OPER3208-001 Supply Chain Management

OPER3208-001Supply Chain Management

Fall 2006

Instructor: Prof. Setzler

• Taylor, Chapter 2

Chapter 2: The Rules of the Game(Taylor)

• Facilities and Links– Supply chain

• A set of facilities connected by transportation lanes

• Illustrated through flow charts


• Facilities and Links – Flow Charts– Facilities

• Symbol: Rounded rectangles• Fall into 2 categories

1. Production facilities2. Storage facilities

– Transportation lanes• Symbol: Arrows• Categories by mode of transportation

– Roadways, railways, waterways, sea lanes, air lanes, and pipelines


• Facilities and Links – Flow Charts– SCs extend from the extractor of raw materials (i.e.,

mines, farms, etc.) to the consumer of finished goods

– From Tree to Book (Figure 2.1)

YouBookstoreBinderyPrint Shop

Paper Mill

Timer Company

Consumer

Extractor

BookPagesPaperWood


• Facilities and Links – Flow Charts– SCs extend from the extractor of raw materials (i.e.,

mines, farms, etc.) to the consumer of finished goods


• Facilities and Links – Flow Charts– Inventories

• 3 different forms1. Raw materials inventory

– Materials ready for use in production

2. Work-in-process (WIP) inventory

– All materials being worked on

3. Finished goods inventory– Holds completed products ready for shipment



• Three Kinds of Inventory (Figure 2.2)

Finished Goods

Work-in-Process

Raw Materials


• Facilities and Links – Storage facilities

– Warehouses– Usually contain only a single kind of inventory

– Distribution centers– Do final assembly

– 3 types of inventories

– Cross docks– used only to transfer goods between trucks– Do not maintain any inventory


• Facilities and Links – Lanes

• Used to move inventory between facilities along a mode of transportation

• Combination of vehicles and containers– Truck tractors and railway engines

» Can be decoupled from containers– Delivery vans and tanker ships

» Container built in

• Decoupling is important– Offers more flexibility in routing, dispatching, temporary storage, and

other activities

• Pipeline– Vehicle and container are merged with the lane itself– Pipes contain the inventory in transit


• Facilities and Links – Each mode of transportation offers a unique mix of

speed, cost, availability, and capability– Example,

• Air is fast, expensive, available in large cities, but limited to small, lightweight packages

• Sea is slow, cheap, available at cities with ports, and unlimited size and weight standards

• Volume tradeoffs– Trucking

» Cheaper to send full truckload (FTL) shipments than less-than-full truckloads (LTL) shipments


• Facilities and Links – Limited geographical region

• Usually uses a single mode from point A to point B

– Large geographical regions• Shipments might use 2 or more modes• Inter-modal transportation• Example

– Shipment might travel rail to seaport by ship across ocean finish journey by truck


• Facilities and Links – Transportation lanes contain inventory

• In-transit inventory– 4th type of inventory

• Different from other inventories– Unavailable for use

– At high risk (theft or accident)

– Subject to delays



• Facilities and Links – Package carriers (e.g., UPS and FedEx)

• Viewed as another mode of transportation• They use a combination of air and highway transport

– Have their own fleet of planes and trucks

• They are fast, relatively expensive, available in most locations, but limited to small, lightweight packages


• Demand, Supply, and Cash– Essential goal of SCM

• Achieve an orderly flow of goods from beginning (extractor) to end (customer)

• Transportation management + materials management = logistics

• Logistics – Manages the flow of materials from suppliers through 3 internal

inventories to customer• Supply Chain Management

– Logistics + manages the flow of demand + the flow of cash up the chain» Demand movement» Cash motivation


• Demand, Supply, and Cash– Great insight

• The key to managing the flow of goods effectively lies in synchronizing all three flows1. Flow of Demand

2. Flow of materials

3. Flow of Cash


• Demand, Supply, and Cash– Demand flows up SC

• Orders

– Products flow down SC • Shipments

– Cash flows up SC to pay for products • Payments


• Demand, Supply, and Cash– Most flows are discrete, not continuous

• Exception: products flowing through a pipeline• Discrete: distinct “packets” that convey particular quantities

at particular times• SCM is concerned with finding the best tradeoffs between

size and frequency of “packets”– Economies of scale favor large, infrequent orders– To reduce inventory costs it may be better to have small,

frequent shipments

• The smaller the packets, the more closely the SC operates as a continuous flow



• Demand, Supply, and Cash– The exchange of demand, shipments (supply) and

cash takes place between customers and suppliers• Customers and suppliers can be any where within the SC• Some textbooks:

– Only use “customer” to refer to ultimate end user– Only use “supplier” to refer to initial supplier of raw materials or

components

– Within the SC they use buyer and seller


• Demand, Supply, and Cash– Orders trigger shipments

• Depending on production strategy, they may or may not trigger immediate production

• Make-to-stock strategy– Supplier makes product prior to demand and holds them in

finished goods inventory– Demand is satisfied by this inventory

• Make-to-order strategy– Supplier doesn’t build (make) a product until it has a firm order

• Assemble-to-order strategy– Intermediate strategy– Product is partially built in advance of demand, but final

assembly is postponed until an order is received



• Demand, Supply, and Cash– Example,

• Make-to-stock strategy– Sony

• Make-to-order strategy– Boeing

• Assemble-to-order strategy– Dell


• Demand, Supply, and Cash– Make-to-stock strategy

• Inventory is “pushed” down the SC• Relies on demand forecasting to determine

– How much inventory to produce– Where to hold the inventory

– Make-to-order strategy• Inventory is “pulled” down the SC• Forecasting less important, however long-term forecasts are

important for setting levels of manufacturing capacity– SCs are often referred to as either push chains or pull chains

• All chains are a combination of push and pull– Customers pull– Extractors push– Somewhere between is the push-pull boundary



• Demand, Supply, and Cash– Cash flow is the flow that receives the least attention

• Cash is the driver for the SC• Cash flow performance is the worst of the three flows• Accelerating the flow of cash is coming to be recognized as

a key element of SC excellence


• Demand, Supply, and Cash– Information also moves across the chain

• Information is included in the three flows• Other information includes:

– Demand forecasts– Production plans– Promotion announcements– Reports of all kinds

– Unlike the three flows, information can move across the chain at any time

• Information doesn’t have to be connected with a specific transaction

• Information can move up or down the chain– It can be broadcast to any subset of the chain


• Demand, Supply, and Cash– Great insight

• Information can often be substituted for inventory• Uncertainty can be reduced by sharing information

– Information sharing can allow members of the chain to reduce safety stock (buffer) because uncertainty can be reduced

– Sharing information helps members anticipate coming changes in flows of demand, supply, and cash

– Information usually much cheaper than inventory

– Key Technique for improving SC performance:» Substitute information for inventory


• Distribution and Procurement– 2 basic patterns of SC

• From the perspective of a single plant– All facilities downstream is a destination for its products

» Forms part of the plant’s distribution network

– All facilities upstream is a source of supplies

» Forms part of the plant’s procurement network


• Distribution and Procurement– Some plants ship to only 1 destination, but

that is rare– Most plants ship to many destinations

– These destinations may ship goods to still more destinations, and so on

– The layers of the supply chain are commonly referred to as echelons

• Echelons are numbered outward from the plant



• Distribution and Procurement– Distribution network

• Moving finished goods from plant to consumer in cost-effective, demand satisfying, manner

• Traditionally, if a single distribution manager– Shipments were not allowed to skip echelons– Each destination received shipments from only one facility in

the echelon above it

– This strategy simplifies management, but don’t produce most cost-effective solutions

• As more sophisticated tools become available, constraints on distribution patterns are being relaxed


• Distribution and Procurement– Distribution network

• As number of destination increases, so does the difficulty of managing distribution

– With more facilities, inventory has to be divided up into smaller amounts

» Increase risk of not having the right amount at any one facility

• As number of echelons increases, the time and expense of handling goods increases

– Transportation costs go down with more echelons (larger, cheap shipments)

– Key tradeoff in distribution design:• Finding the right balance between the number of facilities

and the number of echelons


• Distribution and Procurement– Procurement network

• It is possible for a plant to receive all its suppliers from 1 supplier, this is rare

• A plant usually receives supplies from multiple sources• These suppliers also receive supplies from multiple sources,

and so on, up to the point where raw materials are obtained from an extractor

• The layers are called tiers• Like echelons, tiers are numbered outward from the plant




• Procurement– The movement of raw materials and subassemblies from

suppliers to the plant in a timely, cost-effective manner

• Procurement networks tend to be less orderly than distribution networks

– Overlapping sources are the rule rather than the exception



• Like distribution, procurement becomes more difficult to manage as the number of sources increases

• Successful procurement– Having everything arrive as close to the production date as

possible without paying extra– Laws of chance

» The more suppliers involved, the more likely that at least one will miss its deliver date and force the delay of production

• The cost of placing orders and making payments goes up with the number of suppliers, as well as the cost of managing additional relationships

• Adding tiers increases time and expense


• Distribution and Procurement– Important consideration in analyzing SCs

• Identifying ownership boundaries• Sequence of facilities owned by the same

company– Internal supply chain

• Links outside of the ownership boundary– External supply chain

• Vertical integration– A single company owns as much of the supply chain a it

can



• Complexity and Variability– There are 2 root causes to the difficulty of

managing SCs1. Complexity

2. Variability


• Complexity and Variability– Complexity begins with the way the 3 flows

relate to each other– In practice, the relationship of orders to

shipment and payment becomes problematic• Procurement

– A single production run could generate orders to many different suppliers

– These orders could be combined with orders for other production runs



• Complexity and Variability– Shipments

• Fulfilling these orders may combine orders to reduce the cost of transportation– Large orders may be split across more than 1 shipment

• Invoices often cover multiple shipments

• Payments may cover multiple invoices• Etc.


• Complexity and Variability– Another source of complexity is the way that

each company manages there SC and the 3 basic flows

– Many groups handle different flows– No one group is responsible for the outcome

of the entire transactions



• Complexity and Variability– Customer side of transactions

• Orders might be placed by a centralized purchasing department

• Shipments received by many assembly plants

• Payments made by regional accounting departments


• Complexity and Variability– Supplier side of transactions

• Orders might be satellite sales offices

• Shipments received from regional distribution centers

• Payments received by accounting office of a parent firm


• Complexity and Variability– Complexity is also created by the proliferation of

documents associated with orders• Shipment documents

– Packing slips, bills of lading, advance shipping notices, etc

• Billing and payment cycles generates another trail of paper• These are just the documents the flow between

companies, the number of documents within each company can be larger


• Complexity and Variability– The structure of the chain itself is another

source of complexity• Most chains are rarely designed

• Chains evolve over time


• Complexity and Variability– Variability

• No matter how well managed, all business activities exhibit natural variability in – Duration– Quality– And other attributes

» Daily sales, delivery times, production yields, defect rates, maintenance times, etc

» All vary around some average value» The more variability, the more difficult and

expensive it is to run the chain



• Inventories in finished goods can act as a buffer against variability in demand

• Raw material inventories offer some protection against variability in supply

• Redundant sources can also provide protection against variation in availability of materials and services– Alternate suppliers and transportation options



• There are a number of ways to try and reduce variability at a cost– Quality assurance

» Reduce variability in product quality

– Forecasting

» Tries to predict variability in demand

– etc



• SCs are very vulnerable to variability– A small delay in an upstream process can cascade down the

entire SC throwing off production schedules and disrupting deliveries

• Variability in demand can amplify back up the chain– Classic example of demand amplification

» Study conducted by Proctor&Gamble in early 1990s» Fluctuation in demand for raw materials» Sales of diapers showed only minor, random variations» These small variations where being amplified up the

chain» P&G called it the bullwhip effect» Demand amplification continues to be a problem in many

chains



• Complexity and Variability– Scale makes complexity and variability worse– Negatively impacting efficiency and effectiveness– As the number of contributors to a finished product

increases, the likelihood of errors and delays inevitably increase, and the resulting disruptions become increasingly severe

– SCs aren’t going to get smaller, but complexity and variability can be reduced

OPER3208-001 Supply Chain Management

Documents

game taylor facilities

set of facilities

links lanes

finished goods inventory

links flow charts inventories

links flow charts scs

links tra

links supply chain