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What is Supply-Chain Management?

Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together.

Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer.

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Bullwhip Effect Or

der Q

u ant

ity

Time

Retailer’s Orders

The magnification of variability in orders in the supply-chain.

Time

Wholesaler’s Orders

Orde

r Qu a

ntity

Time

Manufacturer’s Orders

Orde

r Qu a

ntity

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Matching Supply-Chains with Products

EfficientSupply-Chain

ResponsiveSupply-Chain

FunctionalProducts

InnovativeProducts

Match

MatchMismatch

Mismatch

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What is Outsourcing?

Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers.

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Reasons to Outsource- Categories

Organizationally-driven Improvement-driven Financially-driven Revenue-driven Cost-driven Employee-driven

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Reasons to Outsource Quality/reliability/consistency Best Practices/effectiveness/economies of scale Business restructuring Access to technology/new ideas Greater management control through better record keeping

and reporting Customer service improvement Fixed price/cost savings potential Clear accountability Improved ability to focus on company’s core business

strategies Access to superior training/resources Elimination of recruiting, hiring, and retaining motivated

employees for non-core functions Career path for non-core employees

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Outsourcing Issues Managing multiple suppliers vs. staff Impact of change/support to employees during transition Coordination of internal vs. external activities (must be

seamless!) Determination of appropriate performance measurements Resources/funding available for the change Perceived loss of management control Payment for outsourced resources Financial health of supplier Competitive climate Confidential information Quality improved?

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Outsourcing Issues (cont’d)

Matching right project with right supplier Don’t outsource a bad process Don’t buy on price alone Can’t outsource accountability Don’t start with an answer and try to find the problem Excellent communications needed Misconceptions (e.g., always less expensive; all tasks can be

outsourced) Training needs Need mutual respect for supplier to help you achieve your goals! Need to retain expertise if it doesn’t work (experts walk away!) Harder to go back once outsourced (insourcing)

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Single Supplier Strategy

Should there be more than one supplier for a specific commodity?

What if the commodity is key to the core business?

What are the trade-offs?

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Single Supplier Strategy- Advantages

o Time saved dealing with many supplierso Larger batch sizes possible (more stable process)o Fewer changeovers; less idle timeo Captive assembly lines possible; easy to schedule prioritieso Supplier can demand higher quality from its suppliers due to

larger quantitieso More time for corrective actiono Reduction in price due to quantity given to single suppliero Reduction in incoming quality rejections (e.g., 2% to 0.3%)o Reduction in variability

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Single Supplier Strategy- Advantages (cont’d)

o Easier to share responsibilities for quality; more commitment; better communications

o Greater moral responsibility for quality from supplier (as opposed to arrogance)

o More volume available if industry shortages of materialso Simpler and faster trainingo Improved document and sample control (less specs, more up-to-date, etc.)o Minimized identification issues when field failureso One stop corrective actionso Reduced cost of quality (e.g., less travel, telephone costs, executive time,

etc.)o More time to communicate with customerso Priority access to supplier’s R&D breakthroughs 

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Single Supplier Strategy- Limitations

• Fewer brainstorming opportunities and competitive benchmarking opportunities (but can offset with industry research, benchmarking, FMEA analysis, leveraging best ideas of single supplier, etc.)

o Dependence on one supplier to get it right (but can use SPC for early warnings of process deviations)

o Emergency breakdown at single supplier facility (can be offset with contingency planning, dormant supplier preparedness, and long-term ordering)

o Potential loss of diversity of suppliers  

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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.

Also key are independent modules, flexibility, responsiveness and cost-effectiveness

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Material Requirements Planning

Dependent demand drives Materials requirements planning (MRP)

MRP is the logic for determining the number of dependent demand items needed.

MRP provides time scheduling information specifying when each of the dependent demand items should be ordered or produced.

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Introductory Example - Dependent Demand

Product Structure Tree for Assembly A Lead Times

A 1 dayB 2 daysC 1 dayD 3 daysE 4 daysF 1 day

Demand

Day 10 50 ADay 8 20 B (Spares)Day 6 15 D (Spares)

Create a schedule to satisfy demand.

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

LT = 1 day

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Day: 1 2 3 4 5 6 7 8 9 10A Required 50

Order Placement 50

Day: 1 2 3 4 5 6 7 8 9 10A Required 50

Order Placement 50B Required 20 200

Order Placement 20 200

LT = 2

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

Spares

40 + 15 spares

Part D: Day 6

Day: 1 2 3 4 5 6 7 8 9 10A Required 50

LT=1 Order Placement 50B Required 20 200

LT=2 Order Placement 20 200C Required 100

LT=1 Order Placement 100D Required 55 400 300

LT=3 Order Placement 55 400 300E Required 20 200

LT=4 Order Placement 20 200F Required 200

LT=1 Order Placement 200

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

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Master Production Schedule (MPS)

Time-phased plan specifying how many and when the firm plans to build each end item Aggregate Plan

(Product Groups)

MPS(Specific End Items)

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Master Production Schedule:Time Fences

Frozen

Moderately Firm

Flexible

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Master Production Schedule: Time Fences

8 15 26

Weeks

FrozenModerately

Firm Flexible

Firm Customer Orders

Forecast and availablecapacity

Capacity

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Material Requirements Planning :Bill of Materials (BOM) File

A complete product description Materials Parts/Components Production sequence/“Recipe”

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Manufacturing Resource Planning (MRP II)

Integrated software system to plan and monitor all resources of a manufacturing firm: Manufacturing Marketing Finance Purchasing Engineering

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Is there enough capacity for the planned order schedule?

Production PlanningMaster Production SchedulingMaterial Requirements PlanningCapacity Requirements Planning

Realistic?No

Feedback

Execute:Capacity PlansMaterial Plans

Yes

Feedback

Closed Loop MRP

Firm orders from knowncustomers

Forecastsof demand

from randomcustomers

Aggregateproduct

plan

Materialplanning

(MRP)

Engineeringdesign

changes

Bill ofmaterial

file

Inventorytransactions

Inventoryrecord

file

Reports

Masterproductionschedule

(MPS)

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A B

C(1)

H(1)I(2)

F(2)

E(2)

I(2)

F(2)

C(2)

H(1)

G(2)

DVD Model DVD Model

I(2)

F(2)

D(2)

G(2)

Problem 18: (Corrected BOM)