Chapter 10

Supply-Chain Management

11-1

OBJECTIVES
Supply-Chain Management
Measuring Supply-Chain Performance
Bullwhip Effect
Outsourcing
Mass Customization

11-2

What is supply chain?

Supply chain, which is also referred to as the
logistics network, consists of:
Suppliers
Manufacturing centers
Warehouses
Distribution centers
Retail outlets
And raw materials, work-in-process inventory,
and finished goods that flows between the
facilities.
11-3

Example of a supply chain

Consider a customer walking into a Wal-Mart store to purchase
detergent. The supply chain begins with the customer and
her need for detergent. The next stage of this supply chain
is the Wal-Mart retail store that the customer visits. Wal-Mart
stocks its shelves using inventory that may have been
supplied from a finished-goods warehouse that Wal-Mart
managed or from a distributor using truck supplied by a third
party. The distributor in turn is stocked by the manufacturer
(say, Protect & Gamble [P&G] in this case). The P&G
manufacturing plant from various suppliers, who may
themselves have been supplied by lower-tier supplier, i.e.
for packaging material
11-4

Another example
When a customer purchases on-line from Dell Computer,
the supply chain include, among other, the customer, the
Web page that take the customers order, the Dell
assembly plant, and all of Dells suppliers and their
suppliers. The Web provide the customer information
regarding pricing, product variety, and product
availability. Having made a product choice, the customer
enters the order information and pays for the product.
The customer may later return to the Web page to check
the status of the order.
11-5

The Supply-Chain
VISA

Material Flow

Supplier

Credit Flow

Manufacturing

Supplier
Schedules

Order
Flow

11-6

Retailer

Consumer

Wholesaler

Retailer
Cash
Flow

The Supply Chain

Market research data
Scheduling information
Engineering and design data
Order flow and cash flow

Supplier
Inventory

Supplier

Customer

Ideas and design to

satisfy end customer
Material flow
Credit flow

Customer

Manufacturer
Inventory

Supplier

Inventory

Distributor
Inventory

11-7

Customer

Definition of logistics
Definition of logistics by
Council of Logistics Management (CLM)
Logistics is part of the supply chain process
that plan, implement, and controls the
efficient, effective flow and storage of goods,
services, and related information from the
point of origin to the point of consumption in
order to meet customers requirement.
11-8

Definition of supply chain

management
Supply chain management is defined as the
systematic, strategic coordination of the
traditional business functions and the tactics
across these business functions within
particular company and across business
within the supply chain, for the purpose of
improving the long-term performance of the
individual companies and the supply chain as
a whole. (Mentzer et al.)
11-9

Definition of supply chain

management
Supply chain management is a set of
approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and
stores, so that merchandize is produced and
distributed at the right locations, and at the right
time, in order to minimize system-wide costs
while satisfying service level requirement.
(Simchi-Levi et al.)
11-10

Supply-Chain Management
Planning, organizing, directing, & controlling flows
of materials

Begins with raw materials

Continues through internal operations
Ends with distribution of finished goods

Involves everyone in supply-chain

Example: Your suppliers supplier

Objective: Maximize value & lower waste

11-11

Material Costs in
Supply-Chain
Wholesale
8% 9%

Manufacturing
31%
11%

COGS
Payroll

Material

83%

Other

Dir Wages

58%

Retail

Other

13%

16%

71%

11-12

COGS
Payroll
Other

Supply-Chain Support for Overall

Strategy
Low Cost

Response

Suppliers
goal

Supply demand
at lowest
possible cost

Respond
quickly to
changing
requirements
and demand to
minimize
stockouts

Share market
research; jointly
develop
products and
options

Primary
Selection
Criteria

Select
primarily for
cost

Select
primarily for
capacity,
speed, and
flexibility

Select primarily
for product
development
skills

11-13

Differentiation

Supply-Chain Support for Overall

Strategy - continued
Low Cost

Response

Differentiation

Process
Characteristics

Maintain high
average
utilization

Invest in
excess
capacity and
flexible
processes

Modular
processes that
lend themselves
to mass
customization

Inventory
Characteristics

Minimize
inventory
throughout the
chain to hold
down costs

Develop
responsive
system, with
buffer stocks
positioned to
ensure supply

Minimize
inventory in the
chain to avoid
obsolescence

11-14

Supply-Chain Support for Overall

Strategy - continued
Low Cost

Response

Differentiation

Lead-time
Characteristics

Shorten leadtime as long as it

does not
increase costs

Invest
aggressively to
reduce
production
lead-time

Invest
aggressively to
reduce
development
lead-time

Product-design
Characteristics

Maximize
performance
and minimize
cost

Use product
designs that
lead to low setup time and
rapid production
ramp-up

Use modular
design to
postpone
product
differentiation for
as long as
possible

11-15

Network Configuration Involves

Procure
Procure

Vendors

Sourcing
locations
Sourcing
quantities

Make
Make

Plants

Producti
on
locations
Producti
on
quantitie
s

Move
Move

Distribution
Centers

JIT centers

Sell
Sell

Distribution
Channels

Customer
Cross-dock
channel
locations/flo selection
w through
Mode
Value-added selection
services
Intermediarie
Facility size s
11-16
requirement

Customer
Service
Lead-times
Accuracy
Availability

Global Supply-Chain Issues

Supply chains in a global environment must be:
Flexible enough to react to sudden changes in parts

availability, distribution, or shipping channels, import

duties, and currency rates
Able to use the latest computer and transmission
technologies to schedule and manage the shipment of
parts in and finished products out
Staffed with local specialists to handle duties, trade,
freight, customs and political issues
11-17

Importance of Purchasing
Major cost center
Affects quality of final product
Aids strategy of low cost, response, and
differentiation

11-18

Supply-Chain Costs as a Percent

of Sales
Industry

Percent of Sales

All industry
Automobile
Food
Lumber
Paper
Petroleum
Transportation

52%
67%
60%
61%
55%
79%
62%
11-19

Objectives of the Purchasing

Function
Help identify the products and services that can
be best obtained externally; and
Develop, evaluate, and determine the best
supplier, price, and delivery for those products
and services

11-20

One of the Purchasing techniques is

Outsourcing?
Outsourcing is defined as the act of
moving a firms internal activities and
decision responsibility to outside
providers

11-21

Reasons to Outsource
Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Cost-driven
Employee-driven
11-22

Make/Buy Considerations
Reasons for Making
1. Maintain core competencies
and protect personnel from
layoff
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply
5. Utilize surplus labor and
make a marginal
contribution

Reasons for Buying

1. Frees management to deal
with its primary business
2. Lower acquisition cost
3. Preserve supplier
commitment
4. Obtain technical or
management ability
5. Inadequate capacity

11-23

Make/Buy Considerations Continued

Reasons for Making
6. Obtain desired quantity
7. Remove supplier collusion
8. Obtain a unique item that
would entail a prohibitive
commitment from the
supplier
9. Protect proprietary design or
quality
10. Increase or maintain size of
company

Reasons for Buying

6. Reduce inventory costs
7. Ensure flexibility and
alternate source of supply
8. Inadequate managerial or
technical resources
9. Reciprocity
10. Item is protected by patent
or trade secret

11-24

Supply-Chain Strategies
Plans to help achieve company mission
Affect long-term competitive position
Strategic options

Many suppliers
Few suppliers
Keiretsu network
Vertical integration
Virtual company

Plan

1995 Corel Corp.

11-25

Supply-Chain Strategies
Negotiate with many suppliers; play one supplier against another
Develop long-term partnering arrangements with a few suppliers
who will work with you to satisfy the end customer
Vertically integrate; buy the actual supplier
Keiretsu - have your suppliers become part of a company coalition
Create a virtual company that uses suppliers on an as-needed
basis.

11-26

Many Suppliers Strategy

Many sources per item

Adversarial relationship
Short-term
Little openness
Negotiated, sporadic POs
High prices
Infrequent, large lots
Delivery to receiving dock
11-27

1995 Corel Corp.

Few Suppliers Strategy

1 or few sources per item

Partnership (JIT)
Long-term, stable
On-site audits & visits
Exclusive contracts
Low prices (large orders)
Frequent, small lots
Delivery to point of use

11-28

1995
Corel
Corp.

Tactics for Close Supplier

Relationships
Tactic

Reduce total number of suppliers

Results

Average 20% reduction in 5 years

Certify suppliers

Ask for JIT delivery from key

suppliers
Involve key suppliers in new product
design
Develop software linkages to
suppliers

11-29

Almost 40% of all companies

surveyed were themselves
currently certified
About 60% ask for this
About 54% do this
Almost 80% claim to do this
About 50% claim this

Keiretsu Network Strategy

Japanese word for affiliated chain
System of mutual alliances and
cross-ownership

Company stock is held by allied firms

Lowers need for short-term profits

Links manufacturers, suppliers, distributors, &

lenders

Partnerships extend across entire supply chain

11-30

Vendor Managed Inventory (VMI)

Postponement keeps product generic as long as possible
Channel Assembly sends to distributor individual components and
modules rather than finished goods
Drop Shipping and Special Packaging supplier will ship to end
consumer rather than to seller
Blanket Orders a long-term purchase commitment to a supplier for
items that are to be delivered against short-term releases to ship
Standardization reducing the number of variations in materials and
components
Electronic Ordering and Funds Transfer paperless ordering and
100% material acceptance, payment by wire

11-31

Vendor Selection Steps

Vendor evaluation

Identifying & selecting potential vendors

Vendor development

Integrating buyer & supplier

Example: Electronic data exchange

Negotiations

Results in contract
Specifies period of agreement, price, delivery terms etc.

11-32

Supplier Selection Criteria

Company

Service

Financial stability
Management
Location

Product

Quality
Price

11-33

Delivery on time
Condition on arrival
Technical support
Training

Vendor Selection Rating Form

11-34

Logistics Management
Integrates all materials functions

Purchasing
Inventory management
Production control
Inbound traffic
Warehousing and stores
Incoming quality control

Objective: Efficient, low cost operations

11-35

Supply-Chain Performance
Compared
Benchmark
Typical Firms
Firms
3.3%
0.8%

Administrative costs as
percent of purchases
Lead time (weeks)

15

Time spent in placing order

42 minutes

15 minutes

Percentage of late deliveries

33%

2%

Percentage of rejected material

1.5%

.0001%

400

Number of shortages per year

11-36

Mass Customization
Mass customization is a term used to describe
the ability of a company to deliver highly
customized products and services to different
customers
The key to mass customization is effectively
postponing the tasks of differentiating a
product for a specific customer until the latest
possible point in the supply-chain network
11-37

Three organizational design principles of

an effective mass customization program
Principle 1: A product should be designed so it
consists of independent modules that can be
assembled into different forms of the product
easily and inexpensively
Principle 2: Manufacturing and service processes
should be designed so that they consist of
independent modules that can be moved or
rearranged easily to support different distribution
network
11-38

Three organizational design principles of

an effective mass customization program
(contd)
Principle 3: The supply network the positioning of
inventory and location, number, and structure of
service, manufacturing and distribution facility
should be designed provide two capabilities. First, it
must be able to supply the basic product to the facility
performing the customization in a cost-effective
manner. Second, it must have the flexibility and the
responsiveness to take individual customers orders
and delivery the finished, customized good quickly
11-39