Supply Chain Management

Supply Chain Supply Chain ManagementManagement

To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved.

Supply ChainSupply Chain (Definition of) (Definition of)

The sequence of organizations- their facilities, functions, processes and activities- that are involved in producing and delivering a product or service

Sometimes referred to as value chain

The Supply ChainThe Supply Chain

Products and Services



CustomersCustomers

Total satisfaction with quality, price, delivery, and service

DistributorsDistributors

Package and delivery

Inventory

ProducersProducers

Finished goods, end products and services

Inventory

SuppliersSuppliers

Inventory

Materials, parts, sub-assemblies, and services

Downstream SC members


Information




CustomersCustomers




Inventory

ProducersProducers


Inventory

SuppliersSuppliers

Inventory



Information

Cash




CustomersCustomers




Inventory

ProducersProducers


Inventory

SuppliersSuppliers

Inventory


Typical Supply Chain for a Typical Supply Chain for a ManufacturerManufacturer

Supplier

Supplier

Supplier

Storage} Mfg. Storage Dist. Retailer Customer

Supplier

Supplier

} Storage Service Customer

Typical Supply Chain for a ServiceTypical Supply Chain for a Service

Supply Chain ManagementSupply Chain Management

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 user (planning, organizing, directing and controlling flows of materials)

Encompasses all activities associated with the flow and transformation of goods and services from raw materials to the end user, the customer

Goals of Goals of Supply Chain ManagementSupply Chain Management (1 of 2) (1 of 2)

Synchronization of activities required to achieve maximum competitive benefits

Coordination, cooperation, and communication and timing among SC members

Ensuring rapid flow of information among members


Goals of Goals of Supply Chain ManagementSupply Chain Management(2 of 2) (2 of 2)

Linking the market, distribution channels, processes and suppliers so that market demand is met as efficiently as possible across the chain

Matching supply and demand at each stage of the chainUltimate goal: Achieving customer satisfaction

WarehousesFactoriesProcessing centersDistribution centersRetail outletsOffices

FacilitiesFacilities Involved in SCM Involved in SCM

Strategic or OperationalStrategic or Operational

• Two types of decisions in supply chain management– Strategic – design and policy– Operational – day-today activities


Typical Supply ChainTypical Supply Chain Activities Activities

Purchasing Receiving Storage Operations Storage

Production Distribution

Major decision areas:•Location•Production•Inventory•Distribution

Functions and ActivitiesFunctions and Activities Involved in SCM Involved in SCM ForecastingSchedulingPurchasingInventory managementInformation managementQuality assuranceProduction and delivery LogisticsCustomer service

Elements of Supply Chain Elements of Supply Chain ManagementManagement

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

Processes Involved in SCMProcesses Involved in SCM Acquiring customer ordersProcuring materials and components from

suppliersProducing or manufacturing productsFilling customer orders

Supply-Chain Costs as a Percent of SalesSupply-Chain Costs as a Percent of Sales

• All industry• Automobile• Food• Lumber• Paper• Petroleum• Transportation

• 52%• 67%• 60%• 61%• 55%• 79%• 62%

Industry Percent of Sales

Factors That Contribute to the Increased Factors That Contribute to the Increased Need for Effective Supply Chain Need for Effective Supply Chain

Management:Management:improve operations increased levels of outsourcingincreasing transportation costscompetitive pressuresincreasing globalizationincreasing importance of e-commerceincreasing complexity of supply chainsincreasing pressure to decrease inventories

Benefits of Supply Chain ManagementBenefits of Supply Chain Management

Lower inventoriesLower costs Higher productivityGreater agilityShorter lead timesHigher profitsGreater customer loyaltyIntegration of seperate organizations into a cohesive

operating system

Actual Actual BenefitsBenefits Gained by Gained by Supply Chain Supply Chain ManagementManagement

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

Effective Supply ChainEffective Supply Chain

• Requires linking the market, distribution channels processes, and suppliers

Requirements of a Requirements of a Successful Supply ChainSuccessful Supply ChainTrust among trading partners

Effective communications

Supply chain should enable members to 1) share forecasts, 2) determine the status of orders in real time, 3) access inventory data of partners

Supply chain visibility

Event-management capability

The ability to detect and respond to unplanned events

Measuring SC Performance: Performance metrics

Measuring SC PerformanceMeasuring SC Performance: Inventory : Inventory TurnoverTurnover

• One of the most commonly used measures is “Inventory Turnover”

valueinventory aggregate Average

sold goods ofCost turnoverInventory

valueinventory aggregate Average

sold goods ofCost turnoverInventory

Measuring SC PerformanceMeasuring SC Performance: : SCOR MetricsSCOR Metrics

Perspective Metrics

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

Supply Chain UncertaintySupply Chain Uncertainty

Forecasting, lead times, batch ordering, price fluctuations, and inflated orders contribute to variability

Inventory is a form of insurance

Distorted information is one of the main causes of uncertainty

Bullwhip EffectBullwhip Effect

Final CustomerInitialSupplier

Demand

Inventory oscillations become progressivelylarger moving backward through the supply chain

Inventories in a SC: Inventories in a SC: Bullwhip EffectBullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

n tit

y

Time

Manufacturer’s Orders

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

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

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

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to greater variability for a fewer number of wholesalers, and…

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

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

Inventories in a SC: Inventories in a SC: Bullwhip EffectBullwhip Effect

Tier 2Suppliers

Tier 1Suppliers

Producer Distributor Retailer FinalFinalCustomerCustomer

Amount ofAmount ofinventoryinventory=


Role of Role of Information in the Supply ChainInformation in the Supply Chain(1 of 2) (1 of 2)

Centralized coordination of information flows Integration of transportation, distribution, ordering, and

productionDirect access to domestic and global transportation and

distribution channelsLocating and tracking the movement of every item in the

supply chain


Role of IRole of Information in the Supply Chainnformation in the Supply Chain (2 of 2)(2 of 2)

Data interchangeData acquisition at the point of origin and point of sale Intercompany and intracompany information access Instantaneous updating of inventory levels

Some IT Applications for SCM (1 of 3)Some IT Applications for SCM (1 of 3)

Electronic Business (replacement of physical processes with electronic ones)

Electronic Data Interchange (a computer-to-computer exchange of business documents in a standard format)

Bar Coding (computer readable codes attached to items flowing through the SC). Generates point-of-sale data which is useful for determining sales trends, ordering, production scheduling, and delivery plans


Some IT Applications for SCM (2 of 3)Some IT Applications for SCM (2 of 3)

RFID Technology•Used to track goods in supply chain•RFID tags attached to objects•Similar to bar codes but uses radio frequency to transmit product information to receiver•RFID eliminates need for manual counting and bar code scanning


Some IT Applications for SCM (3 of 3) Some IT Applications for SCM (3 of 3)

Internet (provides instant access to organizations, individuals and information sources; fundamentaly changes the way organizations do business; add speed and accessibility to the SC)

Intranets (internet-like networks that operate within a single organization)

Extranets (intranets that can be connected to the global internet & that include a company’s suppliers and customers; they allow limited access)


The InternetThe Internet Instant global access to organizations,

individuals, and information sourcesFundamentally changes the way organizations

do businessRemoved geographic

barriersAdds speed and accessibility

to the supply chain


Build-to-Order Cars over the Internet

• 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

E-BusinessE-Business


Global presence and increased visibilityGlobal access to markets and customersImproved competitiveness, quality and serviceGreater choices and more information for

customers Collection and analysis of customer data and

preferencesShortened supply chain response times

Advantages Advantages of of E-BusinessE-Business (1 of 2) (1 of 2)


Shorten transaction times for ordering and delivery Cost and price reductions Virtual companies with lower pricesLeveling the playing field for small companies Reducing or eliminating intermediariesImproved service

Advantages Advantages of of E-BusinessE-Business (2 of 2) (2 of 2)

• 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-BusinessDisadvantages of E-Business

IT IssuesIT Issues Increased benefits and sophistication come with

increased costs

Efficient web sites do not necessarily mean the rest of the supply chain will be as efficient

Security problems are very real

Partnership and trust are important elements that may be new to business relationships

• 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.

PurchasingPurchasing

• Identifying sources of supply

• Negotiating contracts

• Maintaining a database of suppliers

• Obtaining goods and services

• Managing supplies

Duties of PurchasingDuties of Purchasing

Purchasing InterfacesPurchasing Interfaces

Purchasing

Legal

AccountingOperations

Dataprocessing

Design

ReceivingSuppliers

Purchasing CyclePurchasing Cycle

1. Requisition received

2. Supplier selected

3. Order is placed

4. Orders are monitored

5. Orders are received

PurchasingPurchasing

LegalLegal

AccountingAccountingOperationsOperations

DataDataprocess-process-inging

DesignDesign

ReceivingReceiving

SuppliersSuppliers

• Centralized purchasing

– Purchasing is handled by one special department

• Decentralized purchasing

– Individual departments or separate locations handle their own purchasing requirements

Centralized vs Decentralized Centralized vs Decentralized PurchasingPurchasing


• Choosing suppliers

• Evaluating sources of supply

• Supplier audits

• Supplier certification

• Supplier relationships

• Supplier partnerships

SuppliersSuppliers

SourcingSourcingSourcing is the selection of suppliers

Relationship between customers and suppliers focuses on collaboration and cooperation

Outsourcing has become a long-term strategic decision

Organizations focus on core competencies

Single-sourcing is increasingly a part of supplier relations

SuppliersSuppliersPurchased materials account for about half of

manufacturing costs

Materials, parts, and service must be delivered on time, of high quality, and low cost

Suppliers should be integrated into their customers’ supply chains

Partnerships should be established

On-demand delivery (JIT) is a frequent requirement

Evaluating the sources of supply in terms of:• Price• Quality • Flexibility• Location• Product or service changes• Reputation and financial stability• Lead times and on-time delivery• Inventory policy• Services (such as technical support) provided

Vendor AnalysisVendor Analysis

Supplier as a PartnerSupplier as a Partner

Aspect Adversary PartnerNumber of suppliers Many One or a few

Length of relationship May be brief Long-term

Low price Major consideration Moderately important

Reliability May not be high High

Openness Low High

Quality May be unreliable; buyer inspects

At the source; vendor certified

Volume of business May be low High

Flexibility Relatively low Relatively high

Location Widely dispersed Nearness is important

• 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

Supplier PartnershipsSupplier Partnerships

E-ProcurementE-ProcurementBusiness-to-business commerce conducted on the

Internet

Benefits include lower transaction costs, lower prices, reduce clerical labor costs, and faster ordering and delivery times

Currently used more for indirect goods

E-Marketplaces service industry-specific companies and suppliers

The Wal-Mart Supply Chain

Centralized Supply at Honda America

Distribution SystemDistribution System

Encompasses all of the distribution channels, processes and functions, including warehousing and transportation, that a product passes through on its way to the final customer.

DistributionDistribution

The actual movement of products and materials between locations

Handling of materials and products at receiving docks, storing products, packaging, and shipping

Often called logisticsDriving force today

is speedParticularly important

for Internet dot-coms

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

LogisticsLogistics

Materials MovementMaterials Movement R

EC

EIV

ING

Storage

Workcenter

Work centerWork center

Storage

Workcenter

Storage

Shipping


Figure 7.5 Order Fulfillment at Amazon.com

Third-Party LogisticsThird-Party Logistics

The term used to describe the outsourcing of logistics management.

Reverse LogisticsReverse 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

Distribution Centers Distribution Centers and Warehousingand Warehousing

Trend is for more frequent orders in smaller quantities

Flow-through facilities and automated material handling

Final assembly and product configuration may be done at the DC

Warehouse Management SystemsWarehouse Management Systems

Highly automated systems

Controls item putaway, picking, packing, and shipping

Cross-docking: Goods arriving at a warehouse from a supplier are unloaded from the supplier’s truck and loaded onto outbound trucks

Avoids warehouse storage

A WMS

Vendor-Managed InventoryVendor-Managed Inventory

Stocking information is accessed using EDIA first step towards supply chain collaboration Increased speed, reduced errors, and improved

service

TransportationTransportation

The movement of a product from one location to another as it makes its way to the end-use customer

Important element, often overlookedCommon methods are railroads, trucking, water, air,

intermodal, package carriers, and pipelines

Linking the Supply Chain with SAP

SC Design System: SC Design System: CPFRCPFR

Collaborative Planning, Forecasting, and Replenishment

A system based on the notion that there should be cooperation among supply chain partners in planning, coordination of activities and information sharing, which in turn requires partners to agree on common goals (goal sharing)

CPFR ProcessCPFR Process

• Internet-based exchange of data and information• Significant decrease in inventory levels and more

efficient logistics• Companies focus on core competencies

CPFR ResultsCPFR 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

Global Supply Chain ProblemsGlobal Supply Chain Problems

National and regional differencesCustoms, business practices, and

regulationsForeign markets are

not homogeneousQuality can be a

major issue

Some Issues in Some Issues in Global Supply ChainsGlobal Supply Chains– Language– Culture– Currency fluctuations– Political– Transportation costs– Local capabilities– Finance and economics– Environmental

Infrastructure Obstacles to Global Infrastructure Obstacles to Global TradeTrade

Some emerging markets lack suitable distribution systems, i.e. roads, rail systems

Existing roads and ports may be inadequate

Market instability, political instability

Vertical integration is a common solution

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

Creating an Effective Supply ChainCreating an Effective Supply Chain

Supply Chain Performance DriversSupply Chain Performance Drivers

1. Quality

2. Cost

3. Flexibility

4. Velocity

5. Customer service

VelocityVelocity

• 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

Barriers to integration of organizations

Getting top management on board

Small businesses

Variability and uncertainty

Long lead times

Dealing with trade-offs

ChallengesChallenges to Optimizing SCs to Optimizing SCs

1. Lot-size-inventory2. Inventory-transportation costs

–Cross-docking3. Lead time-transportation costs4. Product variety-inventory

–Delayed differentiation5. Cost-customer service

–Disintermediation

Trade-offsTrade-offs in SCM in SCM

Techniques to Increase SC EfficiencyTechniques to Increase SC Efficiency• 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

+ Cross Docking

+ Drop Shipping

Potential SolutionsPotential Solutions to SC Problemsto SC ProblemsProblem Potential

ImprovementBenefits Possible

DrawbacksLarge inventories

Smaller, more frequent deliveries

Reduced holding costs

Traffic congestionIncreased costs

Long lead times

Delayed differentiationDisintermediation

Quick response May not be feasibleMay need absorb functions

Large number of parts

Modular Fewer partsSimpler ordering

Less variety

CostQuality

Outsourcing Reduced cost, higher quality

Loss of control

Variability Shorter lead times, better forecasts

Able to match supply and demand

Less variety

Critical IssuesCritical Issues in SCM in SCM

• Increased strategic importance • Emphasis on cost, quality,agility and customer

service• Technology management• Increased conversion to lean production• Just-in-time deliveries• Few suppliers and vendor integration• Increased outsourcing• Globalization

Supply Chain Management

Documents

services products

supplychain costs

chain matching supply

supply costs

inventory costs inventory

asvalue chain

supply chaindefinition

end products