SCM 404 - Fall 2022

Exam 1 Study Guide

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Tips:
• Cover up the answers. Come up with your own answer and compare that to the choices listed.
• Don’t just memorize relationships, understand them! (ie. As order cycle time increases, what happens to
buyer inventories? As order cycle time decreases, what happens to buyer inventories?
• Read questions carefully.
• If you have questions before the test, come to office hours!

Good Luck!

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Module 1: Demand Management and Fulfillment
1. Demand Management
a. Estimate and manage customer demand
b. Optimize operating decisions
c. Collaboration within a supply chain is key
d. Goal: Greater value to end user or customer
e. Common Problems
i. Lack of coordination between departments
ii. Forecasting is prioritized too much, and collaboration is ignored
f. Supports Business strategy
i. Growth strategy → merge / acquisition
ii. Portfolio strategy → new product / diversification
iii. Positioning strategy → capability / channel management
iv. Investment strategy → capital investment
2. Substitutability
a. High substitutability → peanuts
b. Low substitutability → apple technology
3. Units
a. SKU is the lowest unit for which an individual forecast is required
4. Supply and demand will never match perfectly (what happens with excess inventory?)
a. Discount
b. Donate
c. Destroy
5. Phantom demand (order in excess of actual demand expecting the future)
a. People order more when their stock is low, which lowers their future demand
b. Coffee example, buy more with coupon, don’t buy next week
6. Balancing supply and demand
a. External
i. Price
ii. Lead time
b. Internal
i. Production flexibility
1. Easier with simple products
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ii. Inventory
1. Most expensive
2. Most commonly used
3. Easiest to implement
7. Factors affecting demand
a. Independent demand
i. Not relying on anything else
ii. Ex. Bike (final product/item)
b. Dependent demand
i. Depends on independent item
ii. Ex. Tires or seat
c. Trend
i. Economy
ii. Weather
d. Seasonal
i. Candy companies
ii. Level production year-round rather than chasing demand
e. Business cycles
i. Nation’s economy
ii. Random variation – cannot be anticipated
8. Key relationships
a. As service level increases, costs increase at an increasing rate
b. The higher the inventory turnover rate the better. Inventory turnover is the velocity with which
inventory moves through a facility
c. As you increase the number of SKUs, forecast accuracy for each one goes down
d. Transportation and inventory are the biggest tradeoffs in logistics
e. Stock-out costs vs. cost of holding additional units of inventory

Forecasting
1. Forecasts serve as the basis for nearly all planning decisions in a supply chain
2. The purpose of forecasting is to explain the systematic variability as much as possible and describe or
quantify the unsystematic variability to support a decision
3. Characteristics of Forecasting:
a. Always “wrong”
b. Long-term forecasts are less accurate
c. Aggregate forecasts are more accurate
d. Assumes history repeats
4. Traditional Forecasting (Formulas referenced in slides)
e. Simple Moving Average
i. Simplest method
ii. Does not accommodate for seasonality or trends
iii. Good for stable demand
f. Weighted Moving Average
i. Assigns highest weight to most recent period
ii. Challenge: what weights? How many periods?
iii. Better than simple moving average
g. Exponential Smoothing
i. Most commonly used method
ii. Limited data needed
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iii. Handles demand variations better
iv. Trends and seasons hard to account for but possible
h. Forecast Error
i. CFE, MSE, MAD, MAPE, TS (FIND FORMULAS IN THE SLIDES)
1. CFE: Calculates the total forecast error for a set of data, taking into consideration
both negative and positive errors
2. MSE: Squares each period error so the negative and positive errors do not cancel
each other out
3. MAD: Takes absolute value of each error, so the negative and positive signs are
removed
4. MAPE: The Mean Absolute Percentage error, is the sum of the individual absolute
errors divided by the period demand, used after absolute percentage error is found.
5. TS: Can be used to measure forecast error, especially good at identifying if a “bias”
exists in the forecast errors
ii. Closest to zero is the best error term

Sales and Operations Planning (S&OP)
1. S&OP Process Overview
a. Uses a collaborative approach to arrive at a single forecast for the firm
b. Forecast used by marketing, finance, manufacturing, and logistics
c. S&OP gets everyone on the same page
d. Method
i. Forecast based on most recent demand
ii. Add variables that cannot be modeled, Come up with consensus
iii. Sales forecast → demand planning → supply planning → pre S&OP → Executive decision
2. CPFR
a. Takes S&OP to supply chain level
b. Collaborative approach to arrive at single forecast
c. Links with collaborative transportation management (CTM)
d. Example
i. Going on vacation with another family
ii. Take your forecast and go external (customer)
iii. Look at spike for capacity issues
Network Design
1. Why businesses analyze their supply chain?
2. Drivers of supply chain network re-design: 7 in total from global trade to competitive capabilities
3. Most important aspect when selecting a site: connectivity. How easy is to access the facility using
transportation
4. Courses of action given high service level expectations and supply-demand imbalance? Spend more on
inventory or more on transportation
5. Logistics Channel vs. Marketing Channel
a. Logistics channel begins with supplier → transport → manufacturer → transport →
Distribution/Fulfillment Centers → transport → Retail Store → transport → Consumer
b. Marketing channel: E-Procurement → National account sales → Wholesale/Distributor → Internet
site → Retail Customer → Consumer
6. Network design cost consideration: Assuming that the origin and destination remain the same, the more
intermediaries used to deliver the product the higher the fixed cost and the lower the variable cost, and
vice versa
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7. Elements of omni-channel retailing: strategy must align with go to market strategy, integrated fulfillment,
and ease of shopping
8. Cost-service tradeoff
9. Restocking points
a. As number of facilities/stocking points increases
i. Outbound transportation costs go down
ii. Inventory cost increases at an increasing rate
iii. Stockout costs decrease
iv. Fixed costs of facilities increase

Fulfillment Methods
1. Overview
a. How do you go to market?
b. Determines how you set up your back end
c. Channels of distribution
i. Logistics: physical movement
1. How, when, brick-and-mortar
ii. Marketing: transaction points
1. Makes you buy, advertising
d. A distribution channel can be thought of as the physical structures and intermediaries through
which goods, services, information, and finances flow
2. Channels of distribution
a. Direct to customer (DTC)
i. Retailers use multiple channels to reach same consumer
ii. Depends how you “go to market”
iii. Processes must be integrated regardless of order entry point
iv. Prioritize “ease of shopping”
b. Integrated fulfillment
i. Brick-and-mortar AND click-and-mortar
ii. One back-end channel serves two markets (store and internet)
iii. Most popular method recently
iv. Advantages
1. Low start-up costs
2. Existing network can serve both
3. One pile of inventory, one workforce, one building
v. Disadvantages
1. Order profile will change with addition of internet orders
2. Would require fast pickup and/or broken case operation
3. System does not recognize case vs each unit of measure
4. Conflict might arise between online and store order
c. Dedicated fulfillment
i. Both a store and an internet presence with two completely different distribution networks
ii. Retailer maintains presence online and in stores
iii. Advantages
1. Having a separate store and distribution facility eliminates most of the negatives
that can be found in an integrated chain
iv. Disadvantages
1. Duplicate facilities and inventory
d. Pool distribution
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i. Uses 3PL
ii. DC → Full trucks to pool distributor → sorted and made LTL
iii. Best method for small retail footprints
iv. Save money on transportation costs
e. Direct-to-store
i. Manufacturer to customer
1. Straight from Coca-Cola/Frito Lay to Walmart
ii. Usually for unique products with short shelf life
iii. Advantages
1. More information for Coca-Cola/Frito Lay
2. Reduction of inventory in distribution network
iv. Disadvantages
1. Store does not control what’s on their floor
2. Reduction of inventory visibility
f. Store fulfillment
i. For retailers with click-and-mortar and brick-and-mortar
ii. Essentially, each store is a fulfillment center
iii. Store inventories fill B2C orders
iv. Advantages
1. Short lead times (faster fulfillment)
2. Low start-up costs
3. Returns handled through retail store
4. Product available in consumer units
v. Disadvantages
1. Stores don’t know for sure what is available
2. Inventories not accurate
3. Conflict of which orders to prioritize (store vs internet)
4. More space needed in stores to stage products for pickup
g. Flow-through fulfillment
i. For brick and click and mortar
ii. Stores DO NOT pick
iii. Stores are simply a pick-up site or place from where the delivery is sent
iv. Pay and order on the computer, go to the store and get it
v. Advantages
1. Eliminates conflict of which orders to prioritize (store vs internet)
2. Customers pick up last mile (cheaper fulfillment)
3. Simpler inventory model (no store-level inventory needed)
4. Returns handled through the store
vi. Disadvantages
1. Additional storage needed at stores
2. Longer fulfillment lead time
h. Same day delivery
i. Uses store fulfillment model
ii. Regional inventory pulls
iii. Selected locations and specific SKUs only
iv. Must have reliable transportation network
v. Retail information systems critical
vi. Advantages
1. Improves retailers “share of wallet”
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2. Provides more shopping opportunities
3. Drives more business through internet
vii. Disadvantages
1. High transportation costs
2. Impacts store operations
3. Area served is limited to store locations
3. The Amazon Effect
a. Fast delivery
b. Big data (anticipatory shipping)
c. What they do affects what others do
d. If shipping is not your competitive advantage, don’t try to compete with Amazon
4. The Walmart Effect
a. Goal is to surpass Amazon in on-line revenues
b. Walmart+ → Like Amazon Prime
c. Strengths: DC network, store network size, marketplace in online environment
d. Weaknesses: store focus, omni-channel not fully developed, in store inventory visibility – delayed
inventory update (needs improvement)
e. Acquisition of Jet.com

Module 2: Order Management (OM) and Customer Service (CS)
1. Role of OM/CS in supply chain
a. Customer service is anything that touches the customer
b. Information, product, cash flow
c. Order management is the logistics part of customer service
i. Scheduling, sequencing, planning
d. Customer inventories increase if you go from 1 to 2-day shipping
e. Customer service is the whole experience
2. Order management
a. Influencing the order
b. Order execution
i. What are you going to do with it?
3. Customer Service
a. As a philosophy
b. As a performance measure
i. How do you measure and what does it mean?
c. As an activity
4. Relationship Between Order Management and Customer Service
As a philosophy
As performance
measure
As an activity
Influencing the
Order
CRM
Determine
Performance Measure
Order Information
Execute the
order
Service Recovery
Manage performance
measures
Order execution

Influencing the Order: CRM
1. Overview
a. Know the right customer
b. Acquire the right customer
c. Craft the right value proposition
i. What do you do for the customer? B2B vs B2C
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d. Institute the best processes (execution)
i. Most important step
e. Motivate employees
i. Front line to take care of customer
f. Learn to retain customers
i. Service recovery makes a more loyal customer
ii. Know where you are going to fail, and have plans in place to fix
iii. Don’t tell the customer why you screw up, just fix it
2. Steps for CRM (Customer Relationship Management)
a. Segment customer based on profitability
b. Identify product/service package for each segment
i. Credit cards, hotels, Disney packages, etc.
c. Develop and execute the best processes
d. Measure performance and continuously improve
e. Know where revenue stream comes from
f. Organize around the customer, not the commodity
g. Most common is to give more perks as they move up the chain

Knowing the Right Customer
1. Two biggest costs in a DC
a. Space
b. Labor
2. Each
a. Minimum quantity a customer can buy
3. Activity based costing
a. Process defines the following
i. The activities that are absorbing your resources
ii. What drives those activities
iii. What each activity costs
b. Resources → activities → cost drivers → products/customers/markets
c. Looks at cost drivers, then allocate accordingly
4. Customer Profitability Analysis
a. The evaluation of the net profit impact of our relationship with an individual customer
b. Look at Customer Profitability formula (Example: Table 8.5)
5. Traditional Costing
a. Resources → department cost center → allocation basis → product
b. Accounting costs is different to actual cost
c. Allocates costs based on predetermined measure

Order Management as a Process
1. Order Cycles
a. Cash to cash
b. Order to cash
c. Order cycle/replenishment cycle
d. Cash to cash  Order to cash  Order cycle
2. Terminology
a. Order replenishment cycle
i. Movement of goods
ii. All activities that occur from when you place an order to when you receive the order
iii. Buyers’ perspective
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b. Order to cash cycle
i. All the elements that take place from when you receive an order to get cash
ii. First activity in this cycle is when the product is actually touched
iii. Sellers side
3. Order management process
a. Order placement
b. Order receipt
c. Order processing (inventory management)
d. Order picking and packing
e. Order shipment
f. Order invoice
g. Order receipt
h. Order payment → payment takes place at a different place when working in B2C after transaction
of goods has occurred
4. Order processing functions
a. Create order
b. Generate invoice
c. Generate picking documents
d. Reserve inventory
e. Release reserved inventory
f. Generate ATD and ATP (both SAP terms)
i. ATD (Available to deliver)
1. Available to deliver
2. They know they have it
3. Within own network
ii. ATP (Available to promise)
1. Available to promise
2. It’s on its way
3. More upstream visibility necessary
4. Must deliver on expectation
5. Inventory and time
a. Absolute length impacts cycle stock or demand inventory
b. Variability impacts safety stock inventories

Customer Service
1. Logistics/marketing interface
a. Customer service is the link between logistics and marketing
b. Logistics is the place part of the 4Ps (place, product, price, promotion)
c. 7 Rs of customer service
2. Customer service and ROI
a. Customer service is an expense
b. Higher levels of customer service provide benefits to the customer
c. As service level increases, inventory increases at an increasing rate
d. Sweet spot is when service level investment = cost of lost sales avoided
3. Elements of customer service
a. Time
i. Order to cash (seller) or Order cycle (buyer)
1. As order cycle time increases between buyer and seller, seller inventories go down
and buyer inventories go up
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ii. Impact on buyer and seller inventories
iii. Must be managed as a process (SCOR)
iv. The shorter the lead time, the more inventory you need
b. Dependability
i. Cycle time- inventory levels
ii. Safe delivery
iii. Correct orders
iv. Dependability and variability impact safety stock
v. If life were perfect, there would be no need for safety stock
c. Communication
i. Pre-transaction: Ease of ordering
ii. Transaction: 1. Can you track shipping
iii. Post-transaction: Did you get what you want? Returns?
d. Convenience
i. Logistics service must be flexible
ii. Cost of lost sale differs by customer group
iii. Flexibility- how easy can you adapt to changes in demand or other external causes
4. Performance measure in customer service
a. Seller vs. buyer metrics
b. Must cover time, dependability, communications, and convenience
c. SCOR looks at reliability, responsiveness, agility, and costs/assets
d. On time delivery
i. Most measured
ii. Least agreed upon
5. Expected Costs of Stockouts
a. The higher the level of substitutability, the lower the stockout costs
b. No stockout unless the customer reacts
c. Back orders
i. Increase variable costs
ii. Don’t have it, DC needs to go back out to pick again
d. Customer buys something else
i. One-time revenue loss
e. Buyer switches brands permanently

Order Management Influence on Customer Service
1. Understand how the five major outputs of order management impact customer service satisfaction
a. Product Availability (how is it measured?)
b. Order Management Measures
2. Order Management Influence on Customer Service
a. Internal Metrics: Item fill rate, Line fill rate
b. External Metrics: Order fill rate, Perfect order
3. Understand what order fill rate does to cash flow (example in slides and done in excel)
4. Order Cycle Time (OCT)
a. Influenced by product availability and transit time
b. As OCT increases, seller inventories decrease, and buyer inventories increase
c. Customer Wait Time (CWT) includes both miniatous and inventory cycles
5. Logistics System Information (LSI)
a. How to increase STM (speed to market)?
b. Pre-transaction – planning
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c. Transaction – execution
d. Post-transaction – evaluation
e. LSI
i. Reduces inventories
ii. Improves cash flow
iii. Data warehousing
iv. Timeliness
v. Accuracy
vi. Coverage of the supply chain