©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin

Chapter 9

Supply Chain Management: Managing

Business to Business Interactions

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Learning Objectives

• Explain the motivating forces behind the adoption of supply chain management (SCM).

• List examples of how customer actions affect suppliers and how supplier• actions affect customers.• Explain the seven critical decision areas of SCM.• Describe the decisions that constitute the logistics network configuration.• Describe an example of a supply chain and identify points of interaction• between buyers and suppliers.• Explain the pros and cons of outsourcing supply chain services.• Explain the bullwhip effect and its possible causes.• Describe risk pooling and the implications it has for distribution networks.• Explain the current trend affecting supply chain management.

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Generic Supply Chain

Supply Chain – Encompasses all activities associated with the flow and transformation of goods from the raw material stage (extraction) through to the end user, as well as the associated information flows. Material and information flow both up and down the supply chain.

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• Increasing competition to meet customer expectations for value

• Recognition that customer decisions and actions often dictate costs and limitations for suppliers.

• Recognition that supplier decisions and actions often dictate costs and limitations for customers.

• Increased potential for timely communication and feedback brought about by technological advances.

The Motivating Forces

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• U.S. businesses spend 20-30% of revenue acquiring goods from outside suppliers

• Purchase cost savings have strong impact on bottom line.

In this example, if the business saves just 6% in supply costs ($432,000), profit will increase by 45%.

Motivating Forces: Supply Savings Example

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• Increased global competition forces companies to stretch and add value.

• Businesses, focused on core competencies and outsourcing, need closer relationships with firms they outsource to.

• Adding value by:– Reducing inventory throughout supply chain.– Improving timeliness and reliability of deliveries.– Working with suppliers to improve their product and service quality.– Communicating and cooperating in general.

Motivating Forces: Increased Competition

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• Customers and suppliers have traditionally been adversarial - “Us-against-them” attitude.

• Bullwhip effect – The increasing variability of demand as one moves upstream in supply chain.– Variability of demand increases costs. Hard to plan, hard to

produce efficiently, need for larger inventories.

Motivating Forces:The Impact of Customers on Suppliers

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• Many possible events can have negative impact on customers (missed delivery due dates, defective products...)

• Customers increase inventory to protect against supplier unreliability.

• Correct placement of inventory in a supply chain improves performance, reduces cost, and reduces impact of disruptions.

Motivating Forces:The Impact of Suppliers on Customers

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• The Internet provides a means of having immediate access to information, enabling integrated decision making.

• Rather than attempt to forecast demand, a supplier can view customers’ production schedules and eliminate forecasting.

Motivating Forces:Technological Advances

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Supply Chain Management Decisions

• Strategic Alliances• Inventory Management• Cooperative product design• Information management• Standardization• Electronic commerce

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Supply Chain Management Components: Strategic Alliances

• A balance between commitment to low prices and commitment to the relationship is needed

Exhibit 10.4 Supplier Relationship Matrix

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Supply Chain Management Components: Strategic Alliances

• Develop alliances rather than just hiring suppliers.– Relationships create opportunity for communication

– Communication enhances productivity improvement

There are significant costs to switching suppliers

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Supply Chain Management Decisions: Inventory Management

• Information is used to help make decisions at all supply chain levels.

• How many to order? When? What are the risks? How much safety stock? Where should inventory be held?

• There are two fundamental questions: When shouuld we reorder? and How many?

• Increasing use of retail-supplier partnerships– Vendor managed inventory (VMI)

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Supply Chain Management Components: Cooperative Product Design

• Make sure components from multiple suppliers can be assembled.

• Gain insight from your suppliers– Improve products

– Reduce costs

– Reduce time

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Supply Chain Management Components: Information Management

Three information management decisions related to supply chain management

• What data should be collected?• How should it be stored?• With whom should it be shared?

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Supply Chain Management Components: Information Management

• Traditional supply chain: Forecasts based on different data. Contributes to the bullwhip effect, excess inventory, and stockouts.

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• Improved approaches enabled by technology to collect, store and communicate data– Collaborative planning, forecasting, and replenishment

(CPFR) – Approach to demand planning in which partners negotiate and agree on a plan for meeting demand

Supply Chain Management Components: Information Management

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Supply Chain Management Components: Standardization

• Long-term relationships drive businesses to make their processes compatible

• Standardizing processes makes for higher levels of productivity

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Supply Chain Management Components: Electronic Commerce

• Electronic commerce contributes to time reduction– Electronic cash transfers speed up the cash-to-cash cycle

– Electronic order processing makes continuous replenishment much more economical

• Online auctions/reverse auctions

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A Typical Example of Supply Chain Management: Pacers

• Pacers shoes sold through national chains of athletic shoe stores.– Fabrication and assembly

are done at the same plant.– They purchase raw

materials (leather, foam, laces, etc.) from a variety of suppliers.

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A Typical Example of Supply Chain Management: Pacers

What are the implications of a customer’s decision to have a promotion four months in the future?

• Pacers must revise the demand forecast– Effect of promotions harder to forecast

– Must account for “post-promotion lag” in demand

– Need to know when retailer needs the inventory, not date when promotion starts.

• Which distribution center should Pacers ship to?

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A Typical Example of Supply Chain Management: Pacers

What are the implications?

When we’ve picked a distribution center, we need to pick a manufacturing facility.– Is there enough capacity at that facility, or will we be forced to produce

elsewhere?– Will the promotion disrupt the production pattern?– When should we fulfilling the order? The sooner we start the less capacity

will be a problem, but the longer inventory will have to be held

Results of all these decisions are largely dictated by the distribution network configuration, inventory

management, and distribution strategy.

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A Typical Example of Supply Chain Management: Pacers

• Moving further up the chain:– Do we have enough raw material transportation and storage capacity at the

chosen manufacturing facility?– Will we have to use multiple transportation channels?– How would that impact our manufacturing schedules?– Can our suppliers handle these additional orders?– Can our suppliers’ suppliers handle it? Will our suppliers run short on raw

materials?

If something goes wrong at any point, the order is at risk of being late. Standardization, information management, and electronic commerce determine the efficiency of these interactions.

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The Supply Function

• Supply Activities– Recognition of a need

– Description of the need

– Identification and analysis of possible sources

– Supplier selection and determination of terms

– Preparation and placement of a purchase order

– Follow-up or expediting of the order

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Sourcing Decisions: Channel Selection

• Make versus buy, and how to buy.• The more strategically important the item, the more it

makes sense to ally with a supplier for it.• Low priority items should be purchased

independently.

• Exchanges are another possible channel. – Pooled purchases on an exchange can result in cost savings.– Give sellers access to more buyers

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Sourcing Decisions:Outsourcing Supply Chain Activities

• Supply chain activities, especially warehousing and transportation, are complex– Many businesses choose to outsource these functions.

• Third party logistics provider (3PL)– A provider of logistics services such as warehousing or transportation logistics.

• Outsourcing to a 3PL is primarily done to improve quality, because many companies cannot afford to invest in the expertise and technology required to do so.– Drawback is loss of control.

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• Extending the customer end– Potential to increase size of markets– Distribution network often forced to be different– Lack of technology infrastructure could inhibit utilization of information

and communication capabilities

• Extending the supplier end– Technology infrastructure problems– Cooperation and formation of strategic partnerships hampered by distance

and cultural differences– Difficulties in policy, procedure, and product standardization

Supply Chain Management Components: Information Management

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A Closer Look at the Bullwhip Effect

• As you go up a supply chain, demand increases in variability.

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A Closer Look at the Bullwhip Effect: Causes

• Demand forecast updating– Orders from suppliers must meet demand and fill safety stocks. The longer

the lead times, the more uncertain demand is and the more safety stock is held

• Order batching– Because of high transaction costs, orders are batched together, causing

“lumpy” demand. Suppliers similarly allow demand to accumulate before releasing orders

• Price fluctuation– Businesses often buy before they need to, and in larger amounts, because

suppliers offer pricing advantages

• Rationing and shortage gaming– Fear of supply shortages drives businesses to order in larger quantities than

they need

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A Closer Look at the Bullwhip Effect: Impact

• Impact on cost, quality, and timeliness– Spiking demand patterns puts businesses in ‘feast-or-famine’ mode. Not

good for productivity– High inventory costs– High inventory increases time for an innovation to get to market– Mismatch between demand and design capacity results in increased cost per

unit, whether demand is higher or lower than capacity– May cause low demand period layoffs, decreasing the quality of the

workforce as employees leave for more stable jobs– Long cash-to-cash cycles and diminishing financial returns

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A Closer Look at the Bullwhip Effect: Solutions

• Increase information supplied by businesses to their suppliers—link to point of sale (POS)

• Eliminate price discounts (everyday low pricing)• Reduce order transaction costs• Very frequent deliveries of small quantities

(continuous replenishment)

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A Closer Look at Risk Pooling

• Uncertainty associated with customer demand must be accommodated through inventory safety stocks.

• If retailers are supplied from a central warehouse rather than hold their own inventory, safety stocks would be less because aggregated variability would be less. High demand at one place would cancel out low demand at another place.

• The savings from this must be compared to the costs of facility modification and changes in transportation.

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Supply Chain Performance

• There are tradeoffs that may bring performance measurements into conflict– Batch size/inventory cost tradeoff– Transportation costs/inventory cost tradeoff– Customer service/inventory cost tradeoff– Lead time/warehousing cost tradeoff

• The perfect order is one that arrives on time as promised, is of the correct quantity, is not damaged, and also includes all of the agreed-upon services.

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Trends in Supply Chain Management

• Trading Communities• Optimization Modeling• Radio-Frequency Identification (RFID)• Supply Chain Security