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Chapter 4 E-Commerce and Supply Chain Management

Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition Wiley 2010
PowerPoint Presentation by R.B. Clough UNH M. E. Henrie - UAA

2010 Wiley

Supply Chains & SCM

A supply chain is the network of all the activities involved in delivering a finished product/service to the customer Sourcing of raw materials, assembly, warehousing, order entry, distribution, delivery Supply Chain Management is the vital business function that coordinates all of the network links Coordinates movement of goods through supply chain from suppliers to manufacturers to distributors Promotes information sharing along chain like forecasts, sales data, & promotions
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A Supply Chain can provide strategic advantage

Why Nokia Is Leaving Moto in the Dust

Nokia's supply-chain management may be the best of any company in the world. It has a big head start in fast-growing markets such as China and India. And it has $9.5 billion in cash and practically no debt, so it can invest far more than rivals on developing new products or conquering new marketsand thus build even more intimidating economies of scale. "We are about to report our billionth customer, so we must be doing something right," says Anssi Vanjoki, a Nokia executive committee member responsible for multimedia devices. Thanks to those advantages, Nokia's global market share has climbed to 37%, and some in the industry think it could hit 40% this year.
Business Week July 19, 2007 2010 Wiley 3

Supply Chain Management is Challenging!


Even More Boeing 787 Delays? Given assembly and design issues, deliveries of the 787 Dreamliner aren't likely until late 2009. Some dissatisfied customers are discussing compensation Deliveries of the Dreamliner are already 10 months behind schedule and glitches along Boeing's complex global supply chain slowed production and forced the company to redesign its wing box. Asked on Apr. 3 about the possibility of yet another delay, Boeing (BA) spokeswoman Yvonne Leach simply acknowledged that an announcement of a revised schedule is coming soon.
Business Week April 4, 2007

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A Supply Chain can be a matter of life & death


Iran has the second largest natural gas reservoir of the world but its supply network has been overwhelmed by high demand. Both reformists and conservatives are increasingly asking the president why Iranians are dying from the cold while sitting on the massive gas fields. As much as 22 inches of snow fell in areas of northern and central Iran in early January, the heaviest snowfall in more than a decade. Local media have reported 64 cold-related deaths this winter and say gas cuts are to blame. Breitbart.com, January 21, 2008
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Key Material Decisions

Location Capacity Lot sizes; that is, how much to make in a production run Inventory (mainly raw material) Customer orders Costs, market prices EDI; web-based;
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Key Information & Related Decisions


Key Material Decisions

Location Capacity Sourcing of components necessary resources: labor, fuel, equipment Lot sizes; that is, how much to make in a production run Inventory (in all forms)
Supplier shipments Customer orders Costs, market prices
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Key Information & Related Decisions

Warehouse/Distribution Centers

Key Material Decisions Location Capacity Inventory (finished & semi-finished) Key Information & Related Decisions

Customer orders Manufacturer/Assembler shipments

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Key Material Decisions Location Inventory (finished goods) Key Information & Related Decisions

Customer orders Shipments from Warehouses/DCs Market prices

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Logistical or Physical

Routes Modes Capacities Rates Tracking of shipments Orders Contracts Regulations

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Components of a Supply Chain

External Suppliers source of raw material

Tier one supplier supplies directly to the processor Tier two supplier supplies directly to tier one Tier three supplier supplies directly to tier two

Internal Functions include processing functions

Processing, purchasing, planning, quality, shipping

External Distributors transport finished products to appropriate locations

Logistics managers are responsible for traffic management and distribution management
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Components of a Supply Chain

External Distributors transport finished products to appropriate locations

Logistics managers are responsible for managing the movement of products between locations. Includes;

traffic management arranging the method of shipment for both incoming and outgoing products or material distribution management movement of material from manufacturer to the customer
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Sourcing Issues

Which products to produce in-house and which are provided by other supply chain members Vertical integration a measure of how much of the supply chain is owned by the manufacturer

Backward integration owning or controlling of sources of raw material and component parts Forward integration owning or control the channels of distribution

Vertical integration related to levels of insourcing or outsourcing products or services

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Insourcing vs. Outsourcing

What questions need to be asked before sourcing decisions are made?

Is product/service technology critical to firms success? Is product/service a core competency? Is it something your company must do to survive?
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Make or Buy Analysis

Analysis will look at the expected sales levels and cost of internal operations vs. cost of purchasing the product or service
TC Buy = FCBuy + (VCBuy Q ) Total Cost of Outsourcing : Total Cost of Insourcing :

TCMake = FCMake + (VCMake Q ) Indifference Point : FCBuy + (VCBuy Q ) = FCMake + (VCMake Q )

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Example 1: Make-or-Buy analysis- Mary and Sue, have decided to open a bagel shop. Their first decision is whether they should make the bagels on-site

or by the bagels from a local bakery. If they buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually. They can buy the bagels for $0.40 each. If they make the bagels in-house they will need a small kitchen at a fixed cost of $15,000 annually. It will cost them $0.15 per bagel to make. The believe they will sell 60,000 bagels.

Mary and Sue wants to know if they should make or buy the bagels. FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q) $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q) Q = 56,000 bagels Since the costs are equal at 56,000 bagels and Mary and Sue expect to use 60,000 bagels, they should make the bagels in-house
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Critical Factors in Successful Partnership Relations

Critical factors in successful partnering include;

Impact attaining levels of productivity and competitiveness that are not possible through normal supplier relationships Intimacy working relationship between two partners Vision the mission or objectives of the partnership
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Critical Factors in Successful Partnership Relations

Have a long-term orientation Are strategic in nature Share information Share risks and opportunities

Share a common vision Share short/long term plans Driven by end-customer needs

Benefits of Partnering

Early supplier involvement (ESI) in the design process Using supplier expertise to develop and share cost improvements and eliminate costly processes Shorten time to market
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Suppliers & Partnerships

The key to Stallkamp's first revolution was the emphasis on cooperation among carmakers and their suppliers. Rather than dictate lower parts prices to suppliers, he offered incentives. If suppliers found a way to save a dollar, Stallkamp let them keep 50 cents. And instead of playing competitors off against one another, he pledged loyalty to Chrysler's incumbent suppliers, as long as they could meet contract terms. The idea is to create alliances of suppliers who have agreed to centralize the control of their supply-chain operations. Suppose that a dozen companies are involved in the manufacturing and assembly of a car seat. Today, the small fry make and deliver parts to a larger integrator, who assembles the seat and delivers it to a General Motors Corp. (GM ) or a Ford Motor Co. (F ) The staff at each of these companies watches over the flow of goods, manages delivery dates, and tends to their clients.
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Suppliers & Partnerships

Q: Why do we need to change the way we deal with the supply chain? A: [Stallkamp] In a nutshell, I still believe that supply chains need to be actively managed by someone. When I was at [Chrysler], we had a concerted policy to help our suppliers and cooperatively manage the supply chain. Now, the OEMs [original equipment manufacturers--i.e., the auto makers] seem to be moving away from active management to more passive management. When that happens, I believe it's up to the supply base itself to try to find another alternative


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SCM Factors

SCM must consider the following trends, improved capabilities, & realities:

Consumer Expectations and Competition power has shifted to the consumer Globalization capitalize on emerging markets Government Regulations and E-Commerce issues of Internet government regulations Environment Implications of E-Commerce recycling, sustainable eco-efficiency, and waste minimization
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Global SCM Factors

Managing extensive global supply chains introduces many complications

Geographically dispersed members - increase replenishment transit times and inventory investment Forecasting accuracy complicated by longer lead times and different operating practices Exchange rates fluctuate, inflation can be high Infrastructure issues like transportation, communication, lack of skilled labor, & scarce local material supplies Product proliferation created by the need to customize products for each market
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The Role of Purchasing

Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold

Ethics considerations is a constant concern Developing supplier relationships is essential Determining how many suppliers to use Developing partnerships
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The Traditional Purchasing Process

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The E-purchasing Process

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The Bullwhip Effect

Bullwhip effect - the inaccurate or distorted demand information created in the supply chain Causes are generated by: demand forecasting updating, order batching, price fluctuations, rationing and gaming

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Bullwhip Effect

(from Chase, Jacobs, & Aquilano)

The magnification of variability in orders in the supplyThe magnification of variability in orders in the supplychain chain
Retailers Orders Wholesalers Orders Manufacturers Orders

Order Quantity

Order Quantity



Order Quantity


A lot of retailers A lot of retailers each with little each with little variability in variability in their orders. their orders.

can lead to can lead to greater variability greater variability for a fewer number for a fewer number of wholesalers, of wholesalers, and and
2007 Wiley McGraw-Hill

can lead to even can lead to even greater variability greater variability for a single for a single manufacturer. manufacturer.

The Bullwhip Effect

Counteracting the Effect:

Change the way suppliers forecast product demand by making this information available at all levels of the supply chain Share real demand information (POS terminals) Eliminate order batching Stabilize pricing Eliminate gaming
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Issues Affecting Supply Chain Management

Information technology enablers include the Internet, Web, EDI, intranets and extranets, bar code scanners, and point-of-sales demand information E-commerce and e-business uses internet and web to transact business
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Supply Chain Logistics & Distribution

Warehouses involved in supply chain distributions and include

Plant warehouses Regional warehouses Local warehouses General used for long-term storage Distribution used for short-term storage, consolidation, and product mixing
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Warehouses can either be

Supply Chain Logistics & Distribution

Transportation consolidation warehouses consolidate less-thantruckload (LTL) quantities into truckload (TL) quantities Product mixing warehouse value added customer service of grouping a variety of products into a direct shipment to the customer
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Supply Chain Logistics & Distribution

Services are offered can improve customer service by moving goods closer to the customer and thus reducing replenishment time Crossdocking or movement of material without storage and order-picking material while still performing the receiving and shipping functions.
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Supply Chain Logistics & Distribution

Radio Frequency Identification Technology (RFID) automated data collection technology which relies on radio waves to transfer data between reader and RFID tag Third-party Service Providers ease of developing an electronic storefront has allowed the discovery of suppliers from around the world
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Integrated SCM

Implementing integrated SCM requires:

Manufacturers Goals

Analyzing the whole supply chain Starting by integrating internal functions first Integrating external suppliers through partnerships

Suppliers Goals

Increase sales volume Reduce costs Reduce duplication of effort Increase customer loyalty Improve quality Reduce cost Reduce lead time Improve demand data Implement cost reduction Improve profitability program Involve suppliers early Reduce time to market 2010 Wiley


Supply Chain Measurements

Measuring supply chain performance

Traditional measures include;

Return on investment Profitability Market share Revenue growth Customer service levels Inventory turns Weeks of supply 2010 Wiley

Additional measures


Supply Chain Performance Measurement

Customer demands for better-quality requires companys to develop ways to measure improvements Some measurements include

Warranty costs Products returned Cost reductions allowed because of product defects Company response times Transaction costs 2010 Wiley


Eliminating Sources of Waste in Supply Chain

Overproduction: dont build product before needed Delay between activities in chain: eliminate them Unnecessary transport or conveyance of product: includes both internal and external movement
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Eliminating Sources of Waste in Supply Chain cont

Unnecessary movement of people: includes travel or reaching due to poorly designed work space Excess inventory ready and in position: includes early deliveries, excess inventory, etc. Suboptimal use of space: trailer loads, warehouses, etc. Errors that cause rework: billing errors, inventory discrepancies, etc.
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Types of E-Commerce

E-commerce is defined as the use of the Internet and the Web to transact business Two types of e-commerce are

Business-to-business (B2B) and Business-to-consumer (B2C)

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Types of E-Commerce

Business-to-Business (B2B) Evolution:

Automated order entry systems started in 1970s Electronic Data Interchange (EDI) started in the 1970s Electronic Storefronts emerged in the 1990s Net Marketplaces emerged in the late 1990s

Benefits of B2B E-Commerce

Lower procurement administrative costs, Low-cost access to global suppliers Lower inventory investment due to price transparency/reduced response time Better product quality because of increased cooperation between buyers and sellers, especially during the product design and development
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Types of E-Commerce

Business-to-Consumer (B2C):

On-line businesses try to reach individual consumers Advertising Web site offers providers and opportunity to advertise Subscription Web site charges a subscription fee for access to the site Transaction company receives a fee for executing a transaction Sales a means of selling goods, information, or service directly to customers Affiliate companies receive a referral fee for directing business to an affiliate
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B2C revenue model sources


E-Commerce Case: Amazon.com

In 2003, Amazon achieved a net profit margin of 0.7%. Though not spectacular, this was a milestone for a company that had run large losses in each and every year since its founding as an online bookstore in 1995. Healthier net profit margins of 8.5% and 4.2% followed in 2004 and 2005, respectively. One of the keys to attaining profitability was the reconfiguration of Amazons supply chain. At first Amazon had attempted to implement a pure pull system without the use of warehouses. The internet had seemed to pave the way to this mode of operation. Most of Amazons books came from the wholesaler Ingram Book Group. Ingram maintained inventory but received an appreciable amount of sales revenue in return. In addition, Amazon shared Ingrams inventory with other booksellers, leading to costly stockouts during peak demand periods, such as the holidays. Amazon adapted by redesigning its supply chain to include warehouses that are managed as push operations. The retail part of operations, however, remains a pull system, satisfying demand in the form of individual orders.
Sources: Designing and Managing the Supply Chain, Third Edition, by D. Simchi-Levi, P. Kaminsky, and E. Simchi-Levi, McGraw-Hill Irwin, Boston. Hoovers online, http://www.hoovers.com/ 2010 Wiley 47

E-Commerce Case: Furniture.com

Furniture.com was a shooting star during the dot.com boom in the late 90s. It featured thousands of products and at its peak drew 1,000,000 visitors per month to its website. But while Furniture.com was racking up $22 million in sales through the first 9 months of the year 2000, it was also incurring huge logistics costs because of inefficient delivery processes. While furniture production lot sizes are typically small and activated by orders, economic delivery lot sizes are usually much larger and regularly scheduled, causing a mismatch in the supply chain. The firm also encountered unexpected problems maintaining an alliance with 6 regional distributors along with thorny repair and return issues. Business was permanently tabled at Furniture.com in November, 2000.

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E-Commerce Case, continued: Furniture.com

Or so it seemed! In mid-2002, several former employees rallied investors to re-start the company. The new Furniture.com eschews distribution centers and a fulfilment infrastructure. The previous Furniture.com followed the model en vogue at the time, the model getting funded at the time, which was to be the next Amazon of the relevant category said President Carl Prindle. In markets where it operates, the new company partners with brickand-mortar retailers, who provide the distribution. The firms focus is now exclusively on upgrading its online marketing, providing, for instance, a room planner to online shoppers. A percentage of each online sale is remitted to Furniture.com in return.
Sources: Designing and Managing the Supply Chain, Third Edition, by D. Simchi-Levi, P. Kaminsky, and E. Simchi-Levi, McGraw-Hill Irwin, Boston.Reincarnated Furniture.com partners with retailers, by Mike Duff, DSN Retailing Today; 2/7/2005, Vol. 44 Issue 3, p6, 2p 2010 Wiley 49

Current Trends in SCM

Increased use of electronic marketplace such as

E-distributors independently owned net marketplaces having catalogs representing thousands of suppliers and designed for spot purchases E-purchasing companies that connect on-line MRO suppliers to business who pay fees to join the market, usually for long-term contractual purchasing
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Current Trends in SCM continued

Increased use of electronic marketplace such as

Value chain management automation of a firms purchasing or selling processes Exchanges marketplace that focuses on spot requirements of large firms in a single industry Industry consortia industry-owned markets that enable buyers to purchase direct inputs from a limited set of invited suppliers

Decreased supply chain velocity due to greater distances with greater uncertainty and generally less efficient.
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SCM Across the Organization

SCM changes the way companies do business. Accounting shares SCM benefits due to inventory level decreases Marketing benefits by improved customer service levels Information systems are critical for information sharing through PSO data, EDI, RFID, the Internet, intranet, and extranets Purchasing is responsible for sourcing materials Operations use timely demand information to more effectively plan production schedules
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Case in Supply Chain Network Design: Procter & Gamble In the 1990s, P&G was facing competitive pressure primarily with regard to overall cost. Excess capacity at plants, largely due to successful quality initiatives in the 80s, and reduced distribution requirements, largely due to redesigned compactified products, presented P&G with an opportunity to re-design their supply chain. Comprised of over 50 product categories, over 60 plants, 15 distribution centers, and over 1000 customers, the redesign was a major project involving over 500 people organized in more than 30 teams. Analysis of this supply chain led to the formulation of a large-scale mixed integer linear program, An important feature of the DSS developed around this model was the visualization capability afforded by integrating a Geographic Information System (GIS) into the user interface. The GIS gave managers a good grip on solutions generated by the DSS under various scenarios, such as that of closing specific plants. The documented pre-tax savings of roughly $200 million annually is proof of the pudding indeed in the case of this DSS. Sources: "Blending OR/MS, Judgment, and GIS: Restructuring P&G's Supply Chain" by Jeffrey Camm et al.
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3M Supply Chain Design


EXPANSION AND CONTRACTION Buckley plans to spend $1.5 billion on 18 new plants or major expansions around the world, including 11 outside the U.S., with four new factories in China alone. The thinking is that the new factories will add much needed capacityespecially abroad, where 3M pulls in more than 60% of its revenues, and where it expects to get up to 75% over the next several years. Despite a vast, complicated network of 64 international subsidiary companies, just 35% of 3M's manufacturing capacity is overseas. In Buckley's view, the plant expansions won't just add capacitythey are an opportunity to make the whole logistics chain more efficient by shortening supply lines and bringing production closer to local markets. How did things get that way at 3M? For a long time, one of the tenets of the 3M catechism was "make a little, sell a little."
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Once a project was green-lighted, it might receive funding, but the developer or scientist would have to make small quantities of the product in an ad hoc manner by using idle spots of time at factories throughout the 3M system. It was a way to minimize the financial risk of a new product, and it served the company quite wellwhen its infrastructure and sales were centered mainly in the U.S. KEEPING INVENTORY MOVING Now, "make a little, sell a little" means that a typical product might be extruded in Canada, machined in France, packaged in Mexico, and sold in Japan. That's costly, and it means that half of 3M products spend 100 days traveling through the supply line, according to Buckley, even before it has to jump any local bureaucratic hurdles. The net result is that 3M has a lot of money tied up in inventory around the world that's just sitting on boats, in trucks, and in warehouses. In the fourth quarter of 2006, for instance, sales rose about $500 million. But working capital went up $450 million and receivables increased $250 million, Buckley says. If that trend continues, "You'd be borrowing money to grow," he says.
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Chapter 4 Highlights

Every organization is part of a supply chain, either as a customer or as a supplier. Supply chains include all the processes needed to make a finished product, from the extraction of raw materials through the sale to the end user. SCM is the integration and coordination of these efforts. The bullwhip effect distorts product demand information passed between levels of the supply chain. The more levels that exist, the more distortion that is possible. Variability results from updating demand estimates at each level, order batching, price fluctuations, and rationing
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Chapter 4 Highlights


Many issues affect supply chain management. The Internet, the WEB, EDI, intranets, extranets, bar-code scanners, and POS data are SCM enablers. B2B and B2C electronic commerce enable supply chain management. Net marketplaces bring together thousands or suppliers and customers. Allowing for efficient sourcing and lower transaction costs.
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Chapter 4 Highlights


Global supply chains increase geographic distances between members, causing greater uncertainty in delivery times. Purchasing has a major role in SCM. Purchasing is involved in sourcing decisions and developing strategic longterm partnerships.
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Chapter 4 Highlights


Ethics in supply management is an ongoing concern. Since buyers are in a position to influence or award business, it is imperative that buyers avoid any appearance of unethical behavior or conflict of interest. Companies make insourcing and outsourcing decisions. These make-or-buy decisions are based on financial and strategic criteria.
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Chapter 4 Highlights


Partnerships require sharing information, risks, technologies, and opportunities. Impact, intimacy, and vision are critical to successful partnering. Supply chain distribution requires effective warehousing operations. The warehouses provide transportation, consolidation, product mixing, and service.
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Chapter 4 Highlights


Integrated SCM usually begins with the manufacturer integrating internal processes first. The, the company tries to integrate the external suppliers. The last step is integrating the external distributors.

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Chapter 4 Highlights


A company needs to evaluate the performance of its supply chain. Regular performance metrics (ROI, profitability, market share, customer service levels, etc.) and other measures that reflect the objectives of the SC are used. The emergence of net marketplaces has significantly affected SCM. As supply chains become longer, it is likely that supply chain velocity will decrease. It is possible that a more strategic and integrated approach is needed to advance SCM to the next level.
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