11

Supply Chain Management

McGraw-Hill/Irwin

Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
Explain what a supply chain is. Explain the need to manage a supply chain and the potential benefits of doing so. Explain the increasing importance of outsourcing. State the objective of supply chain management. List the elements of supply chain management. Identify the strategic, tactical, and operations issues in supply chain management. Describe the bullwhip effect and the reasons why it occurs.
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Learning Objectives
Explain the value of strategic partnering. Discuss the critical importance of information exchange across a supply chain. Outline the key steps, and potential challenges, in creating an effective supply chain. Explain the importance of the purchasing function in business organizations. Describe the responsibilities of purchasing. Explain the term value analysis. Identify several guidelines for ethical behavior in purchasing.
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Supply Chain Management

Supply Chain: the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service.

Sometimes referred to as value chains

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Facilities
Warehouses Factories Processing centers Distribution centers Retail outlets Offices

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Functions and Activities

Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service
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Typical Supply Chains

Production Distribution

Purchasing Receiving Storage Operations Storage

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Typical Supply Chain for a Manufacturer

Supplier

}
Storage Mfg. Storage Dist. Retailer Customer

Supplier

Supplier

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Typical Supply Chain for a Service

Supplier

Storage

Service

Customer

Supplier

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Need for Supply Chain Management

1.Improve operations 2.Increasing levels of outsourcing 3.Increasing transportation costs 4.Competitive pressures 5.Increasing globalization 6.Increasing importance of e-commerce 7.Complexity of supply chains 8.Manage inventories
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Bullwhip Effect
Figure 16.3

Demand

Initial Supplier

Final Customer

Inventory oscillations become progressively larger looking backward through the supply chain
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Benefits of Supply Chain Management

Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Integrates separate organizations into a cohesive operating system
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Global Supply Chains

Increasing more complex
Language Culture Currency fluctuations Political Transportation costs Local capabilities Finance and economics Environmental
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Table 11.1 Element

Customers

Elements of Supply Chain Management

Typical Issues
Determining what customers want
Predicting quantity and timing of demand Incorporating customer wants, mfg., and time Controlling quality, scheduling work

Forecasting Design Processing

Inventory
Purchasing Suppliers Location Logistics

Meeting demand while managing inventory costs

Evaluating suppliers and supporting operations Monitoring supplier quality, delivery, and relations Determining location of facilities Deciding how to best move and store materials

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Strategic or Operational
Two types of decisions in supply chain management
Strategic design and policy Operational day-today activities

Major decisions areas

Location Production Inventory Distribution
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Logistics
Logistics
Refers to the movement of materials and information within a facility and to incoming and outgoing shipments of goods and materials in a supply chain

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Logistics
Movement within the facility Incoming and outgoing shipments Bar coding EDI Distribution JIT Deliveries
0

214800 232087768

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Figure 11.4

Materials Movement
Work center Work center Work center

Work center

Storage

Storage Storage RECEIVING

Shipping

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Distribution Requirements Planning

Distribution requirements planning (DRP) is a system for inventory management and distribution planning Extends the concepts of MRPII

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Uses of DRP
Management uses DRP to plan and coordinate:
Transportation Warehousing Workers Equipment Financial flows

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E-Business
E-Business: the use of electronic technology to facilitate business transactions Applications include
Internet buying and selling E-mail Order and shipment tracking Electronic data interchange

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Advantages E-Business
Companies can:
Have a global presence Improve competitiveness and quality Analyze customer interests Collect detailed information Shorten supply chain response times Realize substantial cost savings Create virtual companies Level the playing field for small companies

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Disadvantages of E-Business
Customer expectations
Order quickly -> fast delivery

Order fulfillment
Order rate often exceeds ability to fulfill it

Inventory holding
Outsourcing loss of control Internal holding costs

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Reverse Logistics
Reverse logistics the backward flow of goods returned to the supply chain Processing returned goods
Sorting, examining/testing, restocking, repairing Reconditioning, recycling, disposing

Gatekeeping screening goods to prevent incorrect acceptance of goods Avoidance finding ways to minimize the number of items that are returned
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Effective Supply Chain

Requires linking the market, distribution channels processes, and suppliers Supply chain should enable members to:
Share forecasts Determine the status of orders in real time Access inventory data of partners

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Successful Supply Chain

Trust among trading partners
Effective communications Supply chain visibility Event-management capability
The ability to detect and respond to unplanned events

Performance metrics
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SCOR Metrics
Table 11.4 Perspective
Reliability

Metrics
On-time delivery Order fulfillment lead time Fill rate (fraction of demand met from stock) Perfect order fulfillment Supply chain response time Upside production flexibility

Flexibility

Expenses

Supply chain management costs Warranty cost as a percent of revenue Value added per employee
Total inventory days of supply Cash-to-cash cycle time Net asset turns
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Assets/utilization

RFID Technology
Used to track goods in supply chain RFID tag attached to object Similar to bar codes but uses radio frequency to transmit product information to receiver RFID eliminates need for manual counting and bar code scanning

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CPFR
Collaborative Planning, Forecasting, and Replenishment
Focuses on information sharing among trading partners Forecasts can be frozen and then converted into a shipping plan Eliminates typical order processing

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CPFR Process
Step 1 Front-end agreement Step 2 Joint business plan

Steps 3-5 Sales forecast

Steps 6-8 Order forecast collaboration

Step 9 Order generation/delivery execution

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CPFR Results
Nabisco and Wegmans
50% increase in category sales

Wal-mart and Sara Lee

14% reduction in store-level inventory 32% increase in sales

Kimberly-Clark and Kmart

Increased category sales that exceeded market growth
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Creating an Effective Supply Chain

1.Develop strategic objectives and tactics

2.Integrate and coordinate activities in the internal supply chain

3.Coordinate activities with suppliers with customers 4.Coordinate planning and execution across the supply chain 5.Form strategic partnerships
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Supply Chain Performance Drivers

1.Quality
2.Cost 3.Flexibility 4.Velocity 5.Customer service

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Velocity
Inventory velocity
The rate at which inventory(material) goes through the supply chain

Information velocity
The rate at which information is communicated in a supply chain

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Challenges
Barriers to integration of organizations Getting top management on board Dealing with trade-offs Small businesses Variability and uncertainty

Long lead times

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Trade-offs
1. Lot-size-inventory
Bullwhip effect

2. Inventory-transportation costs
Cross-docking

3. Lead time-transportation costs 4. Product variety-inventory

Delayed differentiation

5. Cost-customer service
Disintermediation
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Trade-offs
Bullwhip effect
Inventories are progressively larger moving backward through the supply chain

Cross-docking
Goods arriving at a warehouse from a supplier are unloaded from the suppliers truck and loaded onto outbound trucks Avoids warehouse storage

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Trade-offs
Delayed differentiation
Production of standard components and subassemblies, which are held until late in the process to add differentiating features

Disintermediation
Reducing one or more steps in a supply chain by cutting out one or more intermediaries

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Supply Chain Issues

Strategic Issues
Design of the supply chain, partnering

Tactical Issues
Inventory policies Purchasing policies Production policies Transportation policies Quality policies

Operating Issues
Quality control Production planning and control

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Supply Chain Benefits and Drawbacks Table 11.5

Problem
Large inventories

Potential Improvement
Smaller, more frequent deliveries

Benefits
Reduced holding costs

Possible Drawbacks
Traffic congestion Increased costs

Long lead times

Delayed differentiation Disintermediation

Modular

Quick response

May not be feasible May need absorb functions

Less variety

Large number of parts Cost Quality Variability

Fewer parts Simpler ordering Reduced cost, higher quality Able to match supply and demand

Outsourcing Shorter lead times, better forecasts

Loss of control Less variety

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Purchasing
Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. Purchasing cycle: Series of steps that begin with a request for purchase and end with notification of shipment received in satisfactory condition.

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Goal of Purchasing
Develop and implement purchasing plans for products and services that support operations strategies

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Duties of Purchasing
Identifying sources of supply Negotiating contracts

Maintaining a database of suppliers

Obtaining goods and services

Managing supplies

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Purchasing Interfaces
Figure 11.5
Legal

Operations

Accounting

Purchasing

Data processing

Design Receiving Suppliers

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Purchasing Cycle
Legal

1.Requisition received
2.Supplier selected 3.Order is placed 4.Monitor orders 5.Receive orders

Operations

Accounting

Purchasing

Data processing

Design Receiving

Suppliers

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Value Analysis vs. Outsourcing

Value analysis
Examination of the function of purchased parts and materials in an effort to reduce cost and/or improve performance

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Centralized vs Decentralized Purchasing

Centralized purchasing
Purchasing is handled by one special department

Decentralized purchasing
Individual departments or separate locations handle their own purchasing requirements

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Suppliers
Choosing suppliers Evaluating sources of supply Supplier audits Supplier certification Supplier relationships Supplier partnerships

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Factors in Choosing a Supplier

Quality and quality assurance Flexibility Location Price

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Factors in Choosing a Supplier (contd)

Product or service changes Reputation and financial stability Lead times and on-time delivery Other accounts

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Evaluating Sources of Supply

Vendor analysis: Evaluating the sources of supply in terms of price, quality, reputation, and service

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Evaluating Sources of Supply

Vendor analysis - evaluating the sources of supply in terms of
Price Quality Services Location Inventory policy Flexibility

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Supplier as a Partner
Table 11.9

Aspect
Number of suppliers Length of relationship Low price Reliability Openness Quality Volume of business

Adversary
Many May be brief Major consideration May not be high Low May be unreliable; buyer inspects May be low

Partner
One or a few Long-term Moderately important High High At the source; vendor certified High

Flexibility
Location

Relatively low
Widely dispersed

Relatively high
Nearness is important
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Supplier Partnerships
Ideas from suppliers could lead to improved competitiveness
1.Reduce cost of making the purchase 2.Reduce transportation costs 3.Reduce production costs 4.Improve product quality 5.Improve product design 6.Reduce time to market 7.Improve customer satisfaction 8.Reduce inventory costs 9.Introduce new products or services

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Critical Issues
Strategic importance
Cost Quality Agility Customer service Competitive advantage

Technology management
Benefits Risks

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Critical Issues
Purchasing function
Increased outsourcing Increased conversion to lean production Just-in-time deliveries Globalization

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Video: Tech Logistics

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Video: Tracking, GPS

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Video: Intermodel Transp.

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