SCOR Model

The purpose of a process reference model, or business process framework, is the ability to

describe your process architecture in a way that makes sense to key business partners. It is

especially useful for describing value chains that cut across multiple departments and

organizations, providing a common language for managing such processes.

Framework for understanding the scope of SCM based on functions involved in managing

a supply chain

Using SCOR model metrics for the measurement of supply chain performance creates an
understanding of the supply chain processes thus guiding collaboration efforts to optimize supply
chain excellence (Bolstorff & Rosenbaum, 2007).

Therefore, firms need to monitor and control their supply chain operations on a daily basis to
attain the desired performance. The SCOR framework was developed with these in mind The
SCOR framework identifies six primary processes namely:

 plan,
 source,
 make,
 deliver,
 return and
 Enable.

Plan

Plan processes portray the events related with creating plans to drive the supply chain. These
processes incorporate

 gathering of requirements,
 data on accessible resources,
 adjusting requirements plus resources to determine planned capabilities and gaps in
demand or resources
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  Identify actions to correct these gaps.

Source

Source processes describe the ordering or scheduling of deliveries and receipt of goods and
services. These processes embody the

 Issuance of purchase orders or scheduling deliveries,

 Receiving
 Validation
 Storage of goods and accepting the invoice from the supplier. With the exception for
Sourcing Engineer-to-Order goods or services, all supplier identification, qualification
and contract negotiation processes are not described using Source process elements.

Make

Processes describe the activities associated with the conversion of materials or creation of the
content for services.

Conversion of materials is used rather than ‘production’ or ‘manufacturing’ as make

represents all types of material conversions: Assembly, Chemical processing, Maintenance,
Repair, Overhaul, Recycling, Refurbishment, Remanufacturing and other common names for
material conversion processes.

As a general guideline: These processes are recognized by the fact that 1 or more item numbers
go in and one or more different item numbers come out of this process.

Deliver

Deliver processes describe the activities associated with the creation, maintenance and
fulfillment of customer orders.

The Deliver process embodies:

 The receipt,
 validation

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  creation of customer orders,
 scheduling
 order delivery,
 pick, pack and shipment and invoicing the customer. The Deliver Retail process provides
a simplified view of Source and Deliver processes operated in a Make-to-Stock-only
retail operation.

Return

Processes describe the activities associated with the reverse flow of goods. The Return process
embodies :

 The identification of the need to return,

 The disposition decision making,
 The scheduling of the return
 Shipment and receipt of the returned goods.

Repair, recycling, refurbishment and remanufacturing processes are not described using Return
process elements.

Enable processes describe the associated with the management of the supply chain. Enable
processes include

 Management of business rules,

 Performance management,
 Data management,
 Resource management
 Facilities management
 Contract management, supply chain network management,
 Managing regulatory compliance and risk management.

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 Inventory Management and Risk Pooling
Introduction
Managing inventory in complex SCs is typically difficult, and may have a significant impact on
the customer service level and SC system-wide cost.
Inventory appears in the SC in several forms:
– Raw materials
– Work-in-process (WIP)
– Finished products
• Each needs its own inventory control mechanism
• Shipment sizes (i.e., inventory policy)
• Routes (i.e., transportation strategy)
Why hold inventory
Unexpected changes in customer demand
– Short life cycle
– Many competing products
Uncertainty in the quantity and quality of supply, supplier costs, and delivery times
– Due to delivery lead times
– Economies of scale of transportation cost
Besides Raw materials and finished goods, organizations also hold:
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1. Inventories of spare parts to service the products.
2. Defective products, defective parts and scrap also form a part of inventory as long as these
items are inventoried in the books of the company and have economic value.

Inventory is a necessary evil that every organization would have to maintain for various
purposes. Optimum inventory management is the goal of every inventory planner. Over
inventory or under inventory both cause financial impact and health of the business as well as
effect business opportunities. Inventory holding is resorted to by organizations as hedge against
various external and internal factors, as precaution, as opportunity, as a need and for speculative
purposes.

Two important issues in inventory management

– Demand forecasting
– Order quantity calculation
Since demand is uncertain in most situations, forecast demand is a critical element in
determining order quantity
What are the key factors affecting inventory policy?
1. Customer demand - May be known in advance, or may be random.
2. Replenishment lead time - May be known at time of order, or may be uncertain
3. Number of different products
4. Length of the planning horizon
5. Costs, including order cost and inventory holding cost
i. Order cost = cost of the product + transportation cost
ii. Inventory holding cost (a.k.a. inventory carrying cost = taxes and
insurance + Maintenance + Obsolescence + Opportunity costs
6. Service level requirements
i. Management needs to specify an acceptable level of service
Inventory Management Strategies
Two common inventory-management strategies are the:

Just-in-time method, where companies plan to receive items as they are needed rather than
maintaining high inventory levels.

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Materials requirement planning, which schedules material deliveries based on sales forecasts.
Inventory management is a very important functionthat determines the health of the supply chain
as well as the impacts the financial health of the balance sheet.

Reasons why organizations maintain Raw Material Inventory

Most of the organizations have raw material inventory warehouses attached to the production
facilities where raw materials, consumables and packing materials are stored and issue for
production on JIT basis. The reasons for holding inventories can vary from case to case basis

1. Meet variation in Production

Demand Production plans change in response to the sales, estimates, orders and stocking
patterns. Accordingly, the demand for raw material supply for production varies with the product
plan in terms of batch quantities. Holding inventories at a nearby warehouse helps issue the
required quantity and item to production just in time.

2. Cater to Cyclical and Seasonal

Demand Market demand and supplies are seasonal depending upon various factors like seasons;
festivals etc and past sales data help companies to anticipate a huge surge of demand in the
market well in advance. Accordingly they stock up raw materials and hold inventories to be able
to increase production and rush supplies to the market to meet the increased demand.

3. Economies of Scale in Procurement

Buying raw materials in larger lot and holding inventory is found to be cheaper for the company
than buying frequent small lots. In such cases one buys inbulk and holds inventories at the plant
warehouse.
4. Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to changes in demand and
supply in the national or international market, impact of taxes and budgets etc, the company’s
tend to buy raw materials in advance and hold stocks as a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories to take advantage of the
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quantity discounts offered by the supplier. In such cases the savings on account of the discount
enjoyed would be substantially higher that of inventory carrying cost.

5. Reduce Transit Cost and Transit Times

In case of raw materials being imported from a foreign country or from a far
away vendor within the country, one can save a lot in terms of transportation
cost buy buying in bulk and transporting as a container load or a full truck
load. Part shipments can be costlier. In terms of transit time too, transit time
for full container shipment or a full truck load is direct and faster unlike part

• Risk pooling
Risk pooling suggests that demand variability is reduced if one aggregates demand across
locations because, as demand is aggregated across different locations, it becomes more likely
that high demand from one customer will be offset by low demand from another.
This reduction in variability allows a decrease in safety sock and therefore reduces average
inventory.
In a centralized distribution system the warehouse serves all customers, which leads to a
reduction in variability measured by either the standard deviation or the coefficient of variability
3 critical points about risk pooling
1. Centralizing inventory reduces both safety stock and average inventory
 The process of reallocating inventory is not possible in a
decentralized distribution system
2. The higher the coefficient of variation, the greater the benefit obtained
from centralized systems; that is, the greater the benefit from risk
pooling
 Since the reduction in average inventory is achieved mainly
through a reduction in safety stock, the higher the coefficient of
variation, the larger the impact of safety stock on inventory
reduction
Coefficient of variation = Standard deviation/Average demand
3. The benefit from risk pooling depends on the behavior of demand from
one market relative to demand from another.

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  Demand from 2 markets are positively correlated if it is very likely
that whenever demand from one market is greater than average,
demand from the other market is also greater than average.
 The benefit from risk pooling decreases as the correlation between
demand from the markets becomes more positive.
What are the trade-offs that need to be considered in comparing centralized distribution systems
with decentralized distribution systems?
• Safety stock
• Decreases as move from decentralized to centralized systems
• Service level
• Safety stock levels held constant, service level provided by
centralized systems is higher
• Overhead costs
• Typically much higher in decentralized systems because they have
fewer economies of scale
• Customer lead time
• Response time is much shorter in decentralized systems since the
warehouses are much closer to the customer
• Transportation costs
• Depend on specific situation
• Decentralized systems outbound transportation costs decrease
• Decentralized systems inbound transportation costs increase
inventory reduction strategies
Periodic inventory review
• Periodic inventory review policy makes it possible to identify
slow-moving and obsolete products
Tight management of usage rates, lead times, and safety stock
• Allows the firm to identify, for example, situations in which usage
rates decrease for a few months
Reduce safety stock levels
• Perhaps focusing on lead-time reduction
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Introduce or enhance cycle counting practice
• Replaces an annual inventory physical inventory count by a system
where part of the inventory is counted every day, and each item is
counted several times per year
ABC approach
• Because Class A items account for the major part of the business, a
high-frequency periodic review policy is appropriate.
Shift more inventory or inventory ownership to suppliers
Quantitative approaches
• Approaches similar to determining the right balance between
inventory holding cost and ordering cost
– There has been a significant effort by industry to increase the inventory turnover
ratio
Annual sales
Inventory turnover ratio =
Average inventory level

– An increase in inventory turnover leads to a decrease in average inventory

levels
• High turnover ratio suggests a higher level of liquidity, smaller risk of
obsolescence, and reduced investment in inventory
Forecasting
3 rules of forecasting:
• Forecasts are always wrong
• The longer the forecast horizon, the worse the forecast
• Aggregate forecasts are more accurate
Nevertheless, forecasting is a critical tool and by correctly managing inventory, managers can
make the best possible use of forecasts.
4 general forecasting categories
• Judgment method
– Collection of expert opinions
• Market research methods

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 – Qualitative studies of customer behavior
• Time-series methods
– Mathematical methods in which future performance is extrapolated
from past performance
• Causal methods
Mathematical methods in which forecasts are generated based on different system variables
Judgment methods
Judgment methods strive to assemble the opinions of a variety of experts in a systematic way;
• Sales-force composite can be assembled that combines each salesperson’s
sales estimate in a logical way
• Panels of experts can be assembled in order to reach a consensus
– Experts can be external experts, or internal experts, from a variety
of functional areas within a company
The Delphi method is a structured technique for reaching a consensus with a panel of experts
without gathering them in a single location.
– Each member of the group of experts is surveyed for his or her
opinion, typically in writing
– Opinions are compiled and summarized, and each expert is given
the opportunity to change his or her opinion after seeing the
summary
– The process is repeated until consensus is achieved

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