity
– Projected available capacity
– An example of adjusting capacity is overtime
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75
Task 2-A-3 Recall Question #1
Which of the following measures of forecast accuracy is
the one that gives a better idea of the true magnitude of
the forecast error?
(A) Mean absolute deviation
(B) Mean absolute percentage error
(C) Mean squared error
(D) Absolute value error
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Task 2-A-3 Recall Question #2
In the ABC analysis/classification method of inventory
replenishment:
(A) The supplier manages the inventory, ensuring that stock levels are
always appropriate.
(B) There is a fixed order period for certain products, but not for others.
(C) Specific information signals the need for replenishment for each type
of material.
(D) Pareto’s Law is used to define three categories of materials, with
varying levels of controls based on the categories.
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Task 2-A-3 Case Study #1
Discussion Question:
1. What steps should the supply manager consider in making his
decision to improve the company’s forecasting system?
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Task 2-A-3 Summary and Review
Distinguish between quantitative and qualitative forecasting
models and briefly describe least squares/ regression, Box-
Jenkins and Winter’s model
Identify measures of forecast accuracy
Discuss various methods for replenishing inventory
Define flow manufacturing and level scheduling
Identify the goal, process for and benefits of package
optimization
Describe the bull-whip effect and explain how to minimize it
How are sales forecasts and implementation schedule
techniques used for capacity utilization?
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TASK 2-A-4
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80
TASK 2-B-1
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81
TASK 2-B-2
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82
TASK 2-C-1
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83
TASK 2-C-2
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84
Task 2-C-2 Task Outline
1) Purpose of forecasting: quantity, industry capacity and availability, cost
or price, technology, planning and assuring supply
2) Economic concepts and terms used in forecasting
3) Sources of data used in forecasting
4) Forecasting methodologies/techniques
5) Factors that can affect forecasts
Develop supply forecasts in light of economic and technological trends
This task contains bridge and non-bridge exam material.
Full 7Q; Bridge 2Q
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Purpose of Forecasting
Quantity – Organizations predict sales quantities when developing demand forecasts
Industry capacity and availability – An organization determines whether its demand forecast is realistic –
whether there will be enough, too much or not enough industry capacity to
meet overall customer demand and whether it will have the capacity to meet
its share of the market
– To create a capacity forecast, an organization evaluates the competition in
terms of overlapping product lines and market coverage, and the expected
effect on the marketplace
– It then estimates capacity for its own organization and uses the demand
forecast and capacity forecast for its own capacity planning
Cost or price – Organizations forecast prices/costs to identify future costs and their effect
on sales price
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Purpose of Forecasting – Cont.
Technology
– Organizations forecast technology trends to determine
impact on demand and threats to revenue or market
share
Planning
– Historical and economic reviews of key spending
categories provide the cornerstone of planning activities
Assuring supply
– Forecasting supply conditions in critical markets is a key
element for meeting demand
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Economic Concepts and Terms Used in
Forecasting
Price index: a ratio expressing the relationship
between the price of a commodity at a given point
in time to its price during a specified base period.
This information can be used to chart price level
changes
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Economic Concepts and Terms Used in
Forecasting – Cont. Examples of price indices include
– Producer Price Index (PPI): a measurement tool compiled by the U.S. Bureau of Labor Statistics (BLS) reflecting the average change in prices charged by producers during a given time period, compared to those charged in a base year. The PPI measures inflation at earlier stages of the production and marketing process than does the consumer price index (CPI)
– Consumer Price Index (CPI): compiled by the U.S. BLS, the CPI is a monthly measure of changes in the prices of goods and services consumed by urban families and individuals. The relative importance given to individual items in the index’s basket is based on periodic surveys of consumer expenditures. The CPI is computed for the nation as a whole, for each of 17 large metropolitan areas, for individual items, and for commodity and service groupings. It is commonly used to measure inflation
– Implicit price deflator: a factor used to eliminate inflation-related price changes in computing a nation’s real changes in output. Also known as GDP deflator
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Economic Concepts and Terms Used in
Forecasting – Cont.
Interest rate: the price paid for borrowing money,
expressed as a percentage. Interest rates fluctuate
according to a number of factors, including
– Lender’s willingness to postpone use of the money
– Lender’s willingness to assume risk
– The possibility that inflation will reduce the purchasing
power of the funds by the time they are repaid
– The administrative costs of processing a loan
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90
Economic Concepts and Terms Used in
Forecasting – Cont.
Economic indicators: activities that change relative to the economy. Categories include – Leading: a measure of economic activity that changes before
the business cycle does and thus indicates its future direction; for example, bond yields often indicate the direction of the stock market
– Lagging: a measure of economic activity that tends to change after the state of the general economy has changed; for example, the unemployment rate
– Coincident: a measure of economic activity based on a combination of coincident indicators (the Industrial Product Index, manufacturing and trade sales, non-agricultural employment, and personal income net of transfer payments)
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91
Economic Concepts and Terms Used in
Forecasting – Cont.
Inflation/deflation
– Inflation: a loss of purchasing power, caused by
increasing prices
– Deflation: an increase in purchasing power, due to a
decrease in prices
Capacity utilization: the extent to which an
organization, industry or nation uses its installed
facilities. It compares actual output to potential
output using the available installed capacity
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Economic Concepts and Terms Used in
Forecasting – Cont.
Economic indexing: comparing economic factors to
other measures, such as
– Variable interest rates on mortgages
– Social Security payments indexed to the cost of living
– Union wage contracts indexed on a monthly basis
– Certificates of deposit indexed to Treasury bill rates
– Variable interest bonds tied to the return on T-bills
– Etc.
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Economic Concepts and Terms Used in
Forecasting – Cont.
Gross Domestic Product (GDP): a measure of a nation’s domestic
output, which is the total value of all finished goods and services
produced within a country within a given time period (usually one
calendar year)
Balance of merchandise trade: a measure of “visible” (e.g., cars and
electronics) trade; positive value indicates trade surplus (exports
exceed imports) and negative value indicates trade deficit
Balance of payments: measure for the difference in the flows of funds in
and out of a nation’s boundaries; a summary statement of a country’s
transactions with the rest of the world during a year
Exchange rates: the price of a currency as it is being exchanged for
another
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Sources of Data Used in Forecasting
ISM Report on Business® - Manufacturing and Nonmanufacturing
Government publications (international and U.S. domestic) including – Survey of Current Business
– Federal Reserve Bulletin
Private publications such as – The Wall Street Journal
– Business Week
– Financial Times
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Sources of Data Used in Forecasting –
Cont.
Commercial forecasts
Regional surveys
Internal historical data
Industry sources such as – Chemical Week
– American Metal Market
Online indices and search engines/Internet. For example, the following provide extensive statistical data – United Nations (www.un.org)
– Organization for Economic Co-Operation and Development (www.oecd.org/home/)
– International Monetary Fund (www.imf.org)
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Forecasting Methodologies/Techniques
Short-term vs long-term forecasting
– Short-term
• Usually up to one year
• Used as aid in development and execution of short-term
purchase plans and operational or tactical activity
– Long-term
• Longer than one year
• Facilitates the evolution and development of strategic plans
• Typically include in-depth commodity and industry studies
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Forecasting Methodologies/Techniques –
Cont.
Macro vs micro forecasting
– Macro
• Project broad scale activities; e.g.,
– A nation’s gross national product
– An industrial sector such as services or farm sector
– Micro
• Organization-specific or limited to small segments of larger
issues
– Macro and micro forecasts usually are linked; e.g.,
• Organization’s projection for next year’s inventory investment
based on sales estimates (micro)
• Sales estimates based on general economic conditions (macro)
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Forecasting Methodologies/Techniques –
Cont.
Delphi method: a method of forecasting where a
panel of experts is polled repetitively in writing to
develop a consensus prediction of future
environmental conditions
Correlation/regression analysis: method for
measuring the statistical relationship between two
data series. Measures of correlation are used to
describe the degree of relationship between two
variables (or data series)
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Forecasting Methodologies/Techniques –
Cont.
Time-series analysis: method for examining the factors that influence changes in data series over time. These factors include trends, cyclical variances, seasonal fluctuations and random influences
Central tendency: the clustering of data around the central value of a data set
Variability: the degree to which individual data values differ from each other. The smaller the variability, the more tightly the numbers cluster around a central value
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Forecasting Methodologies/Techniques –
Cont.
Analysis of cyclical data: data indicating a cycle, or the residual variation of fluctuation around a long-term trend; i.e., changes in economic or business systems
Trend analysis: a trend is general movement upward or downward. Studying data to reveal such movement may lead to better decision-making. Factors that can create trends include changes in population, productivity, technology, supply/demand, and price or costs
Decision tree analysis: a decision-making tool that maps alternative courses of action and their consequences
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Factors That Can Affect Forecasts
Forecasts are accurate only as long as all conditions remain unchanged
Factors that can affect forecasts include – War and threats of war
– Strikes and threats of strikes
– Natural factors; e.g., disasters, discoveries, depletions
– Changes in • Technology
• Government
• Law
• Population
• Consumer tastes
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Factors That Can Affect Forecasts – Cont.
For critical items, consider and track factors such
as
– Fluctuating lead times
– Changing labor conditions
– Changes in money markets
– Political factors
– Technological shifts
– Climatic conditions
– Changes in global trade
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103
Task 2-C-2 Recall Question #1
Which of the following is the LEAST important reason
supply managers need to forecast? To:
(A) Determine the quantity required.
(B) Determine the availability of the product or service.
(C) Determine the supplier’s delivery time.
(D) Determine the price of the product or service.
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Task 2-C-2 Recall Question #2
Gross Domestic Product is the:
(A) Total value of all finished goods and services produced within a
country within a given time frame.
(B) Difference between the value of a country’s exports and the value of
its imports.
(C) Difference between the flows of funds into and out of a country’s
boundaries.
(D) Amount of funds owed by a domestic organization to another
organization in a foreign country.
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Task 2-C-2 Case Study #1
Discussion Questions:
1. What components of a time series can be seen in these data?
2. What type(s) of time series forecasting model(s) would be appropriate
to use?
3. What error criterion should the supply manager use to evaluate the
various models?
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Task 2-C-2 Summary and Review
Describe the purpose of forecasting
Define the following terms – Price index
– PPI
– CPI
– Implicit price deflator
– Interest rate
– Capacity utilization
– Economic indexing
– GDP
– Balance of merchandise trade
– Balance of payments
– Exchange rates Cont.
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Task 2-C-2 Summary and Review – Cont.
Contrast the following: inflation/deflation
Identify some of the sources of data and some of
the methodologies or techniques used in
forecasting
What are some of the factors that can affect
forecasts?
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108
TASK 2-C-3
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Task 2-C-3 Task Outline
1) Buying strategies
2) Financial tools
3) Forecasts of volume
4) Factors in the selection of the method of procurement
Plan and communicate sourcing and supply strategies based on forecasted data.
This task contains no bridge exam material.
Full 7Q; Bridge No Q
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Buying Strategies
Spot buying – Buying on the open market for immediate delivery
Buying to requirements – Usually 3 weeks to 3 months supply
– Ensures supply without building costly inventory
Forward buying – More than current requirements, but not more than foreseeable
need
– “Drivers” include potential shortage, strikes, price increase, etc.
Speculative buying – More than current and known future requirements
– Usually to take advantage of favorable pricing and profitable future resale
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Buying Strategies – Cont.
Volume purchase agreements – May be based on total order quantity or dollar value
– A time frame is typically specified
– Primary objectives include • To ensure supply
• To consolidate volume and maximize purchasing leverage while eliminating some inventory cost
Life of product supply – Refers to award of a materials or components contract for life of the
finished product
– Typical reasons for a life-of-product contract include • To eliminate repetitive re-bidding
• Supplier familiarity of buyer needs
• Special supplier capabilities
• Best pricing for small quantities
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Buying Strategies – Cont.
Just-In-Time – Focuses on identification and elimination of waste in a process
– Objectives include
• Facilitation of a “pull” manufacturing system
• Reduction in raw material, in-process and finished goods inventory
• Decreased inventory shrinkage
• Increased inventory turnover
• Lower risk of component obsolescence
• Reduced requirement for storage space
– Requires close collaboration and planning with supplier
Consignment – Refers to inventorying supplier owned material on the buyer’s site
– Payment is made as inventory is used and replenished
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Buying Strategies – Cont.
Commodities
– Currently defined two ways • Any tangible good that can be bought, sold or bartered
– Gold, silver, oil, bulk food products (corn, coffee), etc.
• Goods that are sold on a commodities market
– Market dynamics • Price movement may result from speculation, not real
demand
• Many purchases are investments, not for use by the buyer
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Buying Strategies – Cont.
Commodities – Cont.
– Exchanges • An established market where supply and demand may
operate freely while buyers and sellers conduct trading of
various commodities
– Terminology • Cash commodity – an actual commodity under a contract for
the purchase or sale and delivery at some future date
• Spot price – the price paid for a commodity when purchased
for cash on an exchange for immediate delivery
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Buying Strategies – Cont.
Supplier replenishment systems
– Refers to supplier managed inventory on the buyer’s site
– Ownership of the materials depends on the negotiated
agreement
Outsourcing
– Essentially, a make-or-buy decision
– Outsourcing may be
• Nearshore – when business is relocated to a geographically
nearby location
• Farshore – when business is outsourced to a more distant
supplier
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Financial Tools
Hedging – An organization enters into a futures contract to offset or reduce
its price exposure in the cash market
– Long hedge – buying a futures contract to safeguard profits related to an extended delivery, fixed price sales contract when purchase of materials is postponed
• Protect material prices by buying futures contract based on current pricing. Ensures material availability at current futures contract price, should market price of materials rise
– Short hedge – selling a futures contract based on current pricing to protect inventory values in a declining market.
• If declining prices cause finished product prices to fall, the loss should be offset by the difference between the futures contract and the current pricing
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Financial Tools – Cont.
Dollar averaging
– First, the price cycle is estimated and divided into
equal time periods. Then dollar averaging can take
place in two scenarios
• Buying the same quantity in equal time periods over a price
cycle
• Spending the same $ in equal time periods over a price cycle
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Financial Tools – Cont.
Contracting – Long term contracts – typically formed when there is value in
a long term supplier relationship
– Price change clauses – (escalation or de-escalation clauses) • Useful in an agreement where future price of materials and/or labor
is unknown
• Typically in long-term contracts
• Protects buyer and supplier from unpredictable price changes
– Multi-year contracting • Strategic supplier relationships are typically multi-year in scope
• A multi-year agreement demonstrates buyer/supplier commitment
• Performance expectations should be carefully defined
• Problems should be quickly addressed
– Future delivery contracting – typically used to ensure future availability of required goods/services
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Financial Tools – Cont.
Contracting – Cont.
– Buying capacity reserves
• When volume of material requirements can be estimated, but the
exact mix is unknown, a portion of supplier manufacturing
capacity may be reserved
• Reduces the uncertainty and risk associated with insufficient
capacity
• Downside: if reserved capacity is not used, buyer must pay
anyway
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Forecasts of Volume
Determining annual requirements – Derived from sales/marketing forecasts and historical usage
Part (or product) life cycle – Forecasts over entire product life, rather than monthly or annually
– May form the basis for life-of-product supply contracts
Supply markets relative to short/long term buying needs – Short term need may require no more than a quick scan of the
market
– Long term, more critical needs dictate extensive studies, including • Current/future technological impact assessments
• Possibility and availability of material substitutes
• Worldwide demand and supply
• Price analysis
• Development and use of tracking mechanisms and info systems
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Factors in Selection of the Method of
Procurement
First, a question: Competitively bid or negotiate? The “drivers” may include – Degree of competition and the market situation
• Many suppliers: competitive bidding
• Few suppliers: negotiation may be favored
– Industry norms and standards • Standard products are competitive. Bidding may be favored
• Negotiation is favored for custom-made items, specialized need, or poorly defined specs
– Urgency • Competitive bidding is typically more time consuming
• If need is urgent, negotiation may be best
– Dollar value • Low dollar value may not be worth the bid process
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Factors in Selection of the Method of
Procurement – Cont.
– Nature of the product or service specifications • When specs are clearly defined, bidding is usually favored
• Where specs are unclear, or may be changed later, negotiation is best
– Type of contract desired • Fixed price contracts favor bidding
• Cost reimbursable and uncertain delivery contracts favor negotiation
• As uncertainty rises, so does the likelihood of negotiation
– Frequency of purchase • Repetitive purchases often call for blanket order, systems
contracts or use of a charge card
• Competitive bidding is likely not worth the effort
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Factors in Selection of the Method of
Procurement – Cont.
– Risk • Low volume/low risk – non-critical, bid process impractical
• Low volume/high risk – increase volume and bid, or simplify and mitigate risk and negotiate
• High volume/low risk – bidding is generally favored
• High volume/high risk – negotiation is generally favored
– Customer requirements • When final customer dictates the supplier, negotiation is favored
• Short lead times may reduce available suppliers….negotiation
• When there are sufficient competitive sources, bidding is favored
– Lead time • Given sufficient time for the process, bidding may be favored
• If goods are required quickly, negotiation is usually favored
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Factors in Selection of the Method of
Procurement – Cont.
– Level of flexibility
• When supply manager has high level of flexibility, bidding is
favored
• If the buyer needs a high level of supplier flexibility, negotiation is
best
– Buyer/seller uncertainty
• Generally, as level of uncertainty rises, so does the need to
negotiate
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125
Task 2-C-3 Recall Question #1
Which of the following is a PRIMARY objective of a
volume purchasing agreement?
(A) To take advantage of volume pricing while maintaining low inventory
(B) To reduce the cost per unit of holding inventory
(C) To fix the delivery schedule of the contract over a defined time frame
(D) To reduce pricing volatility over the contract term
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Task 2-C-3 Recall Question #2
Which of the following is the MOST critical issue when
selecting a supplier for a Just-In-Time (JIT) delivery
agreement?
(A) Availability of transportation resources is the most key supplier
selection criterion when implementing a JIT delivery agreement.
(B) A JIT delivery agreement will change a supply management
department from a transactional orientation to a focus on supplier
understanding of JIT.
(C) JIT II operates the same as JIT, but on a larger scale.
(D) The supplier’s quality process is of prime concern when developing a
JIT delivery agreement.
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Task 2-C-3 Case Study #1
Discussion Questions:
1. What are the key considerations in design of a JIT system for delivery
of M-1 to Moss, Inc.?
2. How much inventory should be on hand at Moss, Inc.?
3. How would you structure the JIT delivery arrangement?
4. Are there any other issues that warrant consideration?
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Task 2-C-3 Summary and Review
Define
– Spot buying
– Buying to requirements
– Forward buying
– Speculative buying
– Life of product supply
– Dollar averaging
What is “hedging,” what is its intent and how is it used?
Identify 10 key influences on selection of a method of
procurement
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TASK 2-C-4
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Task 2-C-4 Task Outline
1) Elements of early supplier involvement (ESI)
2) Business forecasting models
3) Confidentiality issues
4) Parameters for disclosure
5) Legal implications
6) Supplier managed inventory (SMI)
7) Collaborative Planning Forecasting and Replenishment (CPFR)
8) Product life cycle
9) Information exchange options
Manage forecasted data with suppliers.
This task contains no bridge exam material.
Full 6Q; Bridge No Q
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131
Elements of Early Supplier Involvement
(ESI)
Early supplier involvement (ESI)
– A practice that brings together one or more selected
suppliers with a buyer’s product or service design team
early in the product development process
– Objective: utilize the supplier’s expertise and experience
in developing a product specification that is designed for
effective and efficient product roll-out
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Elements of Early Supplier Involvement
(ESI) – Cont.
ESI can be particularly beneficial in the following areas
– Manufacturing process
– Capital acquisitions budget
– Product or service development/implementation
– Cost
– Quality
– Availability
– Technology
– Design
– Product co-development
– Cycle time
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Business Forecasting Models
Rely on leading indicators
– Indicators of economic activity that change in advance of
business cycle changes, thus indicating its future direction
Examples of indicators include
– Change in number of building permits
– Money supply
– Inventory level changes
– Changes in stock prices
– Number of unemployment insurance claims
– Average hours worked per week
– New orders
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Confidentiality Issues
ESI requires trust between the parties
Confidentiality plays a big role
Information shared may take a variety of forms
Supply management professionals must ensure information about one supplier is NOT shared with another (unless legally required) – Must make sure everyone in organization understands
need for confidentiality
– Must establish controls to protect information
– May use non-disclosure agreements (NDA)
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Parameters for Disclosure
When using ESI, agree in advance on parameters for disclosure
Organizations often are concerned with protecting intellectual property – Safest: no access
– An alternative: intellectual property agreement
Organizations often share production plans with suppliers – Supplier should regard as confidential
– Use confidentiality or non-disclosure agreement
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Legal Implications
NDAs must clearly define “proprietary information”
and how it may be used
May include a dispute resolution clause
Effective NDAs
– Prevent each party from disclosing other party’s
confidential information to third parties
– Limit use of other party’s confidential information to
authorized purposes set forth in NDA
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Supplier Managed Inventory (SMI)
An inventory management system that holds a
supplier responsible for
– Ensuring that stock is maintained at appropriate levels in
the supply management professional’s facility and
– Replenishing items when these levels drop
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Collaborative Planning Forecasting and
Replenishment (CPFR)
An initiative developed by the Voluntary Industry
Commerce Standards (VICS) Association that
allows collaborative processes across the supply
chain
Some of the first applications involved a final
retailer sharing its consumer demand forecasts
upstream in the supply chain to enable
manufacturers of branded goods to produce and
distribute their products to the retailer at lower
costs
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Product Life Cycle
Product life cycle: the stages a product goes
through from beginning to end. Five distinct stages
are
– Design
– Introduction
– Growth
– Maturity
– Decline
Suppliers can be actively involved during each
stage
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Information Exchange Options
There are many options for sharing information
between supplier, buying organization and other
involved parties
Formats for sharing include
– Face-to-face meetings
– Virtual meetings
– Conference calls
– Web portals
– Other systems integrations using various technologies
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Task 2-C-4 Recall Question #1
In the early stages of engagement with suppliers,
which factors are the BEST considerations when
managing early supplier involvement (ESI)?
(A) Technology, design, cost, co-development, quality, intellectual
property and risk management
(B) Delivery, cost and quality
(C) Supplier contract and relationship
(D) The supplier’s history with the buying company
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Task 2-C-4 Recall Question #2
Which of the following BEST describes Supplier Managed
Inventory (SMI)?
(A) Inventory management system related to forecasting and MRP
(B) Inventory management system related to maintaining stock at
appropriate levels
(C) Inventory management system relating to capacity planning models
(D) Inventory management system relating to legal contracting
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Task 2-C-4 Comprehension Question #1
John Davis is a sourcing manager for a consumer electronics manufacturing company. His company is developing a new product that they expect will change the industry, and Davis wants to engage suppliers in the product development cycle. Which of the following includes the items MOST important when involving suppliers in the development cycle?
(A) Confidentiality agreements are essential.
(B) Confidentiality agreements, production plans and pricing are important.
(C) Confidentiality agreements, ownership of intellectual property (IP), risk, production capacity and cycle time are important.
(D) Price, quality and delivery are important.
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Task 2-C-4 Comprehension Question #2
Julio Suarez is the Director of Supply Management for an arts and crafts company that sells to retail stores and television home shopping networks. The products are seasonal items and his company’s customers are very demanding about on-time delivery, often charging his company for lost profit if delivery schedules are not met with 99% on-time delivery. Suarez is responsible for managing forecasted data with suppliers. The two key success factors for Suarez’s management of forecasted data are:
(A) The supplier’s contract and price.
(B) The company’s material requirements planning (MRP) and the strength of the supplier relationship.
(C) Early supplier involvement and detailed knowledge of the company’s and supplier’s manufacturing processes.
(D) The supplier’s delivery schedule and a company’s receiving schedule.
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Task 2-C-4 Summary and Review
What is ESI and what is its objective?
Give examples of leading indicators
Describe the impact of the need for confidentiality
on ESI and ways to manage this need
Define the following and describe the role of ESI in
each
– Supplier managed inventory
– CPFR
– Product life cycle
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TASK 2-C-5
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TASK 2-D-1
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TASK 2-D-2
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Task 2-D-2 Task Outline
1) Sales projections
2) Staffing requirements
3) Operations capacity and capabilities
4) Logistics/distribution capabilities
5) Supplier capability/capacity analysis
6) Lead time and inventory planning
Participate in product-service ramp-up and/or ramp-down strategies and
implementation
All of the content in this task is bridge exam material.
Full 6Q; Bridge 3Q
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Introduction
Supply management must be able to manage a ramp-up
strategy (including various logistics and distribution
decisions) to
– Meet challenges of
• Time-to-market
• Volume growth
– Help the organization
• Achieve fast payback on new product development
• Gain leading market position from early entry
Ramp-up: the period during which the manufacturing
process makes the transition from zero to full-scale
production at target levels of cost and quality
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Sales Projections
Sales projections
– Critical to achieve effective ramp-up
– Poor forecasting
• May lead to involuntary downtime as suppliers cannot supply
enough critical components
• Other times, supply management may rely on a supplier to
handle problems caused by poor sales forecasts
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Staffing Requirements
Ramp-up projects
– Operate most effectively within a cross-functional and
cross location team structure
– As production moves from pilot to volume, cooperation
among people and departments is critical
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Operations Capacity and Capabilities
Operations flexibility and response time
– Ramp-up is characterized by
• High variability and uncertainty
• Conflicts in managing short cycle times and fast throughput
increases
– Fast entry strategy may be achieved through
• Computer-aided-design/computer-aided manufacturing
(CAD/CAM)
• Design for manufacturing
• Aggregate project planning
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Operations Capacity and Capabilities –
Cont.
Equipment and labor capabilities
– During ramp-up, new equipment needs to be
• Delivered
• Hooked-up
• Installed
• Aligned with the right process
– May require detailed experiments and analyses to prove
process capability prior to release of product
– Skilled labor is required to undertake rapid problem
solving to build knowledge of the process and improve
yield rates
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Logistics/Distribution Capabilities
Efficient logistics networks
– Key to ramp-up
– Ensure materials arrive on desired schedule
Rapid logistics may help keep schedule when
supplier shortages occur
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Supplier Capability/Capacity Analysis
Supply management professionals must be mindful of
– Technological aspects of product design
– Commercial issues of capacity and ramp-up
Tooling
– Long lead times
– Lasting impact
– “Right” amount of tooling and capacity are critical to meet expected
demand without incurring significant costs
Prototype qualification
– Testing and evaluation of prototypes for minimal technical
requirements is critical for meeting long term cost and performance
targets
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Lead Time and Inventory Planning
Key challenge of ramp-up: ensure supply chain
maintains pace with volume growth
This challenge is exacerbated in a global
production network
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Task 2-D-2 Recall Question #1
What is the BEST definition of a ramp-up period when
introducing a new product and/or service?
(A) The planning leader invites the cross-functional, cross-location team
members to begin working.
(B) The manufacturing or production process makes the transition from
zero to full-scale production.
(C) The project planning process is initiated with key milestones and
deliverables noted.
(D) Suppliers are notified of the planned introduction of a new product
and given detailed specifications.
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Task 2-D-2 Recall Question #2
Which of the following is NOT a consideration in
developing a ramp-up strategy for new product
introduction?
(A) Sales projections
(B) Capacity requirements
(C) Early supplier involvement (ESI)
(D) Staffing requirements
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Task 2-D-2 Case Study #1
Discussion Question:
1. What should New Age’s supply management professionals consider
as they seek to establish both the inbound logistics requirements and
assist in selecting the outbound distribution suppliers?
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Task 2-D-2 Summary and Review
Define ramp-up
Discuss some of the key areas of concern during
ramp-up and the contributions made by supply
management in each
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TASK 2-D-3
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Task 2-D-3 Task Outline
1) Product and technology roadmaps of supplier and customer
2) Data on sales performance to plan
3) Integration requirements between supplier and customer systems
4) Product pricing strategy
5) Financial and information flows
6) Critical service factors
7) Customer segmentation (derived demand and market segmentation)
8) Supplier collaboration processes
Create systems and process improvements to help the organization meet sales goals.
All of the content in this task is bridge exam material.
Full 5Q; Bridge 4Q
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Product and Technology Roadmaps
To identify opportunities, one must first understand the organization’s supply chain strategy and
economics. This is typically based on:
Target market Mass market or niche market?
High price/high service market vs low price discount market?
Decisions: make-or-buy, leverage supplier value, joint venture
Product features and
technology
What is needed to support the target market and
product/service?
Choice of technology level depends on joint R&D capabilities
Customer features and
operational scale
One large customer or lots of small customers?
Collaborate with suppliers to ensure balanced supply chain
capacity and low cost
Customer service and
inventory/staffing alignment
Usually, higher service requires higher inventory and staffing
Should share planning information with suppliers
Doing so tends to improve the quality of decisions
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Product and Technology Roadmaps
The Roadmap
A roadmap is a plan that identifies the route to achieving a desired end result – A technology or product roadmap
• Focuses on a single technology or product
• Describes the way it is expected to develop
• May include project plans to support development
– The roadmap focuses on • Forecasting development/commercialization of new technology
• The organizations’ competitive position relative to the technology
• How the technology and the competitive position will develop
– The roadmap may be used to • Influence resource allocation
• Form subsections of complex product maps
• Form development time frames and milestones
• Leverage R&D investment by coordinating research activities
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Product and Technology Roadmaps
Supply management’s role – Influencing which technology will be used
– Assessing the risk of switching to new technologies
– Determining resulting impact on the supply chain
– Working with engineers to evaluate/select suppliers
– Monitoring supplier investment in future technology
Sales goals – Sales and revenue objectives are good guidelines for
• Planning supply chain activities
• How to best engage suppliers
• Ensuring alignment between supply and sales strategies
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Data on Sales Performance to Plan
Sales continually change in response to micro and macro economic conditions
Supply must monitor the planned to actual sales gap in order to appropriately adjust supply chain capacity and capability
Point-of-sale information – This refers to computation of sales data and inventory
adjustments at the time and place of sale
– It uses magnetic or electronic media
– Point-of-sale data is a good source of actual to planned sales data
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Integration of Supplier and Customer
Systems
Multiple cross-business communication standards
increase difficulty and cost of buyer/supplier
system integration
Before proposing joint improvement opportunities
to suppliers, supply management must
– Understand where integration is desirable
– Identify the issues with establishing the linkages
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Product Pricing Strategy
Supply management can help meet target sales price and margin goals by working with suppliers to optimize the cost vs product/service features trade-off
Margins – “Margin” is defined as
• As a business metric, the ratio of operating profit to revenue
• For individual products, the difference between cost and selling price
• The minimum return below which products are not profitable
– Supply management’s role • Reduce cost of good to improve margin to target levels
• If reducing price in order to gain additional sales and revenue, supply management can provide options on which to base that decision
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Financial and Information Flows
Supply management
– Is concerned with the extended supply chain. Financial and
information flows up and down the chain facilitate better
supply chain management
– Must partner with Finance and IT to facilitate better decisions
Inability to share and synchronize key data hinders
seamless information flow between supply chain
partners
Best-in-class organizations seek to integrate and align
their entire inter-corporate procurement-to-pay cycle
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Critical Service Factors
Supply management must stay current on critical
customer service factors
Organizational ability to meet customer service
requirements depends in part on supply
management performance
Strong links with Sales and Marketing facilitate
better supply management performance
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Customer Segmentation
Understanding segmentation of an organization’s customers facilitates better understanding of the demand for final products
This requires segmentation of current and, sometimes, potential customer base
Customer segmentation is the process of grouping customers with similar characteristics, such as demographics or attributes, in order to – Better manage customer relationships
– Meet existing customer needs
– Identify needs that are not being met
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Customer Segmentation – Cont.
The goal of segmentation is to quantify each customer segment’s net contribution to profitability
Segmentation may be used as the principle basis for allocation of resources to
– Product development
– Marketing strategy
– Pricing
– Service
– Sourcing strategies
– Product distribution
– Differentiated delivery programs
Supply management’s understanding of customer segmentation and strategic suppliers facilitates contribution to customer satisfaction and, ultimately, to profitability
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Supplier Collaboration Processes
Supplier collaboration refers to practices aimed at driving continuous improvement and lowering total cost to the mutual benefit of all stakeholders
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Supplier Collaboration Processes – Cont.
Demand management – A compilation of demand data/supply management capability
– The objective is to closely match supply with demand, within the constraints imposed by supply management
Specification rationalization – Defined as
• Improving value through continued cost analysis
• Simplifying non-critical product attributes
• Use of lower cost substitutes
– Techniques include
• Standardizing parts
• Substituting lower cost parts or materials
• Product value analysis
• Examination of product life-cycle costs
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Supplier Collaboration Processes – Cont.
Make vs buy analysis – Defined as
• Determining what products/services should be provided in-house
• Determining what products/services should be sourced outside
– A make-or-buy analysis evaluates options based on
• Whether or not the process is a core competency
• Relative “fit” of the decision
• Relative cost
Inventory or asset management – Consider “Vendor Managed Inventory” (VMI)
• Integrates the supply chain
• Empowers suppliers to manage replenishment
– VMI may also involve suppliers in production planning
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Supplier Collaboration Processes – Cont.
Joint Process Improvement – Defined as
• A joint effort by supply managers and suppliers to analyze current and potential future aspects of their relationship
• Analysis should extend over the entire value chain
– Goal: identify mutually beneficial opportunities
Value chain may include
Customer Service
Manufacturing Processes
Procure-to-Pay Cycles
Product Development
Research and Development
Planning
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Task 2-D-3 Recall Question #1
All of the following are primary choices that organizations
are faced with in determining their supply chain strategy
and economics EXCEPT:
(A) Target market.
(B) Customer selection and operational scale.
(C) Product features and technology.
(D) Sales goals.
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Task 2-D-3 Recall Question #2
Demand management is included in the supplier
collaboration process, and allows an organization to
reduce costs by managing the factors that drive
consumption. Which of the following is NOT one of the
typical levers used in demand management?
(A) Reducing frequency
(B) Encouraging substitution
(C) Imposing tighter process/tracking
(D) Applying product value engineering
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Task 2-D-3 Comprehension Question #1
Organizations that collaborate with their suppliers receive many benefits, including increased mutual visibility into inventories and other information that improves efficiency in the physical supply chain.
However, many parts of the total business-to-business information flow have not kept pace with the information flows about products and materials in the physical supply chain. Which of the following initiatives could a supply organization implement to more fully integrate financial and information flows?
(A) Inventory and logistics information systems
(B) Accounts payable and accounts receivable systems
(C) Procurement-to-pay cycles
(D) Respective warehousing systems
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Task 2-D-3 Summary and Review
Describe the typical basis of an organization’s supply chain
strategy and economics
Discuss supply management’s role in
– Product and technology roadmaps
– Product pricing strategy
– Customer service
Explain point-of-sale information and why it is useful to
supply management
Identify the reasons for customer segmentation
Define supplier collaboration and describe several supplier
collaboration processes
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TASK 2-E-1
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Task 2-E-1 Task Outline
1) Supplier quality practices
2) Supplier certifications/registrations (e.g., International Organization for
Standardization [ISO], good manufacturing practices [GMP])
3) Congruence of test methodologies and results between buying and
selling organizations
4) Organizational requirements for supplier certification (e.g., evidence of
statistical process control [SPC])
Develop and/or administer a supplier quality certification program
This task contains no bridge exam material.
Full 6Q; Bridge No Q
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Introduction
Supplier certification: an organization’s process for
evaluating the quality systems of key suppliers in
an effort to eliminate incoming inspections
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Supplier Quality Practices
Supply management organizations may categorize
suppliers as follows
– Approved suppliers: suppliers that meet an organization’s selection
criteria and have been added to the approved list
• Approval process may include
– Submission of samples for testing
– Inspection of the supplier’s quality systems
– Preferred suppliers: a group of suppliers that an organization has
determined meet its expectations for quality, delivery and/or price
and that are able to respond to unexpected changes
• Often master price agreements are established
• Entire organization must buy from these suppliers
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Supplier Quality Practices – Cont.
Partnered suppliers: close relationship with supplier usually
built around long term arrangements, large volume
commitments, and joint product/service process
development
– Often called strategic alliance
– A collaborative relationship
Certified suppliers: suppliers whose enterprise-wide quality
control systems are integrated with the supply management
organization’s enterprise-wide quality control system
– Reduces total costs associated with quality
• Eliminates duplication of effort
• SPC an other quality control processes are used
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Supplier Quality Practices – Cont.
Prequalified suppliers: suppliers added to an organization’s “approved supplier” list when they have passed preliminary screening including examination of – Financial strength
– Facilities
– Location
– Size
– Technology
– Labor status
– Management
– Costs
– Terms
– References
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Supplier Quality Practices – Cont.
Certifiable suppliers: suppliers that are not currently
certified but in the process of becoming certified by the
supply management organization
Disqualified suppliers: individuals, companies or other
organizations that fail to meet the standards established by
a supply management organization and are barred from
competing for that organization’s business
Acceptance testing: test procedures that lead to formal
acceptance of a new/changed product, process or system
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Supplier Quality Practices – Cont.
Certification requirements
– Created by the supply management organization
– Basis for supplier to be certified
• Qualifies supplier for reduction/elimination of incoming inspections
– Certification standards include definitions of
• How measurements are made
• Minimum level of quality no longer requiring inspection
– Supplier reviews its measurement system with supply
management to
• Ensure measurements are correlated
• Provide documentation that minimum certifiable quality levels have
been achieved
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Supplier Quality Practices – Cont.
Locations of inspections may include
– Supplier’s plant
– In process
• At inspection stations
• At final inspection before shipment
– Supply management organization
• Incoming inspection
• In process (as supplier’s materials are used)
• At final inspection before shipment
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Supplier Quality Practices – Cont.
Levels of thoroughness of inspections include
– No inspections at all
– Occasional audits or random inspections
– Routine sample inspections
– One hundred percent inspections
Results of inspections should be documented
– Regardless of their location
– Regardless of their level of thoroughness
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Supplier Certifications/Registrations (e.g., ISO [International Organization for Standardization], GmP [Good Manufacturing Practices])
International Organization for Standardization
(ISO)
– A worldwide federation established in 1947
– Promotes the development of global standards to
enhance international business interactions
– The ISO is comprised of standards organizations from
more than 140 countries
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Supplier Certifications/Registrations – Cont.
ISO 9000: family of standards and guidelines primarily
concerned with
– Quality management or what the organization does to fulfill the
customer’s quality requirements and
– Applicable regulatory requirements
The intent of the standards is to provide an organization
with a methodology for enhancing customer satisfaction
and achieving continual improvement of its performance in
pursuit of these objectives
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Supplier Certifications/Registrations – Cont.
Good manufacturing practices (GmP)
– First prepared by the World Health Organization (WHO) in 1967
– Currently extended through international organizations and country-
specific regulations
– GmP ensures
• Quality assurance
• Compliance
• Good product development
– GmP regulations require a quality approach to manufacturing,
enabling companies to minimize or eliminate instances of
• Contamination
• Mix-ups
• Errors
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Congruence of Test Methodologies and Results
between Buying and Selling Organizations
To achieve consistent quality, organizations and suppliers collaborate in such areas as – Acceptance/rejection
– Testing capability • Workers
• Machines
– Process control • Statistical process control (SPC)/statistical quality control (SQC)
• Six sigma/Cpk
– Quality systems • Organization and management
• Documentation
• Certification/validation
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Organizational Requirements for Supplier
Certification (e.g., Evidence of SPC)
Management responsibility
Quality system
Contract review
Design control
Document and data control
Procurement
Control of customer-supplied
product
Product identification and
traceability
Process control
Inspection and testing
Control of inspection, measuring and test equipment
Inspection and test status
Control of nonconforming product
Corrective and preventive action
Handling, storage, packaging, preservation and delivery
Control of quality records
Internal quality audits
Training
Servicing
Statistical techniques
Areas examined before certifying suppliers may include
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Task 2-E-1 Recall Question #1
Which of the following worker capability indicators is of
LEAST value to a supply manager when determining the
supplier’s ability to detect and report on individual
workers’ correct and incorrect work?
(A) Hours of SQC (statistical quality control) or TQM (total quality
management) training
(B) Number of certifications held
(C) Use of process control charts by equipment operators
(D) Reviewing acceptance/rejection history
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Task 2-E-1 Recall Question #2
Which of the following would be LEAST useful in
evaluating a supplier quality system?
(A) Process control
(B) Acceptance sampling criteria
(C) Employee quality training programs
(D) Product traceability
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Task 2-E-1 Comprehension Question #1
The following list contains the steps in obtaining an ISO 9000 certification.
I. Process audits
II. Inquiry into registration process
III. Contract with registrar
IV. Rolling certification audits
V. Final certification audit
VI. Certification audit
Which of the following is the correct sequence from first to last of these steps?
(A) I, II, III, VI, IV, V
(B) II, III, VI, I, V, IV
(C) III, IV, VI, V, I, II
(D) VI, II, I, III, V, IV
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Task 2-E-1 Comprehension Question #2
Rank the type of supplier classification given below from least stringent to most stringent from a supplier’s perspective.
I. Approved
II. Certified
III. Partnered
IV. Preferred
(A) I, II, III, IV
(B) I, IV, III, II
(C) II, III, I, IV
(D) IV, III, II, I
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Task 2-E-1 Summary and Review
Define the following
– Supplier certification
– Approved suppliers
– Preferred suppliers
– Partnered suppliers
– GmP
Identify the focus of ISO 9000
Discuss methodologies and requirements that
organizations use to certify their suppliers
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TASK 2-E-2
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TASK 2-E-3
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Task 2-E-3 Task Outline
1) Benchmarking systems
2) Process mapping
3) Process costing
4) Maturity models
5) Capability maturity model-integration (CMMI)
6) Contract management maturity model (CMMM)
7) Process improvement metrics
8) Process improvement methods (e.g., lean methods, JIT [Just-In-Time], Six Sigma, value stream mapping)
9) Supplier workshops
Implement Continuous improvement processes within the supply chain
All of the content in this task is bridge exam material.
Full 10Q; Bridge 3Q
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Benchmarking Systems
Benchmarking: a process by which selected
practices and results of one organization are
compared to those of one or more other
organizations to establish targets for improvement
Benchmarking can be performed either by
– Identifying world class organizations and visiting them
for information gathering and comparison
– Responding to surveys from third-party independent
research organizations that collect, aggregate and
disseminate benchmark data
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Benchmarking Systems – Cont.
Benchmarking
– A search for industry best practices that lead to superior
performance
– A method for continuous improvement
• Focuses on continuous process of measuring against the “best”
– Results allow organization to
• Establish goals
• Periodically measure progress
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Benchmarking Systems – Cont.
Steps in benchmarking include
– Identify what is to be benchmarked
– Identify comparative organizations
– Determine data collection methods and collect data
– Determine current performance gap
– Project future performance levels
– Communicate benchmark findings and gain acceptance
– Establish functional goals
– Develop action plan
– Implement specific actions and monitor progress
– Recalibrate benchmarks
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Benchmarking Systems – Cont.
Maturity in benchmarking is achieved when
– Organization achieves leadership and superiority as a
result of incorporating best industry practices in all
business processes
– Benchmarking program is institutionalized throughout
entire organization
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Process Mapping
Process mapping: a method of drawing a pictorial
representation of a process (e.g., manufacturing a
component or ordering a part) that breaks the process
into key activities, transfers, decisions and approvals
Process maps enable analysis of the inputs, outputs
and interrelationships of each process to
– Understand how processes interact in a system
– Locate process flaws that are creating systemic problems
– Evaluate which activities add value for the customer
– Mobilize teams to streamline and improve processes
– Identify processes that need to be reengineered
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Process Mapping – Cont.
Process mapping
– Ensures common understanding of activities, results and
users involved in a specific business process
– May help define boundaries of a business process
– Provides a baseline against which to measure
improvements
– Also known as
• Flow charts/diagrams
• Process diagrams
• Workflow diagrams
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Process Costing
Process costing: determining the cost to perform a specific process. Process costs include both – Direct expenses
• Direct labor
• Direct materials
– Indirect costs; e.g., • Overhead
• Profit
Used with process mapping to – Reduce costs of a process
– Distinguish between high value add and low value add activities in a process
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Maturity Models
Maturity: a measure of effectiveness in any specific process
Maturity model: an evolutionary roadmap
Originated from quality initiatives such as – The Deming Prize
– ISO Standards
– Malcolm Baldrige National Quality Award
Examples – Capability Maturity Model-Integration (CMMI)
– Contract Management Maturity Model (CMMM)
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Capability Maturity Model-Integration
(CMMI)
Developed by the Software Engineering Institute (SEI) at Carnegie Melon University in Pittsburgh
Collection of best practices that guide process improvement
Five maturity levels – Initial
– Managed
– Defined
– Quantitatively managed
– Optimizing
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Contract Management Maturity Model
(CMMM)
Developed by Acquisition Research Program, Naval Postgraduate School
Assess level of capability for each of six major steps in the contract
management process
– Procurement planning
– Solicitation planning
– Solicitation
– Contract administration
– Contract closeout
Identify level of maturity
– Ad hoc
– Basic
– Structured
– Integrated
– Optimized
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CMMM – Cont.
CMMM helps you
– Develop a roadmap to assess, measure and improve
contract management processes and relationships
including
• Roles and responsibilities
• Timelines
• Performance management
• Costs
– Create a vision of excellence
– Produce a framework or guide for improvement
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Process Improvement Metrics
Process management: the function of planning,
organizing, controlling and improving a process and
measuring its utility in providing the desired end result
Common process improvement metrics
– Productivity: a measure of the ratio of outputs to inputs
– Efficiency: a measure of actual outputs compared to a
standard output measure where the standard output measure
is an estimate of what should be produced, given a certain
level of resources
– Cycle time: a measure of total elapsed time needed to
complete the process
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Process Improvement Methods (e.g., Lean Methods, JIT
[Just-In-Time], Six Sigma, Value Stream Mapping)
Tools and techniques used to improve various business
processes
Common methods include
– Lean production
– Just-in time (JIT)
– Six sigma
– Value stream mapping (VSM)
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Process Improvement Methods – Cont.
Lean production
– A philosophy of operations that focuses on minimization
of all resources (including time) used in the organization
– It employs a set of principles and practices to reduce
cost through the
• Relentless removal of waste
• Simplification of all processes
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Process Improvement Methods – Cont.
Just-in time (JIT)
– An operations management philosophy, the objectives of
which are to reduce waste and cycle time
– Operationally, JIT minimizes inventory at all levels. It requires
• Consistent quality at the appropriate level
• Frequent on-time delivery of small lot sizes
– The objectives are to
• Have only the required inventory, as needed
• Have zero defects
• Reduce lead times through reductions in setup times, queue
lengths and lot sizes
• Accomplish all of this at minimum cost
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Process Improvement Methods – Cont.
Six sigma: a quality management program with a goal of no
more than 3.4 defects per million parts and an outstanding
commitment to quality
Value stream mapping (VSM): a lean manufacturing
technique in which the transformation of materials is traced
from beginning to end to determine if there is waste in the
process in the form of a
– Step where no value is added or
– Point of “wait time” when material is being stored to await further
value adding transformation
– This concept may also be applied to services
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Supplier Workshops
Another source of process improvement
– Specific to buying organization’s supply chain
– Allows for exchange of information and ideas
In supplier workshops
– Buying organization and its critical suppliers
• Collaborate on process improvement opportunities
• Seek results of
– A more streamlined supply chain
– Benefits for all supply chain partners
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Task 2-E-3 Recall Question #1
Which continuous improvement process measures the
effectiveness of an organization’s contract maturity
processes?
(A) Capability maturity model-integration (CMMI)
(B) Capability management maturity model (CMMM)
(C) Process mapping
(D) Value stream mapping
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Task 2-E-3 Recall Question #2
What definition BEST fits a description of a six sigma
continuous improvement process?
(A) A reduction of variability of a process resulting in about 3.4 defects
per million quality levels
(B) A means of understanding inter-organizational process relationships
(C) A measure of the ratio of outputs to inputs
(D) Total elapsed time needed to complete a process
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Task 2-E-3 Case Study #1
Discussion Questions:
1. What steps would you undertake to plan and execute the
benchmarking study?
2. What recommendations would you make to improve efficiency of the
supply organization?
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Task 2-E-3 Summary and Review
Discuss the steps involved in benchmarking
Describe how each of the following contributes to process
improvement
– Benchmarking
– Process mapping
– Process costing
– Maturity models
– Supplier workshops
Explain the differences between CMMI and CMMM
Name 3 common process improvement metrics
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226
TASK 2-F-1
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Task 2-F-1 Task Outline
1) Policies and procedures
Design transportation and distribution policies and procedures to ensure optimum
flow of materials
All of the content in this task is bridge exam material.
Full 5Q; Bridge 2Q
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Policies and Procedures
Transportation Modalities
Ability to execute transportation and logistics
strategies better than competitors will lead to
improved performance
Transportation market drivers include
– Globalization
– Intense competition
– Short product life cycles
– Deregulation
– Environmental issues
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Policies and Procedures
Transportation Modalities – Cont.
Five modes of transportation
– Water
– Motor carrier
– Rail
– Air
– Pipeline
See Task 2-B-3
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Policies and Procedures
Transportation Modalities – Cont.
Considerations for selecting a transportation mode include – Types of goods to be transported including
• Size
• Weight
• Density
• Packaging
• Specific physical characteristics
– Which mode (or combination of modes) best suits organization’s needs
– Delivery requirements, including time needed
– Organizational requirements
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Policies and Procedures
Transportation Restrictions
There are many transportation rules and
restrictions
Examples include
– All carriers have weight and volume restrictions
– Laws restrict the transportation and handling of
hazardous materials
– Policies govern border-crossing inspections and security
measures
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Policies and Procedures
Carrier Cost Auditing
Organizations implement audit procedures to – Review freight bills
– Objective is to control transportation costs
Overcharges typically result from human error – Rate variances
– Descriptions
– Weights
– Routing
Auditing activity is often outsourced to a third party, called a freight bureau
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Policies and Procedures
Carrier Performance Auditing
Carrier performance
– Must be optimal
– To ensure customer value
Areas monitored for performance include:
– Willingness to work as a partner
– Commitment to continuous improvement
– Acceptance of innovation
– Focus on time reduction
– Flexibility in logistics systems design
– Commonality of core values
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Policies and Procedures
Freight Classifications/Rates
Line-haul: transport between major cities or nodes
as differentiated from local service. The term
applies to all modes of transportation: air, truck, rail
Line-haul rate: freight rate that is charged for the
line haul of the cargo. Usually the rate does not
include any related cargo handling such as lifting
containers on and off rail cars
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Policies and Procedures
Freight Classifications/Rates – Cont.
Most rates are negotiated
– Due to deregulation
– Set forth in contract
Basis for negotiated rates stem from former
regulatory standards; e.g.,
– Class
• Goods categorized according to value, density, susceptibility to
damage and theft
– Distance
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Policies and Procedures
Available Technology
Use of technology is widespread in logistics
Four groups of computerized transportation activities
– Transportation analysis: software that facilitates monitoring costs
and service by providing historical reporting of key performance
indicators
– Traffic routing and scheduling: software providing features such as
sequencing and timing of vehicle stops, route determinations,
shipping paperwork preparation, vehicle availability
– Freight-rate maintenance and auditing: software that maintains
databases of freight rates that are used to rate shipments or to
perform freight bill auditing
– Vehicle maintenance: common features of this software include
vehicle-maintenance tracking, scheduling, reporting
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Policies and Procedures
Relocation or Movement Processes
Considerations when relocating or moving
products include
– Physical restrictions such as warehousing
– Methods of transportation
– Amount of material to be relocated or moved
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Task 2-F-1 Recall Question #1
Freight classifications/rates are generally based on which
of the following?
(A) A national freight classification system
(B) One set of rates for inter-state transportation and another set for intra-
state transport
(C) The former standards based on classes and distances but negotiated
between each shipper and carrier
(D) A carrier’s published rates which are applied to every shipper
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Task 2-F-1 Recall Question #2
When a shipper checks performance of a carrier based on
such items as the carrier’s willingness to commit to
continuous improvement and acceptance of innovations,
the shipper is performing a/an:
(A) Carrier performance audit.
(B) Carrier cost audit.
(C) Shipment process audit.
(D) Early supplier involvement (ESI) program.
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Task 2-F-1 Comprehension Question #1
Your organization has been experiencing high fleet
operating costs, slow response times to customers, many
overtime charges and trouble managing the drivers’
schedules. For these reasons you are considering
implementing a:
(A) Process audit to see exactly where things are falling apart.
(B) Plan to change transportation modes.
(C) Freight rate maintenance and auditing software package.
(D) Traffic routing and scheduling software package.
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Task 2-F-1 Application Question #1
A supply manager for a U.S. auto parts manufacturer has
begun buying some raw materials and components from
China and other locations overseas. In the process of
auditing the entire logistics function the supply manager
has determined that shipping rates have gotten out of
hand. With his location in the Midwest, the company has
utilized air transport in the past as the primary method of
shipment since the goods can then essentially go door-
to-door with little delay.
Cont.
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Task 2-F-1 Application Question #1 – Cont.
Which of the following changes would BEST control costs while minimizing delays in receipt of the materials? (A) Multimodal shipping, with water transport to the United States port of
entry and trucking to the warehouse.
(B) Multimodal shipping, with air transport to the United States port of entry and trucking to the warehouse in order to keep shipping times as short as possible.
(C) Multimodal shipping, with water transport to the United States port of entry, rail to the closest point to the warehouse and trucking from there to the warehouse.
(D) Multimodal shipping, with water transport to the United States port of entry, air shipment to the closest airport and trucking to the warehouse.
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Task 2-F-1 Summary and Review
Discuss considerations when selecting a
transportation modality
Define freight bureau
Describe how freight rates are determined and the
basis for the rates
Identify four groups of computerized transportation
activities
List key considerations when relocating or moving
products
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TASK 2-F-2
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Exam 2
245
TASK 2-F-3
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Task 2-F-3 Task Outline
1) Freight terms (domestic and international)
2) Delivery tracking systems
3) Delivery performance measurements
4) Visible versus latent damage
5) Rules for freight claims
6) Resolution processes
7) Freight audit procedures
Manage the resolution of delivery/ receiving problems
This task contains bridge and non-bridge exam material.
Full 5Q; Bridge 2Q
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Freight Terms (Domestic and International)
Incoterms are the standard for specifying
international freight terms
Incoterms are increasingly being applied to
domestic shipments, although some organizations
in the U.S. still use FOB terms
See Task 2-B-3
Refer to Incoterm in contract to resolve
delivery/receiving problems
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Delivery Tracking Systems
Large organizations use real-time tracking systems to
determine
– Shipment dates
– Where a shipment is at any point in time
– When delivery has taken place
These systems allow
– Remedial action when necessary
– Redirecting cargo to respond to sudden need elsewhere
RFID (radio frequency identification device) support
systems by providing real-time communication
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Delivery Performance Measurements
Delivery performance = important determinant of customer satisfaction
Primary objective: supplier to deliver required materials/services on time
Frequently used delivery performance measures – Damages
• ($) amount/vehicle
• ($) amount to goods while in transit
• ($) amount to goods during loading
• ($) amount to goods while unloading
– Late deliveries as a percent of all deliveries
– Percent of orders delivered on time
– Percent of deliveries outside preset delivery windows
– Cost of damage claims
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Visible versus Latent Damage
Visible damage – Unconcealed loss or damage
– Easy to detect during routine inspection
– Goods can be refused for delivery or replaced at no additional cost to buying organization
– Damage should be noted on carrier’s delivery receipt
Latent damage – Concealed loss or damage
– Not easy to detect
– Hidden and unnoticeable during inspection
– Often discovered after time has passed
– Latent damage may be difficult to identify before using the goods, but a buying organization may invoke
• Warranty rights to replace/repair item
• Or, in the U.S., rejection rights under the Uniform Commercial Code (UCC)
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Rules for Freight Claims
Freight claims: claims against a carrier due to loss of, or damage to, goods transported by that carrier; also for erroneous rates and weights in assessment of freight charges
Freight claims are important when loss/damage occurs in a transport move
Procedures and forms used are generally standardized across all modes
Claims handling involves actual recording, handling and monitoring of product claims
Requires accurate, real-time data and historical records
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Resolution Processes
Two components to a claims resolution process
– Escalation of conflict: if parties cannot settle claim
amicably (through negotiation), litigation may be
necessary
– Corrective action: action taken to bring a process that
has veered off the planned course back on track
• To avoid escalation of claims and satisfy the customer, the
carrier or shipper has the option of taking corrective action
before claim is filed
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Freight Audit Procedures
To control costs, organizations need procedures for
auditing freight bills
Common for freight bills to include mistakes
Auditing can be performed internally or externally
Many organizations outsource freight auditing to
freight bureaus
– Freight bureaus provide auditing service on percentage
or commission basis
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Task 2-F-3 Recall Question #1
In addition to simply tracking the location of a shipment,
sophisticated, advanced delivery tracking systems
provide which of the following?
(A) Routing, scheduling and dispatching
(B) Shipment delivery date, scheduling and routing
(C) Scheduling, driver assignments and driver performance ratings
(D) Routing, dispatching and driver performance ratings
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Task 2-F-3 Recall Question #2
“Rate basis” for freight classification rates can BEST be
defined as:
(A) Rates established for direct routes from one point to another.
(B) Rates established based on agreements regarding quantity of freight
to be shipped.
(C) Rate formula including the specific factors or elements that control the
making of a rate.
(D) Rates from point of origin to point of destination.
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Task 2-F-3 Comprehension Question #1
A supply manager is tasked with developing an in-house freight
auditing process. In developing the process and testing it, there
appears to be a significant problem with matching descriptions of
items ordered with descriptions of items received. This could
potentially cause problems in determining if the freight bills are
correct. To combat this, the supply manager institutes a new policy to
have:
(A) Supplier purchase orders forwarded to the responsible carrier.
(B) All order, receipt and invoice documentation matched before shipping.
(C) Restrictions on the choice of carriers to those who provide the best
information.
(D) Shipments with incomplete bills of lading refused.
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Task 2-F-3 Comprehension Question #2
Your lamp manufacturing firm has been facing increased damages to the components it receives from a specific domestic supplier. While you have been in frequent contact with the component supplier, you have not been satisfied with the response as the supplier is adamantly maintaining that the carrier is to blame. You are not certain the carrier is causing the damage, but you are also not certain that the carrier isn’t at fault. At this point you realize that if you don’t do something soon, you will not be able to collect on any damages from anyone, as:
(A) You are closing in on nine months since the date of first delivery, at which time you will not be able to file a claim with the carrier.
(B) You have been negotiating for so long with the supplier that you will be accused of having accepted the situation.
(C) Your company does not intend to use litigation to resolve its claim.
(D) The visible damage to the shipment was not noted at the time of delivery.
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Task 2-F-3 Summary and Review
Name the common standard for specifying freight
terms
What are delivery tracking systems?
List commonly used delivery performance
measurements
Contrast visible versus latent damage
Define freight claims and describe how they are
resolved
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TASK 2-F-4
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TASK 2-F-5
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Task 2-F-5 Task Outline
1) Considerations for geographical location
2) Order picking versus stock replenishing functions
3) Labor intensive versus mechanized
4) Virtual warehouse versus real warehouse
5) Logistics-performance measures, strategies and cost savings
initiatives
6) Third-party logistics considerations
7) Scorecards
8) Process improvement action plans
Develop and/or implement a warehouse management system
All of the content in this task is bridge exam material.
Full 4Q; Bridge 4Q
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Introduction
Organizations use inventory to
– Improve ability to coordinate supply with demand
– Keep transportation and supply costs reasonable
Warehouses and materials handling systems are
needed to support production and service delivery
and the strategic supply management process
Warehouse: a facility used for receiving, storing
and distributing materials in support of
organizational strategies
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Considerations for Geographical Location
Labor Considerations
Labor costs are ongoing costs in warehousing
Workers ultimately determine an organization’s
success
In locating the logistics organization, consider
– Employees’ skills and abilities
– Pay scales
– Training programs
– Selection and retention procedures
– Other employee-related issues
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Considerations for Geographical Location
Transportation Availability Considerations
Transportation is probably the largest variable cost
component in the location decision
Selection of transportation carriers is important
Availability, adequacy and cost of transportation
carriers affect proximity of
– Plants
– Warehouses
– Retail locations to final consumers
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Considerations for Geographical Location
Governmental Issues
Federal, state, local laws influence location of
– Plants
– Warehouses
– Offices
– Retail locations
Every country, state and local government has
different zoning ordinances that govern location
Organizations must ensure that their buildings
meet requirements
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Considerations for Geographical Location
Governmental Issues – Cont.
Political – Some countries, state and local governments offer tax
breaks and other concessions in order to bring new jobs into an area
– Others do not, as they do not wish to see changes in their communities
Tax considerations – In most U.S. states, there could be a disadvantage to
owning property – various taxes apply
– In other countries, e.g., India, tax incentives are offered to encourage building in their country
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Considerations for Geographical Location
Environmental Considerations
An important supply management responsibility is
keeping the environment clean and healthy for the
future, regardless of where doing business
Supply managers should be proactive in
environmental areas of logistics including
– Packaging
– Remanufacturing
– Disposal
– Reuse
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Considerations for Geographical Location
Environmental Considerations – Cont.
When deciding on location, consider
– Availability of local recycling programs
– Cleanup and disposal requirements for hazardous
materials and obsolete or out-of-date inventory
Oversight
– In U.S., state and federal agencies such as Department
of Transportation, Environmental Protection Agency,
Occupational Safety and Health Administration
– A source for international environmental information is
the Center for International Environment Law (CIEL)
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Considerations for Geographical Location
Channel Proximity/Modality Considerations
Channel provides consumers with goods they desire in right combinations at minimum cost – Location and structure determined by consumer buying
patterns that drive logistical service output requirements
– The best channel is formed when no other competing organization generates higher profits and consumer satisfaction per dollar of cost
– Supply chain intermediaries arrange processes and functions in ways to minimize cost if given desired level of output by consumer and competitive conditions
– Shifting of specific processes leads to entry and exit of service providers in channel
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Considerations for Geographical Location
Average Delivery Time
Average lead time is an indicator of logistics
performance
Yet, variances occur
Remote or global logistics facilities tend to increase
– Average delivery time
– Variability in delivery time
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Considerations for Geographical Location
Build Out versus Build Up
Build out: to expand a facility horizontally
Build up: to expand a facility vertically
Building height dictates how high shelving can be
assembled
The higher the shelving, the better the space
utilization
– Important to consider cubic footage (CF) as well as
square footage (SF)
– Equipment needed is directly related to vertical capacity
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Considerations for Geographical Location
Two-Dock versus Single-Dock Layout
Loading docks must be
– Flexible
– Efficient
Single-dock may be appropriate
– For a smaller facility
– Low to moderate shipping activity
Two-dock system can handle
– Higher-use operation
– Simultaneous shipping and receiving
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Considerations for Geographical Location
Two-Dock versus Single-Dock Layout – Cont.
Good dock design contributes to
– Sound logistics
– Safety
– Efficiency
– Profitability
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Considerations for Geographical Location
Two-Dock versus Single-Dock Layout – Cont.
Guidelines for dock design
Position building on site and doors on building to
allow safe access to roads and dock area
Arrange loading dock to accommodate trucks of all
sizes. Factors include
– Dimensions of dock door
– Dock height
– Location of landing strip
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Considerations for Geographical Location
Two-Dock versus Single-Dock Layout – Cont.
Assist those responsible for material flow to get
through the docks. Judge dock equipment based
on
– Safety
– Productivity
– Reliability
– Capacity
– Flexibility
Plan a staging area inside loading dock for efficient
material flow to and from internal destination
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Considerations for Geographical Location
Safety Considerations
No compromise on safety for carriers and their
customers
Due to demand, carriers often allow longer times
between repair and replacement of equipment
Supply managers – be aware if carrier develops
reputation for unsafe operations
– Having too many accidents
– Loss of customers
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Considerations for Geographical Location
Security
Key issue: required level of security
Goal: adequately protect organization’s fiscal, physical and human resources from theft/harm
If entire facility is secure, the need for guards and gates will be lower
Can limit cost of securing facility by – Controlling ingress and egress
– Keeping parking areas away from immediate vicinity
– Designing building to be difficult to penetrate
Alarm systems are deterrents, but are not impenetrable
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Considerations for Geographical Location
Security – Cont.
Local fire codes dictate alarm and extinguishing
equipment
Ensuring warehouse security is a good investment
– Security systems with television monitors
– Badge entry
Most losses are from internal theft – to limit risk
– Control ingress and egress
– Have verifiable document system
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Considerations for Geographical Location
Sanitation
Another consideration in locating a facility
Distance to local landfill affects
– Transportation costs
– Labor costs
Consider local and government regulations
regarding
– Substances that may be banned from dumping
– Recycling requirements
Sewage systems also may be a factor
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Considerations for Geographical Location
Warehouse Material Handling Systems (e.g., Facility
Consideration Regarding Forklifts, Pickers, etc.)
Forklifts
– Have enabled productivity growth for
• Receiving
• Storing
• Picking
• Staging
• Loading
– Must integrate into product flow within facility
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Considerations for Geographical Location
Warehouse Material Handling Systems – Cont.
Pallets – Most common method of supporting a unit load
– Allow for effective movement of unit loads by forklift
– Produced in various materials, sizes, designs
– Most common materials • Wooden: available in most geographical locations and can be repaired
easily
• Plastic: use increasing because can be reused almost indefinitely
• Corrugated paper: can be erected as needed, thus reducing space requirements
• Steel and aluminum also used
– Useful, but a cost consideration in material handling systems
– Return process • Supply managers design the process
• Adds complexity to operating processes
• A consideration in locating a facility
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Considerations for Geographical Location
Warehouse Material Handling Systems – Cont.
Warehouse receiving – Entails scheduling appointments with carriers for specific
unloading times
– Requires ability to measure and predict work flows
– Advance shipping notices (ASNs) facilitate receiving • Notification in electronic data interchange (EDI) or extensible
markup language (XML) format (may also be paper based)
• Sent ahead of a shipment listing its contents and shipping information
– Often includes purchase order numbers, lot numbers, quantity, pallet or container number and carton number
– Usually combined with bar-coded compliance labeling for scanning, receipt into inventory, automated data collection
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Order Picking versus Stock Replenishing
Functions
Order picking: outbound flow of materials from an organization’s warehouse to its customers
Orders must be – Prepared
– Picked
– Packed
– Delivered to staging area
Consider how to reduce order-picking time when designing materials handling system
Sequence orders into efficient pick lists
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Order Picking versus Stock Replenishing
Functions – Cont.
Stock replenishing: inbound flow of materials
from suppliers to an organization’s
warehouse
Key to ensuring optimal level of stock that is
– Cost effective
– Minimizes on-hand inventory
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Order Picking versus Stock Replenishing
Functions – Cont.
Replenishment methods
– Independent or random demand • Usually end-customer driven
• Uses a reorder point/level system for inventory management
– System sets a predetermined inventory level that triggers order
– Level provides adequate inventory to meet anticipated demand
– Dependent or predictive demand • Derived from demand for another component/finished product
• Driven by customer demand
• Uses systems such as MRP or MRPII
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Labor Intensive versus Mechanized
Materials handling is typically a labor-intensive process when performed – Manually
– Semi-manually
Goal is to – Optimize materials handling
– Minimize costs
Achieve goal through – Layout
– Equipment
– Automation
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Labor Intensive versus Mechanized
Automation
Automated warehouse: a storage facility that uses
one or more automated technologies such as
– Automated storage/retrieval systems (AR/RS)
– Automated-guided vehicle systems (AGVS)
– Radio-frequency identification systems (RFID)
– Automation includes automated palletizers and handheld
bar-code readers
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Automated Warehouse Technologies
SYSTEM CHARACTERISTICS
Automated storage/retrieval
systems (AS/RS)
•Enables highly accurate, real-time inventory
management
•Keeps precise records of all item counts by location in
storage while ensuring security of materials
•Frees up large amounts of floor space due to ability to
densely pack inventories in overhead space
•Permits major expansions in production volume
without need for additional new space
Automated-guided vehicle
systems (AGVS)
•Computer controlled materials handling system
•Consists of small vehicles (carts) that move along a
guided pathway
Radio-frequency identification
systems (RFID)
•A passive or active radio-data chip that is attached to
products to allow warehouse to track, access and
compile data
•Part of the supply chain flow process
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Labor Intensive versus Mechanized
Picker-to-Part versus Part-to-Picker
Picker-to-part methods
include
– Pick-to-pallet
– Pick-to-cart
– Pick-to-roller
– Man-aboard
storage/retrieval
Part-to-picker systems
include
– Carousels
– Storage conveyers
– Automated storage/retrieval
systems (AS/RS)
Traditional material-handling approaches require picker to travel to storage location
Goal: minimize travel – a non-value-added activity
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Virtual Warehouse versus Real Warehouse
Real warehouse – Organizations operate bricks-and-mortar warehouse
– Inventory travels through warehouse before being shipped to customer
Virtual warehouse – Building and inventory still exist
– Inventory for sale may not be in organization’s warehouse but shipped directly from supplier
– Made possible by real-time information sharing through systems integration
– Advantages • Organizations can offer wider variety of products to customers without
stocking them
• May generate more revenue
• Reduces cost of warehousing
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291
Logistics-Performance Measures, Strategies and Cost Savings Initiatives
Cost-to-Sales Ratios
Used to evaluate organizational effectiveness
Must determine which costs to include in metrics,
e.g.,
– Logistical functions
– Overhead
– Net or gross sales
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292
Logistics-Performance Measures, Strategies and Cost Savings Initiatives
Logistics Cost Per Unit versus Budget
Most comprehensive way to control costs is through predetermined standards and flexible budgets
Standard costs (a benchmark): what costs should be if operations are efficient; a direct approach to determining and assigning logistics costs but may not be appropriate for non-repetitive tasks
Four basic types of budgets to control logistics costs – Fixed-dollar (static): estimate of functional expenses
– Flexible: accounts for seasonal and internal factors that drive activity costs beyond budgeted levels
– Zero-level: assigns all costs necessary to perform range of support services for functional units and develops funding in zero-up manner – funds justified on basis of planned activity
– Capital: specifies amount and timing of significant financial investments for logistics resources
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293
Logistics-Performance Measures, Strategies and Cost Savings Initiatives
Cost of Functions as a Percent of Sales
A productivity ratio; the cost of a function; e.g.,
– Logistics
• Compare annual amount spent on logistics resources (labor,
operations, overhead) to sales revenue
• Although sales vary annually, ratio should remain same or
change in an expected way
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294
Logistics-Performance Measures, Strategies and Cost Savings Initiatives
Inventory Turns (e.g., Sales/Inventory, Cost of
Goods Sold [COGS]/Inventory)
Measure of the velocity of total inventory movement through
the organization
Found by dividing annual sales (at cost) by average
aggregate inventory value maintained during the year
Generally, the higher the turnover, the more favorable the
measure
Calculating inventory turns is a key method for determining
world-class performance in logistics and supply
management
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Third-Party Logistics Considerations
Third-party logistics (3PL) services are provided by a party other than the manufacturer or seller or the party buying or receiving
Third party – Not directly involved in buy/sell transaction
– Provides one or multiple services, e.g., warehousing, transportation, crossdocking, inventory management, packaging, freight forwarding
Trend in warehousing: increased use of 3PLs
Service provided by 3PL is their core activity
Use of 3PL enables client to release many fixed costs and decrease headcount
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296
Scorecards
A performance measurement and management
document
Records ratings from a performance evaluation
process
Improve logistical performance using scorecards
Vision and Goals
Activities Strategies Performance
Measures
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Process Improvement Action Plans
Applied when an area of performance is
unsatisfactory
Ways to improve/change must be identified
Corrective action requires
– Reviewing the underperforming process
– Determining the underlying factors
– Developing an action plan to make improvements
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Process Improvement Action Plans – Cont.
Continuous process improvements – Not just when there are issues
– Should be addressed throughout the life of a partnership • Joint interaction
• Involvement among all parties
5S discipline – Originated with Japanese
– Practical improvement method for • Office
• Logistics functions
• Warehouse
– Based on premise that by assigning everything a location, time is not wasted looking for items
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Process Improvement Action Plans – Cont.
Benefits of 5S come from deciding
– What should be kept
– Where it should be kept
– How it should be stored
Five levels of 5S
Sort Seiri Keep only essential items that can be stored
efficiently to keep workplace free of clutter
Set in order
or arrange
Seiton Focus on orderly workplace and keep items where
they will be used
Shine Seiso Keep workplace clean and neat
Standardize Seiketsu Standardize work practices so individuals
understand responsibilities
Sustain Shitsuke Continuously improve and train
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300
Task 2-F-5 Recall Question #1
Which of the following should a supply manager take into
consideration when designing and laying out a
warehouse?
(A) Union labor is efficiently utilized, state and local taxes are minimized
and entry and exit points are on opposite sides.
(B) Materials flow efficiently, locations are clearly identified and space
utilization is optimal.
(C) Build ups and build outs remain possible, space utilization is optimal
and labor costs are minimized.
(D) Equipment options remain flexible, state and local taxes are
minimized and labor costs are minimized.
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301
Task 2-F-5 Recall Question #2
In a process improvement project, what is the FIRST step
that should be taken?
(A) The process owner should be identified and consulted.
(B) All those involved in working through the process should be notified.
(C) The underperforming process should be reviewed.
(D) The underlying factors of the underperforming process should be
determined.
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302
Task 2-F-5 Application Question #1
Your organization has one warehouse which is currently
running out of space. While there is some money in the
budget for improvements, there is not enough financing
for either an expansion of the current warehouse or the
construction of a new warehouse. The current warehouse
is a largely manual, labor-intensive operation. While it
utilizes forklifts and hand carts, most material handling is
done by personnel.
There has also been a large drop in accuracy of the
inventory, causing some production delays because raw
materials that were supposed to be in stock were, in fact,
out of stock. Cont.
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Task 2-F-5 Application Question #1 – Cont.
As a way to expand the capacity of the warehouse without incurring huge construction costs, as well as increasing the accuracy of the inventory, you recommend:
(A) An automated storage and automated retrieval (AS/AR) system as it provides for a significant increase in inventory accuracy and the ability to densely pack inventories in overhead spaces.
(B) A radio frequency identification (RFID) system because it will increase the accuracy of the inventory and allow pickers to find material more quickly.
(C) Guided vehicles because they will decrease the need for personnel, which should help move material more quickly and accurately.
(D) Reformulating the layout of the warehouse which should help alleviate the space congestion.
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Task 2-F-5 Summary and Review
There are 12 considerations for geographical location – name and describe at least 6 of these
Define and describe order picking and stock replenishing
Name 3 components of optimizing materials handling and minimizing cost
Describe the differences between virtual and real warehouses
What are the 4 types of budgets used to control logistics costs?
What is a 3PL and what does it do?
List the steps involved in improving logistical performance using a scorecard Cont.
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Task 2-F-5 Summary and Review – Cont.
When and how is process improvement used?
Define – Inventory turns
– Build out
– Build up
– Order picking
– Stock replenishing
– 5S discipline
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TASK 2-F-6
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TASK 2-F-7
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308
TASK 2-F-8
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Task 2-F-8 Task Outline
1) Physical tracking systems
2) Overall project plan
3) Customer requirements
4) Cost considerations
5) Available technology for warehouse management system (WMS)
6) Warehouse management
7) Inventory accuracy and inventory integrity
Develop and/or implement an inventory management system
All of the content in this task is bridge exam material.
Full 4Q; Bridge 4Q
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Physical Tracking Systems
There is necessity for locating inventory items and linking those items to inventory or warehouse management system (WMS)
Inventory or warehouse management system (WMS) – Provides accurate and timely information
– Basis for supply management and other decisions
U.S. government and many large retailers place stringent requirements on suppliers to provide products that can be easily – Identified
– Tracked
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Physical Tracking Systems
RFID (Radio Frequency Identification Devices)
Primary components of RFID devices/systems
– Host computer
– Reader
– Interface transmitter
– Tag device
A data chip attached to a product to allow tracking,
access to and compilation of data as part of supply
chain flow process
– Passive data chip: read only
– Active data chip: may be read and updated
– Tagless systems: tag printed directly on item; lowers costs
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Physical Tracking Systems
RFID – Cont.
RFID may be used
– For individual items, entire cartons and containers (as large
as those used in ocean shipping)
– As a tool for use with security information systems
– To provide manifest for shipping containers sealed at factory
whose contents have been verified (may facilitate customs
security inspections at ports)
– For animal identification, media centers and libraries,
hospitals, prepaid toll passes, etc.
Initial cost: high, but dropping
Areas of concern: data security and invasion of privacy
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Physical Tracking Systems
RFID – Cont.
Key benefit to RFID: maintains real-time communications on all inventory encompassed in system within range of RFID readers
RFID reader’s function: capture information remotely and transmit it to WMS where it is used for – Order and production planning
– Customer order fulfillment
– Replenishment decisions
– Order tracking
– Other purposes
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Physical Tracking Systems
Bar Code
Bar code: machine-readable code; a pattern of
alternating parallel bars and spaces, representing
numbers and other characters
Scanning a bar code facilitates
– Interface with computerized records
– Automatic updating of inventory records
– Reduced data-entry errors
– Improved processing speed and inventory accuracy
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Physical Tracking Systems
Bar Code – Cont.
Universal Product Code (UPC)
– A popular form of bar coding
– Used by retailers and food and grocery industries
Many industries have different standards
Common application: intelligent shipping label
– Information stored and accessed within small space
– Information includes
• Purchase information
• Carrier code
• Freight sort code
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Physical Tracking Systems
Bar Code – Cont.
Bar coding increases efficiencies in
– Receiving
– Inventory
– Warehouse management
– Reordering for replenishment
– Sales management
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Physical Tracking Systems
Unique Identification Device (UID) and Item Unique Identification Device
(IUID) [Department of Defense (DoD) Initiative]
Used by – U.S. Department of Defense (DoD)
• Best known application: DoD suppliers must affix UID labels on
– Items with acquisition cost of at least $5,000
– Classified or sensitive items
– Items that are serially managed
– Property furnished to third parties such as contractors
– U.S. Food and Drug Administration (FDA) • Interested in applying UID system to drugs, medical devices
– U.S. Patent Agency • Interested in applying UID system to patented items
– Other U.S. governments (state and local)
– Several industries
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Physical Tracking Systems
UID and IUID – Cont.
Consists of
– Reader device (UID/IUID): retrieves data encoded on
machine-readable media
– Item unique identification devices (IUID)
• Subset of UID
• Mark tangible items with unique item identifier (UII)
– A character string, number or sequence of bits assigned to a
discrete entity or its associated attribute
– Uniquely distinguishes asset from other like and unlike entities
– Each UII has only one occurrence making it useful to track items
during their life cycle
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Overall Project Plan
Increasingly important to manage inventories and
warehouses well in order to
– Remain competitive
– Be a good customer
– Deal with security issues
Technology helps add value for
– Internal customers
– External customers
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Overall Project Plan
Plan for Business Continuity
Business continuity and disaster recovery plans are strategic guiding principles of – How to ensure an organization can maintain and continue
operations if a crisis, disaster or other disruption occurs
Business continuity: an action plan for sustaining business operations in support of customer needs. Capabilities, communications and data must be maintained
Disaster recovery plan: an action plan for being properly prepared for when a crisis seriously affects an organization
Supply continuity plan: an action plan for continued receipt of supplies in the event of a disruption of normal supply chain channels, or a plan to prevent such disruption from occurring
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Overall Project Plan
Plan for Business Continuity – Cont.
Internal and external supply chain business continuity and
recovery plans for warehouse and inventory management
supply interruptions typically include
– Plans for employees’ safety and escape from dangerous situations
– Method of communicating with and locating employees during and
after the disaster
– Communications plans for all stakeholders, including employees,
suppliers, shareholders
– Plans for communicating with the press
– Regularly backing up data so that databases can be restored to a
point just before crisis, disaster or disruption, if necessary
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Overall Project Plan
Plan for Business Continuity – Cont.
Business continuity and recovery plans – Cont.
– Contingent shipping methods
– Contingency plan for labor interruption
– Plans for safeguarding equipment, computer systems, other assets
– Action plans for escape paths
– Having well-developed supplier relationships
– Training for disasters that are likely to occur in given area
– Generic disaster drills
– Maintaining safety stock level
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Overall Project Plan
Implementation Plan
Objectives for inventory-management system
– Minimize inventory-related risks
– Ensure smooth operations as costs of ordering and carrying
inventory are balanced against costs of stock outs
Key considerations for WMS plan
– Meet customer requirements
– Cost considerations
– Available technologies
Inventory and warehouse management are not identical but
overlapping; e.g., could have an inventory but no physical
warehouse
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Overall Project Plan
Implementation Plan – Cont.
Planning change to inventory/warehouse management
begins with describing current state
– Develop set of detailed process flow diagrams describing current
flows of materials and services into, through and out of system
– Include quantities and timing of flows when possible
– Consult users of current system
– Compile data/records to support process flow diagrams
– Verify that diagrams accurately represent the process
Once the current state is understood
– Prioritize objectives
– Identify where changes should be made
– Design new system
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Overall Project Plan
Implementation Plan – Cont.
Develop transition plan – Determine budget and available funding
– Assemble team to lead transition
– Determine transition milestones
– Set performance objectives such as • Product availability
• Inventory turnover
• Throughput
• Order fill rate
• Stock outs
• Mishandled items
• Number of items received in given time period
• Inventory accuracy
• Order fill accuracy
• Length of time to fill orders
– Determine training needs
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Overall Project Plan
Implementation Plan – Cont.
Transition plan – Cont.
– Develop plan for continuity of business during the
switchover
– Set overall measures at a strategic level
– Keep goals in mind
• Adding value for the customers
• Eliminating non-value-added steps from processes
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327
Overall Project Plan
Manpower and Equipment Requirements
Largest operating costs in warehouse budget
– Labor
– Equipment
Largest capital costs
– Floor space
– Cubic warehouse space
Other large investments
– Electronic and computer systems
– Material handling systems
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Overall Project Plan
Facility Design
Objectives of facility design – Ensure warehouse activities add value for the customer
– Minimize non-value-added activities
Design must facilitate how goods are received, stored and issued
Key factors in design – Materials handling equipment
– Personnel needed
– How movement of materials is performed including patterns needed for
• Group picking
• Zone picking
• Commodity picking
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Overall Project Plan
Facility Design – Cont.
The dock area
May be a receiving area during one part of day and a shipping area during another part of day
There may be areas for – Cross-docking
– Inspection of goods
– Breaking bulk
– Special-order pallet assembly
– Problem resolution
– Other assembly processes
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330
Overall Project Plan
Facility Design – Cont.
Warehouse size depends on
– Location relative to other warehouses
– Whether it is general purpose warehouse or has special
requirements such as
• Refrigeration or temperature control
• High level of security for items of high value or a sensitive nature
• Storage of highly flammable items
• Storage of hazardous or corrosive materials
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Overall Project Plan
Facility Design – Cont.
Warehouses must store fast moving goods in
convenient locations
Warehouse expansion
– Build up or build out
– Consider cubic footage (CF) as well as square footage
(SF)
– See Task 2-B-1(1)(G)
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Overall Project Plan
Physical Constraints
Characteristics of goods stored create the physical
constraints
Consider
– Type of goods
– Size and weight of product stored
– Special equipment requirements
– Danger level of an accident
– Value of goods stored
– Security requirements
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Overall Project Plan
Fixed or Random Storage Locations
Typically, two types of storage systems – Fixed-location system
• One that stores inventory item in a set physical location
• Usually has lower space utilization and higher accuracy
• Simplifies storing and record keeping
– Random-location system • One that stores the inventory in any available space
• Facilitates higher utilization of storage space
• A computer is typically required for item location
• More real-time analysis required to know if spaces
– Are empty
– Can be consolidated
With both systems, warehouse location of item is identified in perpetual inventory record
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Customer Requirements
Driving force in development and implementation of inventory and WMS – Adding value for internal and external customers
Customer requirements vary due to – Frequency of order placement
– Size of orders due to quantity or money
– Variety of items in an order
– Shipping or delivery methods
– Amount of order preparation processing
– Need for special handling
– Packaging requirements
– Security requirements
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Cost Considerations
To better manage costs and implement process
changes and improvements, consider the
numerous costs involved in warehouse
management. These relate to
– Customer requirements
– Nature of the customers
– Products stored
– Warehouse design, layout and structure
– Equipment used
– Personnel required
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Cost Considerations – Cont.
Products stored
– Types
– Variety
– Size and weight
– Value
Specific requirements
– Customer expectations
– Quality standards
enforced or required
– Safety, security,
temperature, shelf life
– Equipment
Warehouse personnel
– Safety, security and
training requirements
– Flexibility, availability, skill
set, location of labor pool
Warehouse
– Size, location, physical
structure
– Ownership; e.g., leased
or owned
– State of automation
Examples of Cost Characteristics
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Available Technology for Warehouse
Management System (WMS)
WMS’s continues to evolve. Look for these features and functionality – Flexible location assignment system
– Ability for user-defined task parameters; e.g., FIFO/LIFO for picking
– Easy-to-use integration with data collection devices including bar code scanners and RFID technology
– Reasonable logic in determining locations and put-away/pick sequences
– Various order-picking choices; e.g., wave, batch or zone picking
– Ability to interleave tasks; put-away and pick
– Automated data collection
– Cycle counting
– Labor tracking and capacity planning
– Integration with accounting and ERP systems
– Ability to communicate with WMS at other locations – organization’s, its customers or suppliers
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Available Technology for Warehouse Management System (WMS)
SWOT Analysis
SWOT analysis can help define most important features for a WMS – consider such things as – Whether to lease or own
– How many warehouses are needed
– Where to locate the warehouses
– What product variety to manage in each
– What value-added services to offer
May be performed – Manually by brainstorming
– With commercially available software tools; e.g., some WMS software solutions have a SWOT analysis module
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Available Technology for Warehouse Management System (WMS)
SWOT Analysis – Cont.
Reach consensus on – Strengths
– Weaknesses
– Opportunities
– Threats
Examine results
List alternative courses of action
Develop set of recommendations to bring about desired changes
Strengths
Capitalize on
strengths
Weaknesses
Shore up
weaknesses
Opportunities
Take advantage
of opportunities
Threats
Thwart threats
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Warehouse Management
Important goal: minimize cost of storing, moving
and transporting goods into and out of warehouse
stores location
Must be achieved while
– Providing best possible customer service
– Making best use of
• Space
• Labor
• Equipment
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341
Warehouse Management
Structures
Private ownership
– An organization chooses to
own its own warehouses
– Creates a fixed cost on
income statement
(depreciation expense)
– Creates a fixed asset on
balance sheet
Public warehousing
– Short- or long-term leases of
warehouses and related
services that are owned and
operated by other
organizations
– Common for organizations to
hire third-party logistics (3PL)
providers (see Task 2-B-1) if
warehousing is not a core
competency
Two primary types of warehouse structures
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Warehouse Management
Structures – Cont.
Centralized warehouse system Order replenishment decisions
made in one location
Requirements of entire distribution and warehouse network are combined
Total customer service and demand needs are balanced throughout the system
Volume purchasing can be used to create larger costs savings
Sometimes decisions delayed and do not always consider individual needs of separate locations
If inventory must be transshipped, transportation costs may be higher than in decentralized system
Decentralized warehouse system Each location functions
independently from all others in the system
Decisions from a given site
– Can be made faster
– More closely matched to customer’s demand
Smaller orders and more overall inventory in the system create higher costs
Centralized and decentralized structures may be used in both private and public warehousing environments
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Warehouse Management
Storage Location
WMS frequently have computer programs to optimize stocking locations for incoming goods. This facilitates achieving goals to – Minimize stocking costs
– Minimize picking costs
– Maximize space
– Group similar items as closely together as possible
– Ensure that all constraints with respect to safety, temperature, security are met
– Put-away and pick on a timely basis
– Provide good customer service
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Warehouse Management
Storage Location – Cont.
Examples of location systems include – Fixed location: see Task 2-C-2(2)(F)
– Random/floating location: see Task 2-C-2(2)(F)
– Overflow location • Used when more inventories come into warehouse than expected
• Always considered temporary
• Goods pulled on LIFO basis to free up space for other goods and move to fixed/random location when overflow need has subsided
– Point-of-use location • Usually managed by Kanban
• Used to store goods close to consumption area
• Replaced on a pull signal only when demand is required
• Likely to be used when warehouse provides assembly services
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Warehouse Management
Replenishment Systems
Distribution Requirements Planning (DRP)
– Supply management term for the time-based demand from the
distribution center to balance the customer fill rate against inventory
investment
– Primary method of planning goods in a WMS
– An information system that takes individual customer demands upon
a set of warehouses projected over next several periods of time and
uses that information to predict demand across warehouses
– Demand information and current inventory are matched against the
master production schedule to determine which items must be
replenished
– Links customers, distribution centers, warehouses and
manufacturing plans to help plan flow of materials
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Warehouse Management
Replenishment Systems – Cont.
Distribution Resource Planning (DRP II) – More sophisticated than DRP
– Uses computerized inventory system for replenishment at multiple warehouse sites
– Includes functions for planning for warehouse space, personnel requirements, transportation alternatives and financial flows
Kanban – “Lean” concept approach to warehouse management (minimize
inventory while maximizing product flows)
– Concept: replace inventory or materials only when there is demand for those goods
– Japanese term meaning “signal.” Signal is printed card that contains specific information (part name, description, quantity). Card used to signal replenishment needs. It is an order-release mechanism and a primary tool of just-in-time
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Warehouse Management
Inventory Classification Systems
Since some inventory items warrant closer attention and
control than others, a variety of techniques are used
including
– Classification as indirect and direct purchases
– Classification by physical characteristics (then category specialists
oversee purchase and management of their group)
– Inventory type/classification for SKU
– ABC classification
Note: Classification in each technique by individual stock keeping unit (SKU)
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Warehouse Management
Inventory Classification Systems – Cont.
Classification as indirect and direct purchases
– Individual SKUs classified
– Indirect purchases: those items that will be used
internally by some process or management system
– Direct purchases: those items that will be used in
production or service delivery and sold to an external
customer
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Inventory type/classification for SKU – Cost and demand are primary considerations for every SKU.
Then, SKU’s break down into nine types of inventory
– Each SKU assigned classification and monitored accordingly; e.g., low cost, low demand (1) items may require less attention than medium cost, high demand (8) items
– Method set forth in book, Inventory Classification Innovation
Low Cost Medium Cost High Cost
High Demand 7 8 9
Medium Demand 4 5 6
Low Demand 1 2 3
Warehouse Management
Inventory Classification Systems – Cont.
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Warehouse Management
Inventory Classification Systems – Cont.
ABC Classification – A commonly used classification system
– In use for many years
– Based on Pareto analysis or 80/20 rule • 20 percent of items account for 80 percent of value
– Total value calculated for each SKU is based on • Annual usage
• Total purchase dollars spent
– SKUs are ranked high to low
– Listing enables supply manager to see where bulk of dollars reside in inventory
– SKUs classified as A, B, C
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Warehouse Management
Inventory Classification Systems – Cont.
A Classification: higher value items. Top 20% of total items purchased comprise 80% of value of total purchases. Items receive close oversight to maintain scheduled deliveries and minimal inventory
B Classification: medium value items. Next 30% of items purchased comprise 10-15% of value of total purchases. Items are reviewed periodically with normal amount of oversight and only given high priority when need is critical
C Classification: last 50% of items purchased comprise 5-10% of value of total purchases. Items receive minimal attention and may be ordered in bulk or purchased with procurement cards since they represent only a small percentage of dollars spent
* Percentages will vary by product, industry, etc.
Class
Percentage of Total
Items Purchased*
Percentage of Value of
Total Purchases*
A 20 Up to 80
B 30 10-15
C 50 5-10
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Warehouse Management
Inventory Classification Systems – Cont.
Inventory is also classified for valuation purposes. Three basic methods are – LIFO
• Stands for last in, first out
• Assumes items purchased last are used or sold first
• Last purchased items likely higher in value – remaining inventory valued at older price. Results in lower value for remaining inventory on organization’s balance sheet
– FIFO • Stands for first in, first out
• Assumes items purchased first are also used or sold first
– Average costing • Assigns an inventory value for an item at the average cost paid
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Warehouse Management
Cycle Counting
A physical stock-checking system in which inventory divided into groups – Physically counted at predetermined intervals depending on their
ABC classification
– Counting goes on continuously without interrupting operations or storeroom activities
Proactive approach to inventory management and a best practice: makes inventory accuracy a priority
Preferred method for ensuring accuracy
Corrections are achieved through cycle counting but this is not the primary objective
Objective: identify reasons, find cause of any inaccuracies and correct cause
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Warehouse Management
Cycle Counting – Cont.
Here’s an example of predetermined intervals for physically counting inventory groups depending on their ABC classification – A Items
• 20% of items account for 80% of dollars spent
• Count once a month
– B Items • 30% of items account for 10-15% of dollars spent
• Count four times per year
– C Items • 50% of items account for 5-10% of dollars spent
• Count once annually
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Warehouse Management
Perpetual
An inventory control record system that requires immediate recording of transactions (receipts and withdrawals) for each item in inventory
Does not negate need for physical inventory counts
Checks inventory after each transaction to see if level is below reorder point – If so, places order of pre-determined size
Periodic inventory system is an alternative system – Records completed transactions in batches
– Fixed order-interval inventory control system – item’s inventory position reviewed on scheduled, not continuous, basis
– If appropriate, order placed after review – quantity usually varies
©2020 ISM All Rights Reserved
Exam 2
356
Inventory Accuracy and Inventory Integrity
Stock Keeping Units (SKU) Establishment
Items are kept in inventory at a specific location
Each has a unique number or bar code
Creating SKUs for individual items
– Is an initial step in identifying and controlling inventory
– Can be meaningful/non-meaningful
Meaningful Non-meaningful
PHW-125-2303
PHW – Purchased Commodity – Hardware
125 – Supplier identification
2303 – Supplier part number
S1274043725
©2020 ISM All Rights Reserved
Exam 2
357
Inventory Accuracy and Inventory Integrity
Physical Inventory
In a manufacturing organization, physical inventory is classified as
– Raw material
– Work in process
– Finished goods
– Maintenance, repair and operations (MRO) items
– Sub-classifications such as repair parts or spares, excessive items,
obsolete items
– Possible non-manufacturing items such as office or building supplies
In a retail distribution center, most inventory is held as finished goods
RFID technology
– Facilitates tracking of physical inventory
– Improves inventory accuracy
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Exam 2
358
Inventory Accuracy and Inventory Integrity
Reconciliation
There may be discrepancy between physical
inventory count and perpetual record
If so, variances are noted on discrepancy report
Reconciliation
– Settling or resolving these variances
– Requires an adjustment
Discrepancy report serves as audit trail
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Exam 2
359
Inventory Accuracy and Inventory Integrity
Shrinkage
Less inventory on hand than expected; a reduction in the amount of inventory on hand for reasons other than issuance or a sale
Result of materials being – Lost
– Stolen
– Misplaced
– Evaporating
– Deteriorating
Policy changes may be warranted if specific items repeatedly experience shrinkage; e.g., – Additional security measures
– Relocation of items
©2020 ISM All Rights Reserved
Exam 2
360
Inventory Accuracy and Inventory Integrity
Issue/Return
A common term used in conjunction with “issue
and return” is “store”
– Store: keeping the item in a given location until there is a
request for its use
– Issue: goods going out of the warehouse
– Return: goods coming back into the warehouse
©2020 ISM All Rights Reserved
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361
Inventory Accuracy and Inventory Integrity
Issue/Return – Cont.
Steps involved with storing inventory – Receiving
– Issuing paper/electronic record
– Determining storage location
– Putting item away in designated location
Steps involved with issuing inventory – Upon request for inventory item, generating pick ticket
identifying materials needed
– Picking: retrieving item from wherever it resides in warehouse
– Staging: can be separate area where materials are housed until delivered or picked up
– Delivery or pick up
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Exam 2
362
Inventory Accuracy and Inventory Integrity
Issue/Return – Cont.
Steps involved with returns – Occur for variety of reasons including
• More material was received than was needed
• Incorrect item was received
– Customer returns material to warehouse
– Warehouse must have procedures to • Inspect item to ensure its condition
• Adjust inventory count
– May be a restocking fee – returns generate additional costs in labor time and handling
– Customers may return damaged/unusable stock and expect credit • Such items not returned to stock but properly disposed of and removed
from accounting and inventory records (not always easy to determine when/where damage occurred)
• To accept return and issue credit often requires a returning materials authorization (RMA)
©2020 ISM All Rights Reserved
Exam 2
363
Inventory Accuracy and Inventory Integrity
Recoup
A strategy supply managers should have in place
to recover losses in inventory and other assets
when disposal is necessary due to obsolescence
or damage
Objective: elimination of items in ways that
maximize value to the organization. Recoup
methods remove items from the financial assets on
the balance sheet and avoid the carrying cost
associated with holding the inventory
©2020 ISM All Rights Reserved
Exam 2
364
Inventory Accuracy and Inventory Integrity
Recoup – Cont.
Methods for recouping inventory losses
– Sell excessive inventory back to supplier
– Re-engineer component for use elsewhere in a product’s bill
of material (BOM)
– Rework item as an alternative part that is useable
– Send item to a spare parts distribution center or another
division if it is useful as a spare part or still needed elsewhere
– Donate item to a non-profit organization that can use it –
obtain a possible tax deduction
– Sell item at scrap value
– Scrap at no value
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Exam 2
365
Inventory Accuracy and Inventory Integrity
Inventory Consolidation
Trend is toward leaner inventory
– Reducing amount and types of inventory on hand
– Consolidating inventory at multiple locations
Reducing number of locations also reduces
– Operational costs
– Inventory levels
– Safety stock levels
With multiple locations, lead times may vary. Key considerations
when consolidating inventory include identifying which sites have
– Lowest lead time
– Best operational efficiency
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Exam 2
366
Inventory Accuracy and Inventory Integrity
Security
Internal – Limit access to
• Inventory to ensure inventory items are not lost, stolen, misplaced, damaged
• Warehouse and storage locations to personnel who work there
– Establish procedures for • Placing new items in inventory
• Receiving goods
• Requesting materials
• Picking and releasing materials
• Returning materials
– Require documentation at each step of process
– Update records – bar coding and RFID tags help
©2020 ISM All Rights Reserved
Exam 2
367
Inventory Accuracy and Inventory Integrity
Security – Cont.
External
– Under C-TPAT, organizations are asked to
• Ensure integrity of their security practices
• Communicate their security guidelines to their business partners
• See Task 2-B-3
– Many other countries impose similar requirements
– ISO 28000
• Issued by International Organization for Standardization (ISO)
• Series of standards on supply chain security management
systems
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Exam 2
368
Inventory Accuracy and Inventory Integrity
Inventory Policies/Procedures
Effective inventory management requires sound
policies and procedures
– Supply management plays key role in development
– Must have support and buy-in of senior management
Policy manual
– Provides blueprint for entire organization on its supply
management practices
– Reflects value of warehouse operation
– Must be easily understood by customers and staff
– Should be reviewed and updated periodically
©2020 ISM All Rights Reserved
Exam 2
369
Inventory Accuracy and Inventory Integrity
Inventory Policies/Procedures – Cont.
Policies and procedures must address – Safety
– Recycling
– Standardization
– Security
– Access to inventory
– Inventory issuance
– Product returns
– Surplus property
– Inventory counting
– Requests for new inventory items
– Distribution
– Deliveries
©2020 ISM All Rights Reserved
Exam 2
370
Inventory Accuracy and Inventory Integrity
Inventory Policies/Procedures – Cont.
Inventory accuracy and integrity are best controlled by
– Establishing strict policies
– Performing regular and routine training for all involved with
handling the inventory
– Holding people accountable for errors
– Taking disciplinary action
Policies and procedures should be evaluated for
effectiveness and cost
Is the effectiveness of the policy worth the return on investment of
implementation and ongoing costs?
©2020 ISM All Rights Reserved
Exam 2
371
Inventory Accuracy and Inventory Integrity
Inventory Policies/Procedures – Cont.
Examples of evaluating for effectiveness and cost include – Safety and security
• Has become a top concern
• To maintain good safety and security records, check effectiveness of
– Training
– Drills
– Reviews of concepts and procedures
• Reward employees with longstanding safety and security records
• Breaches of safety or security result from no or ineffective training, drills, reviews, recognition
©2020 ISM All Rights Reserved
Exam 2
372
Inventory Accuracy and Inventory Integrity
Inventory Policies/Procedures – Cont.
Examples – Cont.
– Inventory accuracy in cycle counting procedures policies
on inventory accuracy should clarify monetary value
above which supervisory approval is required in order to
make corrections
– Allowable tolerance for adjusting low-level C items
during cycle counting
• If items within 1-2%, system may be set to not record adjustment
• May be cost prohibitive to count exact amounts of some very
inexpensive C items if large quantities stored – weighing is an
alternative
©2020 ISM All Rights Reserved
Exam 2
373
Inventory Accuracy and Inventory Integrity
Inventory Policies/Procedures – Cont.
Examples – Cont.
– Procurement policies: Economic Order Quantity (EOQ),
lot size multiplier, minimum buys, level of spend are
procurement policies to assure inventory items are
purchased at the best possible cost/benefit ratio
• Price is just one factor – may not be overriding issue
• Policies today are as likely to exist for quality and timeliness as
for price
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Exam 2
374
Inventory Accuracy and Inventory Integrity
Location of Materials (e.g., Secure Storeroom, Outside
Yard Storage, etc.)
How and where items are stored depends on
– Method of movement needed
– Items’ characteristics
Availability and location of international facilities vary by
country
– Long-term investments may be required to establish storage
facilities
– If existing facility used, must be analyzed to ensure products and
storage containers will fit the facility
©2020 ISM All Rights Reserved
Exam 2
375
Inventory Accuracy and Inventory Integrity
Location of Materials (e.g., Secure Storeroom, Outside
Yard Storage, etc.) – Cont.
Special storage considerations
– Any items at high risk for pilferage must be kept in secure location
– If certain items are for a specific department, they may require
special security arrangements
– Hazardous goods should be stored in area with special structures –
some cannot be stored together and must be separated by
containment walls and ceilings
If moveable trailers/containers are used for storage,
inventory system should include location codes for trailer
numbers, yard locations, etc.
©2020 ISM All Rights Reserved
Exam 2
376
Inventory Accuracy and Inventory Integrity
Location of Materials (e.g., Secure Storeroom, Outside
Yard Storage, etc.) – Cont.
Tracking inventory items
– Satellite systems, coupled with RFID systems make global tracking
of inventory items possible
– Items can be tracked by the minute and scheduled receipts may be
based on known location of goods
– At any time during shipment, goods can be tracked to a location,
vessel, port, rail car, highway trailer, third-party warehouse, etc. with
scanning and recording equipment
– Sophisticated systems can record all movements and material can
be tracked to its exact location at any time
©2020 ISM All Rights Reserved
Exam 2
377
Task 2-F-8 Recall Question #1
Jeff Jones, of AllBright Solar Power, Inc., thought that to
help choose the optimum features of the warehouse
management system (WMS) capabilities that best fit the
needs of AllBright he should first consider performing a
SWOT analysis. Jones analysis would examine all of the
following decision elements EXCEPT:
(A) Warehouse location.
(B) Required configuration of docking platforms.
(C) A lease or buy option.
(D) A finished goods product mix.
©2020 ISM All Rights Reserved
Exam 2
378
Task 2-F-8 Recall Question #2
All of the following are important features of a warehouse
management system (WMS) EXCEPT:
(A) A flexible location assignment system.
(B) Automated storage and retrieval integration.
(C) A cycle counting training program.
(D) Multiple picking options.
©2020 ISM All Rights Reserved
Exam 2
379
Task 2-F-8 Comprehension Question #1
In performing a SWOT analysis for AllBright Solar
Power’s warehouse expansion strategy, Jeff Jones
examined the boundaries of business continuity and
disaster recovery planning. All of the following are
considered strategic elements of business continuity and
disaster recovery planning EXCEPT:
(A) Regular data backup and alternate site storage
(B) Action plans for escalation
(C) Selection of an asset security organization
(D) A communications plan with the press
©2020 ISM All Rights Reserved
Exam 2
380
Task 2-F-8 Summary and Review
Describe the components and uses of RFID, bar coding, UID and IUID
What is business continuity planning?
Identify the objectives and key considerations when planning a warehouse management system
Name the objectives of warehouse facility design
Describe 4 types of storage location systems
Name 5 reasons customer requirements vary
In addition to customer requirements, identify 4 areas of costs involved in warehouse management
What features and functionality should a WMS include?
What are the key steps in a SWOT analysis?
Describe the differences between private and public warehouses and centralized and decentralized structures
Cont.
©2020 ISM All Rights Reserved
Exam 2
381
Task 2-F-8 Summary and Review – Cont.
Define 3 replenishment systems used in WMS
Describe 3 inventory classification systems
What is the purpose of cycle counting?
What is a perpetual record system?
How are stock keeping units (SKU) established?
Define store, issue and return, and describe steps involved in each
Identify the objective and various methods of recoup
What are benefits of inventory consolidation?
List key elements of internal and external security
Why have inventory policies/procedures and what are some of the areas they must address?
Name 2 determinants of location of materials
©2020 ISM All Rights Reserved
Exam 2
382
TASK 2-F-9
©2020 ISM All Rights Reserved
Exam 2
383
Task 2-F-9 Task Outline
1) Organizational policy for asset classification
2) Physical tracking systems (e.g., bar coding, asset tags, serial
numbers, RFID)
3) Financial tracking systems
4) Internal distribution (e.g., distribution channels)
5) Types of equipment and assets. (e.g., cars, airlines, railroads, copiers)
6) Asset management
Coordinate and/or monitor the movement of equipment and assets within the
organization
All of the content in this task is bridge exam material.
Full 4Q; Bridge 4Q
©2020 ISM All Rights Reserved
Exam 2
384
Organizational Policy for Asset Classification
Asset classification: the process of grouping economic resources into appropriate categories. Assets are classified to facilitate an efficient overview of the organization’s financial health. These assets are defined as – Current assets: short-term resources owned by an organization including
cash, inventory and accounts receivable. Have a life of one year or less or the normal operating cycle of the organization
– Fixed assets: assets that last more than a year, with an impact on shareholder value and considered by management to be worth controlling. Usually referred to as property, plant and equipment and depreciated over a certain monetary amount
– Intangible assets: assets such as brand name, goodwill, reputation, patents or trademarks that have a value but cannot be physically seen or touched. Usually have a life in excess of one year. Amortization is used for use, costing and control
– Investment assets: use of capital to create more money, either through income-producing vehicles or through risk-oriented ventures designed to result in capital gains
– Deferred cost: incurring of an expenditure that has a future benefit in excess of one year and is capitalized to an asset account
©2020 ISM All Rights Reserved
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385
Organizational Policy for Asset
Classification – Cont.
Assets are usually classified by specific accounting
rules
– In U.S.
• Established by the American Institute of Certified Public
Accountants (AICPA) or the Securities and Exchange
Commission (SEC)
• Sarbanes-Oxley (SOX) reporting requirements also apply
– Other countries
• Other organizations specify the country’s accounting rules
– Internationally
• No one global accounting system
©2020 ISM All Rights Reserved
Exam 2
386
Organizational Policy for Asset
Classification – Cont.
Inventory policies aligned with term “current assets” – Inventory is a current asset
– Organizations typically use inventory classification systems
– See Task 2-C-2(6)(D)
Capital expenditures aligned with term “fixed assets” – Are typically for depreciable fixed assets
– Have impact on shareholder value
– Considered by management to be worth controlling
©2020 ISM All Rights Reserved
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387
Physical Tracking Systems (e.g., Bar Coding, Asset Tags,
Serial Numbers, Radio Frequency Identification [RFID])
Any asset considered of value must be monitored
and tracked – can move throughout organization
and between organizations
Asset tags are a popular way to track
– Bar codes: see Task 2-C-2(1)(B)
– Serial numbers: adding serial numbers to an asset tag
improves tracking integrity and adds value to reliability of
security
– RFID: see Task 2-C-2(1)(A)
©2020 ISM All Rights Reserved
Exam 2
388
Physical Tracking Systems – Cont.
Asset tracking software allows an organization to
track
– Assets it owns
– Where each is located
– Who has it
– When it was checked out
– When it is due for return
– When it is scheduled for maintenance
– Cost and depreciation
©2020 ISM All Rights Reserved
Exam 2
389
Physical Tracking Systems – Cont.
Other automated methods for tracking – Optical character reading (OCR)
– Machine vision
– Magnetic strip and surface acoustic wave (SAW)
SOX mandates methods for managing and tracking fixed assets for publicly owned corporations – Records and controls must be documented
– Policies are imposed and need to be adhered to
– Physical asset inventories must be performed
– Audit trails must be sustained
©2020 ISM All Rights Reserved
Exam 2
390
Financial Tracking Systems
Tracking value of assets is required by all organizations
These are key indicators of organizational performance. They assist in
– Measuring net value
– Reporting the value
Capital equipment
– Equipment used by an organization for its production potential that costs
more than predetermined threshold value and whose cost is depreciated
over time
• Basic equipment and asset tracking systems include spreadsheets like Excel
that can be charted for analytical use and graphed for presentation
• Most fixed asset tracking software includes RFID/bar coding
• ERP modules can be programmed/customized to manage tracking on capital
assets
Software programs available to track inventory and assets: from
complex (integrated tracking system) to simple (spreadsheet)
©2020 ISM All Rights Reserved
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391
Internal Distribution (e.g., Distribution
Channels)
The moving of materials such as raw materials, parts and sub assemblies within the organization to – An internal customer
– The next stage of the manufacturing process
Internal transportation – The infrastructure that allows materials to be moved
including internal transportation equipment such as • Pallet jacks
• Fork lifts
• Conveyor belts
• Storage-and-retrieval machines
©2020 ISM All Rights Reserved
Exam 2
392
Types of Equipment and Assets (e.g., Cars,
Airlines, Railroads, Copiers)
Equipment and assets – Vary from organization to organization
– Typically items used in • Production
• Delivery of goods/services to internal and external customers
– Examples • Cars
• Airlines
• Railroads
• Copiers
• Computers
• Machinery
• Finished goods
©2020 ISM All Rights Reserved
Exam 2
393
Asset Management
Asset management: process of tracking fixed assets that an organization owns and lists on its balance sheet
Most organizations use inventory management software, bar coding and/or RFID tools
Purpose of asset management – Maintain accurate financial accounts
– Prevent theft
– Manage movement of assets
Process aspires to maximize return on investment for each asset and includes – Purchase of asset
– Use of asset
– Disposal of asset
©2020 ISM All Rights Reserved
Exam 2
394
Asset Management
Inventory Management
Inventory management: the business function concerned with planning and controlling inventory. An inventory of fixed assets differs from an inventory of expendable goods – Inventory of expendable goods
• See Task 2-C-2
– Inventory of fixed assets • Information Technology (IT) and finance are primary stakeholders.
Usually accountable for collecting, reporting and performing physical inventories of assets
• Software programs available which include bar coding
• Human Resources (HR) plays key role if someone is hired or leaves the organization
• Usually, IT, finance and HR work together and are accountable for acquisition, collecting data on location, performing physical inventories and reporting financial obligations of asset value for government reporting purposes
©2020 ISM All Rights Reserved
Exam 2
395
Asset Management
Asset Recovery
The re-employment, reuse, recycling or
regeneration of something of value (property,
equipment or goods) that is no longer needed for
its original intent. After an asset has exceeded its
usefulness, the practice of asset recovery begins
Finding new use for existing asset
– Good business practice
– Can minimize environmental impacts
– Reduces an organization’s disposal costs
©2020 ISM All Rights Reserved
Exam 2
396
Asset Management
Asset Recovery – Cont.
When disposing of assets, the objective is to increase the cash position
of the organization by optimizing the return on the assets
Action items for asset recovery
– Identifying assets for removal from the organization’s asset inventory
– Consideration for asset tracking, inventory accuracy
– Data security, removal of organization information
– Environmental compliance, current and cradle-to-grave or cradle-to-cradle
responsibilities
– Logistics, storage and handling
– Life-cycle completions
– Value analysis, optimal return from asset
All issues must be addressed and resolved before removing an asset
from organization’s balance sheet
©2020 ISM All Rights Reserved
Exam 2
397
Task 2-F-9 Recall Question #1
Which of the following asset tracking methods would be
LEAST effective in tracking warehouse capital assets?
(A) An Excel spreadsheet.
(B) Bar codes.
(C) Radio Frequency Identification Devices (RFID).
(D) A card index system.
©2020 ISM All Rights Reserved
Exam 2
398
Task 2-F-9 Recall Question #2
The PRIMARY objective of asset recovery is to:
(A) Minimize the environmental impact of the asset’s disposal.
(B) Classify and monitor an asset throughout its life cycle.
(C) Re-employ or reuse a surplus asset of value.
(D) Optimize return on the asset.
©2020 ISM All Rights Reserved
Exam 2
399
Task 2-F-9 Application Question #1
AllBright’s two new warehouses were built to house finished goods to improve overall customer service. AllBright Solar Power’s Marketing and Sales Vice President, Mike Moore, wanted the highest customer service levels possible. Moore had a discussion with Mike Jones, Manager for Inventory Control and Warehousing, and Moore suggested that the best way to achieve desired high customer service levels was to carry 100% of all finished goods inventory. Jones responded that AllBright could not afford that level of customer support, as the necessary finished goods inventory would cost too much. Aside from the cost of the finished goods themselves, which of the following cost elements would MOST likely be the greatest driver of finished goods inventory costs? (A) Inventory holding costs. (B) Cost of invested funds. (C) Shrinkage of goods. (D) Material handling costs.
©2020 ISM All Rights Reserved
Exam 2
400
Task 2-F-9 Summary and Review
Define asset classification, current assets, fixed assets, intangible assets, investment assets
List SOX mandates for tracking fixed assets
Identify the key performance indicators on how well an organization is performing financially
What are internal distribution and transportation?
Define asset management and compare inventory of expendable goods versus inventory of fixed assets
Define asset recovery and state its objective
©2020 ISM All Rights Reserved
Exam 2
401
TASK 2-F-10
©2020 ISM All Rights Reserved
Exam 2
402
TASK 2-F-11
©2020 ISM All Rights Reserved
Exam 2
403
TASK 2-F-12
©2020 ISM All Rights Reserved
Exam 2
404
TASK 2-F-13
©2020 ISM All Rights Reserved
Exam 2
405
TASK 2-G-1
©2020 ISM All Rights Reserved
Exam 2
406
Task 2-G-1 Task Outline
1) Project initiation
2) Project planning
3) Project execution
4) Project monitoring and control
5) Project closure
Perform project management activities
All of the content in this task is bridge exam material.
Full 9Q; Bridge 5Q
©2020 ISM All Rights Reserved
Exam 2
407
Introduction
Project management: the process of coordinating
the organization, planning, scheduling, controlling,
monitoring and evaluating of activities so that the
objectives of a project are met
Relationship to supply management involves
– Method/approach for conducting many supply
management activities
• Many of which are executed as projects
– Supply management activities; e.g., sourcing, support
many projects
©2020 ISM All Rights Reserved
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408
Introduction – Cont.
Projects are created to meet at least one of five
objectives
– Create a change in organization
– Exploit new opportunities
– Implement the strategic plan
– Fulfill a contractual agreement
– Solve some problem
©2020 ISM All Rights Reserved
Exam 2
409
Introduction – Cont. Project Life Cycle – New Product Development
(sequence of activities to accomplish
specific goals and objectives)
Feasibility
Study
Deploy
Test
Build
Prototype
Design
Concept
Development
Ph
ase
Time
©2020 ISM All Rights Reserved
Exam 2
410
Process
Group Description Activities
Initiating Processes for formalizing
authorization to begin new
project or project phase
Evaluate alternatives
Clarify objectives
Develop project scope
Develop project charter
Identify available resources
Planning Planning and managing a
successful project
Gather information
Finalize scope
Develop cost budget
Develop schedule
Identify risks
Establish quality requirements
Plan purchases
PROJECT PROCESS GROUPS
Introduction – Cont.
©2020 ISM All Rights Reserved
Exam 2
411
Process
Group Description Activities
Executing Processes to complete the
work and meet project
requirements
Coordinate people and resources
Perform project activities
Obtain information, bids, quotes, proposals
from suppliers
Select suppliers
Implement any approved changes
Monitoring
& Control
Processes to examine project
execution, identify problems,
take corrective action
Observe/monitor
Review supplier performance
Measure against project plans & performance
baselines
Implement corrective actions
Establish preventive measures
Closing Formal termination of a project
or project phase; handing off a
project; canceling a project
Finalize all process group activities
Close out contracts
Resolve contract issues
©2020 ISM All Rights Reserved
Exam 2
412
Project Initiation
Initiation: necessary activities to gain approval for
project
Projects are initiated to
– Solve problems
– Develop new processes/procedures
Project-related supply management activities include
– Needs identification or problem definition
– Determining project feasibility
– Proposing a project solution
– Obtaining project approval and authorization
©2020 ISM All Rights Reserved
Exam 2
413
Project Initiation
Root Cause Analysis
Initiation includes conducting root cause analyses to – Define the problem that the project will solve
– Identify needs for which the project will provide solution
Analyses include – SWOT analysis
– Kepner-Trego rational process analysis
– Six sigma process analysis
– Business case analysis
– Alternative analysis
– Project feasibility analysis
– Stakeholder analysis
©2020 ISM All Rights Reserved
Exam 2
414
Project Initiation
Strengths, Weaknesses, Opportunity, Threats (SWOT) Analysis
SWOT Analysis (see Task 2-C-2)
– Define problem/identify need
– Create understanding of the environment that created the
problem(s)
– Help identify projects that will minimize/eliminate these problems
– Include stakeholders
– Address three important issues
• Frequency
• Importance
• Likelihood of resolution
– You can rank order results using a prioritization matrix
©2020 ISM All Rights Reserved
Exam 2
415
Problem
Description
(1)
Frequency
of
Occurrence
(2)
Importance
(3)
Feasibility of
Resolution
(4)
Total
Score
SWOT analysis: Prioritization Matrix 1. How frequently does the problem/issue occur? 2. How important is the problem/issue? 3. How likely is it that we can resolve problem/issue? 4. To obtain score
– Assign rankings (1=low, 2=medium, 3=high) for questions 1, 2 and 3 for each problem
– Calculate product of columns 1, 2 and 3 for each problem to obtain Total Score
Project Initiation
SWOT Analysis – Cont.
©2020 ISM All Rights Reserved
Exam 2
416
Problem
Description
(1)
Frequency
of
Occurrence
(2)
Importance
(3)
Feasibility of
Resolution
(4)
Total
Score
Late deliveries 1 2 2 4
# of rejections 2 3 3 18
High prices 3 3 1 9
Project Initiation
SWOT Analysis – Cont.
SWOT analysis: Prioritization Matrix 1. How frequently does the problem/issue occur? 2. How important is the problem/issue? 3. How likely is it that we can resolve problem/issue? 4. To obtain score
– Assign rankings (1=low, 2=medium, 3=high) for questions 1, 2 and 3 for each problem
– Calculate product of columns 1, 2 and 3 for each problem to obtain Total Score
©2020 ISM All Rights Reserved
Exam 2
417
Project Initiation
Kepner-Trego Rational Process Analysis
Kepner-Trego rational process analysis
– Systematic procedures developed to apply critical thinking to
information, data and experience for the purpose of
• Solving problems
• Making decisions
• Anticipating future problems
• Appraising situations
– Four phases
• Situation appraisal
• Problem analysis
• Decision analysis
• Opportunity (or potential problem) analysis
©2020 ISM All Rights Reserved
Exam 2
418
Project Initiation
Kepner-Trego Analysis – Cont.
Phase 1 of Kepner-Trego
– Situation appraisal
• What is the environment?
• Look at the actual situation and identify problems to solve
• Helps regain order where there has been uncertainty, establish
priorities, determine project parameters
©2020 ISM All Rights Reserved
Exam 2
419
Project Initiation
Kepner-Trego Analysis – Cont.
Phase 2 of Kepner-Trego – Problem analysis
• Why did this happen?
• Develop a deviation statement
– Identify the problem
– Describe it
– Important step: problem description is the basis for scope of project
• Based on deviation statement, describe identity, location, timing, magnitude – ask
– How often is this happening?
– Where is the problem occurring?
– When is it happening?
– What is the extent/degree of the problem and its occurrence?
– Who is involved in the situation/problem?
©2020 ISM All Rights Reserved
Exam 2
420
Project Initiation
Kepner-Trego Analysis – Cont.
Phases 3 and 4 of Kepner-Trego
– Decision analysis
• Determine course of action to meet project goals
– Opportunity (or potential problem) analysis
• What lies ahead?
• What kinds of decisions will have to be made in the future?
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Project Initiation
Six Sigma Process Analysis
Six sigma process analysis
– A quality improvement initiative originally developed by
Motorola
– A data-driven framework to make quality improvements
in an organization’s value-adding processes while
simultaneously
• Saving money
• Increasing revenues
– Objective: implementation of a measurement-based
strategy aimed at reducing variances and improving
processes
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Project Initiation
Six Sigma Process Analysis – Cont.
Six sigma
– Everyone (CEO to frontline employee) involved in improving
quality
– Uses project management approach
– Six sigma equation: Y = ƒ(X)
where: Y = output (key business objectives and measures)
ƒ = function (interrelationships to be controlled and
managed)
X = controllable and noncontrollable variables that affect Y
– Strives for perfection
• No more than 3.4 (0.00034%) defects per million measurement
opportunities
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Project Initiation
Six Sigma Process Analysis – Cont.
DMAIC Improve existing processes
incrementally
– D – Define project deliverables and customer goals
– M – Measure the process to determine current performance
– A – Analyze and determine the root causes of any defects
– I – Improve the process by eliminating defects
– C – Control future process performance
DMADV New processes or improve
existing processes more than incrementally
– D – Define project deliverables and customer goals
– M – Measure and determine customer’s needs and specifications
– A – Analyze process options that will meet customer’s needs
– D – Define the process in detail to meet customer’s needs
– V – Verify design performance and ability to meet customer’s needs
Two Common Six Sigma Processes
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424
Project Initiation
Business Case Analysis
Business case analysis
– An approach to analyzing a business case for a
proposed project
– Structured proposal for business improvement
• Functions as decision package for organizational decision-
makers
• Should include
– Reasons for proposed project
– Estimated costs
– Expected benefits
– Analysis of alternatives to the project
– Expected risks
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Project Initiation
Alternative Analysis
Alternative analysis
– Part of the business case
– Analyzes various alternatives to proposed project
– For each alternative, examines
• Benefits
• Costs
• Risks
• Feasibility
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Project Initiation
Alternative Analysis – Cont.
Examples of Project Benefits
BENEFIT DESCRIPTION
Financial $ of new revenue generated
$ cost savings
% increase in profit margin
Market % gain in market share
Estimated increase in competitiveness
% increase in customer awareness
Customer % increase in customer satisfaction
% increase in customer retention
Increase in customer loyalty
Supply Management % increase in efficiency
% improvement in supplier quality
% improvement in supplier delivery
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Project Initiation
Alternative Analysis – Cont. Examples of Project Costs
COST DESCRIPTION
Project Participants Project staff salaries
Training costs for employees
Purchasing costs of contractors/consultants
Internal Organization Downtime during testing
Losses in productivity during transition
Resistance to change
New manuals
Physical Assets Equipment and materials
Computers, phones, printers
Office space dedicated to project
External Suppliers Training costs
Temporary losses in productivity/service delivery
Resistance to change
Search costs for new supplier(s)
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Project Initiation
Alternative Analysis – Cont.
Risks
– Generally associated with the project itself; e.g.,
• Project will not be completed on time
• Funding needed to complete project not available
– In analyzing risk, assess
• Probability risk will occur
• Difficulty in avoiding risk
• Difficulty in mitigating risk
• Potential effect of risk (including costs)
• Countermeasures to take if risk occurs
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Project Initiation
Project Feasibility Analysis
Project feasibility analysis
– Feasibility study helps limit the number of solutions to
consider by determining the chance that each will
• Solve the problems
• Take advantage of an opportunity
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Project Initiation
Project Feasibility Analysis – Cont.
Example of Feasibility Study
CATEGORY RATING METHODOLOGY USED
Additional people needed to
complete project
7 Survey of available
employees taken to identify
skill sets
New processes will have to
be adopted
4 Benchmarked processes at
other organizations
New capital equipment will
have to be purchased
8 Inspected current capital
equipment
New technology needed to
complete project
8 A team created technology
prototype
Feasibility Rating: 1 = extremely low feasibility 10 = extremely high feasibility
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Project Initiation
Project Feasibility Analysis – Cont.
Feasibility study may include analyses of
– Net present value (NPV): difference between present
value of all cash inflows and present value of all cash
outflows during life cycle of improvement
– Internal rate of return (IRR): rate of return that would
make present value of future cash flows plus final market
value of an investment/business opportunity equal the
current market price of investment/opportunity; i.e., what
is break even rate of return?
– Payback period: period of time needed for project to
recover its initial investment, based on cash inflows
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Project Initiation
Stakeholder Analysis
Stakeholder analysis – Assists in
• Assessing project environment
• Determining level of risk and variability
• Identifying relationships, both positive and those with conflicts
– Helps identify each stakeholder and • His/her role
• Level of interest
• Influence in project
• Primary stakeholder: those ultimately affected by project’s deliverables
• Secondary stakeholder: intermediaries that aid in project delivery process
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Project Initiation
Stakeholder Analysis – Cont.
Stakeholder analysis questions to consider – What are each stakeholder’s expectations with regard to
project?
– What are likely benefits each stakeholder will accrue from project?
– What resources will each stakeholder want to commit (or avoid committing) to project?
– What other interests does each stakeholder have that could conflict with project?
– How does each stakeholder feel about other stakeholders involved in project?
See Task 3-C-4
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Project Initiation
Project Charter
Project charter – Developed by project manager and project sponsor once project
approved
– May be in form of memo, email, formal document and addresses
• Project scope and any constraints
• Project’s important milestones
• Assigned project manager
• Project team members
• Risk analysis
• Dated signature of project sponsor
– Defines project
– Used to announce project to stakeholders
– Begins paper trail
– Used as guide by team members
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Project Planning
Planning: provides roadmap for project. Formal project plan provides each team member with details
Planning begins with
– Writing description of project
– Writing clear statement of project objectives
– Creating work breakdown structure (WBS) with corresponding project organization and functional responsibility chart
• WBS: provides illustration of project scope and tasks, and becomes a basis for monitoring project progress
• Organization and functional responsibility chart: identifies project team and shows responsibilities assigned to team members for various tasks
– Preparing project schedule
– Planning resource requirements
• Known as resource loading
• Involves scheduling necessary resources including people, equipment, for given project activities at given times
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Project Planning – Cont. Project Name:
Supplier Development
Process Performance Analysis
Data Analysis Supplier
Opportunities Improvement
Strategies
Task 1
Task 2
Task 3
Task 1
Task 2
Task 3
Subtask 1
Subtask 2
Example Work Breakdown Structure (WBS)
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Project Planning
Organizational Structures
Project organizational structures can include
– Functional: project tasks performed by department
responsible for the function; e.g., accounting,
engineering, finance, supply management, marketing
– Matrix: project roles, responsibilities and authority
shared by functional department members and project
managers
– Projectized: greater degrees of independence and
authority, with project manager having full authority over
project team members
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Project Organizational Structures
TRAITS FUNCTIONAL MATRIX PROJECTIZED
PM’s Authority Little or none Limited to high High to almost total
% Personnel
Assigned FT
Virtually none 0-95% 85-100%
PM’s Role Part-time Part- to full-time Full-time
Titles for PM’s role Project Coordinator
Project Leader
Project Coordinator
Project Manager
Project Officer
Program Manager
Project Manager
Program Manager
Project Adm. Staff Part-time Part- to full-time Full-time
Level of Commitment Inside group: high
Outside group: low
Varies Highest
Communication More difficult More difficult Least difficult
More structured
Priority Inside group: high
Outside group: low
Varies Highest
Potential Conflicts Low High Low
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Project Planning
Project Team Roles and Responsibilities
Example Responsibility Assignment Matrix (RAM)
Project Phase Task
Project
Mgr.
SM
Team
Tech.
Team
Oper. Imp.
Team
Analyze Need A1 ○ ● ● ●
A2 ● ○ ○
A3 ● ● ■
Solicit Quotes B1 ○ ●
B2 ■ ○ ●
Write RFP C1 ■ ○
C2 ○
Coding: ○ Approval ● Responsible Notification ■ Support
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Project Planning
Schedule Development
Project schedule
– A time-phased plan for performing activities of project
– Based on WBS
– Critical path
• Consecutive sequence of activities in project whose cumulative
time requirements determine minimum total project time
• Delay in critical path activities delays entire project if other steps
are not compressed
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Project Planning
Schedule Development – Cont.
Many organizations use one or more of the following to
graphically portray project schedule
– Gantt chart: horizontal bar chart commonly used to plot planned and
actual progress of project activities
– Critical Path Method (CPM): involves analyzing all steps in project to
identify shortest path
– Program Evaluation and Review Technique (PERT): network
planning technique used for controlling activities in project
• Each activity assigned pessimistic, probable and optimistic estimate of
duration
• Critical path and project duration are determined
• Project progress monitored using this data
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Project Planning
Budget Development
Budget
– A plan to allocate resources to a project
– Must be developed to gain approval for plan
– Usually organized by
• Project task
• Expected timing of expense associated with task
– Used by senior management to monitor and control
project
• Data must be collected and reported in timely manner
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Project Planning
Risk Management
Risk management – Identification, analysis and planned response to potential project
risks
– Identified by
• Brainstorming with stakeholders
• Analyzing schedule
• Reviewing past similar projects
– After risks are identified, they are assessed for
• Probability of occurrence
• Possible magnitude
• Risk matrix: risk analysis tool for assessing a risk based on an event’s probability of occurrence and impact of that risk event
– Assign responsibility to someone on the project team for monitoring and managing highest risks
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Project Planning
Risk Matrix
Example Risk Matrix
High
Probability
Low
Low Consequence High
Mitigating this risk reduces the consequences, moving it to the upper left quadrant
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Project Planning
Procurement Planning Process
During planning, the project manager involves
– Stakeholders
• Including supply management
– Decides what should be outsourced
Supply management activities during planning
– Procurement planning
– Solicitation planning
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Project Planning
Procurement Planning Process – Cont.
Procurement planning process
– Identifying which business needs can best be met
through outsourcing
– Determining
• Sourcing method
• Specifications or descriptions
• Quantities
• Timing
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Project Planning
Solicitation Planning and Process
Solicitation planning process
– Determine contract type
– Develop solicitation document
– Determine
• Proposal evaluation criteria
• Contract award strategy
– Structure contract terms and conditions
– Finalize solicitation
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Project Planning
Project Plan Approval Process
Planning culminates in a project plan that covers – Overview: short project description, deliverables, major milestones
– Objectives: details of project deliverables
– Technical and managerial approaches: special practices beyond normal procedures
– Contractual agreements: detailed description of agreements with clients and suppliers
– Project schedule: timeline of all project-related activities and major deliverables, milestones
– Project budget: capital and operating expenses
– Risk management: solutions to eliminate/mitigate potential problems
– Resource requirements: project team and skill requirements
– Evaluation methods: evaluation standards and procedures, monitoring requirements
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Project Planning
Project Plan Approval Process – Cont.
Project plan approval process
– Plan must be written so progress can be tracked
– Plan goes through a review and approval process
• Small functional projects may need only functional manager
approval
• Large projects may require sponsor approval
• Individual organizations develop their own review and approval
processes
– Once a plan is approved, the project is ready for
execution
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Project Execution
Once project plan approved, team moves to next
phase, the actual deployment of the project
Project execution for supply management activities
involves implementing supply management plans
developed during project planning
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Project Execution
Selection Process
Solicitation process involves obtaining bids and
proposals from prospective suppliers on how
project needs can be met
It includes
– Conduct pre-proposal conference
– Conduct advertising
– Develop and maintain qualified bidders list
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Project Execution
Source Selection Process
Source selection process involves
– Receive bids/proposals
– Evaluate bids/proposals based on evaluation criteria
stated in solicitation
– Negotiate with suppliers
– Execute contract award strategy (select supplier)
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Project Monitoring and Control
Project monitoring and control
– Once tasks have started and contract work has begun,
the project must be administered
– Includes monitoring the project by collecting, reporting,
documenting any project information important to
• Project manager
• Other stakeholders
– Part of administration and control process is
• Overseeing contracts
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Project Monitoring and Control
Contract Administration Process
Contract administration process – Ensures that both party’s performance meets contractual
requirements
– Project manager and supply manager should create and follow a set of control procedures to assure compliance
– All work must be properly authorized
– Periodic inspections are necessary
– A system to deal with change orders should be established
– Report performance to project manager and other stakeholders
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Project Monitoring and Control
Contract Administration Process – Cont.
Performance measurement tools include
– Earned value management (EVM): see Task 2-D-1
– Schedule analysis
• Compares planned schedule with actual schedule
• Schedule variance is computed by comparing difference between
– Budgeted cost of work scheduled (BCWS)
– Budgeted cost of work performed (BCWP)
– Budget analysis compares budgeted cost of work scheduled
(BCWS) against actual cost of work performed (ACWP)
– Can calculate efficiency indicators
• Cost performance index (CPI) = BCWP/ACWP
• Schedule performance index (SPI) = BCWP/BCWS
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Project Monitoring and Control
Contract Administration Process – Cont.
Additional areas involved in project monitoring and
control include
– Consideration and processing of all change requests
– Monitoring and controlling risk
– Managing and reporting cost, schedule and performance
results
• Called triple constraints (cost, schedule, performance)
• The parameters of the project objectives
– Conducting milestone reviews
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Project Closure
The last step in the project life cycle
Formalizes acceptance of project and brings it to an end
All personnel involved in project are – Transferred back to their function
– Reassigned to a new project
Completed project is transferred to – Client
– User department
Important step at this stage: closing out contracts
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Project Closure – Cont.
Contract closeout: the process of verifying that all
administrative matters are concluded on a contract
that is otherwise physically complete
It includes
– Property disposition
– Final receipt and acceptance
– Final payment
– Best practice and lessons learned identification
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Project Closure – Cont.
Post project audit
– Conducted to assess completed project in terms of
• Project methods
• Procedures
• Records
• Properties
• Budgets
• Actual costs
• Contractor performance
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Task 2-G-1 Recall Question #1
Consider the following steps in the project management process.
I. Closing
II. Execution
III. Initiation
IV. Planning
V. Monitoring and controlling
Which of the following options describes the appropriate sequence (from first to last) of these steps?
(A) IV, II, III, V and I
(B) IV, V, III, II and I
(C) III, IV, II, V and I
(D) III, IV, V, II and I
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Task 2-G-1 Recall Question #2
You have been asked by the head of Supply Management to develop a
training program for a class for the newly hired group of supply management
analysts. As a supply management professional, you decide to create case
studies covering each of the project procurement management areas for use
in the class. Which of the following represents the six (6) procurement
project management areas identified by the Project Management Institute?
(A) Plan purchase and acquisitions, negotiate contracting, request suppliers’
responses, select suppliers, contract administration and contract closure.
(B) Plan purchase and acquisitions, plan contracting, request suppliers’
responses, select suppliers, contract termination and contract closure.
(C) Plan acquisitions, negotiate contracting, request suppliers’ responses, select
suppliers, contract administration and contract closure.
(D) Plan purchase and acquisitions, plan contracting, request supplier’s
responses, select suppliers, contract administration and contract closure.
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Task 2-G-1 Case Study #1
Discussion Questions:
1. What are some analysis tools Rodriguez should incorporate when
analyzing capital equipment acquisitions during the project initiation
phase?
2. List four or five processes or tools Rodriguez can use in the project
monitoring and control phase to manage the contract.
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Task 2-G-1 Summary and Review
Describe the relationship between project management and supply management
Projects are typically created to meet at least one of five objectives – name them
Define project life cycle
Describe the following project process groups and identify key activities and deliverables/outputs of each – Initiating
– Planning
– Executing
– Monitoring and control
– Closing