SUPPLY CHAIN MANAGEMENT

Supply ChainManagement Manual Page 1
SUPPLY CHAIN MANAGEMENT
MANUAL
BY
COLLINS C. NWEKE

SUPPLY CHAIN MANAGEMENT
 Supply chain is a linked set of resources and processes that begins with the sourcing of
raw material and extends through to the delivery end items to the final customer.
 Supply chain comprises of vendors, manufacturing facilities, logistics providers, internal
distribution centers, distributors, wholesalers and all other entities that lead to the final
customer acceptance.
 There are five key decision areas that form the basic pattern for supply chain
management and they includes:
 Production
 Inventory
 Geographic location
 Transportation
 Information
 Information is used for two purposes in supply chain decision-making:
 Activities management – Information is pivotal for supply chain decision
making related to the production, inventory, locations and transport mechanisms
as it enables to decide on the production schedules, inventory levels,
transportation routes and stocking locations.
 Planning and forecasting – Accurate historical data is vital in anticipating future
demand. Information is used to make forecasts that can be used as a guide for
setting production schedules and timetables for a given period. Information
can also be used for planning decisions, such as whether or not to build new
facilities, enter a new market or exit an existing one.
SUPPLY CHAIN OPERATIONS
 Supply chain operations involve four stages:
 Planning – Planning is the first activity of any business operation that enables the
business to organize how it will execute the other three operational activities.
Failing to plan is failing to manage. Main activities of planning are focused on:
 Forecasting
 Aggregate Planning
 Pricing
 Inventory Management
 Sourcing – Sourcing operations include activities that are needed in order to
identify and purchase raw materials or components needed in order to create
products or services. Sourcing operations include the following activities:
 Purchasing
 Consumption management
 Vendor Selection

 Contract Negotiation
 Contract Management
 Credit Management
 Making – Making operations include activities needed to develop and build
products or services, and it involves the following activities:
 Design
 Production
 Facility Management
 Order Management
 Delivering – Delivery activities are centered on receiving orders and delivering
products to customers.
FORECASTING PLAN
 Forecasting is a process that enables businesses to estimate expected sales (customers’
demand) in the future. Forecasting takes into consideration the following four variables:
 Demand – The overall market demand for a product.
 Supply – The overall quantity of product in the market.
 Product Characteristics – These includes features and functions that influence
the customers’ demand for the products.
 Competitive Environment – Actions of the business striving to create demand
and satisfy demand with given products.
 There are four types of forecasting methods that can be collectively used to create
effective forecast to great extent:
 Qualitative Forecasting – This method is speculative in nature and it relies on
people’s opinions of the market.
 Casual Forecasting – This is assumptive in nature and it assumes that demand is
strong based on specific environmental and market factors.
 Quantitative Forecasting – This is also known as “Time Series” and it uses
historical patterns as an indicator to forecast future demand.
 Simulation Method – This is combination of casual and quantitative methods
and it aims to imitate consumer behavior in a given set of circumstances.
 Most businesses use combination of all these methods to produce forecasts and combine
the results, but the two methods that have the most impact on decision-making are
combination of the Qualitative and Quantitative methods.
 Demand forecasts based on historical data available in inventory and sales records
pertaining to a review period preferably in months, combined with other forecasting
methods produce relatively accurate sales forecast if record keeping is accurate.
 The shorter the review period the more accurate the sales forecast, and no forecast can be
100% accurate.

PRACTICAL PROBLEM
On the 1st of January, Erisco Foods Limited wants to maintain quarterly supply in inventory
of Ric-Giko sachet tomato and the sales of this brand has increased by 20% year-to-year.
Sales in January, February and March of the previous year are as follows:
January – 4000 cartons
February –6000 cartons
March - 5800 cartons
SOLUTION
Previous year sales for the three months = 4000 + 6000 + 5800
= 15800 cartons
% Growth in sales = 20% = 0.2
Sales Growth = 0.2 * 15800
= 3160 cartons
Expected Sales = Sales Growth + Review Period Sales
= 3160 + 15800
= 18960 cartons
 Erisco Foods Limited should therefore have 18960 cartons of Ric-Giko sachet tomato on
the 1st of January to satisfy the demand.
 In making the above judgment, it is important that the inventory controller has to
consider events related to availability during the review period. For example, sales and
inventory data should be correlated in order to determine whether or not the sales figures
were affected by stock outs. If the business experienced stock outs during the review
period, this would have prevented customer requests from being fulfilled, and
consequently the historical sales data would not be an accurate reflection of the demand.
AGGREGATE PLANNING
 Aggregate planning takes into consideration the entire business and not just each stock
keeping unit (SKU). It aims to satisfy demand in a way that will maximize profit, and
provides a framework within which short-term decision can be made about production,
inventory and distribution.

PRICING PLAN
 Pricing can influence both short and long term demand for a product. As with everything
else, pricing requires a trade-off. In this case the trade-off is between maximizing revenue
and maximizing profit. Lower prices have a greater appeal to customers, as the product is
more affordable and consequently maximized revenue. Higher prices do the opposite but
usually mean a higher profit margin. Finding a balance between the two, while enabling
flexibility in the pricing to stimulate demand during peak demand is the position of
choice. This position maximizes gross profit during peaks to compensate for low demand
periods.
 The degree of flexibility a business has with pricing is largely dependent on the cost
structure and the approach taken in the aggregate plan. Businesses that are flexible can
afford to do additional promotions and give price incentives during peak period, because
they can easily increase their production capacity.
 Pricing plan uses price as a way to:
 Increase product consumption.
 Persuade customers to buy one product over another.
 Encourage customers to increase their purchase quantity.
 There are eight pricing methods and strategies businesses can use in their pricing plans:
 Cost plus – This method entails taking the cost and adding the desired profit to it.
This is a common practice but not the proper method of pricing.
 Perceived value – This method entails charging by the value provided regardless
of the cost. This is the price that the customers see as good value.
 Skimming – This entails charging a higher price than required and skimming
high profit margins.
 Penetration – This entails capturing maximum market share on the basis of low
cost. It requires mass production to reach economies of scale and a large market
appeal.
 Quality – This strategy uses perceived value to command a higher price. The
quality of the products associated with a brand trust is usually instruments used in
this method. However, consumers will also attribute a high price with uniqueness
or craftsmanship. For example, genuine LG products in Nigerian market are more
expensive than Nexus products.
 Competition – This strategy entails meeting or beating competitor’s prices. To
increase or retain a market share the seller uses a pledge to match or better any
competitor’s price for the same product.
 Scale – This entails deciding price on the size of the market. The larger the
market the lower the price can be, as volume will create the income to cover costs
and make profit. In small markets, volume is low and prices must therefore be
higher in order to cover costs and make profit.

 Elasticity – This strategy entails adjusting the price in accordance with the
customers’ level of resistance to price increments. Customers with elastic demand
do not take well to price increments, while the opposite is true of inelastic
customers.
INVENTORY MANAGEMENT
 Inventory management plan is aimed to balance reduced inventory holdings to the lowest
point without negatively impacting availability or customer service levels while
maximizing the business ability to exploit economies of scale in order to positively
impact profitability.
 Inventory management is an ongoing process that takes its inputs from forecasts and
product pricing and is executed within the cost structure of the business under an overall
plan known as Aggregate Planning.
 There are three forms of inventory within flow cycle of a business:
 Basic Stock – This is also referred to as cycle inventory and it is the amount of
inventory sufficiently required to satisfy the demand of a sales forecast. For
finished goods inventories, this is an amount that will provide customers with a
reasonable selection of finished goods in accordance with regular sales while for
raw materials, it is the amount of inventory required to carry out an effective
production at any given time. It is not acceptable to maintain a minimum
inventory level equal to the production or supply’s inventory requirement,
because this would not account for unexpected events or problems that could
delay supply to the point where a stock out of basic stock occurs. To take care of
such situation, another form of inventory known as safety stock is introduced.
 Safety Stock – This is also known as a buffer stock and it is a portion of
inventory that acts as an insurance policy against unforeseen events that may lead
to a stock out situation. Safety stock serves as surplus to requirement and aims to
cushion stock as a protection against unexpected events. The exact size of safety
stock is dependent on the number and extent of factors that may interrupt
production and supplies. Guidelines therefore vary between industries and are
normally the result of inventory controllers’ cumulative experience. The higher
the level of uncertainty, the higher the required level of safety stock.
 Seasonal Stock – This is the amount of inventory that is produced and stockpiled
in anticipation of a known future demand. This is a typical case of Erisco tomato
brands that sell most at a particular season when there are insufficient fresh
tomatoes in the markets. Another example is when a business decides to run a
discount promotion during a particular season, which would attract more
customers’ attraction to the product and inherently increase demand. To manage
seasonal inventory demand, forecasts need to be accurate to a great extent as large
amount of inventory will be produced and stockpiled over a period when demand

is low. A business can run easily run the risk of producing too much and find
itself in a position where the stock has become obsolete or where holding costs
can become prohibitive to selling at a profit. To mitigate this risk, adequate
planning in marketing, sales and promotion to the channel and end users must be
properly done.
 Economic Order Quantity (EOQ) is the most effective amount of inventory for a
business to order at any given time. It is good practice for a business to know the EOQ
for each of the products it buys, and it is calculated as follows:
EOQ = √2UO/HC
U = Annual usage rate
O = Ordering cost
H = Holding cost per year as a percentage of unit cost
C = Cost per unit
 EOQ tells just how much of a product that needs to be purchased in order to maintain the
lowest item cost, and does not give any indication as to whether the resulting quantity is
the desired level of inventory required to meet specific targets.
PURCHASING
 Purchasing is a routine activity carried out to ensure that goods are purchased to input to
the company. Purchasing has two types of business inputs:
 Direct Input – Materials or services needed to produce products or services.
 Indirect Input – Materials or services consumed by the business in daily
operations.
 Purchasing process starts with identifying, selecting and contacting reliable vendors for
proposals and quotations. Due diligence and negotiation follows to ensure the best deal
and right vendors are selected. Lastly, orders are placed under contractual constraints.
CONSUMPTION MANAGEMENT
 Consumption management activities includes:
 Overstock Elimination – Prompt identification and elimination of overstocks
enable excess inventory levels to be cleared at reasonably favorable prices and
prevents the situation where over time the business may find itself with increasing
numbers of inventory developing due to declining market demand. Elimination of
overstocks is therefore a corrective action that reduces the negative effects of
inventory management problems after they occur.

 Inventory Replenishment – This strives to reduce the possibility of overstocks
through production and purchase planning. This activity tends to raise inventory
level of items to maximum whenever the level is at minimum to maintain
inventory control system. Lead time is a critical point to determine and monitor
when carrying out inventory replenishment.
 Lead Time is the time between the moment a material/product is ordered and when it is
being received and make available for use.
VENDOR SELECTION
 Vendor selection is an ongoing process to identify and select businesses that are capable
of meeting the procurement requirements needed to support operational business plans.
Evaluation and selection of vendors can be accessed based on five different areas to attain
optimal price, quality and delivery.
 Price – Businesses should aim to purchase materials and services at prices that
are competitive. Fairness will be determined by competition.
 Quality – Businesses should purchase products of the highest affordable quality.
 Service – Businesses should expect good pre and post-services from the vendor.
Vendors have to deliver materials and services on time and in full (OTIF) and
adhere strictly to the contractual agreements.
 Performance – Evidence of right price, quality and service will be demonstrated
by performance. Businesses prefer long-term relationships to sporadic deals.
 Value – Businesses ought to derive great value from their purchase by fully
utilizing their purchasing money.
 Once a vendor has been selected, the vendor is considered to be on the businesses’
preferred suppliers or vendors’ list, and is bound by the terms of a contract to meet
commitments.
CONTRACT NEGOTIATION
 Contracts are used to record agreements between two businesses, and it contains details
such as prices, service levels and payments. As business’s needs change, contracts must
be negotiated.
 The level of complexity involved in contract negotiation varies depending on what is
being purchased and the mission critical nature. For example, items such as raw materials
often require commitment to extracting quality standards in order to meet governmental
regulations or simply to ensure consistency in the produced product’s quality
 Contracts typically fall within a business’ overall business plan and require planning and
execution in their negotiation. It is very important to know what exactly you want before
entering the negotiation. Always show facts and have data on hand to support your
statements, because constructive and useful information can often give insight help in
decisions making. If the outcome of a negotiation is not what was expected and required

by the business plan, do no not accept the position, but should not take the attitude of
“take it or leave it”. In case of the afore-mentioned situation, find a new vendor that can
meet the business requirements.
CONTRACT MANAGEMENT
 Businesses have to continually measure vendor performance and test that the stipulated
commitments remain pertinent to the changing environment of the business. To perform
these tasks a business must routinely collect data about the performance of suppliers and
monitor whether the framework of the agreement is meeting operational requirements
PRODUCT DESIGN
 The design of product often depends on the technology available. As technology
advances, parts become smaller, lighter, more or less expensive, and even increase in
functionality so that fewer parts can be used to assemble a new product. Product design
affects shape of the supply chain, how inventory is managed and often the success of the
business.
PRODUCTION MANAGEMENT
Once product design is complete, the task at hand becomes the management of production. A job
well done in the design stage can often make life easier in the production stage, enabling
production to focus on allocating available capacity without having to endure design related
problems. Schedules need to be organized for optimum efficiency at a level that meets products
demand.

SUPPLY CHAIN MANAGEMENT

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