Supply-Chain Management

Creation of Inventory
Input flow of materials Inventory level

Scrap flow
Figure 11.1

Output flow of materials

2

Inventory at Different Stocking Points

At Suppliers: Raw materials Within manufacturing plant: Raw materials, Work in Process & Finished goods At distributors: Finished goods At retailers: Finished goods

What is Supply-Chain Management?

Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together. Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer.
4

Supply Chain

Supply Chain

Tier 3

Figure 11.3

Legend

Supplier of services

Supplier of materials

Supply Chain

Tier 2

Tier 3

Figure 11.3

Legend

Supplier of services

Supplier of materials

Supply Chain

Tier 1

Tier 2

Tier 3

Figure 11.3

Legend

Supplier of services

Supplier of materials

Supply Chain
Manufacturer

Tier 1

Tier 2

Tier 3

Figure 11.3

Legend

Supplier of services

Supplier of materials

Supply Chain

Distribution center

Distribution center

Manufacturer

Tier 1

Tier 2

Tier 3

Figure 11.3

Legend

Supplier of services

Supplier of materials

10

Supply Chain

Customer

Customer

Customer

Customer

Distribution center

Distribution center

Manufacturer

Tier 1

Tier 2

Tier 3

Figure 11.3

Legend

Supplier of services

Supplier of materials

11

Supply Chain

12

Supply Chain

Electric transformers

Facility maintenance services

Janitorial services

Programming services

Electric energy backup power

Office supplies

Fuel supplies

Figure 11.4

13

Supply Chain
Electric power utility

Electric transformers

Facility maintenance services

Janitorial services

Programming services

Electric energy backup power

Office supplies

Fuel supplies

Figure 11.4

14

Supply Chain
Home customers Commercial customers Other electric utilities Electric power utility

Electric transformers

Facility maintenance services

Janitorial services

Programming services

Electric energy backup power

Office supplies

Fuel supplies

Figure 11.4

15

Supply Chain
The interconnected set of linkages between suppliers of materials and services that spans the transformation of raw materials into products and services and delivers them to a firms customers is known as the supply chain.
Three things flow in a supply chain
Value: from suppliers to consumers Information: in both directions Finance: from consumers to suppliers

16

Supply Chain Management

SCM seeks to synchronize a firms functions with those of its suppliers to match the flow of materials, services & information with customer demand Basic purpose is to control inventory by managing the flow of materials Common to manufacturing & service organizations Percentage of income used for buying materials & services
Manufacturing 60% Service 30%
17

Supply Chain Management

A large proportion of income is used to buy raw materials & services Companies can reap benefit (profit) by a small percentage of reduction in the cost of materials or cost of procuring them Main reason of SCM becoming a key competitive advantage
SCM has strategic implications because many companies have used SCM to achieve competitive priorities
18

Supply Chain Management

Supply chain is influenced by two types of uncertainties
Supply-side uncertainty Demand side uncertainty

Managing supply chain is in effect managing these two types of uncertainties

19

Integrated Supply Chain

In order to have smooth flow of materials all the components of a supply chain must be seamlessly integrated Integrated supply chain can be established by facilitating sharing of information between members in advance Overall cost of a supply chain can be reduced only if
It is an integrated supply chain Total view (end-to-end) is taken

20

Integrated Supply Chain

Phase 1: Independent supply-chain entities Suppliers Purchasing Production Distribution Customers

Figure 11.5

21

Integrated Supply Chain

Phase 1: Independent supply-chain entities Suppliers Purchasing Production Distribution Customers

Phase 2: Internal integration

Suppliers

Purchasing Production Distribution

Customers

Internal supply chain Materials management department

Figure 11.5

22

Integrated Supply Chain

Phase 1: Independent supply-chain entities Suppliers Purchasing Production Distribution Customers

Phase 2: Internal integration

Suppliers

Purchasing Production Distribution

Customers

Internal supply chain Materials management department

Phase 3: Supply-chain integration

Suppliers

Internal supply chain

Customers

Integrated supply chain

Figure 11.5

23

Materials Management

24

Materials Management

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

Figure 25 11.6

Materials Management

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

Figure 26 11.6

Materials Management
FG storage

Transformation process and WIP storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

RM storage

Figure 27 11.6

Materials Management
FG storage

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

Figure 28 11.6

Materials Management
FG storage

Production domain of responsibility

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

Figure 29 11.6

Materials Management
FG storage

Production domain of responsibility

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

Figure 30 11.6

Materials Management
Supermarket A distribution center Distribution domain of responsibility Supermarket B distribution center
FG storage

Transportation services supplier

Production domain of responsibility

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

Figure 31 11.6

Materials Management
Supermarket A distribution center Distribution domain of responsibility FG storage Supermarket B distribution center Transportation services supplier

Production domain of responsibility

Transformation process and WIP storage

RM storage

Purchasing domain of responsibility

Egg supplier

Sugar supplier

Flour supplier

Chocolate chips supplier

Maintenance services supplier

Figure 32 11.6

Material Management & SCM

Purchasing
Responsible for working with suppliers to ensure desired flow of inward materials & services Also responsible for storage of raw material inventory

Production control
How much to produce? When to produce? With which material, machine & people?

Distribution
Responsible for outward flow of materials Finished goods inventory & selection of transporters

Material Management decisions have major cumulative effect on the profitability of the firm

33

Integrated Supply Chain

Firms should use a seamless information & control system from purchasing to distribution integrating marketing, finance, accounts & operations Internal supply chain is extended to integrate external supply chain Firms to change focus from product or service orientation to customer orientation Instead of reacting to customer demands, firms should work with customers so that both can benefit from improved flow of materials & services Similarly suppliers should be involved at the early stage of product developments & future requirements are shared with suppliers
34

Purchasing
Management of acquisition process Involves five steps
Recognize a need Select suppliers Place the order Track the order Receive the order

35

Supplier Selection
For supplier evaluation criteria start from the competitive priorities of the customer segments to be served Service firms in food items: On-time delivery & consistent quality Selecting a new supplier: Price, Quality & Delivery
Low Price: Will reduce cost firms spent sizeable amount in buying inputs Quality: Hidden cost of poor quality can be enormous Delivery: On-time delivery can reduce the inventory level

36

Supplier Certification
Verify that a potential supplier has the capabilities of meeting the expectations of the buying firm Supplier can help the firm in meeting the competitive priorities of the customer segments that the firm has targeted to serve

37

Supplier Relation
Nature of relations maintained with suppliers can affect the quality, timeliness & price of the firms products or services Two orientations
Competitive Cooperative

38

Supplier Relation - Competitive

Views negotiations between buyer & seller as a zero sum game ones gain is others loss Buyer tries to
Beat price down to minimum level Push demand as high as possible during boom time Reduce demand to almost zero during recession

Party having maximum clout wins Clout: Buyer will have clout if the quantity bought is substantial percentage of the supplier sale; plus
Product is standard Many suppliers are available
39

Supplier Relation Cooperative

Long term commitment Jointly improve quality Support from buyer to improve managerial skills, technical skills & capacity Few suppliers As order volume increases supplier gains repeatability results in lower cost Large & long term contract helps supplier to plan long term
40

Sole sourcing
Risky any problem in suppliers company may disrupt the production Less opportunity to bargain a good price Advantage reduces complexity

41

Inventory Measures

42

Inventory Measures
Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year

Example 11.1

43

Inventory Measures
Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year Rs 2 million Weeks of supply = (Rs 10 million)/(52 weeks) = 10.4 weeks

Example 11.1

44

Inventory Measures
Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year Rs 2 million Weeks of supply = (Rs 10 million)/(52 weeks) = 10.4 weeks Rs 10 million Inventory turns = Rs2 million
Example 11.1

= 5 turns/year
45

Inventory Measures

46

Supply-Chain Process Measures

Operational Measures linked to financial measures
Aggregate inventory value Current asset Weeks of supply Working capital Inventory turnover Contribution margin Production & material costs Contribution margin Percentage defects Contribution margin Supplier lead time Working capital

47

Supply-Chain Process Measures

Financial measures
Current asset Working capital Contribution margin

48

Supply-Chain Process Measures

Table 11.1

49

Supply-Chain Process Measures

Order Placement
q qPercent orders taken

accurately qTime to complete the order-placement process qCustomer satisfaction with the orderplacement process

Table 11.1

50

Supply-Chain Process Measures

Order Placement
q qPercent orders taken

Order Fulfillment
q qPercent of incomplete

accurately qTime to complete the order-placement process qCustomer satisfaction with the orderplacement process

orders shipped qPercent of orders shipped on time qTime to fulfill the order qPercent of returned items or botched services qCost to produce the item or service qCustomer satisfaction with the orderfulfillment process

Table 11.1

51

Supply-Chain Process Measures

Order Placement
q qPercent orders taken

Order Fulfillment
q qPercent of incomplete

Purchasing
q qPercent of suppliers

accurately qTime to complete the order-placement process qCustomer satisfaction with the orderplacement process

orders shipped qPercent of orders shipped on time qTime to fulfill the order qPercent of returned items or botched services qCost to produce the item or service qCustomer satisfaction with the orderfulfillment process

deliveries on time qSuppliers lead times qPercent defects in purchased materials and services qCost of purchased materials and services

Table 11.1

52

Supply-Chain Environments

53

Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and Responsive Supply Chains

54

Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and Responsive Supply Chains

Factor
Demand Competitive priorities

New-product introduction Contribution margins Product variety

55

Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and Responsive Supply Chains

Factor
Demand Competitive priorities

Efficient Supply Chains

Predictable; low forecast errors Low cost; consistent quality; on-time delivery

New-product introduction Contribution margins Product variety

Infrequent Low Low

56

Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and Responsive Supply Chains

Factor
Demand Competitive priorities

Efficient Supply Chains

Predictable; low forecast errors Low cost; consistent quality; on-time delivery

Responsive Supply Chains

Unpredictable; high forecast errors Development speed; fast delivery times; customization; volume flexibility; highperformance design quality Frequent High High
57

New-product introduction Contribution margins Product variety

Infrequent Low Low

Supply-Chain Design

58

Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

59

Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

Factor
Operations strategy

Capacity cushion Inventory investment Lead time Supplier selection

60

Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

Factor
Operations strategy

Efficient Supply Chains

Make-to-stock or standardized services; emphasize high volume, standardized products, or services Low Low; enable high inventory turns Shorten, but do not increase costs Emphasize low prices; consistent quality; ontime delivery
61

Capacity cushion Inventory investment Lead time Supplier selection

Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

Factor
Operations strategy

Efficient Supply Chains

Make-to-stock or standardized services; emphasize high volume, standardized products, or services Low Low; enable high inventory turns Shorten, but do not increase costs Emphasize low prices; consistent quality; ontime delivery

Responsive Supply Chains

Assemble-to-order, maketo-order, or customized services; emphasize product or service variety High As needed to enable fast delivery time Shorten aggressively Emphasize fast delivery time; customization; volume flexibility; highperformance design quality
62

Capacity cushion Inventory investment Lead time Supplier selection

Supply-Chain Dynamics

63

Supply-Chain Dynamics
Customer Customer

Firm A

(a)

Figure 11.8 64

Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

(a)

Figure 11.8 65

Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

Firm C
(a) Figure 11.8 66

Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

Firm C
(a) (b)

Materials requirements

Time
Figure 11.8 67

Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

Materials requirements

Firm A

Firm C
(a) (b)

Time
Figure 11.8 68

Supply-Chain Dynamics
Customer Customer

Materials requirements

Firm C

Firm A

Firm B

Firm A

Firm C
(a) (b)

Time
Figure 11.8 69