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Supply Chain Management

Operations Management

William J. Stevenson

8th edition

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Supply Chain Management

CHAPTER

16

Supply Chain Management

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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Supply Chain Management

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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Supply Chain Management

Facilities

Warehouses Factories Processing centers Distribution centers Retail outlets Offices

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Supply Chain Management

Functions and Activities

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

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Supply Chain Management

Typical Supply Chains

Production

Distribution

Purchasing Receiving Storage Operations Storage

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Typical Supply Chain for a Manufacturer

Supply Chain Management

Figure 16.1a

Supplier Supplier Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

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Supply Chain Management

Typical Supply Chain for a Service

Figure 16.1b

Supplier

Storage

Service

Customer

Supplier

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Need for Supply Chain Management

1.
2. 3. 4. 5.

Supply Chain Management

6.
7. 8.

Improve operations Increasing levels of outsourcing Increasing transportation costs Competitive pressures Increasing globalization Increasing importance of e-commerce Complexity of supply chains Manage inventories

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Bullwhip Effect

Figure 16.3

Amount of = inventory

Tier 2 Suppliers

Tier 1 Suppliers

Producer

Distributor

Retailer

Final Customer

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Benefits of Supply Chain Management

Organization
Campbell Soup Hewlett-Packard Sport Obermeyer National Bicycle

Benefit
Doubled inventory turnover rate Cut supply costs 75% Doubled profits and increased sales 60% Increased market share from 5% to 29%

Wal-Mart

Largest and most profitable retailer in the world

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Benefits of Supply Chain Management

Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty

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Elements of Supply Chain Management

Table 16.1 Element
Customers
Forecasting Design Processing

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

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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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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Materials Movement
Work center Work center Work center

Figure 16.4

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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Electronic Data Interchange

EDI the direct transmission of interorganizational transactions, computer-tocomputer, including purchase orders, shipping notices, and debit or credit memos.

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Electronic Data Interchange

Increased productivity Reduction of paperwork Lead time and inventory reduction Facilitation of just-in-time systems Electronic transfer of funds Improved control of operations Reduction in clerical labor Increased accuracy

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Efficient Consumer Response

Efficient consumer response (ECR) is a supply chain management initiative specific to the food industry

Reflects companies efforts to achieve quick response using EDI and bar codes

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E-Commerce

E-Commerce: 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-Commerce

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-Commerce
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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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
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 Supply chain management costs Warranty cost as a percent of revenue Value added per employee

Table 16.4 Perspective

Reliability

Flexibility

Expenses

Assets/utilization

Total inventory days of supply Cash-to-cash cycle time Net asset turns

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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. 2.

Develop strategic objectives and tactics

Integrate and coordinate activities in the internal supply chain

Coordinate activities with suppliers with customers Coordinate planning and execution across the supply chain Form strategic partnerships

3.

4.

5.

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Supply Chain Performance Drivers

1.
2. 3. 4. 5.

Quality
Cost Flexibility Velocity 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 Cross-docking

2.

Inventory-transportation costs

3. 4.

Lead time-transportation costs Product variety-inventory

Delayed differentiation Disintermediation

5.

Cost-customer service

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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

Problem
Large inventories Long lead times Large number of parts Cost Quality Variability

Table 16.5 Potential Improvement

Smaller, more frequent deliveries Delayed differentiation Disintermediation Modular Outsourcing Shorter lead times, better forecasts

Benefits
Reduced holding costs Quick response

Possible Drawbacks
Traffic congestion Increased costs May not be feasible May need absorb functions Less variety Loss of control Less variety

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

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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.

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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
Legal

Figure 16.5

Operations

Accounting

Purchasing

Data processing

Design Receiving Suppliers

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Purchasing Cycle
Legal Operations Accounting

1. 2. 3. 4. 5.

Requisition received Supplier selected Order is placed Monitor orders Receive orders
Receiving Suppliers Design Purchasing Data processing

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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
Adversary
Many
May be brief Major consideration

Table 16.9

Aspect
Number of suppliers
Length of relationship Low price

Partner
One or a few
Long-term Moderately important

Reliability
Openness Quality

May not be high

Low May be unreliable; buyer inspects

High
High At the source; vendor certified

Volume of business
Flexibility Location

May be low
Relatively low Widely dispersed

High
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