Supply Chain Management

McGraw-Hill/IrwinOperations Management, Eighth Edition, by William J. StevensonCopyright © 2005 by The McGraw-Hill Companies, Inc. All rights

reserved.

CHAPTER 11

Supply Chain Management

Supply Chain: the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service.

Sometimes referred to as Sometimes referred to as value chainsvalue chains

Warehouses Factories Processing centers Distribution centers Retail outlets Offices

Facilities

Functions and Activities

Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service

Typical Supply Chains

Purchasing Receiving Storage Operations Storage

Production Distribution

Typical Supply Chain for a Manufacturer

Supplier

Supplier

Supplier

Storage} Mfg. Storage Dist. Retailer Customer

Supplier

Supplier

} Storage Service Customer

Typical Supply Chain for a Service

1. Improve operations2. Increasing levels of outsourcing3. Increasing transportation costs4. Competitive pressures5. Increasing globalization6. Increasing importance of e-

commerce7. Complexity of supply chains8. Manage inventories

Need for Supply Chain Management

Bullwhip Effect

Tier 2Suppliers

Tier 1Suppliers

Producer Distributor Retailer FinalFinalCustomerCustomer

Amount ofAmount ofinventoryinventory=

Benefits of Supply Chain Management

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

Benefits of Supply Chain Management

Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty

Elements of Supply Chain Management

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

Logistics 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

Logistics

Logistics

• Movement within the facility

• Incoming and outgoing shipments

• Bar coding

• EDI

• Distribution

• JIT Deliveries

0

214800 232087768

Materials MovementR

EC

EIV

ING

Storage

Workcenter

Work centerWork center

Storage

Workcenter

Storage

Shipping

Distribution requirements planning (DRP) is a system for inventory management and distribution planning

Extends the concepts of MRPII

Distribution Requirements Planning

Management uses DRP to plan and coordinate: Transportation Warehousing Workers Equipment Financial flows

Uses of DRP

Electronic Data Interchange

EDI – the direct transmission of inter-organizational transactions, computer-to-computer, including purchase orders, shipping notices, and debit or credit memos.

Increased productivity Reduction of paperwork Lead time and inventory reduction Facilitation of just-in-time systems Electronic transfer of funds Improved control of operations Reduction in clerical labor Increased accuracy

Electronic Data Interchange

Efficient consumer response (ECR) is a supply chain management initiative specific to the food industry Reflects companies’ efforts to

achieve quick response using EDI and bar codes

Efficient Consumer Response

E-Commerce: 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-Commerce

Companies can: Have a global presence Improve competitiveness and quality Analyze customer interests Collect detailed information Shorten supply chain response times Realize substantial cost savings Create virtual companies Level the playing field for small

companies

Advantages E-Commerce

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-Commerce

Successful Supply Chain

Trust among trading partners

Effective communications

Supply chain visibility

Event-management capability The ability to detect and respond to

unplanned events

Performance metrics

SCOR 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

CPFR Collaborative Planning, Forecasting,

and Replenishment

Focuses on information sharing among trading partners

Forecasts can be frozen and then converted into a shipping plan

Eliminates typical order processing

CPFR Process

Step 1 – Front-end agreement

Step 2 – Joint business plan

Steps 3-5 – Sales forecast

Steps 6-8 – Order forecast collaboration

Step 9 – Order generation/delivery execution

CPFR 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

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 Chain

Supply Chain Performance Drivers

1. Quality

2. Cost

3. Flexibility

4. Velocity

5. Customer service

Velocity

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

Dealing with trade-offs

Small businesses

Variability and uncertainty

Long lead times

Challenges

1. Lot-size-inventory Bullwhip effect

2. Inventory-transportation costs Cross-docking

3. Lead time-transportation costs

4. Product variety-inventory Delayed differentiation

5. Cost-customer service Disintermediation

Trade-offs

Trade-offs Bullwhip effect

Inventories are progressively larger moving backward through the supply chain

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

Trade-offs 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

Supply Chain Issues

Quality controlProduction planning and control

Inventory policiesPurchasing policiesProduction policiesTransportation policiesQuality policies

Design of the supply chain, partnering

Operating IssuesTactical IssuesStrategic Issues

Supply Chain Benefits and Drawbacks

Problem PotentialImprovement

Benefits PossibleDrawbacks

Large 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

Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service.

Purchasing

Develop and implement purchasing plans for products and services that support operations strategies

Goal of Purchasing

Identifying sources of supply

Negotiating contracts

Maintaining a database of suppliers

Obtaining goods and services

Managing supplies

Duties of Purchasing

Purchasing Interfaces

Purchasing

Legal

AccountingOperations

Dataprocessing

Design

ReceivingSuppliers

Purchasing Cycle

1. Requisition received

2. Supplier selected

3. Order is placed

4. Monitor orders

5. Receive orders

PurchasingPurchasing

LegalLegal

AccountingAccountingOperationsOperations

DataDataprocess-process-inging

DesignDesign

ReceivingReceiving

SuppliersSuppliers

Value analysis Examination of the function of

purchased parts and materials in an effort to reduce cost and/or improve performance

Value Analysis vs. Outsourcing

Centralized purchasing Purchasing is handled by one

special department

Decentralized purchasing Individual departments or

separate locations handle their own purchasing requirements

Centralized vs Decentralized Purchasing

Choosing suppliers

Evaluating sources of supply

Supplier audits

Supplier certification

Supplier relationships

Supplier partnerships

Suppliers

Quality and quality assurance Flexibility Location Price

Factors in Choosing a Supplier

Product or service changes Reputation and financial

stability Lead times and on-time

delivery Other accounts

Factors in Choosing a Supplier (cont’d)

Evaluating Sources of Supply

Vendor analysis: Evaluating the sources of supply in terms of price, quality, reputation, and service

Vendor analysis - evaluating the sources of supply in terms of Price Quality Services Location Inventory policy Flexibility

Evaluating Sources of Supply

Ideas from suppliers could lead to improved competitiveness

1. Reduce cost of making the purchase2. Reduce transportation costs3. Reduce production costs4. Improve product quality5. Improve product design6. Reduce time to market7. Improve customer satisfaction8. Reduce inventory costs9. Introduce new products or services

Supplier Partnerships

Critical Issues Strategic importance

Cost Quality Agility Customer service Competitive advantage

Technology management Benefits Risks

Critical Issues

Purchasing function Increased outsourcing Increased conversion to lean production Just-in-time deliveries Globalization