10

Supply Chain Integration

PowerPoint Slides
by Jeff Heyl

For Operations Management, 9e by

Krajewski/Ritzman/Malhotra
2010 Pearson Education

10 1

Supply Chain Integration

The effective coordination of supply chain
processes through the seamless flow of
information up and down the supply chain
A river that flows from raw material
suppliers to consumers
Upstream
Downstream

Mitigating the effects of supply chain

disruptions

10 2

Supply Chain Integration

Upstream

Downstream

Tier 3

Tier 2

Tier 1

Tomato
suppliers

Tomato
grading
stations

Tomato
paste
factories

Ketchup
factory

Retail
sales

Consumers

Information flows
Cash flows

Figure 10.1 Supply Chain for a Ketchup Factory

10 3

Supply Chain Dynamics

Bullwhip effect
Upstream

members must react to the demand

Slightest

change in customer demand can

ripple through the entire chain

External causes
Internal causes

10 4

Supply Chain Dynamics

Manufacturers
weekly orders to
package supplier

Order quantity

9,000

Package suppliers
weekly orders to
cardboard supplier

Retailers daily
orders to
manufacturer

7,000
Consumers
daily
demands

5,000
3,000
0

Day 1

Day 30 Day 1

Day 30 Day 1

Day 30 Day 1

Day 30

Month of April

Figure 10.2 Supply Chain Dynamics for Facial Tissue

10 5

Supply Chain Dynamics

Integrated supply chains
High

degree of functional and organizational

integration minimizes disruptions

Integration

must include linkages between the

firm, its suppliers, and its customers

SCOR

model

Plan

Source

Make

Deliver

Return

10 6

First-Tier Supplier

Service/Product Provider

Support Processes

Support Processes

New service/
product
development
process

Supplier
relationship
process

Businessto-business
(B2B)
customer
relationship
process

Order
fulfillment
process

New service/
product
development
process

Supplier
relationship
process

Businessto-business
(B2B)
customer
relationship
process

Order
fulfillment
process

External Consumers

External Suppliers

Supply Chain Dynamics

Figure 10.3 External Supply Chain Linkages

10 7

New Service or Product Development

Design
Service or
product not
profitable

Analysis

Need to rethink
the new offering
or production
process

Development
Post-launch
review

Figure 10.4 New Service/Product Development Process

Full Launch

10 8

Supplier Relationship Process

Sourcing
Supplier

selection

Material costs
Annual material costs = pD

Freight costs

Inventory costs
Cycle inventory = Q/2
Pipeline inventory = dL
Annual inventory costs = (Q/2 + dL)H

Administrative costs

10 9

Supplier Relationship Process

The total annual cost for a supplier is the
sum of these costs:
Total Annual Cost = pD + Freight costs
+ (Q/2 + dL)H
+ Administrative costs
Other

supplier selection criteria

Green purchasing

Supplier certification and evaluation

10 10

Total Cost Analysis

EXAMPLE 10.1
Compton Electronics manufactures laptops for major computer
manufacturers. A key element of the laptop is the keyboard.
Compton has identified three potential suppliers for the
keyboard, each located in a different part of the world.
Important cost considerations are the price per keyboard,
freight costs, inventory costs, and contract administrative
costs. The annual requirements for the keyboard are 300,000
units. Assume Compton has 250 business days a year.
Managers have acquired the following data for each supplier.
Which supplier provides the lowest annual total cost to
Compton?

10 11

Total Cost Analysis

Annual Freight Costs
Shipping Quantity (units/shipment)
Supplier

10,000

20,000

30,000

Belfast

$380,000

$260,000

$237,000

Hong Kong

$615,000

$547,000

$470,000

Shreveport

$285,000

$240,000

$200,000

Keyboard Costs and Shipping Lead Times

Annual Inventory Shipping Administrative
Supplier

Price/Unit

Carrying Cost/Unit

$100

$20.00

15

$180.000

Hong Kong

$96

$19.20

25

$300.000

Shreveport

$99

$19.80

$150.000

Belfast

Lead Time (days)

Costs

10 12

Total Cost Analysis

SOLUTION
The average requirements per day are
d = 300,000/250 = 1,200 keyboards
Each option must be evaluated with consideration for the
shipping quantity using the following equation:
Total Annual Cost = Material costs + Freight costs
+ Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL)H + Administrative costs

10 13

Total Cost Analysis

For example, consider the Belfast option for a shipping quantity
of Q = 10,000 units. The costs are
Material
($100/unit)(300,000
costs = pD =
units)
= $30,000,000
Freight costs

= $380,000

Inventory costs = (cycle inventory + pipeline inv

= (Q/2 + dL)H
= (10,000 units/2
+ 1200 units/day(15 days))$20/unit/year
= $460,000
Administrative costs

= $180,000

$30,000,000
+ $380,000=
Total
Annual Cost
+ $460,000 + $180,000 = $31,020,000
10 14

Total Cost Analysis

The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.

Total Annual Costs for the Keyboard Suppliers

Shipping Quantity
Supplier

10,000

20,000

30,000

Belfast
Hong Kong
Shreveport

10 15

Total Cost Analysis

The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.

Total Annual Costs for the Keyboard Suppliers

Shipping Quantity
Supplier

10,000

20,000

30,000

Belfast

$31,020,000

$31,000,000

$31,077,000

Hong Kong

$30,387,000

$30,415,000

$30,434,000

Shreveport

$30,352,800

$30,406,800

$30,465,800

10 16

Application 10.1
ABC Electric Repair is a repair facility for several major
electronic appliance manufactures. ABC wants to find a lowcost supplier for an electric relay switch used in many
appliances. The annual requirements for the relay switch (D)
are 100,000 units. ABC operates 250 days a year. The following
data are available for two suppliers. Kramer and Sunrise, for
the part:
Freight Costs
Shipping Quantity (Q)
Carrying
Cost/Unit
(H)

Lead Time
(L)(days)

Administrative
Costs

Supplier

2,000

10,000

Price/Unit
(p)

Kramer

$30,000

$20,000

$5.00

$1.00

$10,000

Sunrise

$28,000

$18,000

$4.90

$0.98

$11,000

10 17

Application 10.1
SOLUTION
The daily requirements for the relay switch are:
d = 100,000/250 = 400 units
We must calculate the total annual costs for each alternative:
Total annual cost = Material costs + Freight costs
+ Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL)H
+ Administrative costs

10 18

Application 10.1
Kramer
Q = 2,000: ($5.00)(100,000) + $30,000
+ (2,000/2 + 400(5))($1) + $10,000 = $543,000
Q = 10,000: ($5.00)(100,000) + $20,000
+ (10,000/2 + 400(5))($1) + $10,000 = $537,000
Sunrise
Q = 2,000: ($4.90)(100,000) + $28,000
+ (2,000/2 + 400(9))($0.98) + $11,000 = $538,508
Q = 10,000: (4.90)(100,000) + $18,000
+ (10,000/2 + 400(9))($0.98) + $11,000 = $527,428
The analysis reveals that using Sunrise and a shipping quantity
of 10,000 units will yield the lowest annual total costs.
10 19

Using a Performance Matrix

The management of Compton Electronics has done a total cost
analysis for three international suppliers of keyboards (see
Example 10.1). Compton also considers on-time delivery,
consistent quality, and environmental stewardship in its
selection process. Each criterion is given a weight (total of 100
points), and each supplier is given a score (1 = poor, 10 =
excellent) on each criterion. The data are shown in the
following table.
Score
Criterion

Weight

Belfast

Hong Kong

Shreveport

Total Cost

25

On-Time Delivery

30

Consistent Quality

30

Environment

15

10 20

Using a Performance Matrix

SOLUTION
The weighted score for
each supplier is calculated
by multiplying the weight
by the score for each
criterion and arriving at a
total. For example, the
Belfast weighted score is

Score
Weight

Belfast

Hong
Kong

Shreveport

Total Cost

25

On-Time
Delivery

30

Consistent
Quality

30

Environment

15

Criterion

WS = (25 5) + (30 9) + (30 8) + (15 9) = 770

Similarly, the weighted score for Hong Kong is 740, and for
Shreveport, 735. Consequently, Belfast is the preferred
supplier.

10 21

Application 10.2
ABC Electric Repair wants to select a supplier based on total
annual cost, consistent quality, and delivery speed. The
following table shows the weights management assigned to
each criterion (total of 100 points) and the scores assigned to
each supplier (Excellent = 5, Poor = 1).
Scores
Criterion

Weight

Kramer

Sunrise

Total annual cost

30

Consistent quality

40

Delivery speed

30

Which supplier should ABC select, given these criteria

and scores?
10 22

Application 10.2
SOLUTION
Using the preference matrix
approach, the weighted scores
for each supplier are:

Scores
Criterion

Weight

Kramer

Sunrise

Total annual
cost

30

Consistent
quality

40

Delivery
speed

30

WSKramer = (30 4) + (40 3) + (30 5) = 390

WSSunrise = (30 5) + (40 4) + (30 3) = 400
Based on the weighted scores, ABC should select Sunrise
even though delivery speed performance would be better
with Kramer.

10 23

Supplier Relationship Process

Design collaboration
Early

supplier involvement

Presourcing
Value

analysis

Negotiation
Obtain

an effective contract that meets the

price, quality, and delivery requirements

Competitive

orientation

Cooperative

orientation

10 24

Supplier Relationship Process

Buying

Procurement of the service or material from

the supplier

e-purchasing

Loss of control

Information exchange

Radio frequency identification (RFID)

Vendor managed inventories (VMI)

10 25

Order Fulfillment Process

Customer demand planning

Facilitates collaboration

Demand forecasts

Supply planning

Inventory management
Operations planning and scheduling
Resource planning

Production
Logistics

Ownership
Facility location
Mode selection
Capacity
Cross-docking
10 26

Order Fulfillment Process

1 (a)
Web site

2
JIT Inventory

1 (b)
Voice-to-voice

1 (d) Direct
relationship sales

1 (c)
Face-to-face

3
Traveler Sheet

4
Kitting

5 Assemble
to order

6 Testing and
system integration

7 Boxing
and shipping

8
Delivery

Figure 10.5 Dells Order Fulfillment Process

10 27

Using Expected Value

EXAMPLE 10.3
Tower Distributors provides logistical services to local
manufacturers. Tower picks up products from the
manufacturers, takes them to its distribution center, and then
assembles shipments to retailers in the region. Tower needs to
build a new distribution center; consequently, it needs to make
a decision on how many trucks to have. The monthly amortized
capital cost of ownership is $2,100 per truck. Operating variable
costs are $1 per mile for each truck owned by Tower. If capacity
is exceeded in any month, Tower can rent trucks at $2 per mile.
Each truck Tower owns can be used 10,000 miles per month.
The requirements for the trucks, however, are uncertain.
Managers have estimated the following probabilities for several
possible demand levels and corresponding fleet sizes.

10 28

Using Expected Value

Requirements (miles/month)

100,000

150,000

200,000

250,000

Fleet Size (trucks)

10

15

20

25

Probability

0.2

0.3

0.4

0.1

Notice that the sum of the probabilities must equal 1.0. If Tower
Distributors wants to minimize the expected cost of operations,
how many trucks should it have?

10 29

Using Expected Value

SOLUTION
We use the expected value decision rule to evaluate the
alternative fleet sizes where we want to minimize the expected
monthly cost. To begin, the monthly cost, C, must be
determined for each possible combination of fleet size and
requirements. The cost will depend on whether additional
capacity must be rented for the month. For example, consider
the 10 truck fleet size alternative, which represents a capacity
of 100,000 miles per month.

10 30

Using Expected Value

C = monthly capital cost of ownership
+ variable operating cost per month + rental costs if needed
C(100,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles) = $121,000
C(150,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(150,000 miles 100,000 miles)
= $221,000
C(200,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(200,000 miles 100,000 miles)
= $321,000
C(250,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(250,000 miles 100,000 miles)
= $421,000
10 31

Using Expected Value

Next, calculate the expected value for the 10 truck fleet size alternative
as follows:
Expected Value (10 trucks) = 0.2($121,000) + 0.3($221,000)
+ 0.4($321,000) + 0.1($421,000) = $261,000
Using similar logic, we can calculate the expected costs for each of
the other fleet-size options:
Expected Value (15 trucks) = 0.2($131,500) + 0.3($181,500)
+ 0.4($281,500) + 0.1($381,000) = $231,500
Expected Value (20 trucks) = 0.2($142,000) + 0.3($192,000)
+ 0.4($242,000) + 0.1($342,000) = $217,000
Expected Value (25 trucks) = 0.2($152,500) + 0.3($302,500)
+ 0.4($252,500) + 0.1($302,500) = $222,500

10 32

Application 10.3
Schneider Logistics Company has built a new warehouse in
Columbus, Ohio, to facilitate the consolidation of freight
shipments to customers in the region. How many teams of
dock workers he should hire to handle the cross docking
operations and the other warehouse activities? Each team
costs $5,000 a week in wages and overhead. Extra capacity can
be subcontracted at a cost of $8,000 a team per week. Each
team can satisfy 200 labor hours of work a week. Management
has estimated the following probabilities for the requirements:
Requirements (hours/wk)
Number of teams
Probability

200

400

600

0.20

0.50

0.30

How many teams should Schneider hire?

10 33

Application 10.3
SOLUTION
We use the expected value decision rule by first computing the
cost for each option for each possible level of requirements
and then using the probabilities to determine the expected
value for each option. The option with the lowest expected cost
is the one Schneider will implement. We demonstrate the
approach using the one team in-house option.
One Team In-House
C(200) = $5,000
C(400) = $5,000 + $8,000 = $13,000
C(600) = $5,000 + $8,000 + $8,000 = $21,000

Expected Value
(One Team) = 0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800

10 34

Application 10.3
A table of the complete results is below.

Weekly Labor Requirements

In-House

200 hrs

400 hrs

600 hrs

Expected Value

One team
Two teams
Three teams

10 35

Application 10.3
A table of the complete results is below.

Weekly Labor Requirements

In-House

200 hrs

400 hrs

600 hrs

Expected Value

One team

$5,000

$13,000

$21,000

$13,800

Two teams

$10,000

$10,000

$18,000

$12,400

Three teams

$15,000

$15,000

$15,000

$15,000

Based on the expected value decision rule, Schneider should

employ two teams at the warehouse.

10 36

The Customer Relationship Process

Customer relationship management
(CRM) programs identify, attract, and
build relationships with customers
Marketing

Electronic commerce (e-commerce)

Business-to-Consumer (B2C) systems

Business-to-Business (B2B) systems

10 37

The Customer Relationship Process

Order placement

Execute a sale, register the specifics,

confirm acceptance, and track progress

Internet provides advantage

Customer service

Helps customers with answers to

questions, resolves problems, and,
provides general information

Call centers

10 38

Levers for Improved Supply Chain

Performance
The levers

Sharing data

Collaborative activities

Reduce replenishment lead times

Reduce order lot sizes

Ration short supplies

Use everyday low pricing (EDLP)

Be cooperative and trustworthy

10 39

Levers for Improved Supply Chain

Performance
Performance measures

Costs

Time

Quality

Environmental impact

10 40

Performance Measures
TABLE 10.1

SUPPLY CHAIN PROCESS MEASURES

Customer Relationship

Order Fulfillment

Supplier Relationship

Percent of orders taken

accurately
Time to complete the
order placement process
Customer satisfaction
with the order placement
process
Customers evaluation of
firms environmental
stewardship

Percent of incomplete
orders shipped
Percent of orders shipped
on-time
Time to fulfill the order

Percent of suppliers
deliveries on-time
Suppliers lead times

Percent of botched
services or returned items
Cost to produce the
service or item
Customer satisfaction
with the order fulfillment
process
Inventory levels of workin-process and finished
goods
Amount of greenhouse
gasses emitted into the air

Percent defects in
services and purchased
materials
Cost of services and
purchased materials
Inventory levels of
supplies and purchased
components
Evaluation of suppliers
collaboration on
streamlining and waste
conversion
Amount of transfer of
environmental
technologies to suppliers

10 41

Supply Chains and the Environment

Sustainability

Environmental stewardship

Environmental protection

Productivity improvement

Risk minimization

Innovation

Reverse logistics

Planning, implementing, and controlling flows

from consumption back to origin

Closed-loop supply chain

10 42

Closed Loop Supply Chain

Production process

New service/product
development process

Distribution/Retailers

Customers

Direct reuse

Remanufacture

Repair
Returns
processor

Recycle parts
and materials

Product information

Waste
disposal

Forward logistics flow

Figure 10.6 Flows in a Closed-Loop Supply Chain

Reverse logistics flow

10 43

10 44