ME 328 Manufacturing

Engineering

Supply Chain Management

 Supply Chains & SCM Defined
A supply chain is the network of all the activities
involved in delivering a finished product/service to the
customer
– Sourcing of: raw materials, manufacturing & assembly,
warehousing, order entry & tracking, distribution, delivery
Supply Chain Management is the vital business function
that coordinates and manages all the activities of the
supply chain.
– Coordinates movement of goods through supply chain from
suppliers to manufacturers to distributors
– Promotes information sharing along chain like forecasts,
sales data, & promotions

2
The Supply Chain

10-3
Components of a Supply Chain for a
Manufacturer

• External Suppliers – source of raw material

– Tier one supplier supplies directly to the processor
– Tier two supplier supplies directly to tier one
– Tier three supplier supplies directly to tier two
• Internal Functions
– Processing, purchasing, planning, quality, shipping

4
 Components of a Supply Chain

External Distributors – transport finished products

to appropriate locations
– Logistics managers are responsible for managing
the movement of products between locations.
– Logistics includes:
• Traffic management – arranging the method of
shipment for both incoming and outgoing
products or material
• Distribution management – movement of
material from manufacturer to the customer

5
A Traditional Supply Chain
Information Flow

6
 The Bullwhip Effect
• The inaccurate or distorted demand information
created in the supply chain
• Causes generated by • Results in
– demand forecasting – Excessive inventory
updating, investment
– order batching, – Poor customer service
– price fluctuations, levels
– rationing and – Ineffective transportation
– gaming use
– Misused manufacturing
capacity
– Lost revenues
7
 Bullwhip Effect
• Occurs when slight demand variability is
magnified as information moves back upstream

8
 The Bullwhip Effect

Counteracting the Effect:

1. Change the way suppliers forecast product
demand by making this information available
at all levels of the supply chain
▪ Share real demand information (POS terminals)
2. Eliminate order batching
3. Stabilize pricing
4. Eliminate gaming

9
 Major Issues Affecting SCM
• Information Technology:
– enablers include the Internet, Web, EDI, intranets
and extranets, bar code scanners, and point-of-
sales demand information
• E-commerce and e-business:
– uses internet and web to transact business
▪ Business-to-business (B2B)
E-commerce:
▪ businesses selling to/buying from other businesses

10
Business-to-Business (B2B) Evolution

• 1970’s Automated order entry systems

– Telephone modem
• 1970’s Electronic Data Interchange (EDI)
– Computer to computer sharing
• 1990’s Electronic Storefronts
– On-line catalogs
• 1990’s Net Marketplaces
– Suppliers and buyers trade on Internet

11
 Benefits of B2B E-Commerce

• Lower procurement administrative costs

• Low-cost access to global suppliers
• Lower inventory investment due to price
transparency/reduced response time
• Better product quality because of increased
cooperation between buyers and sellers,
especially during the product design and
development

12
 Types of E-Commerce
• Business-to-Consumer (B2C)
on-line businesses sell to individual consumers:
– Advertising Revenue Model – Provides users
w/information on services & products; provides
opportunity for suppliers to advertise
– Subscription Revenue Model – Web site charges a
subscription fee for access to the site
– Transaction Fee Model – Company receives a fee for
executing a transaction

13
 Expectations & Competition

• SCM must consider the following trends,

improved capabilities, & realities:
– Consumer Expectations and Competition –
power has shifted to the consumer (search &
transaction)
– Globalization – capitalize on emerging markets
– Government Regulations and E-Commerce –
issues of Internet government regulations
– Green Supply Chain Management – recycling,
sustainable eco-efficiency, and waste minimization

14
 Global SCM Factors

• Managing extensive global supply chains

introduces many complications
– Infrastructure issues like transportation,
communication, lack of skilled labor, & scarce
local material supplies
• Resulting in Higher costs and poorer services
– Product proliferation created by the need to
customize products for each market
• Resulting in inaccurate demand forecasting

15
 The Role of Purchasing

• The purchasing department plays important role

in SCM and is responsible for:
– Selecting suppliers
– Negotiating and administering long-term contracts
– Monitoring supplier performance
– Placing orders to suppliers
– Developing a responsible supplier base
– Maintaining good supplier relations

16
 The Role of Purchasing
Purchasing role has attained increased
importance since material costs represent 50-
60% of cost of goods sold
– Ethics considerations is a constant concern
– Developing supplier relationships is essential
– Determining how many suppliers to use
– Developing partnerships

17
 Sourcing Issues

Consider which products to produce in-house and

which are provided by other supply chain members
•Vertical integration – a measure of how much of
the supply chain is owned or operated by the
manufacturer
– Backward integration – owning or controlling of
sources of raw material and components
– Forward integration – owning or controlling the
channels of distribution

18
 Insourcing vs. Outsourcing

Questions to ask before sourcing

decisions are made:
– Is product/service technology critical to
firm’s success?
– Is product/service a core competency?
– Is it something your company must do to
survive?

19
 Make or Buy Analysis
Analysis will look at the expected sales levels
and cost of internal operations vs. cost of
purchasing the product or service
Total Cost of Outsourcing :
TCBuy = FCBuy + (VCBuy  Q )
Total Cost of Insourcing: Note:
If quantity you need is exact; make or buy
TCMake = FCMake + (VCMake  Q ) If quantity you need is less; low FC, high VC
If quantity you need is more; low VC
Indifference Point :
FCBuy + (VCBuy  Q ) = FCMake + (VCMake  Q )

20
 Make or Buy Example
Company decide to add a part to one of their
products. Their first decision is whether they should
make the part on-site or buy from a local supplier. If
they buy from the local supplier they will need to pay
shipping at a fixed cost of $10000 annually. They can
buy the parts for $0.40 each. If they make the parts
in-house they will need to buy machinery and add an
employee at a fixed cost of $25,000 annually. It will
cost them $0.15 per part to make. They believe they
will need 75,000 parts.

21
 Make or Buy Computation

Company wants to know if they should

make or buy the parts?
• FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
• $10,000 + ($0.40 x Q) = $25,000 + ($0.15 x Q)
Q = 60,000 parts

22
Developing Supplier Relationship

A strong supplier base is critical to the

success of many organizations
• Top three criteria for choosing suppliers:
– Price
– Quality
– On-time delivery

23
 Critical Factors in Successful
Partnership Relations
• Impact
– attaining levels of productivity and competitiveness
that are not possible through normal supplier
relationships; change
• Intimacy
– working relationship between two partners; trust
• Vision
– the mission or objectives of the partnership;
commitment

24
 Win-Win Factors in Partnership
Relations
Characteristics
• Have a long-term
orientation
• Are Strategic in nature
• Share information
• Share risks and
opportunities
• Share a common vision
• Share short/long-term plans
• Are driven by end-customer
expectations
Benefits of Partnering
•Early supplier involvement
(ESI) in the design process
•Using supplier expertise to
develop and share cost
improvements and eliminate
costly processes
•Shorten time to market
25
 Supply Chain Distribution

• Warehouses involved in supply chain

distributions include
– Plant warehouses
– Regional warehouses
– Local warehouses
• Warehouses can either be
– General – used for long-term storage
– Distribution – used for short-term storage,
consolidation, and product mixing

26
 Supply Chain Distribution
• Warehouses have three roles:
– Transportation consolidation - warehouses
consolidate less-than-truckload (LTL) quantities into
truckload (TL) quantities
– Product mixing - warehouse value added
customer service of grouping a variety of products
into a direct shipment to the customer
– Services - are offered can improve customer
service by moving goods closer to the customer
and thus reducing replenishment time

27
 Supply Chain Distribution

• Crossdocking
– Eliminates the storage (customer is known) and
order-picking functions of a distribution warehouse
while still performing the receiving and shipping
functions.
– 4 types: Manufacturing, Distributor,
Transportation, Retail

28
 Supply Chain Distribution
Crossdocking Implementation

• Successes • Reasons for Failure

– Reduction in capital
investment in facilities and
equipment (less space)
– Reduction in inventory
– Reduction in personnel
requirements
– Reduction in order cycle
time
– Reduction in product
damage (reduced touches)
– Reduction in freight costs
– Poor facility layout
– Internal IS not integrated
– Low SC integration/collaboration
– Noncompliance by SC members
– Wrong products selected
– Unreliable suppliers in terms of
accuracy and on time deliveries
– Insufficient volume of activity
– Not understanding peak workload
variations
29
A WMS
30
 Supply Chain Distribution

• Radio Frequency Identification Technology

(RFID)
– automated data collection technology which relies
on radio waves to transfer data between reader and
RFID tag
• Third-party Service Providers
– ease of developing an electronic storefront has
allowed the discovery of suppliers from around the
world

31
 Integrated SCM
• Implementing integrated SCM requires:
– Analyzing the whole supply chain
– Starting by integrating internal functions first
– Integrating external suppliers through partnerships

• Supplier’s Goals • Manufacturer’s Goals

– Increase sales volume
– Increase customer loyalty
– Reduce cost
– Improve demand data
– Improve profitability
– Reduce costs
– Reduce duplication of effort
– Improve quality
– Reduce lead time
– Implement cost reduction
program
– Involve suppliers early
– Reduce time to market
32
 Supply Chain Integration
• Share information among supply chain members
– Reduced bullwhip effect
– Early problem detection
– Faster response
– Builds trust and confidence
• Collaborative planning, forecasting, replenishment, and design
– Reduced bullwhip effect
– Lower costs (material, logistics, operating, etc.)
– Higher capacity utilization
– Improved customer service levels
• Coordinated workflow, production and operations, procurement
– Production efficiencies
– Fast response
– Improved service
– Quicker to market
• Adopt new business models and technologies
– Penetration of new markets
– Creation of new products
– Improved efficiency 33

– Mass customization
 Transportation

• Rail
– low-value, high-density, bulk products, raw materials,
intermodal containers
– not as economical for small loads, slower, less flexible
than trucking
• Trucking
– main mode of freight transport in Turkey.
– small loads, point-to-point service, flexible
– More reliable, less damage than rails; more
expensive than rails for long distance

34
 Transportation

•Air
–most expensive and fastest, mode of freight transport
–lightweight, small packages <200 kg
–high-value, perishable and critical goods
–less theft
•Package carriers
–small packages
–fast and reliable
–increased with e-Business
–primary shipping mode for Internet companies

35
 Transportation
•Water
–low-cost shipping mode
–primary means of international shipping
–slowest shipping mode
•Intermodal
–combines several modes of shipping-truck, water and
rail
–key component is containers
•Pipeline
–transport oil and products in liquid form
–high capital cost, economical use
–long life and low operating cost

36
Transportation Modes

37
 Global Supply Chain

• International trade barriers have fallen

• New trade agreements
• To compete globally requires an effective
supply chain
• Information technology is an “enabler” of
global trade

38
 Obstacles to Global Chain Transactions

• Increased documentation for invoices, cargo insurance,

letters of credit, ocean bills of lading or air waybills, and
inspections
• Ever-changing regulations that vary from country to
country that govern the import and export of goods
• Trade groups, tariffs, duties, and landing costs
• Limited shipping modes and infrastructure
• Differences in communication technology and availability

39
 Obstacles to Global Chain Transactions

• Different business practices as well as language barriers

• Government codes and reporting requirements that vary
from country to country
• Numerous players, including forwarding agents, custom
house brokers, financial institutions, insurance providers,
multiple transportation carriers, and government
agencies
• Numerous security regulations and requirements

40
 Duties and Tariffs
• Proliferation of trade agreements
• Nations form trading groups
– no tariffs or duties within group
– charge uniform tariffs to nonmembers
• Member nations have a competitive
advantage within the group
• Trade specialists
– include freight forwarders, customs house brokers,
export packers, and export management and
trading companies

41
42
 Landed Cost
• Total cost of producing, storing, and transporting
a product to the site of consumption or another
port
• Value added tax (VAT)
– an indirect tax assessed on the increase in value of a
good at any stage of production process from raw
material to final product
• Clicker shock
– occurs when an ordered is placed with a company
that does not have the capability to calculate landed
cost

43
 Leveraging SCM: A List
1. Regularly assess your 5. Expand your visibility.
SC network to ensure 6. Know what happens,
continued suitability to when it happens.
your needs 7. Design to deliver.
2. Maintain a global view 8. Track performance to
of demand. allow for continuous
improvements.
3. Decide how to get
products to your
customers Note: Implementing these strategies
should reduce operating expenses
4. Improve asset
and result in benefits for members of chain.
productivity.

44
 Supply Chain Performance Metrics
Measuring SC performance
• Traditional measures: • Additional measures:
– Return on investment – Customer service levels
– Profitability – Inventory turns
– Market share – Weeks of supply
– Revenue growth – Inventory obsolescence

Customer demands for better-quality requires company’s to

develop ways to measure improvements
Some measurements include:
Warranty costs
Products returned
Cost reductions allowed because of product defects
Company response times
Transaction costs 45
 Current Trends in SCM
Increased use of electronic marketplace
• E-distributors
– Independently owned net marketplaces having
catalogs representing thousands of suppliers and
designed for spot purchases
• E-purchasing
– Companies that connect on-line MRO suppliers to
business who pay fees to join the market, usually for
long-term contractual purchasing
– Value chain management – automation of a firm’s
purchasing or selling processes

46
 Current Trends in SCM

• Exchanges
– Marketplace that focuses on spot requirements of
large firms in a single industry
• Industry consortium
– Industry-owned markets that enable buyers to
purchase direct inputs from a limited set of invited
suppliers
• Decreased supply chain velocity due to greater
distances with greater uncertainty and generally less
efficient.
• Trends in SC design:
– Globalization, growth, flexibility and competency, quality and
safety, secure investments, environmental sustainability,
integration.

47