CHAPTER 1: 1st-Century Supply Chains

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Overview of 21st-century supply chains

The supply chain revolution Why integration creates value Generalized supply chain model Responsiveness Financial sophistication Globalization
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The supply chain revolution has reshaped contemporary strategic thinking

Supply Chain Management
Consists of firms collaborating to leverage strategic positioning and to improve operating efficiency

Supply Chain Strategy

Is a channel and business organizational arrangement based on acknowledge dependency and collaboration

Logistics
The work required to move and geographically position inventory

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Successful supply chain strategies

A recent Andersen Consulting study revealed six different, but equally successful, supply chain strategies. Market Saturation Driven: Focusing on generating high profit margins, through strong brands and ubiquitous marketing and distribution. Operationally Agile: Configuring assets and operations to react nimbly to emerging consumer trends along lines of product category or geographic region. Freshness Oriented: Concentrating on earning a premium by providing the consumer with product that is fresher than competitive offerings. Consumer Customizer: Using mass customization to build and maintain close relationships with end-consumers through direct sales. Logistics Optimizer: Emphasizing a balance of supply chain efficiency and effectiveness. Trade Focused: Prioritizing "low price, best value" for the consumer (as with the logistics optimizer strategy but focusing less on brand than on dedicated service to trade customers). Source: Supply Chain Management Review, March/ April 2000, p. 29.
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The total integration of the overall business process creates value

Table 1.1 Integrative Management Value Proposition

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The integrated value-creation process must be managed across firms from end to end

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Figure 1.1 The Integrated Supply Chain Framework Companies, Inc. All rights reserved. Copyright 2013 by The McGraw-Hill

Logistics activities and decisions at each level of functionality

Figure 1.2 Information Functionality

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Transaction system functionality consists of formalized rules and procedures

Standardized communications focus on tracking and regulating day-to day logistical transactions For example,
Order entry Order fulfillment Inventory adjustment Invoicing

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Management control functionality focuses on performance management and reporting

Provides real time feedback on supply chain performance and resource utilization Common performance dimensions include
Cost Customer service Productivity Quality

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Decision analysis functionality focuses on software tools to assist managers

Software tools help to identify, evaluate and compare alternatives to improve effectiveness
E.g., Excel solver

Types of analysis include

Supply chain design Inventory management Resource allocation Routing Segmental profitability

Also called decision support software in MIS departments

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Strategic planning functionality transforms transactional data to assist in strategy evaluation

Organizes transaction and performance data into a relational database to assist in evaluating alternative business strategies Examples include
Strategic alliance decisions Development of manufacturing capabilities Customer responsiveness opportunities

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More opportunities exist for improvements at higher levels of functionality

Figure 1.4 SCIS Usage, Decision Characteristics, and Justification

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Supply chain information system modules

Enterprise integration and administration Enterprise supply chain operations Enterprise planning and monitoring Communication technology Consumer connectivity

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Application oriented perspective of SCIS modules

Figure 1.4 Application Oriented SCIS Framework

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Enterprise resource management (ERP)

The backbone of most firms logistical information systems Maintains an integrated database of current and historical data Processes most (if not all) transactions across all business functions Example transactions include
Order entry and management Inventory assignment Shipping

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Enterprise integration and administration modules are not specific supply chain apps

Figure 1.5 Enterprise Integration and Administration Components

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Enterprise operations modules support day-to-day supply chain operations

Enterprise Operations
Customer relationship management
Customer Relationship Management (CRM)
Forecasting Demand Management (DMS) Collaborative Planning, Forecasting and Replenishment (CPFR) Order Management (OMS) Order Processing (OPS) Warehouse Management (WMS) Transportation Management (TMS) Yard Management (YMS) Capacity Management Planning (CMP) Master Production Schedule (MPS) Production Execution and Control (Shop Floor) Quality Management (QM) Materials Requirements Planning (MRP)

Logistics

Manufacturing

Purchasing

Inventory Deployment
Integrated Inventory Planning Advanced Planning and Scheduling\

Finished Inventory Management (FIM)

Manufacturing Resource Planning (MRP II)

Purchase Order Administration (POA)

Supplier Relationship Management (SRM)

Accounts Payable Interface

Donald J. Bowersox, Ph.D. 2005

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Accounts Receivable Interface

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Enterprise planning and monitoring modules facilitate exchange of planning information

Figure 1.7 Enterprise Planning and Monitoring Modules

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Integrative management requires simultaneous achievement of 8 processes

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Table 1.2 Eight Supply Chain Processes Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Concepts necessary for achieving integrated management

Lowest total process cost is the focus of integrated management
Differs from lowest cost of each function in the process

Collaboration of operating information, technology and risk has been encouraged by national legislation to keep US-based firms competitive Enterprise extension includes expanded managerial influence and control beyond traditional ownership boundaries of a single enterprise Integrated service providers (ISP) provide a range of logistics services to accommodate customers, ranging from order entry to product delivery
Commonly known as third (or fourth) party service providers

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Enterprise extension
Information sharing paradigm supply chain participants sharing operating information can achieve a high degree of collaboration and enhanced strategic planning. Process specialization paradigm the commitment to focus collaborative arrangements on planning joint operations with a goal of eliminating nonproductive or non-value adding redundancy by firms in a supply chain.
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Integrated service providers (ISPs)

Outsourcing Transportation modes Public warehouses Value-added services Third- and fourth-party service providers Asset- or nonasset-based service providers

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Forces driving supply chain strategies

Information technology Integrative management Responsiveness Financial sophistication Globalization

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Responsiveness emerges as a competitive advantage

Figure 1.8 Anticipatory Business Model

Figure 1.9 Responsive Business Model

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Postponement strategies keep supply chains responsive

Types of Postponement
Manufacturing (or Form) Geographic (or Logistics) Combined

Manufacturing and geographic types are exact opposites in practice but have the same goal
Meeting customer demand quickly while minimizing inventories

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Manufacturing (or form) postponement

Manufacturing one order at a time Base modular construction of product No customization until the exact customer specs and financial commitment is received Objective is to maintain products in an uncommitted status as long as possible Balances economy of scale with responsiveness
Can build a sufficient quantity of ready to customize basic units

Requires a lot of forethought during product design

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Example of manufacturing postponement

Keeping all the car panels a base color (white or gray) until the order is received, then painting to the color ordered

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Geographic (or logistics) postponement

Build or stock a full-line inventory at one or a few strategic locations Forward deployment of inventory is postponed until customer orders are received Once orders received, specific item is expedited to the local distributor Advantages are manufacturing economies of scale along with responsiveness to customer Often used for critical, high cost parts and assemblies (e.g. engines)
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Example of geographic postponement

Keeping full inventory in a central warehouse and releasing customer orders to local distributors or direct shipping to customer
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Combined postponement
Keeping the basic products centralized and performing the customization at the destination distributor Historical example - Autos
Installing dealer options like sound systems, GPS, sun roofs on new cars purchased

Contemporary example - Computers

Dell Computers, doing final assembly or packaging additional system options like printers, digital cameras at a distribution center
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Barriers to implementing responsive systems

Need for publicly held corporations to maintain planned quarterly profits
Expectations of continued financial results often drive promotional and pricing strategies to load the channel with inventory

Need to establish collaborative relationships

Most business managers do not have training or experience in development of collaborative arrangements

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Financial sophistication enables measurement of time-based supply chain

Cash-to-Cash Conversion the time required to convert raw material or inventory purchases into sales revenue Dwell Time Minimization dwell time is the ratio of time that an assets sits idle to the time required to satisfy its supply chain mission Cash Spinreducing assets in the supply chain can spin cash for reinvestment in other projects
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Globalization offers firms several attractive opportunities

Demand exceeds local supply
90% of global demand is not fully satisfied by local supply

Strategic sourcing
Identifying and matching the sources of raw materials and components to manufacturers and distributors

Offshoring
Moving manufacturing and distribution operations to countries with favorable labor costs and tax laws
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Significant differences for global logistics

Distance of typical order-to-delivery operations is significantly longer compared to domestic business Documentation requirements for business transactions is significantly more complex Operations must be deal with significant Diversity in work practices and local operating environments How consumers Demand products and services must accommodate cultural variations
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