16-1 Supply Chain Management

Operations Management

William J. Stevenson

8th edition
16-2 Supply Chain Management
16-3 Supply Chain Management

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 value chains

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Facilities
 Warehouses
 Factories
 Processing centers
 Distribution centers
 Retail outlets
 Offices
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Functions and Activities
 Forecasting
 Purchasing
 Inventory management
 Information management
 Quality assurance
 Scheduling
 Production and delivery
 Customer service
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Typical Supply Chains

Production Distribution
Purchasing Receiving Storage Operations Storage
 Typical Supply Chain for a
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Manufacturer
Figure 16.1a

Supplier

Supplier

Supplier
} Storage Mfg. Storage Dist. Retailer Customer
16-8
Typical Supply Chain for a
Supply Chain Management

Service
Figure 16.1b

Supplier

Supplier
} Storage Service Customer
 Need for Supply Chain
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Management
1. Improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-commerce
7. Complexity of supply chains
8. Manage inventories
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Bullwhip Effect
Figure 16.3

Amount of
= inventory

Tier 2 Tier 1 Final

Producer
DistributorRetailer
SuppliersSuppliers Customer
 Benefits of Supply Chain
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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
16-12 Supply Chain Management
Benefits of Supply Chain
Management
 Lower inventories
 Higher productivity
 Greater agility
 Shorter lead times
 Higher profits
 Greater customer loyalty
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Elements of Supply Chain
Management
Table 16.1

Element Typical Issues

Customers Determining what customers want
Forecasting Predicting quantity and timing of demand
Design Incorporating customer wants, mfg., and time
Processing Controlling quality, scheduling work
Inventory Meeting demand while managing inventory costs
Purchasing Evaluating suppliers and supporting operations
Suppliers Monitoring supplier quality, delivery, and relations
Location Determining location of facilities
Logistics Deciding how to best move and store materials
16-14 Supply Chain Management

Logistics
 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
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Logistics
• Movement within the facility
• Incoming and outgoing shipments
• Bar coding
• EDI
0
• Distribution
• JIT Deliveries 214800 232087768
16-16 Supply Chain Management

Materials Movement
Figure 16.4
Work center
Work center Work
center

Work Storage
center

Storage

Storage
RECEIVING

Shipping
 Distribution Requirements
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Planning
 Distribution requirements planning
(DRP) is a system for inventory
management and distribution planning
 Extends the concepts of MRPII
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Uses of DRP
 Management uses DRP to plan and
coordinate:
 Transportation
 Warehousing
 Workers
 Equipment
 Financial flows
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Electronic Data Interchange
 EDI – the direct transmission of
interorganizational transactions, computer-
to-computer, including purchase orders,
shipping notices, and debit or credit
memos.
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Electronic Data Interchange

 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
16-21 Supply Chain Management

Efficient Consumer Response

 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
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E-Commerce
 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
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Advantages 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
 Disadvantages of E-
16-24 Supply Chain Management

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
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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
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Table 16.4 SCOR Metrics

Perspective Metrics
Reliability On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment
Flexibility Supply chain response time
Upside production flexibility

Expenses Supply chain management costs

Warranty cost as a percent of revenue
Value added per employee
Assets/utilization Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
16-27 Supply Chain Management
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
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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
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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
 Creating an Effective Supply
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Chain
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
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Supply Chain Performance
Drivers
1. Quality
2. Cost
3. Flexibility
4. Velocity
5. Customer service
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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
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Challenges
 Barriers to integration of organizations
 Getting top management on board
 Dealing with trade-offs
 Small businesses
 Variability and uncertainty
 Long lead times
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Trade-offs
1. Lot-size-inventory
 Bullwhip effect
1. Inventory-transportation costs
 Cross-docking
1. Lead time-transportation costs
2. Product variety-inventory
 Delayed differentiation
1. Cost-customer service
 Disintermediation
16-35 Supply Chain Management

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
16-36 Supply Chain Management

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
16-37 Supply Chain Management

Supply Chain Issues

Strategic Tactical Issues Operating Issues
Issues
Design of the Inventory policies Quality control
supply chain, Purchasing policies Production planning and
partnering Production policies control
Transportation
policies
Quality policies
 Supply Chain Benefits and
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Drawbacks
Table 16.5
Problem Potential Benefits Possible
Improvement Drawbacks
Large Smaller, more frequent Reduced holding Traffic congestion
inventories deliveries costs Increased costs

Long lead times Delayed differentiation Quick response May not be feasible
Disintermediation May need absorb
functions
Large number Modular Fewer parts Less variety
of parts Simpler ordering

Cost Outsourcing Reduced cost, Loss of control

Quality higher quality

Variability Shorter lead times, Able to match supplyLess variety

better forecasts and demand
16-39 Supply Chain Management

Purchasing
 Purchasing is responsible for obtaining
the materials, parts, and supplies and
services needed to produce a product
or provide a service.
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Goal of Purchasing
 Develop and implement purchasing
plans for products and services that
support operations strategies
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Duties of Purchasing
 Identifying sources of supply
 Negotiating contracts
 Maintaining a database of suppliers
 Obtaining goods and services
 Managing supplies
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Purchasing Interfaces
Figure 16.5

Legal

Operations Accounting

Data
Purchasing
processing

Design

Receiving
Suppliers
16-43 Supply Chain Management

Purchasing Cycle
Legal

Operations
1. Requisition received Accounting

2. Supplier selected
Data
Purchasing process-
3. Order is placed ing

4. Monitor orders
Design
5. Receive orders
Receiving
Suppliers
 Value Analysis vs.
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Outsourcing
 Value analysis
 Examination of the function of purchased
parts and materials in an effort to reduce
cost and/or improve performance
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Centralized vs Decentralized
Purchasing

 Centralized purchasing
 Purchasing is handled by one special
department
 Decentralized purchasing
 Individual departments or separate locations
handle their own purchasing requirements
16-46 Supply Chain Management

Suppliers
 Choosing suppliers
 Evaluating sources of supply
 Supplier audits
 Supplier certification
 Supplier relationships
 Supplier partnerships
 Factors in Choosing a
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Supplier
 Quality and quality assurance
 Flexibility
 Location
 Price
 Factors in Choosing a
16-48 Supply Chain Management

Supplier (cont’d)

 Product or service changes

 Reputation and financial stability
 Lead times and on-time delivery
 Other accounts
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Evaluating Sources of Supply

 Vendor analysis: Evaluating the sources

of supply in terms of price, quality,
reputation, and service
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Evaluating Sources of Supply

 Vendor analysis - evaluating the
sources of supply in terms of
 Price
 Quality
 Services
 Location
 Inventory policy
 Flexibility
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Supplier as a Partner
Table 16.9

Aspect Adversary Partner

Number of suppliers Many One or a few

Length of relationshipMay be brief Long-term

Low price Major consideration Moderately important

Reliability May not be high High

Openness Low High
Quality May be unreliable; At the source; vendor
buyer inspects certified
Volume of business May be low High
Flexibility Relatively low Relatively high
16-52 Supply Chain Management

Supplier Partnerships
 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
16-53 Supply Chain Management
Critical Issues
 Strategic importance
 Cost
 Quality
 Agility
 Customer service
 Competitive advantage
 Technology management
 Benefits
 Risks
16-54 Supply Chain Management
Critical Issues
 Purchasing function
 Increased outsourcing
 Increased conversion to lean production
 Just-in-time deliveries
 Globalization