Chapter 12

Supply Chain Management

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Supply Chain

• A supply chain is the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service.

• Also referred to as a value chain

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Typical Supply Chainfor a Manufacturer

Supplier

Supplier

Supplier

Storage Mfg. Dist. Retailer CustomerStorage

Management 3620 Chapter 12 Supply Chain Management 12-4

Supplier

Supplier

Storage} Service Customer

Typical Supply Chainfor a Service

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Customers are Suppliers

InitialSupplier

Customer

Supplier

Customer

Supplier

Customer

Supplier

FinalCustomer

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Need for Supply Chain Management

• 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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Benefits of Supply Chain Management

Organization Benefit

Campbell Soup Doubled inventory turnover rate

Hewlett-Packard Cut supply costs 75%

Sport Obermeyer Doubled profits and increased sales 60%

National Bicycle Increased market share from 5% to 29%

Wal-Mart Largest and most profitable retailer in the world

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Key Elements ofSupply Chain Management

Deciding how to best move and store materialsLogistics

Determining location of facilitiesLocation

Monitoring supplier quality, delivery, and relationsSuppliers

Evaluating suppliers and supporting operationsPurchasing

Meeting demand while managing inventory costsInventory

Controlling quality, scheduling workProcessing

Incorporating customer wants, mfg., and timeDesign

Predicting quantity and timing of demandForecasting

Determining what customers wantCustomers

Typical IssuesElement

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Purchasing in Supply Chain Management

• Increasing outsourcing

• Increasing conversion to lean production and JIT requirements

• Increasing globalization

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Supply Chain Issues

Quality controlProduction planning and control

Inventory policiesPurchasing policiesProduction policiesTransportation policiesQuality policies

Design of the supply chain Partnering

Operating IssuesTactical IssuesStrategic Issues

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SCOR Performance MeasuresPerspective Performance Measure

Reliability On-time deliveryOrder fulfillment lead timeFill rate (fraction of demand met from stock)Perfect order fulfillment

Flexibility Supply chain response timeUpside production flexibility

Expenses Supply chain management costsWarranty cost as a percent of revenueValue added per employee

Assets/utilization

Total inventory days of supplyCash-to-cash cycle timeNet asset turns

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Logistics

• Logistics– The movement of materials and

information within a facility and incoming and outgoing shipments of goods and materials

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Figure 12-5

Storage

Workcenter

Work centerWork center Work

center

Storage

Shipping

Materials Movement

Receiving

Storage

Supplier Warehouse

Customer

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Traffic Management

• Overseeing the shipment of incoming and outgoing materials and goods

• Handles schedules and decisions on shipping method and times– Costs of alternatives– Regulations– Quantities and timing– Risk of delays

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Electronic Data Interchange (EDI)

• Direct, computer-to-computer transmission of interorganizational transactions– Purchase orders

– Shipping invoices

– Debit or credit memos

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Reasons for Using EDI• 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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Quick Response• An application of EDI technology in the retail

industry• Based on scanning bar codes at point-of-

sale devices and transmitting information directly to vendors

• Creates a JIT replenishment system keyed to customer buying patterns

• Benefits– Reduced dependence on forecasts– Achieve better match between supply and

demand– Savings of inventory carrying costs

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Distribution Requirements Planning (DRP)

• A system for inventory management and distribution planning

• Extends the concepts of material requirements planning (MRP) to multiechelon warehousing systems

• Useful in planning and coordinating transportation, warehousing, workers, equipment, and financial flows

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Just-In-Time Deliveries

• Suppliers are required to make frequent small deliveries on a precise schedule

• Increases traffic into the customer firm

• May be an increase in transportation cost per unit

• Any disruption in the supply chain is felt very quickly throughout the chain

• Some firm employ third-party logistics

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E-Commerce

• The use of electronic technology to facilitate business transactions

• Applications include– Internet buying and selling

– e-mail

– Order and shipment tracking

– EDI

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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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• 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

Disadvantages of E-commerce

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Business-to-Business (B2B) Market Places

• Buyer exchange (reverse auction)

• MRO-catalog hub

• Supplier exchange

• Business process operations (BPO)

• Neutral exchange

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Steps in Creating an Effective Supply Chain

• Develop strategic objectives and tactics

• Integrate and coordinate activities in the internal portions of the supply chain

• Coordinate activities with suppliers and with customers

• Coordinate planning and execution across supply chain

• Consider strategic partnerships

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Supply Chain Performance Drivers

• Quality

• Cost

• Flexibility

• Velocity– material

– information

• Customer service

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Challenges in Designing and Operating a Supply Chain

• Barriers to integration of separate 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 of 2)• Lot size-inventory

– Bullwhip effect – inventories increase as you move backward through the supply chain

• Inventory-transportation costs– Combine order to obtain full truckloads– Downsize truck capacity– Ship late in the process and cross-

docking

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Trade-offs (2 of 2)

• Lead time-transportation costs– Time required for supplier to produce

truckload

• Product variety-inventory– Delayed differentiation

• Cost-customer service– Disintermediation - bypassing parts of

the supply chainSkip next slide

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Bullwhip Effect

Tier 2Suppliers

Tier 1Suppliers

Producer Distributor Customers

Ordering

Amount ofinventory=

return

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Supply ChainBenefits and Drawbacks

Problem PotentialImprovement

Benefits PossibleDrawbacks

Large inventories

Smaller, more frequent deliveries

Reduced holding costs

Traffic congestionIncreased costs

Long lead times

Delayed differentiationDisintermediation

Quick response May not be feasibleMay need to absorb functions

Large number of parts

Modular design Fewer partsSimpler ordering

Less variety

CostQuality

Outsourcing Reduced cost, higher quality

Loss of control

Variability Shorter lead timesBetter forecasts

Able to match supply and demand

Increased costsIncreased coordination

Table 12-5