operations management om 306.001 lecture 10 – supply chain management/e-commerce al baharmast,...

Operations ManagementOM 306.001

Lecture 10 – Supply Chain Management/E-Commerce

Al Baharmast, Ph.D.

Some lecture content courtesy of Prentice Hall, Rights Reserved

The Strategic Importance of the Supply Chain

Supply-chain management is the Supply-chain management is the integration of the activities that integration of the activities that procure materials and services, procure materials and services,

transform them into intermediate transform them into intermediate goods and the final product, and goods and the final product, and

deliver them to customersdeliver them to customers

Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains


Supply-Chain Management

1.1. Transportation vendorsTransportation vendors

2.2. Credit and cash transfersCredit and cash transfers

3.3. SuppliersSuppliers

4.4. Distributors and banksDistributors and banks

5.5. Accounts payable and receivableAccounts payable and receivable

6.6. Warehousing and inventoryWarehousing and inventory

7.7. Order fulfillmentOrder fulfillment

8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information

Important activities include determiningImportant activities include determining


Consumers

Consumers

Consumers

Consumers

Distributors

Distributors

e-tailer

Retailer

Retailer

Retailer

Manufacturer

Manufacturer

Manufacturer

Manufacturer

Supplier

Supplier

Supplier

More reflective of reality – much more complex!

• Multiple agents across the stages of supply• Multiple channels of distribution (ways of selling a company’s goods)• Multi-directional flows

Supply Network


Global Supply-Chain Issues

React to sudden changes in parts React to sudden changes in parts availability, distribution, or shipping availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates

Use the latest computer and transmission Use the latest computer and transmission technologies to schedule and manage the technologies to schedule and manage the shipment of parts in and finished products shipment of parts in and finished products outout

Staff with local specialists who handle Staff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues

Supply chains in a global environment Supply chains in a global environment must be able tomust be able to


Supply-Chain Economics

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

Table 11.2Table 11.2

Industry % Purchased

All industry 52

Automobile 67

Food 60

Lumber 61

Paper 55

Petroleum 79

Transportation 62


Make-or-Buy Decisions

1.1. Maintain core competenceMaintain core competence

2.2. Lower production costLower production cost

3.3. Unsuitable suppliersUnsuitable suppliers

4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)

5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities

6.6. Obtain desired qualityObtain desired quality

7.7. Remove supplier collusionRemove supplier collusion

8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive commitment for a suppliercommitment for a supplier

9.9. Protect personnel from a layoffProtect personnel from a layoff

10.10. Protect proprietary design or qualityProtect proprietary design or quality

11.11. Increase or maintain size of companyIncrease or maintain size of company

Reasons for MakingReasons for Making



Make-or-Buy Decisions

1.1. Frees management to deal with its primary Frees management to deal with its primary businessbusiness

2.2. Lower acquisition costLower acquisition cost

3.3. Preserve supplier commitmentPreserve supplier commitment

4.4. Obtain technical or management abilityObtain technical or management ability

5.5. Inadequate capacityInadequate capacity

6.6. Reduce inventory costsReduce inventory costs

7.7. Ensure alternative sourcesEnsure alternative sources

8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources

9.9. ReciprocityReciprocity

10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret

Reasons for BuyingReasons for Buying



Outsourcing

Transfers traditional internal Transfers traditional internal activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors

Utilizes the efficiency that comes Utilizes the efficiency that comes with specializationwith specialization

Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production


Supply-Chain Strategies

Negotiating with many suppliersNegotiating with many suppliers

Long-term partnering with few Long-term partnering with few supplierssuppliers

Vertical integrationVertical integration

KeiretsuKeiretsu

Virtual companies that use Virtual companies that use suppliers on an as needed basissuppliers on an as needed basis


Many Suppliers

Commonly used for commodity Commonly used for commodity productsproducts

Purchasing is typically based on Purchasing is typically based on priceprice

Suppliers are pitted against one Suppliers are pitted against one anotheranother

Supplier is responsible for Supplier is responsible for technology, expertise, forecasting, technology, expertise, forecasting, cost, quality, and deliverycost, quality, and delivery


Few Suppliers

Buyer forms longer term Buyer forms longer term relationships with fewer suppliersrelationships with fewer suppliers

Create value through economies of Create value through economies of scale and learning curve scale and learning curve improvementsimprovements

Suppliers more willing to participate Suppliers more willing to participate in JIT programs and contribute in JIT programs and contribute design and technological expertisedesign and technological expertise

Cost of changing suppliers is hugeCost of changing suppliers is huge


Vertical Integration

Figure 11.2Figure 11.2

Raw material (suppliers)

Iron ore Silicon Farming

Backward integration Steel

Current transformation Automobiles Integrated circuits Flour milling

Forward integrationDistribution

systemsCircuit boards

Finished goods (customers) Dealers

Computers Watches Calculators

Baked goods

Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration


Vertical Integration Developing the ability to produce goods or Developing the ability to produce goods or

service previously purchasedservice previously purchased

Integration may be forward, towards the Integration may be forward, towards the customer, or backward, towards supplierscustomer, or backward, towards suppliers

Can improve cost, quality, and inventory Can improve cost, quality, and inventory but requires capital, managerial skills, and but requires capital, managerial skills, and demanddemand

Risky in industries with rapid technological Risky in industries with rapid technological changechange


Keiretsu Networks A middle ground between few suppliers A middle ground between few suppliers

and vertical integrationand vertical integration

Supplier becomes part of the company Supplier becomes part of the company coalitioncoalition

Often provide financial support for Often provide financial support for suppliers through ownership or loanssuppliers through ownership or loans

Members expect long-term relationships Members expect long-term relationships and provide technical expertise and stable and provide technical expertise and stable deliveriesdeliveries

May extend through several levels of the May extend through several levels of the supply chainsupply chain


Virtual Companies

Rely on a variety of supplier Rely on a variety of supplier relationships to provide services on relationships to provide services on demanddemand

Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands

Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed


Managing the Supply Chain

Mutual agreement on goalsMutual agreement on goals

TrustTrust

Compatible organizational culturesCompatible organizational cultures

There are significant management issues in There are significant management issues in controlling a supply chain involving many controlling a supply chain involving many independent organizationsindependent organizations


Issues in an Integrated Supply Chain

Local optimization - focusing on local Local optimization - focusing on local profit or cost minimization based on profit or cost minimization based on limited knowledgelimited knowledge

Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions) - discounts, quotas, and promotions) - push merchandise prior to salepush merchandise prior to sale

Large lots - low unit cost but do not Large lots - low unit cost but do not reflect salesreflect sales

Bullwhip effect - stable demand becomes Bullwhip effect - stable demand becomes lumpy orders through the supply chainlumpy orders through the supply chain


Why Supply Chain Management is so difficult?

• Nonlinearities –

1. Reliance on forecasts at each stage for basing decisions

2. Different demand patterns of different products over time

3. Different constraints (lot-sizing, transport capacity etc.)

4. Different supply chain structures

5. Dynamic nature of relationships and information

• Results into upstream demand amplification (Bull-whip)

Courtesy of Partha Datta Martin Christopher & Peter Allen Cranfield University


Opportunities in an Integrated Supply Chain Accurate “pull” dataAccurate “pull” data

Lot size reduction (or right-sizing)Lot size reduction (or right-sizing)

Single stage control of Single stage control of replenishmentreplenishment

Vendor managed inventoryVendor managed inventory

PostponementPostponement


Opportunities in an Integrated Supply Chain

Channel assemblyChannel assembly

Drop shipping and special Drop shipping and special packagingpackaging

Blanket ordersBlanket orders

StandardizationStandardization

Electronic ordering and Electronic ordering and funds transferfunds transfer


Internet Purchasing

Internet used to communicate Internet used to communicate order releases against blanket order releases against blanket purchase orderspurchase orders Internet replaces other forms of Internet replaces other forms of

electronic order releaseselectronic order releases

Four Common VariationsFour Common Variations


Internet Purchasing

Internet used to buy non-Internet used to buy non-standard items from catalogsstandard items from catalogs Long-term master agreements in Long-term master agreements in

placeplace

Reduces order lead-time and Reduces order lead-time and purchasing costspurchasing costs



Internet Purchasing

Traditional purchasing system, Traditional purchasing system, but Internet-basedbut Internet-based Significantly speeds up Significantly speeds up

requisitioning, bidding, supplier requisitioning, bidding, supplier selection, and order placementselection, and order placement



Internet Purchasing

Internet auctionsInternet auctions May be used for commodity May be used for commodity

items for which long-term items for which long-term contracts do not existcontracts do not exist



Ships good;receives

electronicpayment

Receiveselectronic

purchase order

Selects a supplierbased on quality,

cost, deliveryperformance;

issues purchaseorder

Collects/reviewsbids submittedelectronically

Assigns suppliersto bid; givesclosing dates

and conditions

Enters data intoInternet system

Buyer reviewsrequisition

Inputs request intocomputer systemand transmits to

purchasingdepartment

Internet Purchasing

Figure 11.3Figure 11.3

Individual initiatesIndividual initiatesrequisitionrequisition

PurchasingPurchasingdepartment/buyerdepartment/buyer SupplierSupplier

Prepares requisition


Internet Purchasing

Suppliers get closer to their customers Shorter cycle times may improve cash

flow Capital investment is low Buyers enjoy comparison shopping,

rapid ordering, reduced transaction costs, and lower inventory

May be part of an integrated Enterprise Resource Planning (ERP) system


Vendor Selection

Vendor evaluationVendor evaluation Critical decisionCritical decision

Find potential vendorsFind potential vendors

Determine the likelihood of them Determine the likelihood of them becoming good suppliersbecoming good suppliers

Vendor DevelopmentVendor Development

TrainingTraining

Engineering and production helpEngineering and production help

Establish policies and proceduresEstablish policies and procedures


Vendor Selection

NegotiationsNegotiations Cost-Based Price Model - supplier Cost-Based Price Model - supplier

opens books to purchaseropens books to purchaser

Market-Based Price Model - price Market-Based Price Model - price based on published, auction, or based on published, auction, or indexed priceindexed price

Competitive Bidding - used for Competitive Bidding - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult


Vendor EvaluationCriteria Weights Scores (1-5) Weight x Score

Engineering/research/innovation skills .20 5 1.0

Production process capability (flexibility/technical assistance)

.15 4 .6

Distribution/delivery capability .05 4 .2

Quality systems and performance .10 2 .2

Facilities/location .05 2 .1

Financial and managerial strength (stability and cost structure)

.15 4 .6

Information systems capability (e-commerce, Internet)

.10 2 .2

Integrity (environmental compliance/ ethics)

.20 5 1.0

Total 1.00 3.9


Distribution Systems

TruckingTrucking Moves the vast majority of Moves the vast majority of

manufactured goodsmanufactured goods

Chief advantage is flexibilityChief advantage is flexibility

RailroadsRailroads Capable of carrying large loadsCapable of carrying large loads

Little flexibility though Little flexibility though containers and piggybacking containers and piggybacking have helped with thishave helped with this



AirfreightAirfreight Fast and flexible for light loadsFast and flexible for light loads

May be expensiveMay be expensive

WaterwaysWaterways Typically used for bulky, low-Typically used for bulky, low-

value cargovalue cargo

Used when shipping cost is Used when shipping cost is more important than speedmore important than speed



PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,

and other chemical productsand other chemical products


Cost of Shipping Alternatives

Product in transit is a form of Product in transit is a form of inventory and has a carrying costinventory and has a carrying cost

Faster shipping is generally more Faster shipping is generally more expensive than slower shippingexpensive than slower shipping

We can evaluate the two costs to We can evaluate the two costs to better understand the trade-offbetter understand the trade-off


Electronic Commerce E-commerce (or e-business) – the use of E-commerce (or e-business) – the use of

the internet to buy and sell products and the internet to buy and sell products and services and exchange informationservices and exchange information

Low cost rapid exchangesLow cost rapid exchanges

A whole new way of doing businessA whole new way of doing business

“… all about cycle time, speed, globalization, enhanced productivity, reaching new customers and sharing knowledge across institutions for competitive advantage.”

Louis GerstnerFormer Chairman, IBM


E-Commerce Definitions Business-to-business (B2B) – Both sides Business-to-business (B2B) – Both sides

of the transaction are businesses, non-of the transaction are businesses, non-profit organizations, or governmentsprofit organizations, or governments

Business-to-consumer (B2C) – Business-to-consumer (B2C) – Transactions in which buyers are Transactions in which buyers are individual consumersindividual consumers

Consumer-to-consumer (C2C) – Consumer-to-consumer (C2C) – Consumers sell directly to each otherConsumers sell directly to each other

Consumer-to-business (C2B) – Consumer-to-business (C2B) – Individuals sell services or goods to Individuals sell services or goods to businessesbusinesses


Economics of E-Commerce

Costs of information exchange are Costs of information exchange are dramatically reduceddramatically reduced

Barriers to entry are lowerBarriers to entry are lower

Time constraints almost disappearTime constraints almost disappear

Information and communication is Information and communication is cheap and easycheap and easy


Product Design

Easily shared knowledge and Easily shared knowledge and information allows quicker and lower information allows quicker and lower cost design cycles that can involve cost design cycles that can involve participants in diverse locationsparticipants in diverse locations

Product data can be managed over the Product data can be managed over the InternetInternet

Engineering changes and configuration Engineering changes and configuration management can be extended along the management can be extended along the supply chainsupply chain


Collaborative Project Management

Project management software Project management software allows for establishing intranet allows for establishing intranet sites for sharing documents and sites for sharing documents and maintaining status reportsmaintaining status reports

Intranets can also be used for Intranets can also be used for document librariesdocument libraries


E-Procurement

Purchasing or order release communicated over the Internet

Online catalogs allow quicker cost comparisons and bidding processes

Catalogs can be provided byVendors IntermediariesBuyers


Online Catalogs

Vendor catalogs provide quick and Vendor catalogs provide quick and easy access to the entire product easy access to the entire product lineline

Available to anyone with Internet Available to anyone with Internet accessaccess

Quick and easy to customize and Quick and easy to customize and adjustadjust

Reduced paper trails reduce Reduced paper trails reduce purchasing costspurchasing costs


Internet Trading Exchanges

Table S11.3Table S11.3

Retail goods — setup by Sears and France’s Retail goods — setup by Sears and France’s Carrefour; called GlobalNetXchange for Carrefour; called GlobalNetXchange for retailers (gnx.com) retailers (gnx.com)

Health care products — set up by Johnson Health care products — set up by Johnson & Johnson, GE Medical systems, Baxter & Johnson, GE Medical systems, Baxter International, Abbott Laboratories, and International, Abbott Laboratories, and Medtronic Inc; called the Global Heath Care Medtronic Inc; called the Global Heath Care Exchange (ghx.com)Exchange (ghx.com)




Defense and aerospace products — created Defense and aerospace products — created by Boeing, Raytheon, Lockheed-Martin, and by Boeing, Raytheon, Lockheed-Martin, and Britain’s BAE Systems; called the Britain’s BAE Systems; called the Aerospace and Defense Industry Trading Aerospace and Defense Industry Trading Exchange (exostar.com)Exchange (exostar.com)

Food, beverage, consumer products — set Food, beverage, consumer products — set up by 49 leading food and beverage firms; up by 49 leading food and beverage firms; called Transora (transora.com)called Transora (transora.com)




Steel and metal products — such as New Steel and metal products — such as New View Technologies (exchange.e-steel.com); View Technologies (exchange.e-steel.com); and Metal-Site (metalsite.com)and Metal-Site (metalsite.com)

Hotels — created by Marriott and Hyatt, and Hotels — created by Marriott and Hyatt, and later joined by Fairmont, Six Continents, later joined by Fairmont, Six Continents, and Club Corp: called Aventra and Club Corp: called Aventra (aventra.com) buys for 2,800 hotels(aventra.com) buys for 2,800 hotels


E-Procurement

Online AuctionsOnline Auctions Maintained by buyers (reverse), Maintained by buyers (reverse),

sellers (forward), or intermediariessellers (forward), or intermediaries

May be used to sell excess raw May be used to sell excess raw material or discontinued or excess material or discontinued or excess inventoryinventory

Low cost and increased access to Low cost and increased access to buyersbuyers


- Traditionally, auctions were seller-initiated events – means of getting a highest price

- A seller identifies a single product or a lot that they intend to sell

- Often requires an intermediary – an auctioneer/qualifier- Generally, the highest bidder (English auction) or the first high

bidder (Dutch auction) ‘wins’- B-2-B seller auctions are most viable for -

- Commoditized goods (wheat, cattle, steel)- Consortium-controlled goods (oil, flowers)

Seller’s (Forward) Auctions


- Relatively new, very successful for B-2-B buy environments – means of getting the lowest price

- A buyer identifies a single product or a lot that they intend to buy

- Often requires an intermediary – an auctioneer/qualifier- Generally, the lowest bidder (English auction) or the first low

bidder (Dutch auction) ‘wins’- B-2-B buyer auctions are most viable for -

- Standardized product acquisitions- Simple services with broadly applicable performance criteria

Buyer’s (Reverse) Auctions


• Supply Chain Council – A leading inter-industry organization consisting of about 1000 top international firms including manufacturers, services, distributors, and retailers.

• SCOR – The Supply Chain Council’s “Supply Chain Operations Reference Model”

From the Supply Chain Council’s SCOR Version 7.0 Overview

Introduction to SCOR


A Process Reference Model Contains:

• Standard descriptions of management processes• A framework of relationships among the standard processes• Standard metrics to measure process performance• Management practices that produce best-in-class performance• Standard alignment to features and functionality




• SCOR spans:• All customer interactions, from order entry through paid invoice• All product (physical material and service) transactions, from your

supplier’s supplier to your customer’s customer, including equipment, supplies, spare parts, bulk product, software, etc.

• All market interactions, from the understanding of aggregate demand to the fulfillment of each order

• SCOR does not attempt to describe every business process or activity, including:• Sales and marketing (demand generation)• Research and technology development• Product development• Some elements of post-delivery customer support




• Demand/Supply Planning and Management• Balance resources with requirements and

establish/communicate plans for the whole supply chain, including Return, and the execution processes of Source, Make, and Deliver.

• Management of business rules, supply chain performance, data collection, inventory, capital assets, transportation, planning configuration, and regulatory requirements and compliance.

• Align the supply chain unit plan with the financial plan.


PLANNote- Planning is required in aggregate and for other, detailed

processes



• Sourcing Stocked, Make-to-Order, and Engineer-to-Order Product• Schedule deliveries; receive, verify, and transfer product; and

authorize supplier payments.• Identify and select supply sources when not predetermined,

as for engineer-to-order product.• Manage business rules, assess supplier performance, and

maintain data.• Manage inventory, capital assets, incoming product, supplier

network, import/export requirements, and supplier agreements.


SOURCE



• Make-to-Stock, Make-to-Order, and Engineer-to-Order Production Execution• Schedule production activities, issue product,

produce and test, package, stage product, and release product to deliver.

• Finalize engineering for engineer-to-order product.• Manage rules, performance, data, in-process

products (WIP), equipment and facilities, transportation, production network, and regulatory compliance for production.


MAKE



• Order, Warehouse, Transportation, and Installation Management for Stocked, Make-to-Order, and Engineer-to-Order Product• All order management steps from processing customer inquiries and

quotes to routing shipments and selecting carriers.• Warehouse management from receiving and picking product to load and

ship product.• Receive and verify product at customer site and install, if necessary.• Invoicing customer.• Manage Deliver business rules, performance, information, finished

product inventories, capital assets, transportation, product life cycle, and import/export requirements.


DELIVER



• Return of Raw Materials and Receipt of Returns of Finished Goods

• All Return Defective Product steps from source – identify product condition, disposition product, request product return authorization, schedule product shipment, and return defective product – and deliver – authorized product return, schedule return receipt, receive product, and transfer defective product.

• All Return of Maintenance, Repair, and Overhaul product steps from source – identify product condition, disposition product, request product return authorization, schedule product shipment, and return MRO product – and deliver – authorize product return, schedule return receipt, receive product, and transfer MRO product.

• All Return Excess Product steps from source – identify product condition, disposition product, request product return authorization, schedule product shipment, and return excess product – and deliver – authorize product return, schedule return receipt, receive product, and transfer excess product.

• Manage Return business rules, performance, data collection, return inventory, capital assets, transportation, network configuration, and regulatory requirements and compliance.


RETURN




Companies implement specific supply-chain management practices at this level. Level 4 defines practices to achieve competitive advantage and to adapt to changing business conditions.

Implementation Level

(Decompose Process Elements)

Defines a company’s ability to compete successfully in its chosen markets, and consists of: Process element definitions, Process element information inputs, and outputs, Process performance metrics, Best practices, where applicable, System capabilities required to support best practices, and Systems/tools; Companies “fine tune” their Operations Strategy at Level 3.

Process Element Level

(Decompose Processes)

Configuration from 30 core “process categories.” Companies implement their operations strategy through the supply chain configuration they choose.

Configuration Level

(Process Categories)

Defines the scope and content for the Supply Chain Operations Reference-model. Basis of competition performance targets are set.

Top Level

(Process Types)

DescriptionNameLevel


operations management om 306.001 lecture 10 – supply chain management/e-commerce al baharmast,...

Documents

rights reservedmake

parts availability

intermediate goods

information technology

shipment of parts

shipping channels

multiple agents

fewer supplierscreate