Chapter Seven

Supply Chain management

 WHAT IS A SUPPLY CHAIN?

 A supply chain is the network of activities that

delivers a finished product or service to the
customer.
 These include:
o sourcing raw materials and parts,
o manufacturing and assembling the products,
o warehousing,
o order entry and tracking,
o distribution through the channels, and
o delivery to the customer.
 Supply Chain management
• All management functions related to the flow
of materials from the company’s direct
suppliers to its direct customers.
– Functions included:
• purchasing,
• traffic,
• production control,
• inventory control,
• warehousing, and shipping.
 Cont’d …
• Keys to effective SCM
– information
– communication
– cooperation
– trust
 Cont’d …
 Important activities in SCM is;
 Determining :
o Transportation vendors
o Credit and cash transfers
o Suppliers
o Distributors
o Accounts payable and receivable
o Warehousing and inventory
o Order fulfillment
o Sharing customer, forecasting, and production information
 Cont’d …

Supply Chain Illustration

 Supply Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few suppliers
 Vertical integration
 Virtual companies that use suppliers on an as
needed basis
 Many Suppliers

 Competition among suppliers may provide better service

and price.
 Probability of assured supply is better. Multiple suppliers
spreads the risks.
 Eliminates a supplier’s dependence on the purchaser.
 Provides a greater flexibility of volume.
 No single supplier may have sufficient capacity.
 Government regulations may require multiple sources.
 Few Suppliers
 The supplier may be the exclusive owner of essential patents
and/or processes and thus be the only possible source.
 By using one supplier, quantity discounts may be achieved.
 The supplier will be more responsive if it has all of your
business for the item.
 Contractual agreements may prohibit the splitting of an order.
 The supplier is so outstanding that no other supplier is a
serious contender.
 Single sourcing is a prerequisite for partnering.
 The order is too small to split between suppliers.
 The just-in-time philosophy can be better utilized.
 Vertical Integration
 Vertical integration is a measure of how much of the
supply chain is owned or operated by the
manufacturer.
 Backward integration:
 Is a company’s acquisition or control of sources of raw materials and
component parts: the company acquires, controls, or owns the sources
that were previously external suppliers in the supply chain.
 Forward integration:
 Is a company’s acquisition or control of its channels of distribution—
what used to be the external distributors in the supply chain.
 Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
(suppliers) Iron ore Farming

Backward integration Steel

Current transformation
Automobiles Flour milling

Forward integration Distribution systems

Finished goods
(customers)
Dealers Baked goods
 Features Vertical Integration

 Developing the ability to produce goods or service

previously purchased
 Integration may be forward(towards the customer),
or backward( towards suppliers)
 Can improve cost, quality, and inventory but
requires capital, managerial skills, and demand
 Supply Chain for Service Providers

• More difficult than manufacturing

• Does not focus on the flow of physical goods
• Focuses on human resources and support services
• More compact and less extended
 Value vs. Supply Chain

• Value chain
– every step from raw materials to the eventual end user
– ultimate goal is delivery of maximum value to the end user
• Supply chain
– activities that get raw materials and subassemblies into
manufacturing operation
• Terms are used interchangeably
 Supply Chain Uncertainty

• One goal in SCM: • Factors that contribute to

– respond to uncertainty uncertainty
in customer demand – inaccurate demand
without creating costly forecasting
excess inventory – long variable lead times
– late deliveries
– incomplete shipments
– product changes batch
ordering
– price fluctuations and
discounts
– inflated orders
 Information Technology: A Supply Chain
Enabler

• Information links all • Bar code and point-of-sale

aspects of supply chain – data creates direct computer
record of a sale
eg • Internet
• E-business – allows companies to
– replacement of physical communicate with suppliers,
customers, shippers and other
business processes with businesses around the world,
electronic ones instantaneously
• Electronic data
interchange (EDI)
– a computer-to-computer
exchange of business
documents
 E-business and Supply Chain

• Cost savings and price reductions.

• Reduction or elimination of the role of intermediaries
• Shortening supply chain response and transaction
times.
• Gaining a wider presence and increased visibility for
companies.
• Greater choices and more information for customers.
 Cont’d …

• Improved service as a result of immediate accessibility

to services.
• Collection and analysis of voluminous amounts of
customer data and preferences.
• Creation of virtual companies.
• Gaining global access to markets, suppliers, and
distribution channels
 Make-or-Buy Decisions
Outsourcing
• It may be easy to calculate the costs of manufacturing versus
purchasing. But such decisions involve more than financial
calculations.
• Questions needs to be answered;
– Is a particular product or service critical to your company’s success?
– Is the product or service one of your company’s core competencies?
– Is it something your company must do to survive?
– Is product quality in-house comparable to product quality in the
marketplace?
– Is product functionality comparable, or does one product have an
advantage in terms of quality or functionality?
– Does the company have the capital needed for any up-front costs
to provide the product or service in-house?
 Make-or-Buy Decisions
Reasons for Making
1. Maintain core competence
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply (quantity or delivery)
5. Utilize surplus labor or facilities
6. Obtain desired quality
7. Remove supplier collusion
8. Obtain unique item that would entail a prohibitive commitment for a
supplier
9. Protect personnel from a layoff
10. Protect proprietary design or quality
11. Increase or maintain size of company
 Make-or-Buy Decisions
Reasons for Buying
1. Frees management to deal with its core competence
2. Lower acquisition cost
3. Preserve supplier commitment
4. Obtain technical or management ability
5. Inadequate capacity
6. Reduce inventory costs
7. Ensure alternative sources
8. Inadequate managerial or technical resources
9. Item is protected by a patent or trade secret
 Global Supply Chain Issues

 Supply chains in a global environment must

be able to:
 React to sudden changes in parts availability,
distribution, or shipping channels, import duties, and
currency rates.
 Use the latest computer and transmission
technologies to schedule and manage the shipment of
parts in and finished products out.
 Staff with local specialists who handle duties, freight,
customs and political issues.
 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
• Differences in communication technology and
availability
 Cont’d …

• 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
 Ethics in the Supply Chain

 A constant concern within purchasing departments

is the issue of ethics in managing suppliers.
 Buyers are in a position to influence or determine
which supplier is awarded business, buyers must
make certain that they avoid any appearance of
unethical behavior or a conflict of interest.
 To guide purchasing employees, the Institute for
Supply Management (ISM) has approved a set of
principles and standards.
 Principles and Standards for Ethical
Supply Management Conduct
 Impropriety. Prevent the intent and appearance
of unethical or compromising conduct in
relationships, actions, and communications.
 Conflicts of Interest. Ensure that any personal,
business, or other activity does not conflict with
the lawful interests of your employer.
 Influence. Avoid behaviors or actions that may
negatively influence, or appear to influence,
supply management decisions.
 Cont’d …

 Responsibilities to Your Employer. Uphold

fiduciary and other responsibilities using
reasonable care and granted authority to deliver
value to your employer.
 Promote positive supplier and customer
relationships.
 Sustainability and Social Responsibility.
Champion social responsibility and sustainability
practices in supply management.
 Cont’d …

 Confidential and Proprietary Information.

Protect confidential and proprietary information.
 Reciprocity. Avoid improper reciprocal
agreements.
 Applicable Laws, Regulations, and Trade
Agreements. Know and obey the letter and spirit of
laws, regulations, and trade agreements applicable
to supply management.
 Professional Competence. Develop skills, expand
knowledge, and conduct business that
 Just-in-Time
• JIT is a Japanese management philosophy which has
been applied in practice since the early 1970s in many
Japanese manufacturing organizations.
• It was first developed and perfected within the Toyota
manufacturing plants by Taiichi Ohno.
 What is Just-in-Time?
• It is a management philosophy of continuous and forced
problem solving
• Help as supplies and components are ‘pulled’ through
system to arrive where they are needed when they are
needed.
• A manufacturing/delivery process where a minimum of
goods are kept in stock.
• Items are planned to arrive precisely at the time they are
required for use or dispatch.
• Philosophy of JIT
• “A philosophy of manufacturing based on planned
elimination of waste and continuous improvement of
productivity ……
 Contd.
• a corporate system designed to produce output within
the minimum lead time and at the lowest total cost by
continuously identifying and eliminating all forms of
corporate waste and variance.
 What Does Just-in-Time Do?
• Attacks waste
– Anything not adding value to the product
– Types of waste
• Material, energy, time, and space.
• Exposes problems and bottlenecks
– make all waste visible.
 7 Basic Types of Waste

• Overproduction
• Waiting time
• Transportation
• Inefficient processing
• Inventory
• Unnecessary motion
• Product defects
 Common Causes of Waste

• Layout (distance)
• Long setup time
• Incapable processes
• Poor maintenance
• Poor work methods
• Lack of training
• Inconsistent performance measures
• Ineffective production planning
• Lack of workplace organization
• Poor supply -quality/reliability
 JIT Contribution to Competitive
Advantage
• Suppliers
– reduced number of vendors
– supportive supplier relationships
– quality deliveries on time
• JIT purchasing- The most challenging area for most
manufacturers in achieving JIT is the purchasing of raw
materials and parts. This is important because an internal JIT
system can only be operated successfully when the material
being fed into it are of sufficient quality and delivered on
time.
 JIT Contribution to Competitive
Advantage - continued
• Layout
– work-cell layouts with testing at each step of the
process
– group technology
– movable, changeable, flexible machinery
– high level of workplace organization and neatness
– reduced space for inventory
– delivery direct to work areas
 JIT Contribution to Competitive Advantage -
continued
• Inventory
– small lot sizes
– low setup times
– specialized bins for holding set number of parts
• Eliminate Safety Stock = Zero Inventory
• Scheduling
– zero deviation from schedules
– level schedules
– suppliers informed of schedules
 JIT Contribution to Competitive
Advantage - continued
• Preventive Maintenance
– scheduled
– operator involvement
• Quality Production
– statistical process control
– quality by suppliers
– quality within firm
 JIT Contribution to Competitive
Advantage - continued
• Employee Empowerment
– empowered and cross-trained employees
– few job classifications to ensure flexibility of
employees
– training support
• Commitment
– support of management, employees, and suppliers
 Yielding

• Faster response to the customer and higher

quality

A competitive advantage!
 Just-in-Time Success Factors
Suppliers
Employee
Layout
Empowerment

Quality JIT Inventory

Preventive
Scheduling
Maintenance