11

Supply Chain Management

McGraw-Hill/Irwin

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

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 Figure 11.1a

Supplier Supplier Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

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Typical Supply Chain for a Figure 11.1b 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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Figure 16.3

Bullwhip Effect
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

Organization
Campbell Soup Hewlett-Packard Sport Obermeyer National Bicycle Wal-Mart

Benefit
Doubled inventory turnover rate Cut supply costs 75% Doubled profits and increased sales 60% Increased market share from 5% to 29% 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 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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Elements of Supply Chain Management Table 11.1

Element
Customers Forecasting Design Processing Inventory Purchasing Suppliers Location Logistics

Typical Issues
Determining what customers want Predicting quantity and timing of demand Incorporating customer wants, mfg., and time Controlling quality, scheduling work 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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Materials Movement
Figure 11.4
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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Table 11.4 Perspective

Reliability

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

Expenses

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

1. Inventory-transportation costs
Cross-docking

1. Lead time-transportation costs 2. Product variety-inventory

Delayed differentiation

1. 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 Potential Improvement Benefits Possible Drawbacks
Traffic congestion Increased costs May not be feasible May need absorb functions Less variety

Large inventories Long lead times

Smaller, more frequent Reduced holding deliveries costs Delayed differentiation Quick response Disintermediation

Large number Modular of parts Cost Quality Variability Outsourcing Shorter lead times, better forecasts

Fewer parts Simpler ordering Reduced cost, higher quality

Loss of control

Able to match Less variety 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. 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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Figure 11.5

Purchasing Interfaces
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

Adversary
Many

Partner
One or a few Long-term Moderately important High High At the source; vendor certified High Relatively high Nearness is important
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Length of relationship May be brief Low price Reliability Openness Quality Volume of business Flexibility Location Major consideration May not be high Low May be unreliable; buyer inspects May be low Relatively low Widely dispersed

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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