MGT3303Michel Leseure
Supply Chain Management
MGT3303
Reading: Chapter 7
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Learning Objectives
• Understand the meaning and importance of supply chains
• Understand the strategic issues in supply chain management
• Understand the operational challenges, solutions, and techniques of supply chain operations
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Example of a Supply Chain
1. Suppliers2. Manufacturer3. Wholesalers 4. Retailers, e-commerce
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ExampleDirection of flow of demand
Direction of flow of product
Tier-II Suppliers
Tier-I Suppliers
Manufacturers
Distribution Centers
Retailers Customers
E-tailers
Typical Supply Chain Structure
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Supply Chain
Customers
ManufacturingSuppliers
Warehousing
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Supply Chain Examples
It takes a box of cereal 3+ months from factory to supermarket.
Efficient Consumer Response (ECR) initiative - estimates $30 billion opportunity by streamlining grocery supply chain
Matching supply and demand: “Boeing lost $2.6 billion in Oct. 97 due to raw
material, internal, and supplier shortages…” (W.S.J., 10-23-97)
Supply chain management is closely tied to strategic partnerships and logistics
Cross-docking logistics & inventory practices at Walmart helped them beat Kmart)
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Supply Chain Management
• Efficiently integrating suppliers, manufacturers, warehouses, and customers so that products are produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.– every player in the system has to be considered
– minimize costs across the system
– efficient integration includes all activities from strategic to operational level
– information flow is upstream (from retailer to supplier), but product flow goes downstream
• Notion of Demand Chain Management
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Supply Chain Management
SupplyChain
Management
Supply Chain Design
Supplier Selection
Purchasing
Relationship Management
Logistical Management
SupplyChain
Performance
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Key Issues in Supply Chain Management
• Dependence– customers depend on suppliers in terms of
punctuality of delivery, quality, reliability, etc.– How can this dependence be managed?
• Relationship/Trust– By opposition to a contractual relationship– What is a good approach?
• Effectiveness/Productivity– Supply chain performance– Comparative advantage– Key issue of responsibility/equity
MGT3303Michel Leseure
Key Issues in Supply Chain Management
• Integration– How can one co-ordinate independent
companies with:• Secretive corporate cultures
• An orientation toward competition
• Different perceptions of operations (i.e. inventory)
• Bargaining power• System dynamics:
– Bullwhip effect
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Bullwhip Effect
Demand propagates from the lower levels of the supply chain (consumer end) to the upper levels (supplier end).
Unfortunately, variability does the same and is amplified by each echelon of the chain. Terms for this include
Information distortion Bullwhip Effect
Modest movement at the whip handle (representing consumer demand fluctuations) leads to wild swings at the whip’s tip (demand experienced by the supplier). Bullwhip cracks are loud because of the Doppler effect (e.g. as seen visibly in a boat’s wake) which generates a small sonic boom as the whip tip breaks the sound barrier at about 800 mph. The supply chain bullwhip crack can be heard through bankruptcy filings as vulnerable suppliers and manufacturers experience deadly cash flow variability.
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Procter & Gamble
P&G Pampers disposable diapers - best selling product
sales of the product at retail stores were fluctuating, but the variabilities were not excessive. Reason & data suggest that diaper sales should be fairly constant because birth rate is constant over a year!
orders placed by the distributors to P&G exhibited a much greater variability
P&G orders to supplier, 3M, had even greater swings and variability!
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The Bullwhip Effect
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The Bullwhip Effect
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Causes of the Bullwhip Effect
Demand Forecast Updating Order Batching Price Fluctuations & Promotions Shortage Gaming (Inflated orders during
shortages) Others:
Long lead times (increase variability) Ineffective IT or lack of partnerships keep everyone
starved for real, consistent information
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Current Trends in Supply Chain Management
• Strategic Sourcing (Single sourcing)– Reduction of the number of suppliers– Centralisation and optimisation of data/decisions– Virtual communities
• Strategic alliances– long term commitment, open book, profit sharing,
exchange of workers
• Integration of linkages:– Project managers– EDI, Internet– ERP with SAP
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Supply Chain System Design
• Several management decision models• Extensions of the traditional accounting
make or buy decision frameworks
SuppliersPerform ance
ExternalEnvironm entInterna l
Perform ance
M ake orBuy D ecision
Perform anceIm provem ent
Interna lExternal
Benchm ark
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Transaction Cost Theory
AssetSpecific ity
Frequency
TransactionU ncerta in ty
G overnanceS tructureD ecision
M in im iseTrasaction
C osts
BoundedR ationality
& O pportun ism
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Core Competencies Theory
C om petenciesC haracteristics
IndustryS tructure
& Supply Base
C oreC om petency
D ecision
S trateg icC om petitiveness
FutureEvolution
w ith inIndustry
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Supply Chain System Design
C om petenciesPotentia l
(order w inner/qualifier)
C om petitivePressure
S trateg icR isk
O utsourc ing D ecis ions
G overnance D ecis ion
C o-ord ina tion R equ irem ent
S ystem D esign D ecis ions
Strateg icR ole
Im pact onC om petitive
Position(R ivalry)
C urrentP ractices
M arketS ignals
U niqueness
O utsourcingD ecis ion
(R eta in in terna lly vs.O utsource)
To co-ord inationrequ irem ent
TransactionC osts
N eed forAdaptation
AssetSpecific ity
C o-ord inationR equirem ent
P rocessM aturity
Know ledgeC ontro l
Frequency
Econom ies o fSca le
Econom ies o fScope
U ncerta inty
SpecificD esign
C haracteristics
R isk inexchange
rela tionsh ip
C ustom erIn tegrity
C ustom erC o-ord ination
N eeds S trateg icVulnerability
InventoryPolicy
D em andVola tility
Supply BaseC haracteristics
Politica l, legal, &environm enta l
factors
Inte
nsit
y of
rel
atio
nshi
p
H igh
Low
P ro po rtio ns o f wo rk ca rried out inte rna lly 00% 100%
P erip hera l ac tiv ity, no b enef itin ret a in ing it.
T he market is challen g ing
Extreme imp o rtanc eand co re co mp etence.
C oop erate w itho ut ab and o ning the ac tiv ity
C ap ac ity subco ntrac ting in cas e o f high d em andif the mark et d eliver
required c harac teris t ic s .
Ab and on partly and b uild s trong relat io ns h ip .M arket less challeng in g
No s trategicimp o rtanc e and c halle ng in gmark et
arm’s length imp erso naltransac tio ns
inte ns ive fo rm o f coo peratio n
P 1
P 3
P 4
P 2
Results in theelaboration of a co-ord ination trajectory
diagram
C o-ord inationR equirem ent(Tra jectory)
C om petitivePressure
O utsourcingC osts
C ostFeasib ility
C ostBenefits
fromO utsoucing
Investm entPerform ance
G overnanceD ecis ion
M arketH ierachy
Hybrid
To system designdecisions
AcquisitionC ost In terna l
P roductionC ost
Externa lF inancia l
Perform ance
Interna lR eturn
on investm ent
C apita lR ation ing
F ixed vs.variab le
costs
O utsourcingTactic
Activ ity i
D em andon System
Portfo lioS tructuring
D ecis ion
Classify activities perclusters
TieringD ecis ions
Should governancebe direct or m ediated
O rganisationD ecis ions
ExistingO rganisation
& C ulture
BusinessP lanningD ecis ions
PurchasingM anagem ent
SystemD esign
Purchasingorganisation
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Logistical Management
• The operational management of the supply chain• Similar in most respect to standard operations
management– Quality management, planning and scheduling, etc.– But increased importance of co-ordination
• Role of IT systems, especially ERP
– Looking for optimal solutions and practices– Unique features:
• Standardisation and specifications• Purchasing management / Procurement
– E-procurement• Transportation Management
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Specifications
• The task of detailing precisely the characteristics of the product/service to be purchased
• Usually as an appendix to a contract– Strict legal liability – not such thing as a
fuzzy specification
• Use of standards reduce the cost of specifications
• An example of a transaction cost
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Procurement
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Purchasing Management
• How should problems/delays be dealt with?– Penalties– Increased communication, collaboration– Switch supplier– Multiple sourcing
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Transportation Management
• Network design– More a strategic issue
• Mode selection– Which mode of transport
• Rail, air, road, water, etc.
– Which routes• Transportation method
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SCM – Part III
Transportation Method
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Transportation Method
500
800
700
500
400
900
200
*
*
*
*
*
*
*
Belgium
Germany
Netherlands
The Hague
Amsterdam
Antwerp
Nancy
Liege
Tilburg
Leipzig
Miles
100500
Source
Destination
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Transportation CostsTo Destination
From Origin Leipzig Nancy Liege TilburgAmsterdam 120 130 41 59.5Antwerp 61 40 100 110The Hague 102.5 90 122 42
Unit transportation costs from harbors to plants
Minimize the transportation costs involved in
moving the motors from the harbors to the
plants
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Transportation Model
Autopower Transportation ModelUnit Cost From/To Leipzig Nancy Liege Tilburg
Amsterdam 120.0$ 130.0$ 41.0$ 59.5$ Antwerp 61.0$ 40.0$ 100.0$ 110.0$ The Hague 102.5$ 90.0$ 122.0$ 42.0$
Shipments From/To Leipzig Nancy Liege Tilburg Total Available
Amsterdam - - - - - 500Antwerp - - - - - 700The Hague - - - - - 800Total - - - - - Required 400 900 200 500
Total Cost From/To Leipzig Nancy Liege Tilburg Total
Amsterdam -$ -$ -$ -$ -$ Antwerp -$ -$ -$ -$ -$ The Hague -$ -$ -$ -$ -$ Total -$ -$ -$ -$ -$
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Building a Solver Model
• Tools | Solver…– Set Target Cell: The cell holding the value
you want to minimize (cost) or maximize (revenue)
– Equal to: • Choose Max to maximize or Min to minimize this
– By Changing Cells: The cells or variables the model is allowed to adjust
In the Transportation spreadsheet that’s G19 - the total transportation cost
In the Transportation spreadsheet we choose Min to minimize transport cost
In the Transportation spreadsheet that is C9:F11 - the Shipment volumes
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Building a Solver Model
• Subject to the Constraints: – The constraints that limit the choices of the values
of the adjustable cells
– Click on Add• Cell Reference is a cell that holds a value calculated from
the adjustables
• Constraint is a cell that holds a value that constraints the Cell Reference.
• <=, =, => is the sense of the constraint. Choose one
In the Transportation spreadsheet for example, G9 is the total volume shipped out of Amsterdam
In the Transportation spreadsheet for example, H9 is the total volume we can ship out of Amsterdam
<= in this case. Don’t ship more than we have in AMS
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What are the constraints?• Supply Constraints
– Amsterdam: G9 <= H9– Antwerp: G10 <= H10– The Hague: G11 <= H11
• Demand Constraints– Leipzig: C12 => C13– Nancy: D12 => D13– Liege: E12 => E13– Tilburg: F12 => F13
Short cut: G9:G11 <= H9:H11
Short cut: C12:F12 => C13:F13
C12 is the total volume shipped to Leipzig
G9 is the total volume shipped from Amsterdam
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The Model
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SolutionTransportation Model
Unit Cost From/To Leipzig Nancy Liege TilburgAmsterdam 120.0$ 130.0$ 41.0$ 59.5$ Antwerp 61.0$ 40.0$ 100.0$ 110.0$ The Hague 102.5$ 90.0$ 122.0$ 42.0$
Shipments
From/To Leipzig Nancy Liege Tilburg Total AvailableAmsterdam - - 200 300 500 500Antwerp - 700 - - 700 700The Hague 400 200 - 200 800 800Total 400 900 200 500 2,000 Required 400 900 200 500
Total Cost
From/To Leipzig Nancy Liege Tilburg TotalAmsterdam -$ -$ 8,200.00$ 17,850.00$ 26,050.00$
Antwerp -$ 28,000.00$ -$ -$ 28,000.00$
The Hague 41,000.00$ 18,000.00$ -$ 8,400.00$ 67,400.00$
Total 41,000.00$ 46,000.00$ 8,200.00$ 26,250.00$ 121,450.00$
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Suggested Homework
• How developed are supply chain management practices in Morocco? Describe:– The extent to which outsourcing takes place– The state of the art of logistical and transportation
management– The factors that hinder transportation management
effectiveness
• Is transaction cost theory relevant in the case of Morocco?
• Problem 7-1, p. 313