Supply Chain Management 01 06 2011

Basics of Supply Chain Management
Manufacturer
Distributor
Retailer
Supplier
Customer
Time is Money
Dr. Attia Gomaa
Industrial Engineering Professor & Consultant
Engineering and Science Services - American University in Cairo
2010
SCM
Supply Chain Management for Engineers
Supply Chain Management
Content:
1. Supply Chain Overview

2. Supply Chain Management
3. Key Indicators of SCM
4. Inventory Management
5. Material Requirement Planning
6. Demand Forecasting
7. Procurement Management
8. Enterprise Resource Planning
9. Value Chain analysis
10. Supply Chain Design
11. Case Studies
SCM
Supply Chain Overview
SCM
SUPPLY CHAIN (Idea 1950 Practice 1980 More 1990)

flow of materials, information, payments, and services from raw material
suppliers, through factories and warehouses, to the end customers.
Suppliers
Company
(Internal Supply
Chain)
Customers
Integration of Supply and Demand Chains

What is a Supply Chain ?
A system or network consisting of organizations and their
business processes.
What is a Global Supply Chain ?
A supply chain developed in a global scale
SCM
SCM
Vertical Integration
Initial Suppliers
End Users
Tier 2
Suppliers
Raw
Material
Suppliers
Tier 1
Suppliers
Company
XYZ
Customers
Manufacturing
Supply Chain
SCM
TIER THREE
SUPPLIERS
TIER TWO
SUPPLIERS
TIER ONE
SUPPLIERS
SERVICE &
SUPPORT
SUPPLIERS
PRODUCER
DISTRIBUTORS
CUSTOMERS
RECYCLERS/
DISPOSERS
SCM
Supply Chains
Cross Functional vs. Departmental
Customer Focused vs. internal process focused
Customer
Service
Suppliers
Manufacturing
Customers
Distribution
Warehouses
Logistics
Inventory
SCM
Vertical Integration
(2)
(1)
(3)
(4)
(5)
(6)
(7)
SCM
Supply Chain - Cost Analysis

(2) $0.33
(1) $0.25
(3) $0.48
(4) $0.56
(5) $1.0
(6) $1.08
(7) Bread
$1.25
SCM
Initial
Suppliers
Supply Chain Vertical Integration
End
Users
Tier 4
--
Tier 3
Tier 2
Tier 1
Manufacturer - XX
Egypt
Tier 1
Tier 2
SCM
--
Assembly
-
Egypt
Supply Chain - Vertical Integration

Tier 4
--
Tier 3
Australia
Tier 2
USA
Germany
Tier 1
Malaysia
Tier 2
SCM
USA
--
Major
subassemblies
USA
Assembly
Distribution
centers
Egypt
Raw
materials
Components
China
Manufacturer - XX
Egypt
Tier 1
Suppliers
Retail
What Is a Supply Chain?

A supply chain is a network of companies that
provides goods or services.
Tier 2
Suppliers
Tier 1
Suppliers
Tier 1
Customers
Tier 2
Customers
Initial Suppliers
1
2
n
1
2
3
n
Tier 3 to
Consumers/
End-users
Consumers/End-users
Tier 3 to
Initial
suppliers
n
1
2
1
n
SCM
Focal Company
Members of the Focal Companys Supply Chain
Global supply chain
Plan
Suppliers
Material Costs
SCM
Source
Manufacturers
Make
Deliver
Warehouses &
Distribution Centers
Buy
Customers
Transportation
Transportation
Costs
Transportation
Costs
Manufacturing Costs
Inventory Costs
Costs
SCM
SC Management Processes
PLAN
PLAN
SOURCE
RETURN
MAKE
SOURCE
DELIVER
RETURN
RETURN
DELIVER
RETURN
PLAN
SOURCE
Supplier
Internal or External
MAKE
MAKE
RETURN
DELIVER
RETURN
Customer
Internal or External
Your Company
SCM
Inventory
Production
scheduling
Finance,
labor
Purchasing
1980
MRP II
Major
Manufacturing
Resources
MRP II
All internal
resources
ERP
Coordinated
Manufacturing
and Service
Transactions
1990
MRP
MRP
Production
Management
ERP
Internal customers
and suppliers
Internal
SCM
Extended
ERP/SCM
2000
1970
1960
The Evaluation of Computerized Aids
Internal
ERP/SCM
External suppliers
and customers
Extended
SCM
Extreme/
Integration
SCM
Enterprise Resource Planning

Evolution of ERP
Electronic
Commerce
Supply Chain
Management
Sales Force
Automation
MRP II ERP
Enterprise
MRP
mrp
Material Manufacturing
Requirement
Planning
Resource
Planning
(+Capacity)
Manufacturing Resource
Resource
Planning
(+BPRHR
Planning
Logistics
(+Cash flow)
Service..)
Knowledge
Management
SCM
ERP II
Internet
Integration
Business
Intelligent
Customer
Relationship
Management
Information, product, service, financial and knowledge flows

Material Flow
Information Flow
Supplier Network
Integrated Enterprise
Materials
Procurement
Market
Distribution
Manufacturing
End Consumers
Distribution Network
Capacity, information, core competencies, capital, and human resource constraints
SCM
Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
SCM

SCM
SCM
SCM
Attempt to balance resources and demand
Resources
Demand
Production Management
SCM
Attempt to balance supply and demand
Supply
Demand
Procurement Management
SCM
Attempt to balance inventory and cost
Inventory
Cost
Inventory Management
SCM
Attempt to balance price and cost
Price
Cost
Market Management
SCM
Optimize the
Production-Inventory System
Suppliers
Fabrication
(1)
Raw materials
inventory
SCM
Distribution
and sales
Assembly
(2)
Component parts
inventory
(3)
Finished goods
inventory
Attempt to balance
demand , inventory, and cost
Demand
Inventory
SCM
Costs
Supply Chain Management (SCM)

SCM is A Systematic Approach to achieve the customer request
Supplier
Management
Production
Management
Customer
Management
SCM Objectives 6 Rights

Right
Information
Right
Quantity
SCM
Right
Quality
Right
Time
Right
Location
Right
Cost
SCM

Supplier
Management
Production
Management
Customer
Management
SCM Objectives 6 Management Integration
Information
Management
Cost
Management
Quantity
Management
SCM
Quality
Management
Location
Management
Time
Management

Supplier
Management
Production
Management
Customer
Management
SCM Objectives 6 Management Integration
Information
Management
Cost
Management
Quantity
Management
SCM
Quality
Management
Location
Management
Time
Management

Right Cost
Right
Inventory
Right
Order
Right
Resources
Right
Material
Handling
Right
Price
Right
Productivity
SCM

Information
Procurement
Supplier
Management
Quality
Material
Time
Financial
Production
Management
Process
Quality
Material
Time
Financial
Market
Customer
Management
Quality
Material
Time
Financial
Through:
1.
Information Flow Analysis
2.
Market Flow Analysis
3.
Procurement Flow Analysis
4.
Process Flow Analysis
5.
Quality Flow Analysis
6.
Material Flow Analysis
7.
Time Flow Analysis
8.
Financial Flow Analysis
SCM
Supply Chain - Cost Flow Analysis
Suppliers
Company
(Petrojet)
Warehouses &
Material
Costs
Transportation
Costs
Customers
Manufacturing
Costs
Transportation
Costs
Inventory
Costs
Transportation
Costs
Cost / Price
+?
+?
+?
+?
+?
30%
5%
50%
5%
5%
5%
100%
Cost Management Methodology Min. Total Cost

SCM
Supply Chain - Time Flow Analysis
Suppliers
Company
(Petrojet)
Warehouses &
Lead
time
Transportation
time
Customers
Manufacturing
time
Transportation
time
Inventory
duration
Transportation
time
Total Time
+?
+?
+?
+?
+?
10%
5%
60%
5%
5%
5%
100%
Schedule Management Methodology Min. Total Time

SCM
Supply Chain - Quality Flow Analysis
Suppliers
Company
(Petrojet)
Supplier
Defect %
Warehouses &
Customers
Transportation
Defect %
Manufacturing
Defect %
Transportation
Defect %
Inventory
Defect %
Transportation
Defect %
Total Defect %
+?
+?
+?
+?
+?
5%
1%
10%
1%
1%
1%
19%
Quality Management Methodology Min. Total Defect %

SCM
SCM
SCM
SCM
SCM
Multi Dimensional Pareto Analysis

S T O C K T U R N O V E R
V
O
L
U
M
E
F R E Q U E N C Y
ABC based on Volume

ABC based on Frequency
ABC based on Turnover
SCM
SCM
Organization
Structure
Enterprise Chairman
Upstream
Top
Policy
Key Indicators
Middle
Operational
Downstream
Day-to-Day Work Orders
Site Implement
SCM
Data
Main Supply Chain Drivers
SCM
Production
Management
SCM
SUPPLY CHAIN MANAGEMENT (SCM)

to plan, organize, and coordinate all the supply chains activities.
Materials
Manufacturers
Suppliers
5
Products
Distributors
Products
Customer
Products
Demand
Demand
Information
Improve operations
Increasing levels of outsourcing
Increasing transportation costs
Competitive pressures
SCM
Demand
Increasing globalization
Increasing importance of e-commerce
Complexity of supply chains
Manage inventories
SCM
Optimization of A Supply Chain
Customer needs, demand, quality, etc.
Resources (Material, Machines, Manpower)
Procurement
Inventory levels
Lot size
Lead time
Product variety
Customer service
Information & documentation
Tools (H/w & S/w)
Total Cost
SCM
The stream flows between the operation and the customer
Upstream
Downstream
Supply side
Demand Side
Parts, information, Services
Customers
Relevant tier (stage)
SCM
Process Steps for a Production Order
SCM
SCM
Products are processed, stored and

transported by different operations in the chain
SUPPLIES
MANUFACTURE
DISTRIBUTION
The pipeline - total pipeline time

Time is spent at each, process (storage) point
Time compression
Reduce time along the whole process by reducing
stored inventory (stock) at beginning
SCM
Elements of Supply Chain Management

Element
Typical Issues
Customers
Determining what customers want
Forecasting
Predicting quantity and timing of demand
Design
Incorporating customer wants, mfg., and time
Processing
Controlling quality, scheduling work
Inventory
Meeting demand while managing inventory costs
Purchasing
Evaluating suppliers and supporting operations
Suppliers
Monitoring supplier quality, delivery, and relations
Location
Determining location of facilities
Logistics
Deciding how to best move and store materials
SCM
Key Components of Supply Chain Management

1.
2.
3.
4.
5.
6.
Location
Transportation and logistics
Inventory and forecasting
Marketing and channel restructuring
Sourcing and supplier management
Information and electronic mediated environments
7.
8.
9.
10.
11.
12.
Product design and new product introduction

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

The supply chain process is intertwined with the computerization of
its activities. People have wanted to automate the processes along
the chain to reduce cost, expedite processing, and reduce errors.
Material requirements planning (MRP) essentially

integrates production, purchasing, and inventory
management of interrelated products.
Manufacturing resource planning (MRP II), enhanced MRP
methodology by adding labor requirements and financial
planning.
Enterprise resource planning (ERP) further integrates the
transaction processing as well as other routine activities in
the entire enterprise.
Integrations continues along several paths
SCM
functional areas
Combining transaction processing and decision support
Business intelligence
CRM software
Computerized Supply Chains
SCM
Effort
SCM Outline
Supply Demand
Planning Process
Inventory Management Methodology
Network Design
Training
Performance Measures
Current Performance
Time
SCM
Action Plan
What Should
be done?
Activities
- Scope
- Specific
- Measurable
SCM
When?
Schedule
Duration
Start
Finish
How?
Resources:
- Manpower
- Machines
- Materials
- Method
- Management
- Money
Where?
Location
Indoor
Outdoor
Subcontractor
Key Indicators of SCM
SCM
Supply Chain Performance Measurement Framework
The supply chain performance measurement discussed in

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

3. Quality measures,
4. Cost measures,
5. Productivity measures,
6. Composite profitability measures; etc.
SCM
Productivity Analysis
Material
Productivity
Management
Productivity
Manpower
Productivity
Machine
Productivity
Money
Productivity
Method
Productivity
Total Productivity Analysis

Customer Satisfaction Final Product Quality
SCM
Material Productivity
Root Cause Analysis
Skills
Method
Machine
Material
Environmental
Working
Conditions
Actions
Corrective
Policy
SCM
Prevention
Policy
Proactive
Policy
Inventory and Supply Chains
Input flow of materials

Types of Inventory:
Raw materials
Work-in-process
Finished goods
Inventory level
Balance the
advantages and
disadvantages
Scrap flow
Output flow of materials
SCM
Inventory
& Supply
Chains
SCM
SCM

Balance the advantages and disadvantages
Pressures for small inventories

Inventory holding cost
Cost of capital
Storage and handling costs
Taxes, insurance, and shrinkage
SCM
Pressures for large inventories

Customer service
Ordering cost
Setup cost
Labor and equipment utilization
Transportation cost
Payments to suppliers
Q = Average lot size (unit)

d = Average demand per period (unit/period)
L = Average Lead time (period)
Cycle Inventory
Q+0 Q
Average cycle inventory = 2 = 2
Pipeline inventory
Pipeline inventory = DL = dL
Safety Stock inventory
One week supply
Average lot size
Average demand
Average Lead time
SCM
350
70
2
Cycle inventory
Pipeline inventory
Safety Stock
350/2 = 175
70*2 =140
1*70 = 70
Cycle inventory
Reduce the lot size
Reduce ordering and setup costs and allow Q to be reduced
Increase repeatability to eliminate the need for changeovers
Pipeline inventory
Reduce lead times
Find more responsive suppliers and select new carriers
Change Q in those cases where the lead time depends on the lot size
Safety stock inventory
Place orders closer to the time when they must be received
Improve demand forecasts
Cut lead times
Reduce supply chain uncertainty
Rely more on equipment and labor buffers
SCM
Inventory
Level
Product Code
SCM
Work In Process (WIP)
Process A
SCM
Process B
Measures of Supply Chain Performance

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

Weeks of supply =
Weekly sales (at cost)
Annual sales (at cost)

Inventory turnover = Average aggregate inventory value
SCM
Inventory measures:
Case Study
The XYZ Company averaged $2 million in inventory last year, and the cost of
goods sold was $10 million.
Weeks of supply =
Inventory turns =
SCM
$2 million
($10 million)/(52 weeks)
$10 million
$2 million
= 10.4 weeks
= 5 turns/year
Inventory measures:
SCM
Case Study:
Average demand = 50 units /week

Product Price = $650 /unit.
Average lot size = 350 units.
Average lead time = 2 weeks.
Working conditions = 52 weeks per year
Safety stock = One-week supply
Solution:
Type of Inventory
Cycle
Safety stock
Pipeline
Calculation of Average Inventory
Q
350
=
2
2
= 175 units
1-week supply = 50 units

dL = (50 units/week)(2 weeks) = 100 units
Average aggregate inventory = 325 units
Value of aggregate inventory = $650(325)
= $211,250
SCM
Case Study:
Cost of goods sold last year
= $3,410,000,
Working conditions
= 2 weeks per year.
Inventory Items
= 7 item
(3 raw materials, 2 work-in-process items, and 2 finished goods)
Category
Raw materials
Work-in-process
Finished goods
SCM
Part Number
Average Level
Unit Value
15,000
$ 3.00
2,500
5.00
3,000
1.00
5,000
14.00
4,000
18.00
2,000
48.00
1,000
62.00
Part Number
Average Level
Unit Value
15,000
$ 3.00
$ 45,000
2,500
5.00
12,500
3,000
1.00
3,000
5,000
14.00
70,000
4,000
18.00
72,000
2,000
48.00
96,000
1,000
62.00
62,000
$360,500
Total Value
Average weekly sales at cost = $3,410,000/52 weeks
= $65,577/week

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

Inventory turnover =
$3,410,000
=
= 9.5 turns
$360,500
SCM
Case Study:
The following information is an extract from DELL companys 1999 annual report. All amounts are expressed
in millions:
Net Income (Year 1999)
18,243
Cost of Revenue (Year 1999)
14,137
Cost of Production Materials (Year 1999)
6,423
Production Materials on Hand (25 January 1999)
234
Work-In-Process and Finished Goods on Hand (25 January 1999)
39
Production Materials Days of Supply
6 days
14,137
Inventory Turnover =
234 + 39
= 51.78 Turns per year
For a high-tech company this is a tremendous performance demonstrating the financial success of this direct
selling business.
The corresponding weeks of supply calculation is:
234 + 39
Weeks of Supply =
SCM
14,137
x 52
= 1 week.
ROI = Rate On Investment
We must maximize the rate of return

per our investment dollar!
Net Profit /Investment = ROI
$
Inventory Equipment Facilities
SCM
$
Labor
$
Overhead
Tactical Objectives for ROI

Strategy
Inventory Quality
Sales
Cost
OTD
But dont these things often come into conflict

with each other?
SCM
SCM
Time Analysis
Time Productivity = Productive time / Total time

SCM
(60 to 70%)
SCM
SCM
Non-Productive Time
Time Losses
Planned
downtime
(t1)
Quality
losses
(t5)
Unplanned
downtime
(t2)
SCM
Speed losses
(t4)
Waiting time
(t3)
Root Cause Analysis

Planned d.
(t1)
Unplanned d.
(t2)
Waiting time
(t3)
Speed losses
(t4)
Quality l.
(t5)
Internal Factors I Can Control

External Factors I Can Impact
SCM
Time Analysis for the Job / Equipment / Crew
Total (calendar) time (T0)

Planned (target) time (T1)
t1
t2
Available time (T2)

Operating (used) time (T3)
t3
Net operating time or uptime (T4)
Productive time (T5)
t4
t5
Non-productive time (TL)
Total time losses

SCM
(60 to 70%)
Time Analysis for the Job / Equipment / Crew

Total (calendar) time (T0) 8.0
Planned (target) time (T1) 7.25
t1= 0.75
t2=1.0
Available time (T2) 6.25

Operating (used) time (T3) 5.75
t3=0.5
Net operating time or uptime (T4) 5.5
Productive time (T5) 5
t4=0.25
t5=0.5
Start 8 Finish 16
Total time losses

SCM
(60 to 70%)
Time Analysis for the critical Job / Equipment / Crew

Total (calendar) time (T0)
A
Planned (target) time (T1)
t1
R
t2
Available time (T2)
Operating (used) time (T3)
Up
EP
t3
Net operating time or uptime (T4)
QR
Productive time (T5)
t4
t5
Total time losses
A= Availability = T2/T0
R= Reliability = T2/T1
U= Utilization = T3/T2
Up= Uptime ratio= T4/T3
QR= Quality rate = T5/T4
EP= Equipment Productivity = T5/T0 > 80%
SCM
Modern KPIs
Overall Equipment Effectiveness (OEE)
OEE = Equipment Availability Performance efficiency Quality rate
(60 to 70%)
Total effective equipment productivity (TEEP)
TEEP =Utilization Availability Performance efficiency Quality rate
Net Equipment Effectiveness (NEE)

NEE = Uptime ratio Performance efficiency Quality rate
SCM
Resource Capacity Analysis

Resource Productivity Analysis
Resources:
Machines / Equipment / Tools
Manpower / Staff
Materials
Method Knowhow / Standard
Money
SCM
What is Capacity?
Capacity
is the Rate at which output can be produced by an

operating unit, a machine, a process, a facility, a company
During a period of Time.
It is expressed as
the number of units of output produced per unit time

Examples:
No. of cars assembled per day
No. of students taught per semester
No. of computers assembled per month
No. of customers in a restaurant per day
SCM
Capacity Analysis:-
Labor A Labor B
(hr/day) (hr/day)
- Design capacity =Maximum capacity

maximum output rate or service capacity an
operation, process, or facility is designed for.
- Effective capacity = Standard = Available

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

- Actual output = Used capacity
rate of output actually achieved--cannot
exceed effective capacity.
SCM
Capacity Analysis:- Design capacity =Maximum capacity

Crane
1200 ton

1000
800

rate of output actually achieved
Can not exceed effective capacity.
700
SCM

Consultant
10 hr/d


SCM

Excavator
40 m3/hr

35
30

25
SCM

Boiler
5 ton/hr
3.6

3.5
SCM
Benchmarking
- Effective capacity = (Best Capacity)
Target
- Planned capacity = (Demand)
Planned
Actual
SCM
Benchmarking
2000 Car /month
- Effective capacity = (Best Capacity)
Target
1500 Car /month
- Planned capacity = (Demand)
Planned
1200 Car /month
Actual
1000 Car /month
SCM
System Capacity Evaluation:
Data
Process Job Work order Center Department Sector Company
Site Manager
Performance = Actual Capacity / Planned capacity
Quality Rate = (Total units Rejected) / Total units
80 to 100%
90 to 100%
Project Manager
Efficiency
Load ratio
= Actual output / Effective capacity

= Planned Capacity / Effective capacity
70 to 90%
70 to 90%
General Manager
Utilization
= Actual output / Design capacity
Effectiveness = Effective Capacity / Design capacity
60 to 80%
60 to 80 %
Overall Capacity Performance =

{ w1(P) + w2(Q) + w3(E) + w4 (L) +w5 (U) + w6 (E)} / Sum W
SCM
KPI
> 80%
Utilization
Measure of planned or actual capacity usage of a
facility, work center, or machine
Utilization =
SCM
Expected capacity
Capacity
Planned hours to be used
Total hours available
Efficiency
Measure of how well a facility or machine is
performing when used
Actual output
Efficiency =
Effective capacity
=
=
SCM
Actual output in units

Standard output in units
Average actual time
Standard time
For example:
Design capacity = 10 worker * 8 Hour / day = 80 man day
Effective capacity = 10 worker * 7 Hour / day = 70 man day
Standard Labor rate = 2 unit / man-day
Planned Quantity = 35 unit/day
Actual Production = 30 unit/day
Capacity used = 2 * 30 = 60 man-day
Efficiency
= 60 / 70 = 86 %
Utilization
= 60 / 80 = 75%
Performance
= 30 / 35 = 86 %
SCM
Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Efficiency =
Utilization =
Actual output
36 units/day
Effective capacity
Actual output
Design capacity
SCM
40 units/ day
=
36 units/day
50 units/day
= 90%
= 72%
Case:
Scope of work Excavation Process
Design Capacity = 30 m3/hr
Effective Capacity = 25 m3/hr
BOQ = 30,000 m3
Duration = 10 day
Working Condition = 10 hr/day
Planned Performance:
Number of Excavator = 30,000 m3 / (10 day * 10 hr/day * 25 m3/hr)
= 30,000 / 2500 = 12 +2 factor of safety = 14 Equipment
Actual Performance:
Number of Excavators = 14 Eq.
Duration = 12 day
Based on this information, discuss the capacity analysis

Site Manager
Project Manager
General Manager
SCM
Case:
Scope of work Excavation Process
Design Capacity = 30 m3/hr
Effective Capacity = 25 m3/hr
BOQ = 30,000 m3
Duration = 10 day
Working Condition = 10 hr/day
Planned Performance:
Number of Excavator = 30,000 m3 / (10 day * 10 hr/day * 25 m3/hr)
= 30,000 / 2500 = 12 +2 factor of safety = 14 Equipment
Actual Performance:
Number of Excavators = 14 Eq.
Capacity Evaluation
1.
Design capacity
2.
Effective capacity
3.
Load
4.
Actual output
Duration = 12 day
= 30 m3/hr
= 25 m3/hr
= 30,000/ (14 * 10 d* 10 h) = 21.4 m3/hr
= 30,000/ (14 * 12 d* 10 h) = 17.8 m3/hr
KPIS
Performance
Efficiency
Load
Utilization
Effectiveness
SCM
= 17.8 / 21.4 = 83 %
= 17.8 / 25
= 71 %
= 21.4 / 25
= 85 %
= 17.8 / 30
= 59 %
= 25 / 30
= 83 %
Production Data:
Product:
Process :
Planned:
- Design capacity =
- BOQ
=
Actual:
BOQ
=
Rejected Units
=
Effective capacity =
Duration
=
Duration
(Rework)
Calculation:
Design capacity
Effective capacity
Planned capacity
Actual output
Variance Limits:
Daily
Weekly
Monthly
3 Monthly
6 Monthly
Annual
=
=
=
=
Capacity Performance
Performance
Quality Rate
Efficiency
Load
Utilization
Eq. Effectiveness
Overall Performance
SCM
Data
Analysis
=
=
=
=
=
=
=
1%
2%
3%
5%
7%
10%
Evaluation
Root Cause
Remedy
Target
System Capacity Evaluation:
Data
Process Job Work order Center Department Sector Company
Performance
= Actual Capacity / Planned capacity
80 to 100%
Quality Rate
= (Total units Rejected) / Total units
90 to 100%
Efficiency
= Actual output / Effective capacity
70 to 90%
Load ratio
= Planned Capacity / Effective capacity 70 to 90%
Utilization
= Actual output / Design capacity
Effectiveness = Effective Capacity / Design capacity
60 to 80%
60 to 80 %
Overall Capacity Performance =

{ w1(P) + w2(Q) + w3(E) + w4 (L) +w5 (U) + w6 (E)} / Sum W
SCM
KPI
> 80%
Production Data:
Product: Car Manufacturing
Process : Assembly
Planned:
- Design capacity = 150 Car/month
Effective capacity = 140 Car/month
- BOQ
= 300 Car
Duration
= 3 Month
Actual:
BOQ
= 240
Duration
= 3 Month
Rejected Units
= 10
(Rework)
Calculation:
Design capacity
Effective capacity
Planned capacity
Actual output
Performance
Quality Rate
Efficiency
Load
Utilization
Eq. Effectiveness
Overall Performance
SCM
=
=
=
=
150 C/m
140 C/m
300/3=100
240/3=80
Variance Limits:
Daily
Weekly
Monthly
3 Monthly
6 Monthly
Annual
1%
2%
3%
5%
7%
10%
= 80/100 = 80%
= 230/240 = 96%
= 80/140 = 57%
= 100/140= 71%
= 80/150 = 53%
= 140/150= 93%
=
Case:
Product: Transformer Manufacturing
Process : Low Voltage winding Machine
Planned:
- Design capacity = 8 coil/ day
Effective capacity = 6 coil / day
- BOQ = 60 coil
Duration = 10 day
QR (92-95)%
Actual:
BOQ
= 60 coil
Duration = 12 day
Rejected units
= 5 coil (Rework)
Variance Limits:
Calculation:
Design capacity
Effective capacity
Planned capacity
Actual output
Load ratio
Efficiency
Utilization
Process Effectiveness
Performance
Quality rate
Weekly
= 8 coil /day
= 6 coil /day
= 60 / 10 = 6 coil day
= 60 / 12 = 5 coil /day
= 6 / 6 = 100 % E
= 5 / 6 = 83 % G
= 5 / 8 = 63 % VB
= 6 / 8 = 75 % E
= 5 / 6 = 83 % VB
= (60-5)/60 = 92% N
Evaluation:
Excellent
Good
Normal
Bad
Very Bad
2%
> 5%
+3 to 5%
2%
- 3 to 5%
> - 5%
Weight (0 to 3)
2
3
1
0
3
2
Total 11
Overall Performance =
{2(1.0) + 3(0.83) + 1(0.63) + 0(0.75) +3(0.83) + 2(0.92)} / 11= 9.45/11
= 85.9 % >80% Good
SCM
Week
Load
Normal
capacity
10
11
12
13
14
15
16
380
275
200
265
225
175
160
140
120
300
300
300
300
300
300
300
300
300
Insufficient
capacity
400
Weekly 300
work
200
load
(hours) 100
16
14
12
10
Week
Load
SCM
Normal capacity
Resource Productivity Analysis

(Critical Resources)
Total View
Outputs
Quantity
Quality
Cost / Revenue
Inputs
Working Conditions
Critical Resources
Actual Performance
Period #1
Period %
Period
Planned Performance
Period #1
Total %
Cumulative (up to date)
KPIs Report (one page) for each managerial level:
Scope of work
SMART
Key Indicators
(3, 5, or 10) Cost variance, Time Variance, Quality Rate
Strength Points (3, 5, or 10)
Weakness Points (3, 5, or 10)
Recommendations Analysis Why-Why? Root Causes
Future Work
Remedy Corrective / Preventive Actions
Conclusion
SCM
Management Skill: The Key to Management Success
SCM
Performance Management Information System (PMIS)

PMIS is a systematic approach for long term continuous improvements.
A Computerized systematic approach .
2.
Standard ratios
3.
Internal examples
4.
External examples
Reference Internal & External
Target Performance
Planned Performance
Documented information
(Database & Reports)
Standard Information
GAP Analysis
Proactive policy
Actual Performance
SCM
Relative
Good Excellent
International standards
Normal
1.
Benchmarking
Bad
References:
Performance Management Information System (PMIS)

PMIS is a systematic approach for long term continuous improvements.
A Computerized systematic approach .
3. Internal Benchmarks
4. External Benchmarks
Monthly Target Improve 10 %
(25 man-hour/car)
Documented information:
(Database & Reports)
Standard Information
GAP Analysis
3 man-hour/unit, 12 %
Actual Monthly Average
( 28 man-hour/unit)
SCM
Relative
Good Excellent
2. Standard ratios
External (10 man-hr/car)

Internal (22 man-hr/unit)
Normal
1. International standards
Benchmarking Labor Productivity
Bad
References:
1) Scope
3) Quality
7) Documentation
6) Critical
Resources
5) Cost
Bad
4) Time
8)
Relations
Normal
Good
2) Safety
Excellent
Total Performance Management

(Total View)
Main SMART Indicators + Root Cause Analysis

SCM
Organization
Structure
Enterprise Chairman
Upstream
Top
KPIs Report
Key Indicators
Middle
Productivity Analysis
Operational
Downstream
Performance Report (Actual / Planned)
Site Follow-up (Q/Q/T)

SCM
Data
Company: xxxx
Scope of Work: Spare Parts Manufacturing
Organization Chart (Key persons)
General
Manager
Top
Design
Manager
Procurement
Manager
Cost
Manager
Planning
Manager
Production
Manager
Middle
Operational
Operational management (engineers, etc.)

SCM
Site
Production Productivity Analysis
Outputs:
Item
Production Quantity
Total Revenue
Unit
1000 ton
M$
2009
10
60
2010
12
80
78
83
Unit
hour
1000 ton
1000 M-h
1000 E-h
1000 Kwh
2009
3000
13
1200
600
1500
2010
2700
14
1500
800
2000
Comment
Unit
M$
M$
M$
M$
2009
30
10
12
58
2010
35
12
12
70
Comment
Quality Rate
Comment
Inputs Main Resources:

Item
Working Hours
Raw Materials
Labor
Machines
Energy
Inputs Cost Elements:

Item
Total Materials Cost
Total Labor Cost
Total Machine Cost
Total Cost
Based on this information; discuss the performance evaluation for each managerial level:
1) Operational level
2) Middle level
3) Top level (KPI report)
SCM
Operational Level Follow-up Report Standard rates

(Average / ton final product)
Outputs:
Item
Production Quantity
Total Revenue
Unit
1000 ton
$/ton f
2009
10
6000
2010
12
6667
2010/2009
1.2
1.11
Performance
VG
G
78
83
1.06
Unit
2009
2010
2010/2009
Performance
Performance rate
Ton/hour
3.33
4.44
1.33
EX
Raw Materials
ton/ton f
1.3
1.67
1.28
NC
Labor
M-h/ ton f
120
125
1.04
Machines
E-h/ ton f
60
66.6
1.11
Energy
Kwh/ ton f
150
166
1.106
Unit
$/ ton f
$/ ton f
$/ ton f
$/ ton f
2009
3000
1000
1200
5800
2010
3500
1200
1500
7000
2010/2009
1.166
1.2
1.25
1.2
Performance
VB
VB
VB
VB
Quality Rate

Item

Item
Materials Cost
Labor Cost
Machine Cost
Total Cost
( 3% N-Normal) (10%: Good/Bad)

SCM
(20%: V.Good / Fail) (>20%: Ex./ Not Capable)
Middle Level Production Productivity Analysis
Physical Units
Index
Calculation
Unit
Period
#1
Perio
d #2
Output/ Mat. Input
TF/TM
0.769
0.85
Labor Productivity
Output/ Lab. Input
TF/MH
0.00833
Unit
Period
#1
Ratio
(P2/P1)
Perf.
????
Machine Productivity Output/ Mac. Input

Energy Productivity
Output/ Energy
Monetary Units
Index
Calculation
Output/ Mat. Input
Labor Productivity
Output/ Lab. Input
Perio
d #2
Ratio
(P2/P1)
Perf.

Total Productivity
Output/ Input
Overall
SCM
Physical Units
Index
Calculation
Unit
Period
#1
Period
#2
Output/ Mat. Input
TF/TM
0.769
0.85
Labor Productivity
Output/ Lab. Input
TF/100Mh
or
Ratio
(P2/P1)
TF/1000 Mh
or
Perf.
MH/TF

Energy Productivity
Output/ Energy
Monetary Units
Index
Calculation
Output/ Mat. Input
Labor Productivity
Output/ Lab. Input
Unit
Period
#1
Period
#2
Ratio
(P2/P1)
Perf.

Total Productivity
Output/ Input
Overall
SCM
Physical Units
Index
Calculation
Unit
Period
#1
Period
#2
Ratio
(P2/P1)
Yield
Output/ Mat. Input
TF/TM
0.769
0.59
1.28
Labor Productivity
Lab. Input/ Output
Mh/TF
120
125
1.04
Machine Productivity Mac. Input/ Output
Mh/TF
60
66.6
1.11
Energy/ Output
Kwh/TF
150
166
1.106
Calculation
Unit
Period
#1
Period
#2
Ratio
(P2/P1)
Output/ Mat. Input
$/$
2.0
1.9
Labor Productivity
Output/ Lab. Input
$/$
6.0
5.5
Machine Productivity
Output/ Mac. Input
$/$
5.0
4.4
Revenue/ Cost
$/$
1.03
0.85
Energy Productivity
Perf.
Monetary Units
Index
TP = Profitability
Perf.
Overall
SCM
Short description:
KPI Report for Operational Level

Annual Performance Report for xxxxxxx
Key Indicators
Unit
2009
2010
2010/2009
Strength Points:
-
Weakness Points:
-
Area of Concern:
-
Recommendations:
-
Performance
Conclusion:
------------------------------------------------------------------------------------------------------------------SCM
Case Study:
Consider the XYZ Spare Parts Company, the data for output produced and
inputs consumed for January 2010 & February 2010 are given below:
Outputs:
Unit
ton
$/ton
Feb. 2011
1000
1900
Jan. 2011
1200
1800
Comment
Unit
day
worker
ton
k.w.h.
Feb. 2011
22
300
1300
200,000
Jan. 2011
25
310
1600
250,000
Comment
Unit
$/man-day
$/ton
$
$/ k.w.h.
$
Feb. 2011
11
1000
9,000
0.5
5,000
Jan. 2011
10
900
10,000
0.5
6,000
Comment
Item
Production volume
Unit Price

Item
Working days
Number of workers
Direct material quantity
Energy consumption
Item
Average labor rate
Direct material cost
Total Machining Cost
Energy cost
Overhead Cost
2) Middle level
SCM
Outputs:
Scope of Work: Reinforcement Concrete
Item
Production Quantity
Unit Price
Unit
m3
LE/m3
Actual
900
2000
Planned
1000
2000
97
> 98 %
Unit
Day
Ton
Ton
Man-day
M3/hour
Actual
12
450
110
80
30
Planned
10
400
100
70
40
Comment
Unit
LE/ton
LE/ton
LE/man-day
LE/day
1000 LE
Actual
420
4600
80
900
1500
Planned
450
5000
75
800
1600
Comment
Quality Rate
Comment

Item
Working Days
Cement
Steel
Labor
Concrete Pump

Item
Cement Cost Rate
Steel Cost Rate
Total Labor Cost
Concrete Pump Cost
Total Cost
2) Middle level
SCM
Case Study: Scope of Work:
Process : XXX Car Assembly
1) Capacity Information:
Item
Unit
Design capacity
Effective capacity
Planned quantity
Total Actual quantity
Rejected quantity (rework)
Car/month
Car/month
Car/Quarter
Car/Quarter
Car/Quarter
Period 2009
First Quarter
Second Quarter
150
140
300
360
240
270
9
12
Total View?
Critical Resources ?
Cost ?
2) Middle level
SCM
Case Study: Scope of Work:
1) Capacity Information:
Item
Unit
Design capacity
Effective capacity
Planned quantity
Car/month
Car/month
Car/Quarter
Car/Quarter
Car/Quarter
Period 2009
First Quarter
Second Quarter
150
140
300
360
240
270
9
12
2) Critical Resource Information:

Item
Unit
Technical Labor X
Ass. Line working hours
Man-hour
Hour
Period 2009
First Quarter
Second Quarter
10000
9000
600
750
3) Actual Assembly Cost Information:

Item
Unit
Total Internal Resource cost

Total External Resource cost
Assembly Price
M.LE
M.LE
LE/Car
Period 2009
First Quarter
Second Quarter
1.440
1.460
0.360
0.438
7000
7500
2) Middle level
SCM
Operational Level:
Scope of Work: Product: Car Manufacturing
1) Capacity Indicators:
Unit
First Quarter
Second Quarter
Variance
(Q2 Q1)
Evaluation
(Q2 to Q1)
Design capacity
Car/3m
450
450
Effective capacity
Car/3m
420
420
Planned quantity
Car/3m
300
360
+ 60
Good
Car/3m
240
270
+ 30
Good
Car/3m
%
9
3.8%
12
4.4%
+ 0.6%
Bad
Performance= Actual / Planned
80%
75%
- 5.0%
Bad
2) Productivity Indicators:
Labor X Productivity
Ass. Line Productivity
Unit
First Q.
Second Q.
Variance
Evaluation
Man-hr/car
33.33
25.00
- 8.33
Good
Hour/car
2.50
2.78
+ 0.28
Bad
Strength Points
SCM
First Quarter
Second Quarter
Rejected quantity
Planned quantity
Performance
Line Productivity
Operational Level:
Unit
First Quarter
Second Quarter
Variance
(Q2 Q1)
Evaluation
(Q2 to Q1)
Design capacity
Car/3m
450
450
Effective capacity
Car/3m
420
420
Planned quantity
Car/3m
300
360
+ 60
Good
Car/3m
240
270
+ 30
Good
Car/3m
%
9
3.8%
12
4.4%
+ 0.6%
Bad
Performance= Actual / Planned
80%
75%
- 5.0%
Bad
Unit
First Q.
Second Q.
Variance
Evaluation
Man-hr/car
33.33
25.00
- 8.33
Good
Hour/car
2.50
2.78
+ 0.28
Bad
Unit
First Q.
Second Q.
Variance
Evaluation
LE/Car
6000
5470
- 530
Good
LE/Car
1500
1622
+122
Bad
LE/Car
7500
7092
- 408
Good
LE/Car
7000
7500
+ 500
Good
LE/Car
- 500
+ 408
+ 908
Good
3) Cost Indicators:
Internal Resource cost
External Resource cost
Unit Cost
Assembly Price
Profit (+) / Losses (-)
SCM
Middle Level:
Unit
First Quarter
Second Quarter
Variance
(Q2 Q1)
Evaluation
(Q2 to Q1)
Performance = Actual / Planned
80.0%
75.0%
- 5.0%
Bad
Quality Rate =(Total-Rej.)/Total
96.3%
95.6%
- 0.7%
Bad
Efficiency =Actual / Effective
57.1%
64.3%
+ 7.2%
Good
Load = Planned / Effective
71.4%
85.7%
+ 14.3%
Good
Utilization = Actual / Design
53.3%
60.0%
+ 6.7%
Good
Effectiveness= Effective / Design
93.3%
93.3%
0.0%
Normal
Overall Performance (Average)
75.23%
78.98%
+ 3.75%
Good
Unit
First Q.
Second Q.
Variance
Evaluation
Man-hr/car
33.33
25.00
- 8.33
Good
Hour/car
2.50
2.78
+ 0.28
Bad
Unit
First Q.
Second Q.
Variance
Evaluation
LE/Car
6000
5470
- 530
Good
LE/Car
1500
1622
+122
Bad
LE/Car
7500
7092
- 408
Good
LE/Car
7000
7500
+ 500
Good
LE/Car
%
- 500
- 6.7 %
+ 408
+ 5.8%
+ 908
+12.4 %
Good
LE/Car
5000
5878
+ 878
Good
3) Cost Indicators:
Internal Resource cost
External Resource cost
Unit Cost
Assembly Price
Profit (+) / Losses (-)
Value Added = Price ER
SCM
3) Top Level KPI report One Page Management

1) Subject Description:
Global Trend: Second Quarter First Quarter

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

2- Labor Productivity = Man-hr/car
3- Profit = Price TC
1- Performance = Actual / Planned
2- Ass. Line Productivity
3-
7.20 %
8.33 %
12.40 %
5.0 %
0.28 Hour/car
1- Worker training & motivating to improve the performance ratio

2- Line balancing to improve the line productivity
3- Value engineering to improve the value added
45-
3) Recommendation:
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SCM
Up-Stream Performance Management

Enterprise
Chairman
Monthly KPI Report:
Main Indicators
Standard Forms?
(Performance Evaluation Forms)
Standard Forms?
(Follow-up Forms)
Top
Middle
Operational
Site / Process
SCM
Case Study:
Consider XYZ Spare Parts Company, the monthly KPIs for Up-Stream
Performance Management are given below:
Monthly KPIs:
Profitability ratio
(%)
Cost Variance ratio
(%)
Schedule Variance ratio (%)

Labor Productivity
Quality Rate
(man-hr/unit)
(ton/unit)
(%)
Based on this information; Design the performance evaluation forms for each managerial
level:
SCM
2) Middle level
Monthly KPIs:
Scope of work: RF Concrete
Profitability ratio
(%)
Cost Variance ratio
(%)
Schedule Variance ratio (%)
Labor Productivity (man-hr/unit)
Material Productivity (ton/unit)
Quality Rate
(%)
Standard Forms?
(Performance Evaluation Forms)
Standard Forms?
(Follow-up Forms)
Enterprise
Chairman
Top
Middle
Operational
Site / Process
SCM
Profitability
(%) = Price / Total Cost
Enterprise
Chairman
Top
Price
Total Cost
Material Cost
Labor Cost
Equipment Cost
Overhead ratio
Material Cost rate
Material Quantity
Labor Cost rate
No. of Workers
Equipment Cost rate
No. of Equipment
Duration
SCM
Middle
Operational
Site / Process
Profit (%) = Price / Total Cost
Enterprise
Chairman
Top
Price
Total Cost
Material Cost
Labor Cost
Equipment Cost
Overhead ratio (30%)
Middle
Material Cost rate

($1000/ton)
Material (100 ton)
Labor Cost rate

($ 100/man-day)
Equipment Cost rate
($500/Eq-day)
Labor (5 workers)
SCM
Equipment (3 M/c)
Duration (10 days)
Operational
Site / Process
Profitability(%) = Price / Total Cost
Enterprise
Chairman
= 170/156 = 1.09 109 % Profit 9%
Top
Price
$170000
Total Cost = (120000)*1.3 = 156000

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

($1000/ton)
Material (100 ton)
Labor Cost rate

($ 100/man-day)
Equipment Cost rate
($500/Eq-day)
Labor (5 workers)
SCM
Equipment (3 M/c)
Duration (10 days)
Operational
Site / Process
Cost Variance ratio (%) =

(Actual Cost Planned Cost ) / Planned Cost
Enterprise
Chairman
Top
x
x
x
Middle
Operational
Site / Process
SCM

Enterprise
Chairman
Schedule Variance ratio (%) =

(Actual Duration Planned Duration ) /
Planned Duration
x
x
Top
Middle
Operational
Site / Process
SCM

Enterprise
Chairman
Labor Productivity (man-hr/unit) =

(No. of workers * Duration) /
Production Quantity
Top
x
x
x
Middle
Operational
Site / Process
SCM
Material Productivity (ton/unit) =

Material quantity / Production Quantity
Enterprise
Chairman
Top
x
x
x
Middle
Operational
Site / Process
SCM
Outputs:
Item
Production Quantity
Total Revenue
Unit
ton
M$
Actual
Planned
Comment
Defect Quantity
ton
Unit
hour
Ton
Man-hr
M/c-Hr
Actual
Planned
Comment
Unit
M$
M$
M$
M$
M$
Actual
Planned
Comment

Item
Working Hours
Raw Materials
Labor
Machines

Item
Total Materials Cost
Total Labor Cost
Total Machine Cost
Total Overhead Cost
Total Cost
2) Middle level
SCM
Operational Level Follow-up Report Standard rates

(Average / ton final product)
Outputs:
Item
Production Quantity
Total Revenue
Unit
1000 ton
$/ton f
Quality Rate

Item
Actual
Planned
Ratio (A/P)
Performance
Actual
Planned
Ratio (A/P)
Performance
Actual
Planned
Ratio (A/P)
Performance
%
Unit
Performance rate
Ton/hour
Raw Materials
ton/ton f
Labor
M-h/ ton f
Machines
E-h/ ton f

Item
Materials Cost
Labor Cost
Machine Cost
Total Overhead Cost
Total Cost
Unit
$/ ton f
$/ ton f
$/ ton f
$/ ton f
$/ ton f

SCM
Physical Units
Index
Calculation
Unit
Yield
Output/ Mat. Input
TF/TM
Labor Productivity
Lab. Input/ Output
Mh/TF
Machine Productivity Mac. Input/ Output
Mh/TF
Actual
Planned
Actual
Planned
Ratio
(A/P)
Performan
ce
Monetary Units
Index
Calculation
Unit
Output/ Mat. Input
$/$
Labor Productivity
Output/ Lab. Input
$/$
Machine Productivity
Output/ Mac. Input
$/$
Revenue/ Cost
$/$
TP = Profitability
Ratio
(A/P)
Performa
nce
Overall
SCM
KPI Report for Top Level
Short description:
Monthly Performance Report for xxxxxxx

Key Indicators
Profitability ratio
Total Cost
Unit
%
M$
Duration (Working hours)

Labor Productivity
Quality Rate
hour
%
%
%
Actual
Planned
Ratio (A/P)
Strength Points:
-
Weakness Points:
-
Area of Concern:
-
Recommendations:
-
Performance
Conclusion:
------------------------------------------------------------------------------------------------------------------SCM
Case Study:
Consider XYZ Spare Parts Company, the monthly KPIs for Up-Stream
Monthly KPIs:
1. Profitability ratio
(%)
2. Cost Variance ratio
(%)
3. Schedule Variance ratio
(%)
4. Labor Productivity
(man-hr/unit)
5. Material Productivity
(ton/unit)
6. Cycle Time
(min/ton)
7. Performance Rate
(ton/hr)
8. Quality Rate
(%)
9. Efficiency
(%)
10. Effectiveness
(%)
11. OEE
(%)
level:
2) Middle level
SCM
Case Study:
Consider a construction project, the monthly KPIs for Up-Stream
Monthly KPIs:
Efficiency (%) = Actual quantity / Planned quantity
Cost Variance ratio (%) = (Actual cost Planned cost) / Planned cost
Schedule Variance ratio (%) = (Actual duration Planned duration) / Planned cost
Margin Factor (%) = Price / Direct cost
Labor Productivity (man-hr/m3) = (No. of workers * Working hours) / Quantity
level:
SCM
2) Middle level
SCM
Inventory / Materials management

MM is the planning and control of the material flow to:
Minimize the material wastes
Minimize the material shortage
Maximize the material productivity
Reduce the material costs
Reduce the manufacturing
Why the Material Management is very important?

1) Material budget ratio is very high (30 to 70%) ~ 50%
2) Shortage Cost is very high
SCM
Distribution of Costs
Type
Electrical
Mechanical
Construction
& Asphalt
Labor
40%
35%
15%
Material
35%
40%
55%
Equipment
10%
15%
25%
Overhead
15%
10%
5%
Total Cost
100%
100%
100%
Type
Power stations &

Compressors
Gas PL off
Gas PL on
Labor
15%
15%
15%
Material
60%
40%
60%
Equipment
15%
20%
15%
Overhead
10%
25%
10%
Total Cost
100%
100%
100%
SCM
Inventory / Material Management

1.Right Quality
Min. Defect ratio or Max. Quality rate
2.Right Quantity
Min. Shortage ratio or Max. Service level
3.Right Delivery time
JIT (Min. Early or Late) Min. Time variance
4.Right Location
Warehouse, Site, Area, Coding system
5.Right Method
Standard (Secure , Safety conditions, Handling)
6.Right Cost
Min. Over-run or Under-run Min. Cost variance
7.Right Supplier
Agent, Documentation, Inboard or Outboard
8.Right Database
Documentation, Standards, Information system
9.Right Communication Site & Warehouse & Main office

10.Right Leadership
SCM
Managerial activities (Targets, Planning, .. etc.)
Inventory Management =
Targets + Planning + Organizing + Leading + Controlling
Inventory
Strategy
Inventory
Strategy
Forecasting
Transport
Strategy
Transport
Strategy
Inventory decisions
Storage decisions
service goals
The product
Logistics service
Ord . proc. & info. sys.
Location
Strategy
Location
Strategy
CONTROLLING
Storage fundamentals
Transport decisions
ORGANIZING
scheduling decisions
Customer
PLANNING
Purchasing and supply
Transport fundamentals
Location decisions
The network planning process
SCM
Inventory / Material Performance Measures

Inventory utilization factors:
Capacity utilization Max. Used capacity & Min. Unused capacity
= Available Inventory limit / Maximum Inventory limit
Material utilization Min. Overstock
Used Material Volume / Available Material Volume
For Example:
Maximum Inventory limit = 8000 unit
Available Inventory limit = 6000 unit
Used Material volume = 4000
Capacity utilization = 6000 / 8000 = 75 %
>80% Critical items
Material utilization = 4000 / 6000 = 67 %
>80%
SCM
For Total # of Items:

Maximum # of items
= 45,000 item
Available # of items
= 27,000 item
Used # of items
= 9,000 item
80%
80%
For Each Item Critical items

Maximum Inventory limit = 8000 unit
Available Inventory limit = 6000 unit
Used Material volume = 4000
80%
80%
SCM
Inventory / Material Performance Measures

Revenue Value
Inventory Turnover
Average Inventory Cost

Sales Value
Inventory Turnover
Average Inventory Cost

Outputs
Inventory Turnover
Average Inventory
Service Level
1-
Number of out of stock items

Total Demand
SCM
Trade-off Between Inventory

Costs and Service Level
Service
Level
Amount of inventory
SCM
Main Activities of Material Management Purchasing Department

1.
Design & maintain the material reports & forms
2.
Prepare the material list for each department / discipline
3.
Design & maintain a database of each material
4.
Design & maintain a database of available suppliers
5.
Needs, market & cost analysis Risk analysis
6.
Evaluate & select the best suppliers to supply each material
7.
Negotiate supply contracts with supplier
8.
Establish material criticality analysis (A, B and C)
9.
Establish the standard rates for all items
10. Prepare the material budget , material program & schedule

11. Receive, inspect the materials & payment request
12. Control the inventory levels especially for critical items
13. Prepare the material performance evaluation report (Monthly & Annual)
14. Design & maintain the material management information system (MMIS)
15. Act as the interface between the company and its suppliers
SCM
Key Inventory Terms
Item criticality: item classification (A, B, C)
Lead time: time interval between ordering and receiving the order
Holding (carrying) costs: cost to carry an item in inventory for a length

of time, usually a year
Ordering costs: costs of ordering and receiving inventory
Shortage costs: costs when demand exceeds supply
Order quantity: Order size (unit)
Reorder Point - When the quantity on hand of an item drops to this

amount, the item is reordered
Safety Stock - Stock that is held in excess of expected demand due to

variable demand rate and/or lead time.
SCM
Inventory Control Decisions:

What decisions are involved in inventory control?
How should I track inventory?
Continuously versus periodically
When do I place an order?
Safety stock
Reorder point
How much should I order?
Order quantity
SCM
Simple Two-Bin Pull Method (Q,R)

Quantity on-hand
plus on-order
Q
Reorder
point, R
Safety Stock
0
SCM
Lead
time
Order
Order
Placed Received
Lead
Time
time
Order
Order
Placed
Received
9-22
Main Parameters:
Right Order Quantity
Right Reorder Level
Right Safety Stock
Right Service Level
SCM
Inventory Control Systems:

Class A Fixed-order-quantity system (Continuous)
Constant amount ordered when inventory declines to
predetermined level
Class B Fixed-time-period system (Periodic)
Order placed for variable amount after fixed passage
of time
Class C Mixed Fixed Quantity & Fixed Time
SCM
Fixed-order-interval Model
Periodic Control for a Single Item
Quantity on hand
Q2
Q1
Stock
level
reviewed
Order
received
LT
LT
Time
T = review interval
M = maximum level
q = quantity on hand
M - q = replenishment quantity
Qi = order quantity
LT = lead time
SCM
A Min-Max System of Inventory Control
SCM
A Min-Max System of Inventory Control

Quantity on hand
M
Q3
Q2
Q1
Stock
order
Order
received
Safety Stock
0
LT
M = maximum level
CR (2004) Prentice Hall, Inc.
SCM
Time
LT
Qi = order quantity
LT = lead time
9-60
Inventory Classifications
Inventory
Process
stage
Raw Material
WIP
Final Products
Spare Parts
Number
& Value
A Items
B Items
C Items
Demand
Type
Independent
Dependent
Disciplines
Maintenance
Operating
Safety
WIP: Work In Process

SCM
Material Types control the processes a material can go through
1. Raw materials
2. Operating
supplies
SCM
3. Semi-finished products
Examples of material types:

Raw materials
Operating supplies
Semi-finished products
Finished products
4. Finished products
Types of Inventory Items

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

Dependent demand
items used to produce final products
Independent demand
items demanded by external customers
Independent Demand
Dependent Demand
A
C(2)
B(4)
Drives MRP
D(2)
E(1)
D(3)
F(2)
Independent demand is uncertain.

Dependent demand is certain.
SCM
Demand Characteristics
Independent demand
Dependent demand
100 x 1 =
100 tabletops
100 x 4 = 400 table legs
100 tables
Continuous demand
Discrete demand
400
300
No. of tables
No. of tables
400
200
100
1
SCM
3
Week
300
200
100
5
M T W Th F
M T W Th F
Inventory Classification Analysis

Rule 80/20:
Level description
Total Value %
Total Item %
Level
A
Critical
>= 80
<= 20
Medium
15
30
Non-critical
50
Important matrix:
Important
Not important
Urgent
(due soon)
Not urgent
(not due soon)
A
B
B
C
Top (10, 5, or 3) items; based on the project size (>= 80%
Value)
SCM
ABC Classification System
P e rc e n ta g e o f D o lla rs
120
100
80
60
40
20
0
0
10
20
30
40
50
60
70
80
90
100
Percentage of Items
SCM
ABC Classification System

A - Very important
B medium important
C - least important
High
Annual
$ value
of items
C
Low
Few
Many
Number of Items
SCM
ABC Classification
A - Receive tight control
(Continuous Control) Daily feedback
Top 10-20%
-Critical activities
-Critical materials
-Critical labor
-Critical equipment
B - Receive relaxed control

(Periodic Control) I Weekly feedback
Next 30%
-Critical tools
C- Receive minimal control

(Periodic Control) II Monthly feedback
Last 50-60%
SCM
Part
classification
(Rule 80/20)
Top 2 Parts
Based on this information,

classify & discuss these
parts.
SCM
Part list:
Item
Code
Unit price
($)
Annual Demand
(unit)
S11
10
1000
S12
40
100
S13
100
10
S14
30
200
S15
20
500
S16
200
600
S17
100
40
S18
55
950
S19
80
30
S20
100
20
Item
Code
Unit
price ($)
Annual
Demand
(unit)
Annual
Value $
Cumulative
value $
Cumulative
%
S16
200
600
120000
120000
56.7%
A1
S18
55
950
52250
172250
81.4%
A2
S11
10
1000
10000
182250
86.1%
B1
S15
20
500
10000
192250
90.8%
B2
S14
30
200
6000
198250
93.7%
B3
S12
40
100
4000
202250
95.6%
C1
S17
100
40
4000
206250
97.4%
C2
S19
80
30
2400
208650
98.6%
C3
S20
100
20
2000
210650
99.5%
C4
S13
100
10
1000
211650
100.0%
C5
Total
SCM
Item
Level
211650
Inventory Cost Elements:

Constant Price
Carrying
Costs
Expected
Stockout
Costs
SCM
Order/
Setup
Costs
Inventory Costs:
Carrying Cost
cost of holding an item in inventory
Ordering Cost
cost of replenishing inventory
Shortage Cost
temporary or permanent loss of sales when demand
cannot be met
SCM
Annual cost
Order / Setup Cost
Size of order (units)

Note: Order / setup cost reflects:
Fixed costs (e.g., information and communications technology)
Variable costs (e.g., reviewing stock levels, order processing/
preparation expense, etc.)
SCM
Ordering Costs
Cost
($)
Ordering
=
Costs
D
(
) Co
Q
Order Size (units)

SCM
Order Quantity:
Inventory
Level
(units)
Order
Quantity
Q
Average Inventory =
Order Quantity Q
2
2
Time
SCM
Carrying Costs
Cost
($)
Q
Carrying Costs = ( 2 ) Cc
Ordering
=
Costs
D
(
) Co
Q
Order Size (units)

SCM
Stock out = 0
Annual
cost ($)
Shortage cost =0
Qopt
Total Cost
Carrying Cost =
Minimum
total cost
C cQ
2
CoD
Ordering Cost = Q
Optimal order
Qopt
SCM
Order Quantity, Q
Economic Order Quantity

How much to order?
Stock out = 0
Shortage cost =0
We want to balance the
Ordering cost
Carrying cost
cost of keeping
goods in inventory
SCM
cost of placing
an order
How much to order?

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

EOQ balances the cost of placing an order against
the cost of storing product in inventory
The cost of storing a product in inventory can
include warehouse costs, shipping costs, and cost
of capital tied up in inventory
Notice that nowhere did the cost of the
merchandise being sold enter into the equations
EOQ is vitally important in any retail business and
most businesses where stocked items are
managed
SCM
Stock out = 0
Shortage cost =0
Determining Optimal Inventory

Economic Order Quantity (EOQ)
Total
Total
Inventory = Carrying +
Costs
Costs
SCM
Total
Ordering
Costs
EOQ Cost Model

Annual
cost ($)
2CoD
Qopt =
Cc
Total Cost
Carrying Cost =
Minimum
total cost
C cQ
2
CoD
Ordering Cost = Q
Optimal order
Qopt
SCM
Order Quantity, Q
Deriving Qopt
EOQ Cost Model
CoD
CcQ
TC =
+
Q
2
CoD
Annual ordering cost =
Q
Annual carrying cost =
-CoD
Cc
TC
=
2 +
Q
2
Q
CcQ
-C0D
Cc
0=
+
Q2
2
CoD
CcQ
Total cost =
Q + 2
Optimal Time Between Orders or
Order Cycle time
Number of orders per year:
Qopt =
*
Q
T*
D
Cc
D
N *
Q
Co - cost of placing order

Cc - annual per-unit carrying cost
SCM
2CoD
D - annual demand
Q - order quantity
Reorder Point Method Under Certainty for a Single Item

Quantity on-hand
plus on-order
Q
Reorder
point, R
0
Lead
time
Order
Order
Placed Received
Lead
Time
time
Order
Order
Placed
Received
Reorder point = R = d (LT)

LT = Lead time
SCM
Constant demand rate & Constant Lead time

Lead Time
Input
SCM
Wait
Time
Move
Time
Queue Setup Run

Time
Time Time
Output
Basic Tradeoffs:
(EOQ) increases:
Annual inventory
carrying cost also
increases
Annual cost
As order quantity
Minimum cost
reorder quantity
Total Costs
Carrying
Cost
Shortage
Cost
Annual ordering
cost decreases
Order/Set-up
Cost
Annual shortage
cost decreases
SCM
Size of order quantity
Quantity on-hand
plus on-order
Q
Reorder
point, R
Safety Stock
0
(Uncertain conditions)
Lead
time
Order
Order
Placed Received
Lead
Time
time
Order
Order
Placed
Received
The reorder point = ROP = d(LT)

SCM
9-22
EOQ:
Cost of placing order = $6.40 / order
Annual per-unit carrying cost = $0.24/year
Annual demand = 52 unit/year
Calculate the Optimal order quantity ?
Qopt =
2CoD
Cc
2*6.4*52
0.24
= 52 unit/order
One trip/year is optimal

SCM
If the storage costs increase from $0.24/year to

$10/year, what is the new optimal order quantity?
Cost of placing order = $6.40
Annual carrying cost = $10/year
Annual demand = $150/week = $7,500/year
Calculate the optimal order quantity?
Qopt =
SCM
2CoD
Cc
2*6.4*7500
10
= $98/trip
Example:
Qopt =
- Cost of placing order =$15

- Annual per-unit carrying cost = $ 0.1
2CoD
Cc
- Annual demand = 300 unit

Calculate the optimal order quantity?
Qopt =
2*$15*300
$0.10
300*300
= 300 unit
Order once-per-year
SCM
If the storage costs increase from $0.10/year to

$1/year, what is the new optimal order quantity?
- Cost of placing order = Co =$15
- Annual per-unit carrying cost = Cc = $ 1.0
- Annual demand = D = 300 unit
- Order quantity = Q ?
Qopt =
Qopt =
2*$15*300
$1
30*300
2CoD
Cc
~ 95 boxes
Order three time/year

SCM
Example:
Co - cost of placing order = $3.50 per order

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

Qopt =
2CoD
Cc
2($3.50)(160)
$0.30
= 61.1 unit
Order cycle time = Q/D = (61.1/160) = 0.38 weeks
CoD
CcQ
= ($3.50)(160) + ($0.30)(61.1)
Inventory cost =
+
Q
2
61.1
2
Inventory cost = $18.33
SCM
Reduced Order Cost ($3.50 $0.35)

Co = $0.35 per order
Cc = $0.30 per pizza
D = 160
Optimal Order Quantity?
Qopt =
2CoD
Cc
2($0.35)(160)
$0.30
= 19.3 unit
(down from 61.1)
Order cycle time = Q/D = (19.3/160) = 0.12 weeks

(down from 0.38 weeks)
CoD
CcQ
= ($0.35)(160) + ($0.30)(19.3)
Inventory cost =
+
Q
2
19.3
2
Inventory cost = $5.80 (down from $18.33)
SCM
Brain Storming:
Annual Demand = 12,000 per year,
Order Cost = $10 per order
Holding Cost = $1 per unit per year
Lead time = 4 weeks
Calculate:
1. Economic order quantity
2. Order cycle time
3. Number of orders per year
4. Total inventory cost
5. Reorder level
SCM
Stock out = 0
Shortage cost =0
Fixed order cost
Variable Carrying cost
Certain demand rate
Certain lead time
Variable order cost
Fixed carrying cost
Variable lead time
Variable demand rate
Brain Storming:
Annual Demand = 12,000 per year,
Order Cost = $10 per order
Holding Cost = $1 per unit per year
Lead time = 4 weeks
Qopt =
Calculate:
1. Economic order quantity
2CoD
Cc
2. Order cycle time

3. Number of orders per year
4. Total inventory cost
5. Reorder level
SCM
Co = $ 10 per order
d= 12000/52 = 231 unit/week
Cc = $ 1.0 per order
LT= 4 weeks
D = 12000 unit/year
Optimal Order Quantity?
Qopt =
2CoD
Cc
2(10)(12000)
= 490 unit
Order cycle time = Q/D = (490/12000) = 0.04 year *365 day = 15 day
CoD
CcQ
= (10)(12000) +
Inventory cost =
Q + 2
490
Inventory cost = $
(1)(490)
2
490.0 /year
The reorder point = ROP = d(LT) = 231 * 4 = 924 unit

SCM
Safety Stock & Re-Order Level

4 Cases:
Constant demand &
Constant lead time
Variable demand &
constant lead time
Constant demand &
variable lead time
Variable demand &
variable lead time
SCM
Variable Demand with a Reorder Point
Inventory level
Reorder
point, R
LT
LT
Time
SCM
Stock-out
Inventory level
Reorder Point with

a Safety Stock
Q
Reorder
point, R
Safety Stock
LT
LT
Time
SCM
Determining the Reorder Point for

Constant demand rate & Constant Lead Time
Reorder Point (ROP)
= [Lead time length (in days)] X [Demand per day (in units per day)]
Annual Demand
Operation condition
Lead time length
Safety Stock
= 600 unit
= 300 days per year
= 12 days
= 20 unit by default (1.5%)
Then Demand per day = 600 / 300

= 2 units/day
ROP = ( 12 days) ( 2 units/day) + Safety Stock (20 unit)
ROP =
SCM
44 units
Reorder Point
SCM
The ROP based on a Normal

distribution of lead time demand
Reorder Point:
SCM
Mean & Standard Deviation:
Data:
1)
2)
3)
4)
5)
6)
10.3
4.9
8.9
11.7
6.3
7.7
Mean = the calculated average of the values

= 8.3
Variance = S
Standard Deviation =
SCM
n 1
= 6.368
= 2.523
Mean & Standard Deviation
From:http://www.gifted.uconn.edu/siegle/research/Normal/instructornotes.html
SCM
Reorder Point Model:

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

Application
Description
A Major effect on HSE
Service level %
99.99966
Near Zero
Stock-out
(3.4 PPM)
B Major effect on Process

= High down time cost
99.73
C Normal effect on HSE

Normal
effect
on
process
Without standby
95.46
D Normal effect on HSE

Normal effect on process
With standby
68.26
SCM
Criticality Analysis Rule 80/20

Level
HSE
effect
Duration
effect
Performance
effect
Cost
effect
I- Constraint
(limited)
2- Enhance
3- Accept
(Normal)
Priority: (A) High (B) Medium (C) Low
SCM
Reorder Point with Variable Demand

(Leadtime is Constant)
R d L z , where
d = average daily demand
L = lead time
d standard deviation of daily demand

standard deviation of demand during lead time
z = number of standard deviations for desired service level
z safety stock
SCM
Fixed-order-interval order quantity

Given information:
Annual Demand= D=520 units,
Order Quantity = EOQ=62 units,
Item Criticality is Medium:
Service level = 99%, (Z=3)
Demand Standard Deviation = d = 8 units/wk,
Lead time = LT=3 wk
Required:
Number of Orders = n = D / EOQ = 520/62 = 8.4 order / year
Reorder Interval = 52 Week / n = 6.2 or 6 wk
Safety stock= Z(LT d2 ) = 3 . (3*64) =
Demand rate = D / No. of periods = 520/52 = 10 unit/week
ROP = d x LT + Safety Stock = 10 * 3 +
SCM
Determining the Reorder Point for

Constant demand rate & Variable Lead Time
Reorder Point (ROP)
= [Lead time length (in days)] X [Demand per day (in units per day)]
+ Safety Stock
Annual Demand
= 600 unit
Operation condition
= 300 days per year
Average Lead time
= 12 days
Standard deviation of lead time = 2
Z
=3
Safety Stock ?
ROP?
SCM
Case Study: Gas Station

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

Order Cycle time
Number of orders per year:
Co - cost of placing order

Cc - annual per-unit carrying cost
SCM
*
Q
T*
D
D
N *
Q
*
D - annual demand
Q - order quantity
Quantity on-hand
plus on-order
Q
Reorder
point, R
Safety Stock = f (uncertain demand & uncertain LD)
Safety stock= Z(LT d^2 ) (Certain LT & uncertain demand)
SCM
Lead
time
Order
Order
Placed Received
Lead
Time
time
Order
Order
Placed
Received
9-22
Periodic Review
Estimate Q* from the EOQ formula as if under demand
certainty conditions. Recall that this is Q* = 322 units.
Now,
T* = Q*/d = 322/50 = 6.4 weeks

Construct the demand-during-lead-time-plus-ordercycle-time distribution.
T is order
review time
SCM
CR (2004) Prentice Hall, Inc.
SCM
Case #1:
Car Maintenance Center
Part
A
B
C
D
E
F
G
H
I
Number of
Failures
1
8
3
5
0
0
44
0
0
Part
J
K
L
M
N
O
P
Q
R
Number of
Failures
38
0
1
31
1
1
0
16
1
Based on this information, discuss

Pareto Chart and Rule 80/20.
SCM
Pareto TableErrors on Parts

Part
G
J
M
Q
B
D
C
A
O
R
N
L
I
E
H
K
F
P
Total
SCM
Number of Failures
Percent of Total
44
38
31
16
8
5
3
1
1
1
1
1
0
0
0
0
0
0
150
29
25
21
11
5
3
2
0.67
0.67
0.67
0.67
0.66
0
0
0
0
0
0
Cumulative percent of Total

Prob. (<=x)
29
54
75
86
91
95
97
98
98
99
99
100
100
100
100
100
100
100
NUMBER OF FAILURES
-86
100-50
50403020100-
-0
Q B
O R
I E H K F P
ORDER FORM ITEM

SCM
CUMULATIVE PERCENT OF TOTAL
-100
150-
Pareto Table Part Frequency

Part
Number of Failures
Cumulative percent of
Total
Classification
G
J
M
Q
B
D
44
38
31
16
8
5
29
54
75
86
91
95
A
(Continuous Review)
FOQ Approach
B
(Periodic Review)
POQ Approach
Weekly
C
A
O
R
N
L
I
E
H
K
F
P
Total
3
1
1
1
1
1
0
0
0
0
0
0
150
97
98
98
99
99
100
100
100
100
100
100
100
SCM
C
(Non-critical)
(Periodic Review)
POQ Approach
Monthly
Turbine Failure list during three years
Case #2:
Failure
classification
(Rule 80/20)
Top 4 failures

items.
SCM
Part
Code
P11
P12
P13
P14
P15
P16
P17
P18
P19
P20
Number of
failures
2
2
19
11
2
12
17
10
11
4
MTTR
(hour)
4
15
1
14
21
12
1
5
12
3
other
Part
Code
Number
of
failures
MTTR
(hour)
Total
downtime
hours
Cum.
DT
P14
11
P16
14
154
154
25.3%
A1
12
12
144
298
49.0%
A2
P19
11
12
132
430
70.7%
A3
P18
10
50
480
78.9%
A4
P15
21
42
522
85.9%
B1
P12
15
30
552
90.8%
B2
P13
19
19
571
93.9%
B3
P17
17
17
588
96.7%
C1
P20
12
600
98.7%
C2
P11
608
100.0%
C3
Total
Cum. %
Item
Level
Level
608
Recommendations:
Short term: (A) Continuous review & Safety stock

Long term: (A) Improve material quality & reliability through changing types
SCM
Standby & Change over = 10 min

Number of failures 60% & MTTR (hours) 40%
Part
Code
Number of
failures
60%
MTTR
(hour)
40%
Value
Level
P14
11
14
11*0.6 + 14*0.4 = 12.2
P16
12
12
12*0.6 + 12*0.4= 12.0
P13
19
19*0.6 + 1*0.4= 11.8
A1
A2
A3
A4
P19
11
12
11*0.6 + 12*0.4= 11.4
P17
17
17*0.6 + 1*0.4= 10.6
P15
21
2*0.6 + 21*0.4= 9.6
P18
10
10*0.6 + 5*0.4= 8.0
P12
15
2*0.6 + 15*0.4= 7.2
P20
4*0.6 + 3*0.4= 3.6
P11
2*0.6 + 4*0.4= 2.8
SCM
B1
B2
B3
C1
C2
C3
Case #3:
Part
Code
Number of
failures
80%
MTTR
(hour)
20%
HSE
effect
(1 to 3)
Repair
cost
(1 to 3)
Delivery
type
(1 to 3)
P11
P12
15
P13
19
P14
11
14
P15
21
P16
12
12
P17
17
P18
10
P19
11
12
P20
(L) Low , (M) Medium, (H) High

Based on this information, classify & discuss these parts.
SCM
Standby & Change over = 3 min

Number of failures 80% & MTTR (hours) 20%
Number of
failures
80%
MTTR (hour)
20%
P13
19.0
P17
Part
Code
Value
Level
1.0
15.4
A1
17.0
1.0
13.8
A2
P16
12.0
12.0
12.0
A3
P14
11.0
14.0
11.6
A4
P19
11.0
12.0
11.2
B1
P18
10.0
5.0
9.0
B2
P15
2.0
21.0
5.8
B3
P12
2.0
15.0
4.6
C1
P20
4.0
3.0
3.8
C2
P11
2.0
4.0
2.4
C3
SCM
Part
Code
P11
Process
efect
L
HSE
effect
L
Repair
cost
L
Delivery
type
L
P12
P13
P14
P15
P16
P17
P18
P19
P20
(L) Low , (M) Medium, (H) High
SCM
Part
Code
HSE
effect
Process efect
Repair cost
Delivery type
P13
P16
P20
P14
P17
P19
P18
P15
P11
P12
3
3
3
2
2
1
1
1
1
1
3
3
1
3
3
2
2
2
1
1
3
3
1
2
2
3
2
1
1
1
3
3
2
2
1
3
1
1
1
2
SCM
Case #3:
Part
Code
Number of
failures
MTTR
(hour)
HSE
effect
(1 to 4)
Repair
cost
(1 to 4)
Delivery
type
(1 to 3)
P11
P12
15
P13
19
P14
11
14
P15
21
P16
12
12
P17
17
P18
10
P19
11
12
P20
(1) Low (4) High

SCM
Part Code
(1)
HSE effect
(1 to 4)
(2)
Process
effect
(A,B,C)
(3)
Repair
cost
(1 to 4)
(4)
Delivery
type
(1 to 3)
P11
C3
P12
B2
P13
B3
P14
A1
P15
B1
P16
A2
P17
C1
P18
A3
P19
A4
P20
C2
4: Critical
3: Major
2: Medium
Level
1: Minor

SCM
Part
Code
(1) 50%
(2) 25%
HSE effect
Total
(1 to 4)
Downtime
(A,B,C)
(3) 15%
Repair
cost
(1 to 4)
(4) 10%
Delivery
type
(1 to 3)
P11
P12
P13
P14
P15
P16
P17
P18
P19
P20
RPN
Level

SCM
Part
Code
(1) 50%
HSE effect
(1 to 4)
(2) 25%
Total
Downtime
(A,B,C)
(3) 15%
Repair cost
(1 to 4)
(4) 10%
Delivery
type
(1 to 3)
RPN
Level
P16
3.9
A1
P13
3.4
A2
P14
3.15
A3
P20
2.6
B1
P19
2.15
B2
P15
1.9
C1
P12
1.85
C2
P17
1.8
C3
P18
1.8
C4
P11
1.15
C5
A: Major
SCM
B: Medium
C: Minor
Case #4:
Turbine Failure list

during three years
Failure
classification
(Rule 80/20)
Top 4 failures
items.
SCM
Part
Code
Number of
failures
(40%)
MTTR
(hour)
(60%)
P11
P12
15
P13
19
P14
11
14
P15
21
P16
12
12
P17
17
P18
10
P19
11
12
P20
Case #5:
Item Criticality is Very High
History for 2000:
Month #
1
2
3
4
5
6
7
8
9
10
11
12
Required:
Reorder Interval
Number of orders
EOQ
Safety stock
Demand rate
ROP
SCM
Lead time = LT = 2 month

Demand rate
140
150
155
140
155
145
150
140
160
140
145
150
Stock-Outs
0
0
44
0
0
50
0
0
35
0
55
0
Variable demand rate & Constant Lead Time

Item Criticality is Very High
Lead time = LT = 2 month
History for 2000:

Month #
Demand rate
Stock-Outs
1
140
0
2
150
0
3
155
44
4
140
0
D = 1770
5
155
0
6
145
50 Mean = 147.5
7
150
0
d = 6.9
8
140
0
9
160
35
10
140
0
11
145
55
12
150
0
Required:
Reorder Interval (>= 1.5 LT by experience) = 1.5 * 2 = 3 month
Number of orders = 12 / 3 = 4 orders
EOQ = 1770 / 4 = 442.5 = 500 unit
Safety stock= Z(LT d2 ) = 6 (2*47.61) = 59
unit
Demand rate = D / No. of periods = 1770/12 = 147.5
unit
ROP = d x LT + Safety Stock = 147.5 *2 + 59 = 354
unit
SCM
Case #6:
Tank size = 8,000 gallon
(Max
Carrying Cost:
Fixed carrying cost = $5,000 / year
Variable carrying cost = $ 1/gallon/year
Order Cost:
Variable order cost = $ 0.1/gallon
Shortage Cost:
Direct shortage cost rate = $ 0.1/gallon
Indirect shortage cost rate = $ 0.2/gallon
Current order quantity 6000 gallon
Standard order quantities are: 4000 or 6000 gallons
Lead time = (1 to 3) days (Uniform Dis.)
SCM
Demand History for 2007:

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

30
29
28
28
30
30
30
29
30
28
30
30
30
30
30
30
30
29
30
30
30
30
30
28
Shortage
2,000
1,000
1,000
3,000
4,000
1,000
1,000
2,000
4,000
1,000
1,000
4,000

1.
2.
3.
4.
5.
6.
7.
Average demand rate (gl/day)

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

9. Planned No. of orders per year
10.Planned order cycle time
11.Planned reorder level
12.Planned service level
13.Planned inventory cost
14.Sketch the planned inventory transaction
15.How to manage your plan? Long term Continuous Improvement
SCM
Basic Tradeoffs:
(EOQ) increases:
Annual inventory
carrying cost also
increases
Annual cost
As order quantity
Minimum cost
reorder quantity
Total Costs
Carrying
Cost
Shortage
Cost
Annual ordering
cost decreases
Order/Set-up
Cost
Annual shortage
cost decreases
SCM
Size of order quantity

Open Inventory 8,000 gallon (1/1/2007)
Finish Inventory 5,000 gallon (31/12/2007)
Month Actual Sales Target days Actual days
1
34,000
30
29
2
29,000
28
28
3
28,000
30
30
4
28,000
30
29
5
35,000
30
28
6
24,000
30
30
7
35,000
30
30
8
26,000
30
30
9
29,000
30
29
10
24,000
30
30
11
28,000
30
30
12
25,000
30
28
Total
Average
SCM
345,000
28750
358
29.8
351
29.25
Shortage
2,000
1,000
1,000
3,000
4,000
1,000
1,000
2,000
4,000
1,000
1,000
4,000
25,000
2083
Required Dem.
36,000
30,000
29,000
31,000
39,000
25,000
36,000
28,000
33,000
25,000
29,000
29,000
370,000
30833
Annual Actual demand = 345,000 unit

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

Ordering Cost = D/Q {Fixed + Variable * Q }
Shortage Cost = Annual shortage * shortage cost rate
Carrying Cost = 5,000 + 1 * 6000/2
Ordering Cost = (345,000/6000) *(100 + 0.1 * 6000}

= 57.5 * (100+600)
= 40,250 $ / year
Shortage Cost
= 8,000 $ / year
= 7500 $ / year
Current Inventory Costs = 8,000 + 40,250 + 7500

= 55,750 $/year
(Without material price)
SCM
5) Sketch the current inventory transaction
6) Capacity utilization =
Available Inventory limit / Maximum Inventory limit
Available Inventory limit = Q = 6000 unit
Capacity utilization = 6000/8000 = 75 %
Material utilization =
Used Material / Available Material
= 100% (shortage Zero Overstock)
SCM
Bench Marking (Reference indicators):

Shortage ratio
<5%
Shortage cost ratio
< 10
Capacity utilization
> 80%
Working efficiency = Actual days / Target days
> 99%
SCM
7) Your analysis & recommendations Change Management

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

Carrying Cost = Fixed + Variable * Q/2
Ordering Cost = D/Q {Fixed + Variable * Q}
= Ccf + Ccv * Q/2

= D/Q {Cof + Cov *Q}
= Neglect (planning)
TC = (Ccf + Ccv * Q/2) + (Cof * D/Q + Cov *D)

0 = 0 + Ccv /2 - Cof * D/Q2 + 0
EOQ = {2 Cof D / Ccv } *
EOQ = {2 * 100 * 370,000 / 1 } *

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

Variable demand and variable lead time
R= d x LT + Safety Stock
Safety Stock = Z(LT 2 d2 + d 2 2LT )
= 3(2 2 131.52 + 1054 2 12 ) = 3,003 unit
d = 1054
LT = (1+3)/2 = 2 day
d = 131.5 unit
LT = 1 day
R= 1054 x 2 + 3003 = 5111 = 5000 unit
12) Planned service level

Service level = 99.73 % at Z = 3
Shortage ratio = 100 99.73 = 0.27 %
Shortage ratio (at Z=2)

SCM
<= 4.54 %
13) Planned Inventory Costs:
Carrying Cost = Fixed + Variable * SOQ/2

Ordering Cost = No. of orders (Fixed + Variable * SOQ)
Carrying Cost = 5,000 + 1 * 8000/2 = 9,000 $/year

Ordering Cost = 47 (100 + 0.1 * 8000) = 47 * 900 = 42,000 $/year
Shortage ratio = 100 99.73 = 0.27 % (at Z=3)
Expected Annual shortage = 0.0027 * 370,00 = 999 unit / year
Expected Shortage Cost = 999 * (0.1 + 0.2) = 89.91 = 90 $/year
Planned Inventory Costs = 9,000 + 42,000 + 90

= 51,090 $/year
Note:
Current Inventory Costs = 8,000 + 40,250 + 7500 = 55,750 $/year
Cost Saving = 4660 $/year = 8.4 %
SCM
14) Sketch the planned inventory transaction
Quantity on-hand
plus on-order
Max = 8000 unit

Q=
8000
Reorder
point, R
SS
Safety Stock = SS = 3000 unit
0
LT =2
Order
Placed
Order
Received
LT =2
Order
Placed
Time
Order
Received
The reorder point = R = SS + d(LT) = 5000 unit

SCM
9-22
15) How to manage your plan

Continuous Review
Standard forms & reports
Data Documentation
Training Program
Motivation system
Preventive maintenance program
SCM
Case #7 : Gas Station

Order cost $100 / order
Supplier: Standard order quantity is 3000, 4000, 5000, or 6000 gallons.
1. EOQ & SOQ
3. Order cycle time
4. Safety Stock
5. Reorder level
SCM

Order cost $100 / order
Standard order quantity is 3000, 4000, 5000, or 6000 gallons.
Average weekly demand:
Sat. Sun. Mon. Tu.
W.
Th.
Fr.
900 1500 1200 1000 1300 1500 800
1. EOQ & SOQ
3. Order cycle time
4. Safety Stock
5. Reorder level
SCM

Standard order quantity is 3000, 4000, or 5000 gallons.
1. EOQ & SOQ
3. Order cycle time
4. Safety Stock
5. Reorder level
SCM

Demand rate = (500 to 1,500) gallon/day
Average lead time = (1 to 3) days
1. EOQ & SOQ
3. Order cycle time
4. Safety Stock
5. Reorder level
SCM

Open inventory level = 8,000 gallon
initial level
Demand rate = (500 to 1,500) gallon/day
1. EOQ & SOQ
3. Order cycle time
4. Safety Stock
5. Reorder level
SCM
Case #12 :
Tank size = 10,000 gallon
Variable order cost = $ 0.1/gallon
Standard order quantity is:
3000, 4000, 5000, or 6000 gallons.
Uniform distribution

1. EOQ & SOQ
3. Order cycle time
4. Safety Stock
5. Reorder level
SCM

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

(MRP)
SCM
Material Requirement Planning (MRP)

MRP is a scientific technique, concerned with Planning,
Organizing & Control of flow of materials, from their initial
purchase to destination.
To get: 6 Rights
1. The Right quality
2. Right quantity
3. At the Right time
4. At the Right location
5. For the Right cost
6. From the Right supplier
SCM
Materials Requirements Planning (MRP)
Dependent demand
Dependent Inventory Model
SCM
Bill of Material is a structured list of components of a product
Power Train
Motor
SCM
Gear
Chassis
Motorcycle
Exhaust
Front
Wheel
Rear
Wheel
Frame
Brake
Master
Production
Schedule
(MPS)
MRP Model
Product
Structure
Record
(BOM)
Material
Requirement
Planning
(MRP)
Inventory
Status
Records
Purchase &
Production
Plans
Work
orders
SCM
Purchase
orders
Rescheduling
notices
Elements of MRP
Inputs
Service-Parts
Orders and
Forecasts
Inventory
Transaction Data
Inventory
Status File
Order Changes
Order
Planned
Order
Schedule
Master
Production
Schedule
Bill of
Materials File
SCM
Outputs
MRP
System
Planning
Report
Performance
Exception
Reports
MRP Structure
Data Files
BOM
Output Reports
MRP by
period
report
Master
production
schedule
MRP by
date
report
Lead times
(Item master file)
Planned
order report
Inventory data
Purchasing data
Material
requirement
planning
programs
(computer and
software)
Purchase advice
Exception reports
Order early or late
or not needed
Order quantity
too small or too
large
SCM
MRP Formulae
Available = On-hand - Safety stock Allocated
On-hand is inventory physically present
Allocated is inventory reserved for special orders
On-hand = Prior period's on-hand + Scheduled receipts
Net requirement = Gross requirement - Available
SCM
Net Requirements Plan
The logic of net requirements

Gross
requirements + Allocations
Total requirements
On
Scheduled
+
hand
receipts
Net
= requirements
Available inventory
SCM
10) Lot sizing techniques used in MRP systems
Lot-for-lot (L4L) most used

Economic order quantity (EOQ)
Period order quantity (POQ)
SCM
Lot-for-lot (L4L) example
Period
Net requirements
35
10
Planned order
35
10
Total
40
20
10
30
150
40
20
10
30
150
(Assume LT)
The L4L technique:

Minimizes carrying costs
Is certainly the best method for
- highly discontinuous demand
- expensive purchased items
SCM
EOQ example
Setup cost, S = $100
Unit price, C = $50
Holding costs, HR = .24 per annum
HP = .02 per period
Annual demand, D = 200
Q = (2DS / CHR)1/2 = 58
Period
Net requirements
35
10
Planned orders
58
Remnants
23
SCM
40
20
10
30
58
13
13
31
10
58
31
11
54
24
24
Period order quantity example

Technique:
1. Compute EOQ to determine number of orders per year
2. Divide number of periods in one year by number of orders to get
ordering interval
EOQ = 58
Number of periods in one year = 12
D = 200
200 / 58 = 3.4 (orders per year)
12 / 3.4 = 3.5 (ordering interval)
Period
Net requirements
35
10
Planned orders
85
SCM
4
40
20
10 30
35
Total
150
30
Case Study :
A Blast em, dude audio kit (A) is made of 2 small tweeter
boxes (B) and 3 large woofer boxes (C). Each tweeter is made
of two speakers (D) and two shipping boxes (E). Each woofer
consists of two boosters (F) and two shipping boxes (E). Each
booster is made of one circuit board (G) and one speaker (D).
Lead times
A
1 wk.
B
2
C
1
D
1
E
2
F
3
G
2
Bills of Material (BOM):

Level
Product structure for Awesome (A)
A
0
E(2)
2
3
C(3) Std. 12 Speaker kit w/
B(2) Std. 12 Speaker kit
D(2)
amp-booster
F(2) Std. 12 Speaker
E(2)
Packing box and
installation kit of wire,
bolts, and screws
booster assembly
G(1)
D(2)
Amp-booster
12 Speaker
12 Speaker
Assume we need 50 Blast em, dude speaker kits in eight weeks.

We need to calculate when and how many of each component we need to start making.
SCM
Called an exploded product structure.

Items above a level are PARENTS;
items below a level are COMPONENTS or CHILDREN.
4 levels here.
A
Level 0
2B
level 1
level 2
level 3
SCM
2D
3C
2E
2F
G
2E
D
Low-level coding
Necessary for identical items existing at diff. levels in
the BOM.
An item is coded at the lowest level at which it is
used.
Level 0
2B
level 1
level 2
level 3
SCM
2D
3C
2E
2F
G
2E
D
MRP: worked example:

Product Structure Thinking Challenge
The demand for product A is 50.
How many of each component is needed to satisfy demand?
A
B(2)
C(3)
E(3)
D(2)
SCM
E(1)
F(2)
G(1)
D(2)
Product Structure Solution
50
50 x 2 = 100
50 x 3 = 150
B(2)
C(3)
E(3)
D(2)
100 x 2 = 200
SCM
100 x 3 =
300
E(1)
150 x 1 =
150
150 x 2 =
300
F(2)
G(1)
300 x 1 = 300
D(2)
300 x 2 = 600
Product A
Part B: 2 x number of As =
Part C: 3 x number of As =
Part D: 2 x number of Bs
+ 2 x number of Fs =
Part E: 2 x number of Bs
+ 2 x number of Cs =
Part F: 2 x number of Cs =
Part G: 1 x number of Fs =
SCM
50
(2)(50) =
(3)(50) =
100
300
(2)(100) + (2)(300) = 800

(2)(100) + (2)(150) = 500
(2)(150) =
300
(1)(300) =
300
Time-Phased Product Structure

Must have D and E
completed here so
production can
begin on B
Start production of D
1 week
2 weeks to
produce
2 weeks
2 weeks
1 week
1 week
2 weeks
3 weeks
1 week
SCM
4
5
Time in weeks
Figure 14.4
SCM
SCM
Case :
Clipboard
Top clip (1)
Bottom clip (1)
Pivot (1)
Finished clipboard
Pressboard
(1)
Top Clip
(1)
SCM
Rivets (2)
Pressboard (1)
Product Structure:
Spring (1)
Level 0
Clipboard
Clip
Assembly (1)
Bottom Clip
(1)
Rivets
(2)
Pivot
(1)
Level 1
Spring
(1)
Level 2
Case :
Bill-of-Material - Product Structure Tree
Bicycle(1)
P/N 1000
Handle Bars (1)
P/N 1001
Frame Assy (1)

P/N 1002
Wheels (2)
P/N 1003
SCM
Frame (1)
P/N 1004
Case :
SCM
Bill of Materials
Case :
Bill of Materials
Back
legs
SCM
Front
legs
Back slats
Seat cushion
Leg supports
Seat-frame
boards
A
Ladder-back chair
SCM
Demand Forecasting
SCM
SCM
SCM
SCM
SCM
Procurement Management
SCM
Typical Supply Chain for a Manufacturer

Delivery
Production
Procurement
Sales
Inventory
One man show, everything is connected
Supplier
Supplier
Storage
Mfg.
Storage
Dist.
Retailer
Customer
Supplier
SCM
Business Operations:
Early Stage, with independent functions
Sales
Inventory
Barrier
SCM
Barrier
Delivery
Production
Procurement
Barrier
Barrier
Barrier
Barrier
Input
Sales
Production
Delivery
Output
No integration across functions

SCM
Objective
Input
Delivery
Sales
Production
Output
Functional integration
SCM
Internal Functional Integration
Material
Management
Barrier
SCM
Production
Manage
ment
Barrier
Logistics
Manage
ment
Barrier
Barrier
Internal Integration
Material
Management
Production
Management
Logistics
Management
Barrier
SCM
Barrier
Procurement Cycle
SCM
1. Procurement
Strategy
2. Supplier
Identification
7. Supplier
Review
Procurement
Cycle
3. Establish
Supplier
Relationship
4. Finalize
Business
Negotiations
6. Supplier
Development
5. Monitor
Supplier
Performance
SCM
Procurement Strategy
Platform
Company
Commodity
Product
Supplier Identification
Search based on Strategy
Strategic, Integrated, Tactical
Selection Process
Classification
Desire to do Business with them
Establish Supplier Relationship
Capabilities
Commitment
Qualification
Audits
Finalize Business Negotiations
Contracts
POs
1st Articles
Logistics
Monitor Supplier Performance
QDC Metrics
Performance Scorecards
Supplier Development
QDC Metrics
DBS Tools
Continuous Cost Improvement
Process
Supplier Review
Review Process
Basic Reviews
Advanced Reviews
Reporting Performance
SCM
Organizational Levels in
the Procurement Process
SCM
Stock Overview
SCM
Logistics is a part of supply chain process
Materials
management
Supplier
Market
management
Manufacturer
Customer
Logistics Management
SCM
Supplier Identification
Risk Sharing / Trust
Present Snapshot
High
Outsourced
Partnerships
60%
Aggregated
Requirements
30%
Strategic
Integrated
Buy-Sell
10%
Tactical
Low
SCM
Value Analysis
Offers
1.
2.
3.
Procurement
Project
Supplier & Vendor
Main Contractor / Contractor / Subcontractor

1.
2.
3.
4.
5.
Price
Technical Specs
Lead Time
Price
Technical Specs
Duration
Management Approach
Past Experience
1.
2.
3.
4.
5.
Price
Technical Specs
Duration
Grade (1 to 7)
Past Experience
Relative Weight
Criticality Level (A, B, C, D) Safety, Process Effect, or Daily Rate
A Super Critical
SCM
B Critical
C Medium
D Normal
Criticality Analysis
Safety
Effect
Process
Effect
Major Effect
or
Financial
Effect
Minor Effect
(A) Super Critical,

(B) Critical,
(C) Medium,
(D) Normal.
Local effect, System effect, Plant effect
SCM
Spare Parts Criticality Analysis
Criticality
(System level)
HSE Effect
Major
(A)
Centrifugal Pump
Minor
Process
Effect
Major
(B)
Drain system
Water system
Crud oil system
Steam system
Fire-fighting system
Critical Equipment (Planned)

Minor
Non-Critical
Equipment
Standby
Availability
Without
(C)
SCM
With
(D)
Project Criticality Analysis
- Safety effect
- Process effect
- Daily Rate ($/day)
Safety Effect
Major
(A)
Minor
Critical Project
Process
Effect
Major
(B)
Minor
Non-Critical
Project
Daily Rate
High
(C)
SCM
Low
(D)
Class (C)
Parameter
1.
Price
20
2. Technical Specs
3. Duration
SCM
Weight (point)
65%
4
(Fixed) ----
4. Grade (1 to 7)
5. Past Experience
6. Reputation
Supplier or Vendor Evaluation

Relative Weight Point Evaluation System:
Total Index = Price Points * F1 + Technical Points * F2
Max. Total Index
Most Common:
Level
F1= Price or Cost
F2= Technical
A= Catastrophic
A
10
90
Criticality Level
B
C
D
20
35
50
80
65
50
or Min. Cost Rule
B = Critical
C= Medium
D= Normal
Technical Relative Weight

SCM
Contractor Evaluation Project Duration
Total Index
Price
Technical
Approach
Management
Approach
Past
Performance
A 10
B 30
C 50
D 70
50
40
30
20
20
15
10
5
20
15
10
5
A= Catastrophic
B = Critical
C= Medium
D= Normal
Total Index = PR*F1 + TA* F2 + MA*F3 + PP*F4

PR, TA, MA & PP Point system (1 to 10)
SCM
SCM
Main Requirements:
Technical Proposal
Price Proposal
Management Approach Report
Past Experience Report
Submit a hard copy original with the signatures and one
copy for each
SCM
Case Study:
Power Station Project

A Catastrophic
Total Index
Price
Technical
Approach
Management
Approach
Past
Performance
A 10
50
20
20
Total Index = PR*0.1 + TA* 0.5 + MA*0.2+ PP*0.2

PR, TA, MA & PP Point system (1 to 10)
SCM
Case Study:
Gas Pipe Line Project

A Catastrophic
Total Index
Price
Technical
Approach
Management
Approach
Past
Performance
A 10
50
20
20

SCM
Case Study:
Oil Pipe Line Project

B Critical
Total Index
Price
Technical
Approach
Management
Approach
Past
Performance
B 30
40
15
15

SCM
Case Study:
Water Pipe Line Project

C Medium
Total Index
Price
Technical
Approach
Management
Approach
Past
Performance
C 50
30
10
10

SCM
Case Study:
Office Building Project

D Normal
Total Index
Price
Technical
Approach
Management
Approach
Past
Performance
D 50
30
10
10

SCM
Parameter Description:
Parameter
Technical
Approach
Management
Approach
Past
Performance
Evaluation (Scale 010 )

6
8
10
Bad
Accepted
Good
Very Good
6 Minimum Requirements
SCM
Management Approach Evaluation:

Parameter
Weight
0
Bad
Organization
Structure
Project Manager
Experience
Project Manager
is Certified
Project Team
Experience
Presentation On
Management
Approach
Evaluation
6
8
Accepted
Good
10
Very Good
SCM
Past Performance Evaluation

Parameter
Weig
ht
0
Bad
Experience
None
Field
None
Scale
None
Evaluation
6
8
Accepted
Good
10
Very Good
SCM
Technical Approach Evaluation

Parameter
Weight
0
Bad
Evaluation
6
8
Accepted
Good
10
Very Good
SCM
Honda Insight
Toyota Prius
Honda Civic Hybrid

Toyota Scion XA
Honda Civic
VW Deisel
Toyota Corolla
SCM
Toyota Echo
Toyota Scion XB
Toyota Celica
Business Expenditure of R&D in Japan

Toyota
6%
Matsushita
5% Sony
5% Honda
4%
Nissan
3%
Rest of firms
44%
Hitachi
3%
Toshiba
3%
NEC
3%
Other top 30
firms
19%
SCM
Cannon
2%
NTT
3%
Supplier / Vendor
Case Study:
Assume you have to buy 10 new similar car for oil company, and the
offers are as follows:
Item
Price (1000 LE)
Model / Year
BMW
Merc
Honda
Matrix
Opel
Toyota
260
400
140
100
130
140
Lancer Chery
110
50
2008
Based on this information, discuss & select the best Car.

By Experience Toyota
But there is no evidence (Ref.?)
Incomplete Information
Technical evaluation Policy?
SCM
Case Study:
Item
Price (1000 LE)
BMW
Merc
Honda
Matrix
Opel
Toyota
260
400
140
100
130
140
110
50
100
92
82
Model / Year
By Experience
Technical Weight %
Lancer Chery
2008
110
120
98
90
97

Toyota
But there is no evidence (Ref.?)
Technical Evaluation Policy?

SCM
Case Study:
Item
Price (1000 LE)
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style
Model / Year
BMW
260
Merc
400
Honda
140
9
10
9
10
10
10
10
10
9
10
10
10
9
8
9
8
9
9
Matrix Opel
100
130
Ref. # 123
7
9
7
8
9
9
8
8
7
8
7
9
2008
Toyota
140
8
8
10
9
8
9
Lancer Chery
110
50
7
7
8
8
8
7
5
6
9
4
7
5
Incomplete Information
Relative weights?
Equal weight?
Max. Budget ?
SCM
Case Study:
Assume you have to buy 10 new similar car for oil company, and the offers are as follows:
Item
BMW Merc Honda Matrix Opel Toyota Lancer Chery
Price (1000 LE)
260
400
140
100
130
140
110
50
Technical par.
Safety/Stability
9
10
9
7
9
8
7
5
10
Options
10
8
7
8
8
7
6
Fuel consumption
9
9
9
9
9
10
8
9
Maintainability
10
10
8
8
8
9
8
4
Engine Capacity
10
10
9
7
8
8
8
7
Brand & Style
10
10
9
7
9
9
7
5
Model / Year
2008
Weight matrix (relative priority from 1 to 3):

Parameter
Safety
Options
Weight
Fuel
con.
3
Maintainability
3
Engine
capacity
1
Brand &
Style
1
Technical weight 80%

Price weight 20%
Evaluation rules:
Maximum budget = 2,000,000 LE
Accepted Technical points > 7
SCM
Item
Price (1000 LE)
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style
BMW
260
Merc
400
Honda
140
Matrix
100
Opel
130
Toyota
140
9
10
9
10
10
10
10
10
9
10
10
10
9
8
9
8
9
9
7
7
9
8
7
7
9
8
9
8
8
9
8
8
10
9
8
9
Lancer Chery
110
50
7
7
8
8
8
7
5
6
9
4
7
5

Parameter
Safety
Options
Weight
Fuel
con.
3
Maintainability
3
Engine
capacity
1
Brand &
Style
1

Price weight 20%
Evaluation rules:
Maximum budget = 200,000 LE/car
SCM
Points
Item
Price (1000 LE)
Price points
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style
100
Weight
3
2
3
3
1
1
Tech. points
100
Proposal Evaluation:
0.5 *Tech. +0.5 * Price
0.6 *Tech. +0.4 * Price
0.7 *Tech. +0.3* Price
0.8 *Tech. +0.2 * Price
SCM
Honda
140
Opel
Toyota
140
130/140
= 93
130
130/130
=100
130/140
=93
9
8
9
8
9
9
112
9
8
9
8
8
9
111
8
8
10
9
8
9
114
112/114
= 98.2
111/114
= 97.4
114/114
=100
95.8
95.6
96.6
95.1
98.7
98.7
98.2
96.5
96.5
97.8
97.9
98.6
Conclusion: One Page Management

Buy 10 new similar car Model/year 2008
2) Analysis:
Item
Accepted offers
Rejected offers
Honda
Opel
Toyota
Price (1000LE)
140
140
Technical index %
98.2
130
97.4
Value Index %
95.1 %
97.9 %
98.6 %
100
Over budget
BMW
Merc.
Technical
Matrix
Lancer
Chery
Strength
points
Weakness
points
3) Recommendation:
SCM
The best options are:

1) Toyota
2) Opel
3) Honda
Technical Evaluation Policy

Scope of work Buy a Car
Technical Parameters:
Scale ( 0 10 )
Scale
Parameter
Safety/Stability
10
Options
10
Fuel consumption
10
Maintainability
10
Engine Capacity
10
Brand & Style
10
Rejected
Fair
Good
Excellent
10
Specific
Measurable
Relative Weights:
Parameter
Safety
Options
Weight
SCM
Fuel
con.
3
Maintainability
3
Engine
capacity
1
Brand &
Style
1
Case Study: Technical evaluation 0, 6, 8, 10

Assume you have to buy 10 new similar car for oil company, and the offers are as follows:
Item
BMW Merc Honda Matrix Opel Toyota Lancer Chery
Price (1000 LE)
260
400
140
100
130
140
110
50
Technical par.
Safety/Stability
8
10
8
6
8
8
6
0
10
Options
10
8
6
8
8
6
6
Fuel consumption
10
10
10
10
10
10
8
8
Maintainability
10
10
8
8
8
10
8
0
Engine Capacity
10
10
10
8
8
8
8
8
Brand & Style
10
10
8
8
8
8
6
0
Model / Year
2008
Relative Weight matrix (relative priority from 1 to 3):

Parameter
Safety
Options
Weight
Fuel
con.
3
Maintainability
3
Engine
capacity
1
Brand &
Style
1

Price weight 20%
Evaluation rules:
SCM
Item
Price (1000 LE)
Technical par.
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style
Model / Year
BMW
260
Merc
400
Honda
140
Matrix
100
8
10
10
10
10
10
10
10
10
10
10
10
8
8
10
8
10
8
6
6
10
8
8
8
Opel
130
8
8
10
8
8
8
2008
Toyota
140
Lancer Chery
110
50
8
8
10
10
8
8
6
6
8
8
8
6
0
6
8
0
8
0

Parameter
Safety
Options
Weight
Fuel
con.
3
Maintainability
3
Engine
capacity
1
Brand &
Style
1

Price weight 20%
Evaluation rules:
SCM
Points
Item
Price (1000 LE)
Price points
Technical points:
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Capacity
Brand & Style
Toyota
140
130/140
= 93
130/140
=93
8
8
10
8
10
8
8
8
10
8
8
8
8
8
10
10
8
8
112
110
116
100
112/116=
96.5
110/116=
94.8
116/116=
100
100
100
93
96.5
100
94.8
100
95.80
95.84
93
100
98.6
100
Tech. points
SCM
Opel
130
130/130
=100
R. weight
3
2
3
3
1
1
Proposal Evaluation:
Price points
Tech. points
0.8 *Tech. +0.2 * Price
Honda
140

Buy 10 new similar car Model/year 2008
2) Analysis:
Item
Accepted offers
Rejected offers
Honda
Opel
Toyota
Price (1000LE)
140
140
Technical index %
96.5
130
94.8
Over budget
Technical
Matrix
Lancer
Chery
BMW
Merc.
100
Value Index %
Strength
points
Weakness
points
3) Recommendation:
SCM

1)
2)
3)
Contractor Evaluation Policy

Scope of work Project xxxxx
Technical Parameters:
Scale ( 0 10 )
Scale
Parameter
Price $M
10
Technical Approach
10
Management Approach
10
Past Performance
10
Rejected
Fair
Good
Excellent
10
Specific
Measurable
SCM
Project / Contractor
Case Study:
Project overview: 7 MW Power Station for X-Petroleum Site
5 Proposals
B
C
Price $M
7.0
7.5
8.0
9.0
10.0
Technical
Approach
8/10
8/10
8/10
10/10
10/10
Management
Approach
6/10
6/10
8/10
8/10
10/10
Past
Performance
0/10
6/10
8/10
8/10
10/10
Parameter
Evaluation rules:
Maximum budget = $ 9 M
Accepted parameters > = 6/10
Based on this information, discuss & select the best proposal.

SCM
Management Approach:
0
Bad
CRITERION
1) Organisation Structure
2) Leader Skills (CVs)
3) Worker Skills (CVs)
4) QC/QA Management
5) Safety Management
6) Resources Mobilisation
7) Documentation Quality
8) Quality Manual
9) Quality of the Co-ordination
10) Quality of the Support Action
Overall score 100 Points
10 Points
SCM
6
Fair
8
Good
10
Very Good
A
6
6
10
8
6
6
6
6
0
6
60
B
8
6
6
6
6
6
6
10
0
6
60
C
6
8
10
8
8
8
8
8
8
8
80
D
10
8
8
8
8
6
10
8
6
8
80
E
10
10
10
10
10
10
10
10
10
10
100
10
Past Experience:
0
Bad
Non
SCM
6
Fair
Ok
but not in the
same field
Different Scale
8
Good
Ok
& in the same
field
Different Scale
10
Very Good
Ok
& Petroleum
contractor
Same Scale
Project overview: 7 MW Power Station

Parameter
Price $M
7.0
7.5
Technical
Approach
8/10
Management
Approach
Past
Performance
Proposals
C
8.0
9.0
10.0
(over $)
8/10
8/10
10/10
10/10
6/10
6/10
8/10
8/10
10/10
0/10
(not)
6/10
8/10
8/10
10/10
Evaluation rules:
Maximum budget = $ 9 M
Accepted parameters > = 6/10
Based on this information, discuss & select the best proposal.

SCM
Relative Weight :
Power Station Project

A Catastrophic
Total Index
Price
Technical
Approach
Management
Approach
Past
Performance
A 10
50
20
20

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

Parameter
Proposals
C
Price $M
Best price 10/10

10*7.5/7.5 = 10
10*7.5/8.0=
9.375
10*7.5/9.0=
8.333
Technical
Approach
8/10
8/10
10/10
Management
Approach
6/10
8/10
8/10
Past
Performance
6/10
8/10
8/10
Total Index

SCM

Parameter
Proposals
C
Price $M
10
9.375
8.333
Technical
Approach
10
Management
Approach
Past
Performance
Total Index
7.4
8.14
9.03
The best offer

SCM

2) Analysis:
Item
Description
Strength
points
Weakness
points
3) Recommendation:
SCM
Exam: Assume you have to buy a new crane 300 ton, and the offers are as follows:
Item
A
B
C
D
E
Initial cost (M $)
1.5
1.8
1.4
1.0
1.2
Life, year
12
12
10
8
10
Salvage (% initial cost)
15%
15%
12%
10%
12%
Technical parameters
Safety/Stability
10
10
8
6
8
Options
8
10
8
6
8
Fuel consumption
10
10
10
8
8
Maintainability
10
10
8
8
8
Engine Type
10
10
8
6
8
Brand & Style
8
10
8
0
0
Parameter
Safety
Options
Fuel
con.
Weight
4
2
2
Evaluation rules: Maximum budget = 1.5 M$
Maintainability
3
Engine
type
2
Brand &
Style
1
Accepted Technical points > = 6

Price weight 20%
Based on this information, discuss & select the best crane.

SCM
B is over budget
D,E are technical rejected (Brand & style <6)

Points
Item
Annual Depreciation (SL)
Price points
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Type
Brand & Style
0.1063
0.1232
100
100
86.24
4
2
2
3
2
1
10
8
10
10
10
8
134
8
8
10
8
8
8
116
100
100
100
86.57
86.5
Tech. points
0.8 *Tech. +0.2 * Price
D E
Offer (A) is the best one

SCM
Or
B is over budget
D,E are technical rejected (Brand & style <6)

Points
Item
Annual Present Worth
Price points
Safety/Stability
Options
Fuel consumption
Maintainability
Engine Type
Brand & Style
D E
100
4
2
2
3
2
1
10
8
10
10
10
8
134
8
8
10
8
8
8
116
100
100
86.57
Tech. points
0.8 *Tech. +0.2 * Price
Offer (A) is the best one

SCM

Buy a crane 300 ton
2) Analysis:
Item
Accepted offers
Rejected offers
Over budget
Technical
Initial cost (M$)

Technical index %
Total Value Index %
Strength Points
Weakness Points
3) Recommendation:
SCM

1) A
2) C

Buy a crane 300 ton
2) Analysis:
Item
Accepted offers
Initial cost (M$)

Technical index %
Total Value Index %
A
1.5
C
1.4
100
100
86.57
86.5
Rejected offers
Over budget
Technical
B
1.8 M$
D,E
(0) Brand
& Style
Strength Points
Weakness Points
3) Recommendation:
SCM

1) A
2) C
Enterprise Resource Planning

ERP
SCM
Example: order-to-delivery of copy machine

Customer
Sales rep.
Supplier
Order
Customer info
Quote
ERP
Purchase order
Plant
Production order
Accounting
General ledger
SCM
SCM
SCM
Value Chain Analysis
SCM
Value Chain
SCM
SCM
First-Tier Supplier
Service/Product Provider
Support Processes
Support Processes
New Service/
Product
Development
Process
Supplier
Relationship
Process
Business-toBusiness
(B2B)
Customer
Relationship
Process
OrderFulfillment
Process
New Service/
Product
Development
Process
Supplier
Relationship
Process
Business-toCustomer
(B2C)
Customer
Relationship
Process
OrderFulfillment
Process
External Consumers
External Suppliers
External Value-Chain Linkages
Supply Chain Design
SCM
Step #1
Supply Chain
Initial Suppliers
Tier 4
--
Tier 3
Tier 2
Tier 1
Manufacturer - XX
Egypt
Tier 1
Tier 2
SCM
--
Assembly
-
Egypt
End Users
Customer
Step #1
Customer
Customer
Distribution
center
Distribution
center
Supply Chain
Customer
Manufacturer
Tier 1
Tier 2
Tier 3
Supplier of services
SCM
Supplier of materials
Step #2
Supply Chain Design

Current
Inefficient
supply chain
operations
Area of
improved
operations
Total costs
Benchmarking
Reduce costs
New supply chain
efficiency curve with
changes in design
and execution
8
Supply chain performance
(Inventory Turnover)
Figure Supply Chain Efficiency Curve

SCM
Improve
performance
Current
Situation
10
Internal
Benchmark
15
External
Benchmark
SCM Outline
Step #3
Tier 2
Tier 1
Suppliers
Suppliers
Tier 1
Company
Tier 2
Customers Customers
(1) INFORMATION FLOW
(2) ORDER FLOW

(3) PRODUCT / MATERIAL FLOW
(4) PAYMENTS FLOW
SCM
SCM Outline
Step #4: Management Methodology
Tier 1
Tier 2
Tier 1
Suppliers
Suppliers
Company
Tier 2
Customers Customers
(5) CUSTOMER RELATIONSHIP MANAGEMENT

(6) CUSTOMER SERVICE MANAGEMENT
(7) DEMAND MANAGEMENT
(8) MANUFACTURING MANAGEMENT
(9) PROCUREMENT MANAGEMENT
(10) PRODUCT DEVELOPMENT MANAGEMENT
SCM
SCM
Supply Chain - Vertical Integration
Information Flow
Tier 2
Tier 1
Suppliers
Suppliers
Tier 1
Company
Tier 2
Customers Customers
Site
SCM
Supply Chain
Suppliers
Vendors
Company
Contractor
Customer
Client
Site
SCM
SCM
Project Supply Chain
Suppliers
Company
Customer
Vendors
Contractor
Client
SCM
Project Supply Chain

Information
Information
Suppliers
Vendors
Orders
Materials
Company
Orders
Customer
Contractor
Product
Client
Payments
Payments
SCM Integration of Supply Chains

SCM
Supply Chain Information Flow Data Flow Diagram

02
03 Information
04
Suppliers
09
Vendors
Materials
05
08
Orders
10
01Information
06
07
Company
Contractor
Product
15
Payments
14
12
Client
MainContractor
11
Subcontractor
Customers
Orders
13
Payments
SCM Integration of Supply Chains

SCM
Report List
ID
Report / Form
Description
Responsibility
Information
01
Customer Needs
02
Product Analysis
03
Price Quotation
04
Supplier Offers
05
Estimation & Analysis
06
Offer
Orders
07
Customer order
08
Order Analysis
09
Material Orders
Materials & Products

10
Material Orders Receive
11
Production Orders
12
Product
Payments
13
Customer Payments
14
Cost Analysis
15
Supplier Payments
SCM
03
SCM
02
01
Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM
Report / Form
Description
Responsibility
SCM
Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM
Report / Form
Description
Responsibility
SCM
Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM
Report / Form
Description
Responsibility
SCM
Report List
ID
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
SCM
Report / Form
Description
Responsibility
Process Chart
Inputs:
Request
The order fulfillment process
Departments:
Enterprise Applications
Reports:
Order
SCM
Invoice
Process Chart
Inputs:
Request
The order fulfillment process
Departments:
Enterprise Applications
Reports:
Order
SCM
Invoice
Form / Report List:

#
ID
Form/report
Responsibility
1
2
3
4
5
--
Form / Report Description

Form/
Report
SCM
Who
Target /
Purpose
When/
Frequency
Type/
Method
Reference
SCM - Outline
Main Information:
1.
Coding System
2.
Product Information
3.
Product Structure
4.
Process Information
5.
Material Information
6.
Manpower Information
7.
Machines Information
8.
Operating Information
9.
Cost Information
10. Market Information

11. Customer Information
12. Supplier Information
SCM
Estimation & Analysis:

1. Time Estimation & Analysis
2. Material Estimation & Analysis
3. Manpower Estimation & Analysis
4. Machine Estimation & Analysis
5. Cost Estimation & Analysis
6. Price Estimation & Analysis
SCM
Planning Process:
1. Master Plan
2. Material Plans
3. Resource Plans
4. Cost Plan
5. Production Plans
6. Work Orders
SCM
Control Process:
1. Actual Performance
2. Quantity Analysis
3. Cost Analysis
4. Productivity Analysis
5. Capacity Analysis
6. Time Analysis
7. Quality Analysis
8. KPIs report
SCM
Forecasting Process:
1. Market Forecasting
2. Capacity Forecasting
3. Resource Forecasting
4. Quantity Forecasting
5. Time Forecasting
6. Procurement Forecasting
7. Cost & Budget Forecasting
SCM
SCM
Block Diagram
Tools & Approaches
Inputs Information
1.
General information
2.
Coding Information
3.
Customer Information
4.
Supplier Information
5.
Market Information
6.
Product Information
7.
Product Structure
8.
Process Information
9.
Material Information
10. Manpower information

11. Machine information
12. Operating conditions
13. Overhead Information
14. Feedback
SCM
1.
Material Flow
Analysis
2. Material Req.
Planning
3. Manpower Req. Pl.
4. Machine Req. Pl.
5. Cost Price
Estimation
6. Cost Analysis
7. Production
Schedule
8. Productivity
Analysis
10. Performance
Evaluation
11. Forecasting
Outputs Information
1.
Master Plan
2.
Material Flow Diagram
3.
Material Plan
4.
Manpower Plan
5.
Machine / Tools Plan
6.
In/out House Service Plan
7.
Procurement Plan
8.
Cost Estimation
9.
Budget Plan
10.
Cost Analysis
11.
Action Production Plans
12.
Planned Productivity Analysis
13.
Planned Capacity Analysis
14.
Planned Material Analysis
15.
Work Orders / Forms
16.
Implementation & Feedback
17.
Control (Actual / Planned)
18.
KPIs report
19.
Demand / Quantity Forecasting
20.
Cost / Budget Forecasting
Case Study
For a Manufacturing Company
SCM
Case Study
Supply Chain - Estimation & Planning Module
The production information for cast iron parts manufacturing

are as follows:
1) Market Information
Product: Cast Iron Spare Parts
Duration: Annual
2) Material Structure
Product
X
Material
A1 (80%)
A1 Cast Iron Scrap
SCM
Production Quantity = 4000 ton

Unit Price = 5000 LE/ton
Material
A2 (15%)
A2 Steel Scrap
Material
A3 (5%)
A3 Special Scrap
3) Supplier Information:
Mat.
ID
Supplier
ID
Unit price
(LE/ton)
Raw
Material
Defect %
Standard
Lot Size
(ton)
Lead
time
(day)
Transportation
cost
(LE/order)
A1
A2
A3
A11111
B11111
C11111
1000
1500
3000
15%
10%
5%
50
30
20
2
3
4
500
400
300
4) Raw Material Inventory Information:

Mat.
ID
Open
Inventory
(ton)
Safety
Stock
Schedule
Receipt
(ton)
Maximum
Inventory Level
(ton)
Average
Holding Cost
(LE/ton/year)
A1
A2
A3
20
15
10
One week
One week
One week
50
30
20
150
100
50
200
200
200
5) WIP Inventory Information: None

6) Final Product Inventory Information: None
SCM
7) Process Information:
Process
ID
Process
description
Defect
ratio
%
Crew
Size
(man)
Effort
Max. No.
Man-hour of Crew
Per Ton
Process
Cost rate
LE/ton
Melting Process
10%
13
10
300
Molding Process
15%
20
10
200
Machining Process
10%
45
20
350
Finishing Process
2%
20
10
100
8) Working conditions:
Process
ID
Process description
No. of
Shifts / day
Hour /
Shift
Time
Tolerance
%
Melting Process
10
Molding Process
10
Machining Process
10
Finishing Process
10
20
SCM
9) Other cost Information:

Technical overhead
= 25% direct cost
Office overhead
= 5% manufacturing cost
Scrap (defect, .. etc.) cost (return rate) = 800 LE/ton
Based on this information, discuss & analysis the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
SCM
Process Chart
Standard rates based on 100 ton final product
Material Estimation & Analysis
Material Cost Estimation & Analysis
Process Cost Estimation & Analysis
Total Cost Estimation & Analysis
Re-order Level Analysis
Weekly Material Plan based on Lot-for-Lot rule
Weekly Material Plan based on Reorder level rule
Process Crew Plan
Weekly Production Schedule
Work In Process (WIP) Analysis
Chain Time Analysis
Chain Cost Analysis
Key Indicators & KPIs Report
1- Process Chart:
Process
Input
Output
Suppliers
A1
x
A2
x
A3
x
SCM
Final
Product
B
x
C
x
D
x
E
x
Process Scrap Store

Customers
Raw Materials
2- Standard rates based on

100 ton final product
Input
Process
Output
Losses
Material Analysis:
L%
Standard Quantity = 100 ton
Suppliers
A1(0.8)
15%
A2(0.15)
10%
A3(0.05)
5%
SCM
Final
Product
B
10
%
C
15
%
D
10
%
E
2
%
Process Scrap Store

Customers
Raw Materials
Input
Process
Losses
L%
I = O / (1-L)
xx
A1(0.8) xx
15%
xx
xx
A2(0.15) xx
10%
xx
xx
Output
Losses
xx
B
10
%
xx
xx
C xx
15
%
D
10
%
xx
xx
E 100 ton
2
%
xx
xx
A3(0.05) xx
5%
xx
SCM
Process Scrap Store

Input
Process
Losses
L%
I = O / (1-L)
Output
X=I-O
A1(0.8) x
15%
Losses
A2(0.15) x
10%
B
10
%
C x
15
%
D
10
%
102.
04
E 100 ton
2
%
A3(0.05) x
5%
2.04
x
SCM
Input
Process
Losses
L%
I = O / (1-L)
Output
X=I-O
A1(0.8) x
15%
Losses
A2(0.15) x
10%
B
10
%
C 113.
15 78
%
D
10
%
102.
04
E 100 ton
2
%
A3(0.05) x
5%
11.33
2.04
x
SCM
Input
Process
Losses
L%
I = O / (1-L)
Output
A1(0.8) x
15%
Losses
20.92
A2(0.15) x
10%
148.
19
B
10
%
133. C 113.
37 15 37
%
D
10
%
102.
04
E 100 ton
2
%
2.47
A3(0.05) x
5%
0.39
SCM
14.82
20.0
11.33
2.04
Process Scrap Store

Input
Process
Losses
L%
I = O / (1-L)
139.47
Output
A1(0.8) 118.55
15%
Losses
20.92
24.7
A2(0.15 22.23
)
10%
148.
19
B
10
%
133. C 113.
37 15 37
%
D
10
%
102.
04
E 100 ton
2
%
2.47
A3(0.05 7.41
)
5%
7.8
0.39
SCM
14.82
20.0
11.33
2.04
Process Scrap Quantity = 48.19 ton/100 ton final

Yield Analysis
Total yield = Final product weight / Total input weight
Gross
Requirements
A1 139.47
A2 24.7
A1 80
A3 7.8
A1 59.47
A2 9.7
Yield %:
100 ton
Prod. System
Losses
A2 15
A3 5
A3 2.8
A1 57.36
A2 60.72
A3 64.10
SCM
Total yield = 100/(139.47+24.7+7.8)

= (100 / 171.97 ) = 58.14 %
Standard rates based on

Process
Input
Output
Time
Time Analysis:
Suppliers
A1
x
A2
x
A3
x
SCM
Final
Product
B
x
C
x
D
x
E
x
Process Scrap Store

Customers

Raw Materials

Process
Input
Output
WIP
WIP Analysis:
Suppliers
A1
x
A2
x
A3
x
SCM
Final
Product
B
x
C
x
D
x
E
x
Process Scrap Store

Customers
Raw Materials

Process
Input
Output
WIP
Crew Analysis:
Suppliers
A1
x
A2
x
A3
x
SCM
Final
Product
B
x
C
x
D
x
E
x
Process Scrap Store

Customers
Raw Materials

Process
Input
Output
Cost
Direct Cost Analysis:

Suppliers
A1
x
A2
x
A3
x
SCM
Final
Product
B
x
C
x
D
x
E
x
Process Scrap Store

Customers
Raw Materials
Input
Output
Losses
Planned Quantity = 4000 ton

I = O / (1-L)
5579.57
Process
A1(0.8) 4742.64
L%
Losses
15%
836.93
988.05
A2(0.15) 889.25 5928.3

B 5335.46 C 4535.14 D 4081.63 E
10%
10%
15%
10%
2%
4000
98.81
312.02
A3(0.05) 296.42
592.84
800.32
453.51
81.632
5%
15.6
SCM
Process Scrap Quantity =
ton/4000 ton final
3- Material Estimation & Analysis

A1 139.47
ton
A2 24.7
ton
A3 7.8
ton
Total
= 171.97 ton

A1 139.47 * 40
A2 24.7
* 40
= 988.04
A3 7.8
* 40
= 312.00
Total
SCM
5579.44
ton
ton
ton
= 6879.48 ton
4- Material Cost Estimation & Analysis

A1 139.47 * 1000
= 139470 LE/100 ton final
A2 24.7 * 1500
A3 7.8 * 3000
23400 LE/100 ton final
Total = 199920 LE/100 ton final

A1 139470 * 40
5,578,800 LE
A2 37059 * 40
1,482,000
A3 23400 * 40
936,000
Total =
7,996,800 LE / 4000 ton final
Process Scrap Quantity = 48.19 ton/100 ton final *40 = 1927.6 ton
SCM
Material Cost Estimation

A1 139.47 * 1000
A2 24.7 * 1500
A3 7.8 * 3000
23400 LE/100 ton final
Total = 199920 LE/100 ton final

A1 139470 * 40
5,578,800 LE
A2 37059 * 40
1,482,000
A3 23400 * 40
936,000
Material Cost =
7,996,800 LE / 4000 ton final
Process Scrap Cost = 1927.6 ton * 800 LE/ton =

SCM
Transportation Cost Estimation

= Number of orders * Transportation cost rate
Number of orders
= Gross quantity / standard lot size
Number of orders:
A1 5579.44 / 50 = 111.5 = 112 order * 500 = 56,000 LE
A2 988.04 /30
= 32.93 = 33 order * 400 = 13,200
A3 312.00 /20
= 15.6 = 16 order * 300 =
4,800
Transportation Cost =74,000 LE
SCM
Total Material Cost Estimation

Total Material Cost =
Material cost + Transportation cost Process Scrap cost
Material Cost
7,996,800 LE
+ Transportation Cost =
74,000 LE
- Process Scrap Cost= 1927.6 ton * 800 = 1,542,080 LE
Total Material Cost = 6,528,720 LE
SCM
5- Process Cost Estimation & Analysis

Process
ID
Process
description
Process Inputs
Ton /100 final
Ton/4000
Process
Cost rate
LE/ton
Melting Process
148.19
300
Molding Process
133.37
200
Machining
Process
113.37
350
Finishing Process
102.04
100
SCM
Total
Process
cost
Process Cost Estimation

Process
ID
Process
description
Process Inputs
Ton /100 final
Ton/4000
Process Total Process

Cost rate
cost
LE/ton
Melting Process
148.19
5927.6
300
1,778,280
Molding Process
133.37
5334.8
200
1,660,960
Machining
Process
113.37
4534.8
350
1,587,180
Finishing Process
102.04
4081.6
100
408,160
Total Processing cost
SCM
4,884,580
6- Total Cost Estimation & Analysis

Direct cost:
Material cost
Labor cost
Total direct
cost
Machine cost
Subcontractor cost
Manufacturing
cost
Total cost
Or
+
+
Technical
overhead
Office
overhead
Profit
Price
Price Total Cost = Profit
SCM
Total Cost Estimation & Analysis

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

= 11,413,300 * 1.25 = 14,266,625
Office overhead
= 5% manufacturing cost
Total cost = Manufacturing cost + Office overhead

= 14,266,625 * 1.05 = 14979956
Unit cost = 14979956 / 4000 = 3744.98 = 3745 LE/ton
Profit ratio = (price-cost) / cost = (5000-3745)/3745
= 33.5%
Margin ratio = (price direct) / direct = (5000 2853.3)/2853.3
= 75.75 %
Value Added ratio = (price External) / External = (5000 1632.18)/1632.18 = 206%
SCM
Inventory level
7- Reorder Level Analysis
Q
R
d*LT
SS
LT
LT
Time
R = Reorder Point
LT = Lead Time
SCM
SS =Safety Stock
d = Demand rate
Q = Order Quantity
Re-order Level = SS + d*L

R = Reorder Point
LT = Lead Time
Mat.
ID
SS =Safety Stock
d = Demand rate
Open
Annual Standard Lead
time
Inventory
quantity Lot Size
(ton)
L (day)
(ton)
(ton)
Safety
Stock
(SS)
A1
A2
A3
5579.44
988.04
312.00
Mat.
ID
Annual
quantity
(ton)
Average
weekly
demand
(ton/week)
Average
Daily
Demand
d (ton/day)
Safety
Stock
(SS)
A1
A2
A3
5579.44
988.04
312.00
107.29
19.00
6.00
21.45
3.80
1.20
107
19
6
SCM
50
30
20
2
3
4
20
15
10
Q = Order Quantity
One week
One week
One week
Schedule Maximum
Receipt
Inventory
(ton)
Level (ton)
50
30
20
150
100
50
d*L
Reorder
level
End
Inventory
(ton)
42.9=43
11.24
4.8
150
31
11
Reorder Point with a Safety Stock Material A1

Average Inventory level = SS + Q/2
Inventory level
= 107 + 50/2 = 132

Max. Inventory level = SS + Q - d*L = 107+50-43
= 114 < 150 o.k.
R =150
Q= 50
d*L = 43
SS = 107
LT=2
LT=2
Time
SCM
8- Weekly Material Plan based on Lot-for-Lot rule

MRP Terms
Part A1
Duration unit
Daily
Planning Period
10 days
Gross Requirements
Total Daily Demand
Schedule Receipt
Open Orders
Project on Hand
Open Inventory
Net Requirements
Daily Demand Open Inventory
Order Receipt
Receipt date =
Order Release
Release date = Receipt date lead time

=
SCM
Material Requirement Plan

Day
Part A1
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
20
22
22
22
22
22
22
22
Net Requirements
Order Receipt
Order Release
Lead time = L = 2 day
Reorder level = 150 ton
Average Daily Demand = d = 21.45 ton/day

Standard Lot Size = Q = 50 (ton)
Safety Stock = SS = 107 ton
SCM
Open Inventory = 20 ton

Schedule Receipt = 50 ton
Lot-For-Lot

Day
Part A1
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
70
22
22
22
22
22
22
22
48
26
Net Requirements
18
Order Receipt
Order Release

SCM

Lot-For-Lot

Day
Part A1
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
70
22
22
22
22
22
22
22
48
26
Net Requirements
18
Order Receipt
50
Order Release

SCM

Lot-For-Lot

Day
Part A1
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
70
22
22
22
22
22
22
22
48
26
Net Requirements
18
Order Receipt
50
Order Release
50

SCM

Lot-For-Lot

Day
Part A1
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
70
22
22
22
22
22
22
22
48
26
54
32
10
Net Requirements
18
12
Order Receipt
50
50
Order Release
50
50
Average Daily Demand = d = 21.45 22ton/day

SCM

Lot-For-Lot
Weekly Plan
Day
Part A1
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
70
22
22
22
22
22
22
22
48
26
54
32
60
38
16
Net Requirements
18
12
Order Receipt
50
50
Order Release
50
50

SCM

9- Weekly Material Plan based on Reorder level rule

Day
Part A1
-3
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
20
22
22
22
22
22
22
22
Net Requirements
Order Receipt
Order Release

SCM

Reorder Level
Weekly Plan
Day
Part A1
-3
-2
-1
Gross Requirements
Schedule Receipt
50
Project on Hand
70
Net Requirements
80
Order Receipt
100
Order Release
22
22
22
22
22
22
22
100

SCM

Reorder Level
Weekly Plan
Day
Part A1
-3
-2
-1
Gross Requirements
22
22
22
22
22
22
22
Schedule Receipt
50
Project on Hand
170
148
Net Requirements
80
Order Receipt
100
50
Order Release
100
50

SCM

Reorder Level
Weekly Plan
Day
Part A1
-3
-2
-1
Gross Requirements
22
22
22
22
22
22
22
176
154
132
Schedule Receipt
50
Project on Hand
170
198
Net Requirements
80
18
Order Receipt
100
50
50
Order Release
100
50
50

SCM

Reorder Level
Weekly Plan
Day
Part A1
-3
-2
-1
Gross Requirements
22
22
22
22
22
22
22
176
154
182
160
138
Schedule Receipt
50
Project on Hand
170
198
Net Requirements
80
18
12
Order Receipt
100
50
50
50
Order Release
100
50
50
50

SCM

Reorder Level
Weekly Plan
Day
Part A1
-3
-2
-1
Gross Requirements
22
22
22
22
22
22
22
160
188 166
Schedule Receipt
50
Project on Hand
170
198 176
Net Requirements
80
18
12
Order Receipt
100
50
50
50
Order Release
100
50
154 182
50
50

SCM

10- Process Crew Plan:

Process Information:
Process
ID
Process
description
Defect
ratio
%
Crew
Size
(man)
Effort
Max. No.
Man-hour of Crew
Per Ton
Melting Process
10%
13
10
Molding Process
15%
20
10
Machining Process
10%
45
20
Finishing Process
2%
20
10
Working conditions:
Process
ID
Process description
No. of
Shifts / day
Hour /
Shift
Time
Tolerance
%
Melting Process
10
Molding Process
10
Machining Process
10
Finishing Process
1
10
20
SCM
Crew Plan:
Process Process description
ID
Crew
Size
(man)
Effort
Man-hour
Per Ton
Max.
No. of
Crew
Input
Quantity
Ton/4000
Melting Process
13
10
5927.6
Molding Process
20
10
5334.8
Machining Process
45
20
4534.8
Finishing Process
20
10
4081.6
SCM
Daily
No. of Crew
Crew Plan:
Process
ID
M=
Crew
Size
(man)
13
10
5927.6
20
10
5334.8
45
20
4534.8
20
10
4081.6
SCM
Z=Effort Max. No.

Input
Man-hour of Crew Quantity
/ Ton
Ton/4000
X= Daily
Quantity
Q/(52*5)
= Q/260
Y=Hourl
y rate
Ton/hr
(X/8 hr)
No. of
Crew
Y.Z/M
Time Analysis For 100 ton final
Process
ID
M=
Crew
Size
(man)
13
10
148.19
20
15
133.37
45
30
113.37
20
15
102.04
SCM
E= Effort Max. No.

Man-hour of Crew
/ Ton
Q=Input
Quantity
Ton/100
Duration
Q.E/M
(hr/100)
Time Analysis:
Process
Input
Output
Time
Standard Quantity = 100 ton final
Suppliers
A1
x
A2
x
Final
Product
B
x
C
x
D
x
E
x
A3
x
SCM
Customers
Raw Materials
Time Analysis
Process Process description
ID
Crew
Size
(man)
Effort
Man-hour
Per Ton
Input
Quantity
Melting Process
13
148.19*40=
Molding Process
20
133.37*40=
Machining Process
45
113.37*40=
Finishing Process
20
SCM
Daily
No. of Crew
Time Analysis:
Input
Process
Output
Time

A1(0.8) 118.55
139.47
24.7
A2(0.15) 22.23
7.8
A3(0.05) 7.41
SCM
148.
19
133. C
37
113.
37
102.
04
E 100 ton
Time Analysis
Must have D and E
completed here so
production can
begin on B
Start production of D
1 week
2 weeks to
produce
2 weeks
2 weeks
1 week
1 week
2 weeks
3 weeks
1 week
SCM
4
5
Time in weeks
Figure 14.4
Inventory Analysis
SCM
Cost Analysis
SCM
Key Indicators
SCM
KPI Report One Page Management

Key Performance Indicators for decision making process
Short description: xxxxxxx
Key Indicators
Unit
Strength Points:
-
Weakness Points:
-
Area of Concern:
-
Recommendations:
-
Conclusion:
------------------------------------------------------------------------------------------------------------------SCM
Case Study
For a Manufacturing Company
SCM
Case Study #1:
Scope of work: Power Tower Assembly
2) Product Structure
ID
Process description
Resource
type
A, B
Parts procurement
Outdoor
Product assembly /
construction
Indoor
Product testing
Indoor
Product finishing
Indoor
Process description
B(2)
Part
ID
Open
inventory
(unit)
Lead
time
(day)
Unit price
($/unit)
Standard
lot size
(unit)
Part
defect
ratio %
A
B
14
17
3
2
500
250
15
20
10%
15%
5) Machine information:
4) Manpower information:
ID
A(3)
3) Material Information:
man-hour
/unit
Crew size
(man)
$/
man-day
Welding Process
(Eq-hour/unit)
M/c Cost Rate

($/hour)
Process
defect
ratio %
Product assembly
50
80
80
50
10%
Product testing
30
100
40
60
7%
Product Finishing
10
120
--
3%
6) Operating conditions: 6 day/week

One shift
7) Overhead Information: Technical o. head = 20% direct cost
&
10 hour/shift
Weekend: Friday
Office o. head 10% manufacturing cost
8) Market (or contract ) Information:

Demand Order quantity = 30 unit,
Lot size = 3 unit/day,
Start due date: Sat. 02/01/2010
Finish due date: Thu. 14/01/2010
SCM
Price= 15,000 $/unit

Bonus / Penalty = 1000 $/unit/day
Estimation & Analysis:

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

ID
Process
description
Defect
%
A,
B
Parts procurement
10
15
Product assembly
10
Product testing
Product finishing
C
A(3)
xx
B(2)
I = O / (1-L)
Process
Output
Defect /
Losses (L)
xx
A(3) xx
10%
xx
xx
Input
B(2)
15%
xx
C xx
10%
D
7%
xx
E
3%
Q=30
xx
xx
xx
xx
xx
SCM
120
A(3) 109
10%
11
84
B(2)
15%
36.34
C 33.063
10%
D
7%
30.90
E
3%
30
72
3.3063
2.163
12
A 120
B 84
Prod. System
Losses
0.90
30 Final Product
A 3*30 = 90
B 2*30 = 60
Total yield = Final / Total

A = 90/120= 75.00 %
B = 60/84 = 71.42 %
SCM
A 120 -90 = 30
B 84- 60 = 24
120
A(3) 109
10%
11
84
B(2)
15%
36.34
C 33.063
10%
D
7%
30.90
E
3%
30
72
3.3063
2.163
0.90
12
ID
Process description
Defect
ratio %
Input
Output
Yield
Part (A)
10%
120
109
90.83 %
Part (B)
15%
84
72
85.71 %
Product assembly
10%
Product testing
7%
A 109
B 72
33.063
3*33.063
2*33.063
30.90
92.56
91.84
93.47
Product Finishing
3%
30.90
30
97.09
A 120
B 84
3*30
2*30
90/120= 75.00 %
60/84 = 71.42 %
Total
SCM
Manpower Estimation & Analysis
BOQ = 30 Final Product

ID
Process description
Duration= 10 day
Man-hour
/unit
Crew size
(man)
Daily
hours
Unit/
day
Product assembly
50
10
Product testing
30
10
Product Finishing
10
10
No. of
crews
No. of
Workers
Total
SCM
Duration= 10 day
Manhour
/unit
Crew
size
(man)
Daily
hours
Unit/
day
Product assembly
50
10
Product testing
30
10
Product Finishing
10
10
ID
Process description
Required
daily
hours
Daily
workers
No. of
crews
Actual
daily
workers
Total
ID
Process description
Product assembly
Product testing
Product Finishing
No. of crews
Actual
daily workers
Utilization
> 80 %
Total
SCM
Duration= 10 day
Manhour
/unit
Crew
size
(man)
Daily
hours
Unit/
day
Required
daily
hours
Daily
workers
No. of
crews
Actual
daily
workers
Product assembly
50
10
50*3=150
150/10=15
15/4=3.75
=4
4*4=16
Product testing
30
10
30*3=90
90/10=9
9/3=3
3*3=9
Product Finishing
10
10
10*3=30
30/10=3
3/2=1.5
=2
2*2=4
ID
Process description
29
Total
ID
Process description
No. of crews
Actual Daily
workers
Th.
daily
workers
Utilization
> 80 %
Product assembly
16
15
15/16= 94 %
Product testing
9/9= 100%
Product Finishing
3/4=75 %
Total
SCM
29
Machine Estimation & Analysis

ID
Process description
Duration= 10 day
Eq-hour
/unit
Daily
hours
Unit/
day
Product assembly
80
10
Product testing
40
10
Product Finishing
10
Required
daily hours
No. of M/c
Per day
Total
ID
Process description
Product assembly
Product testing
Product Finishing
No. of M/c Per day
Utilization
> 80 %
Total
SCM
Machine Estimation & Analysis

ID
Process description
Duration= 10 day
Eq-hour
/unit
Daily
hours
Unit/
day
Required
daily hours
No. of M/c
Per day
Actual No. of
M/c Per day
Product assembly
80
10
80*3=240
240/10=24
24
Product testing
40
10
40*3=120
120/10=12
12
Product Finishing
10
36
Total
ID
Process description
No. of M/c Per day
Utilization
> 80 %
Product assembly
24
24/24 = 100 %
Product testing
12
12/12= 100 %
Product Finishing
Total
SCM
36
Cost & Price Analysis

Direct cost:
Material cost
Labor cost
Total direct
cost
Machine cost
Subcontractor cost
Manufacturing
cost
Total cost
Or
+
+
Technical
overhead
Office
overhead
Profit
Price
Price Total Cost = Profit
SCM
Direct cost:
Material cost
Labor cost
Total direct cost
Machine cost
Manufacturing cost
Technical overhead
= -- % direct cost
Office overhead
= -- % manuf. cost
Total cost = C
Unit Cost = Total Cost / Quantity
Unit Price = -- LE/unit
Revenue = Unit Price * Quantity = R
Profit = R C
Value Added = R ER
Margin Factor =R DC
Ratio = Profit/R
Ratio = VA/R
Ratio = MF/R
SCM
Cost Estimation & Analysis
Material Cost:
ID
Process description
Unit price
($/unit)
Total units
Material Cost
Part (A)
500
120
500*120 =60000
Part (B)
250
84
250*84=21000
Total
81000
Labor Cost:
ID
Process description
$/
man-day
Actual
daily workers
Daily
Labor cost
Total
Labor cost
Product assembly
80
16
1280
1280*10= 12800
Product testing
100
900
900*10=9000
Product Finishing
120
480
480*10= 4800
2260
22,600
Total
Machine Cost:
ID
Process description
Depreciation
($/hour)
Daily hours
No. of M/c
Per day
Daily
Machine cost
Total
Machine cost
Product assembly
50
10
24
24*10*50= 12000
12000*10=120000
Product testing
60
10
12
12*10*60= 7200
7200*10=72000
Product Finishing
--
10
--
--
36
19200
192,000
Total
SCM
Material cost
81000
Labor cost
Total direct cost

295,600
22,600
Machine cost
192,000
Manufacturing cost
295,600*1.2 = 354720
+
+
Technical overhead
= 20% direct cost
Office overhead
= 10% manuf. cost
Total cost = 390,192 LE

Unit Cost = 390,192 /30 = 13006.4 $/unit
Unit Price = 15,000 $/unit
Profit = TR TC
= 450000 390192
= + 59808
= + 15.3 %TC
SCM
Revenue = 15,000 * 30 = 450,000
Value Added = R ER
= 450000 81000
= + 369000
= + 450 %ER
Margin Factor = R DC
= 450000 295,600
= + 154400
= + 52.2 %DC
Total
Per unit
Material cost
= 81000
= 2700 LE/unit
Labor cost
= 22600
= 753 LE/unit
Machine cost = 192000
= 6400 LE/unit
Total direct cost = 295,600 LE

=
9853 LE/unit
Technical overhead = 20% direct cost = 59120

=
1971 LE/unit
Manufacturing cost = 354720

= 11824 LE/unit
Office overhead = 10% manufacturing cost = 35472
= 1182 LE/unit
Total cost = 390192 LE
SCM
= 13006 LE/unit

Item
Calculation
Value
Unit
Unit direct cost
Mat. + Labor + Machine costs
9853
LE/unit
Unit Manufacturing cost
Direct cost + Tech. overhead
11824
LE/unit
Unit overhead
Tech. overhead + Office overhead
3153
LE/unit
Unit External cost
Material cost + Sub-contactor
2700
LE/unit
Unit cost
Manufacturing cost + office overhead
13006
LE/unit
Unit price
Given
15,000
LE/unit
Unit profit
Unit price Unit cost
+ 1994
LE/unit
% Profit / Unit price

Margin factor
Unit price Direct cost

% Margin / Unit price
Value added
Unit price External cost

% Value / Unit price
SCM
13.3
+ 5147
LE/unit
%
34.3%
+ 12300
LE/unit
%
82%
Planning Process:
1. Master Plan
2. Material Plans
3. Resource Plans
4. Cost Plan
5. Production Plans
6. Work Orders
SCM
Part A
Gross Requirements
Daily Demand = 120 unit / 10 day = 12 unit
Schedule Receipt
Open Orders = 0
Project on Hand
Open Inventory = 14 unit
Net Requirements
Daily Demand Open Inventory = 12 14 =(-) = 0
Order Receipt
Receipt date
Order Release
Release date = Receipt date lead time
SCM
A 120 unit /10 day= 12 unit/day

Part A
Gross Requirements
Schedule Receipt
Project on Hand
Net Requirements
Order Receipt
Order Release
Day
-3
-2
-1
1
12
14
2
10
15
2
12
3
12
Net Requirements
Order Receipt
Order Release
SCM
5
12
6
12
8
12
9
12
10
12
11
12
10
12
11
12
15
Lead time = 3 day
Part A
Gross Requirements
Schedule Receipt
Project on Hand
4
12
Standard lot size = 15 Unit
Day
-3
-2
-1
1
12
14
2
15
17
10
15
2
12
3
12
4
12
5
12
6
12
8
12
9
12
15
Day/ Month
Part A
30/
12
31/
12
Gross Requirements
Schedule Receipt
Project on Hand
Net Requirements
Order Receipt
Order Release
1/
1
14
15
15
+
15
Lead time = 3 day
SCM
A 120/10 = 12 unit/day
2/
1
12
3/
1
12
4/
1
12
5/
1
12
6/
1
12
7/
1
12
8/
1
2+
15
5+
15
8+
15
11+
15
14
2+
15
17
10
15
15
15
15
15
15
15
9/
1
12
10
/1
11/1
12/1
12
12
12
5+
15
8+
15
14
10
11+
15
1
15
15
15
15
15
+
15
B 84/10 = 8.4 = 8.5 = 9 unit/day 9 * 10 = 90 unit

Part B
Day/ Month
31/
12
Gross Requirements
Schedule Receipt
Project on Hand
Net Requirements
Order Receipt
Order Release
1/
1
17
2/
1
9
3/
1
9
4/
1
9
5/
1
9
6/
1
9
7/
1
9
8/
1
6+
20
3
17
8+
20
1
19
10
1+
20
8
20
20
20
20
20
20
Lead time = 2 day
9/
1
9
12
10/
1
11/1
12/
1
3+
20
6
14
10
20
20
Material Analysis:
Part
ID
Open
inventory
(unit)
Total quantity
(unit)
Used quantity
(unit)
End
inventory
(unit)
Utilization factor % =
Total / Used
14
14 open + 8 order *15 unit

=134
120
14
120/134= 89.55 %
17
17 open + 4 order *20 unit

= 97
84
10
84/97= 86.6 %
SCM
Procurement Plan (unit)

Part
A
B
Day/ Month
30/12
31/12
1/
1
15
30
2/
1
15
20
20
3/
1
4/
1
15
A 500 LE/unit
5/
1
6/
1
15
7/
1
30
20
20
B 250 LE/unit
Material Budget Plan (LE)

Part
A
B
Total
Day/ Month
30/12
31/12
7500
15000
2/
1
7500
5000
5000
20000
12500
7500
1/
1
3/
1
4/
1
7500
7500
5/
1
6/
1
7500
7/
1
15000
5000
5000
12500
20000
Material Budget = 80000 $

SCM
Daily Production Plan

ID
Process description
man-hour
/unit
Product assembly
50
Lot size
(unit/day)
3
No. of
crews
4
Cycle time =
(Operating time/day) / (Output rate/day)
50 / ( 3 * 4) = 4.1 hour/unit
Product testing
30
30 / ( 3 *3) = 3.3 hour/unit
Product Finishing
10
10 / ( 3 *2) = 1.5 hour/unit
Total
P
#
(10 hour/day) / (3 unit/day) = 3.33 hour/unit
Day #1
1
Day #2
7
10
10
10
1
2
3
P
#
Day #3
1
Day #4
7
10
C
D
E
SCM

ID
Process description
man-hour
/unit
Product assembly
50
Lot size
(unit/day)
3
No. of
crews
4
Cycle time =
50 / ( 3 * 4) = 4.1 hour/unit
Product testing
30
30 / ( 3 *3) = 3.3 hour/unit
Product Finishing
10
10 / ( 3 *2) = 1.5 hour/unit
Total
Day #1
1
#1
Day #2
7
10
#4
#5
#1
#2
#3
#4
#2
#3
Day #3
3
#3
#1
#2
#4
Day #4
7
10
#6
#7
#8
#9
#10
#5
#6
#7
#8
#9
#4
SCM
#5
10
#6
#7
#8
10
#9

Day #5
1
Day #6
7
10
#11
#12
#13
#14
#15
#10
#11
#12
#13
#14
#9
#10
#11
#12
#13
Day #7
1
#14
Day #8
7
10
#16
#17
#18
#19
#20
#15
#16
#17
#18
#19
#14
#15
#16
#17
#18
Day #9
1
Day #10
7
10
#21
#22
#23
#24
#25
#20
#21
#22
#23
#24
#19
SCM
#20
10
#19
10
#21
#22
#23
10
#24

Day #11
1
Day #12
7
10
#26
#27
#28
#29
#30
#25
#26
#27
#28
#29
#24
#25
#26
#27
#28
Day #13
1
10
#31
#32
#33
#30
#31
#32
#29
#30
10
#33
#31
#32
#33
Actual production = 33.063 = 33 unit
Production Plan:
Working Day #
#29
Day #14
10
10 11 12 13 14
30/
12
31/
12
1/
1
2/
1
3/
1
4/
1
5/
1
6/
1
7/
1
8/
1
9/
1
10
/1
11
/1
12
/1
13
/1
14
/1
Final Product
Cumulative production
11
13
16
18
21
23
26
28
31
33
Date
Customer
SCM

ID
Process description
man-hour
/unit
Product assembly
50
Lot size
(unit/day)
3
No. of
crews
4
Cycle time =
50 / ( 3 * 4) = 4.1 hour/unit
Product testing
30
30 / ( 3 *3) = 3.3 hour/unit
Product Finishing
10
10 / ( 3 *2) = 1.5 hour/unit
Total
P
#
Day #1
1
Day #2
7
10
10
1
2
3
4
5
6
SCM
Control Process:
1. Actual Performance
2. Quantity Analysis
3. Cost Analysis
4. Productivity Analysis
6. Time Analysis
7. Quality Analysis
8. KPIs report
SCM
Short description:
KPIs Report One Page Management
Product: Power Tower Assembly

Lot size: 10 unit
Client: xxxx
Unit Price: $ 15000
Work order #: 12345

Date:
KPIs:
Performance Indicator
Unit Cost
Profit
$/unit
%
Value Added
Time
OEE
13.3%
34.3%
8
10
Day
Capacity Utilization
13006
40
Quality rate
Target
Actual
12500
16.6
97
%
%
%
99
75
65
80
70
Conclusion & Recommendations:

Process is not capable & We need many improvements to maximize the process
performance and productivity.
SCM
III- Cost Performance Evaluation for Top Management

KPI report One Page Management
Subject Description:
Scope of work:
Planned Price:
Contract:
Actual Price:
Planned cost:
Client:
Actual cost:
Analysis:
Strength
points
123-
Weakness
points
123-
Area of
Concern
123-
Recommendation:
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SCM
Case Study #2:
Scope of work: Assembly Product
2) Product Structure
X
ID
Process description
Resource
type
A, B, C
Parts procurement
Outdoor
P1
Product assembly /
construction
Indoor
P2
Product testing
Indoor
P3
Product finishing
Indoor
3) Material Information:
A(3)
B(2)
C(1)
Part
ID
Open
inventory
(unit)
Lead
time
(day)
Unit price
($/unit)
Standard
lot size
(unit)
Part
defect
ratio %
A
B
C
40
120
80
2
3
4
500
300
100
30
40
50
10%
10%
5%
4) Manpower information:
5) Machine information:
ID
Process
description
manhour
/unit
Crew
size
(man)
$/
manday
Bonus
$/
man-hour
Welding M/c
(Eq-hour/unit)
Tools & Welding

depreciation
(LE/hour)
Process
defect
ratio %
P1
Product assembly
60
100
25
40
50
10%
P2
Product testing
40
120
30
20
60
8%
P3
Product Finishing
20
130
35
--
2%
6) Operating conditions: 6 day/week

One shift
7) Overhead Information: Technical o. head = 20% direct cost
&
10 hour/shift
Weekend: Friday
Office o. head 10% manufacturing cost
8) Market (or contract ) Information:

Demand Order quantity = 40 unit,
Lot size = 4 unit/day,
Start due date: Sat. 02/01/2010
Finish due date: Thu. 14/01/2010
SCM
Price= 10,000 $/unit

Bonus / Penalty = 500 $/unit/day
Reference Books:
Business Essentials. 4th Edition. Pearson Education, Inc. 2003

Dell to HP: Catch Me If You Can. CRM Buyer. (20 May 2003)
Koch, Christopher. The ABCs of Supply Chain Management. CIO

Magazine.
McGraw-Hill Companies, Inc. 2004

NC State University, Supply Chain Resource Consortium.
http://searchsap.techtarget.com/generic/0,295582,sid21_gci1125310,00.html
Supply Chain Counsel
http://scrc.ncsu.edu/index.html
Pisello, Tom. Quantifying Supply Chain Management Benefits.

SearchSAP.com (15 Sept. 2005)
http://www.cio.com/research/scm/edit/012202_scm.html
Management Information Systems for the Information Age. 4th Edition.
http://www.crmbuyer.com/story/21546.html
http://www.supply-chain.org/index.ww
Supply Chain Management. Wikipedia
http://en.wikipedia.org/wiki/Supply_chain_management
Supply Chain Council, Supply Chain Operations Reference Model, version 7.0,
www.scc.org
SCM
Thank you for your attention!
Discussion
Suggestions
Comments
Useful Science For the

Sake of Allah
Questions
Copyrights & More Information:
Dr. Attia Hussien Gomaa
Industrial Engineering Professor & Consultant
attiagomaa@yahoo.com or 0101598@aucegypt.edu
Tel: 0122738497
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Were here to help you!
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