Chapter 4

Supply Chain
Management
Supply Chain
A supply chain is the network of all the
activities involved in delivering a
finished product/service to the
customer.

Inventory at Different
Stocking Points
Supplier Manufacturing plant Distribution center Retailer
Figure 8.1
Raw
materials
Work in
process
Finished
goods
Figure 8.2
Supplier of materials Supplier of services
Tier 1
Tier 3
Tier 2
Legend
Customer Customer Customer Customer
Distribution
center
Distribution
center
Manufacturer
Components
Internal processor
External suppliers
External distributors
Supply-Chain for a Service Firm
Figure 8.3
Electric
power utility
Home
customers
Commercial
customers
Other electric
utilities
Electric
transformers
Facility
maintenance
services
Janitorial
services
Programming
services
Electric
energy
backup power
Office
supplies
Fuel
supplies
Bullwhip Effect in a Supply Chain
Bullwhip effect is the inaccurate or
distorted demand information created in
the supply chain.


Bullwhip Effect
(a)
Customer Customer
Firm A
Firm B
Firm C
Firm C
Firm A
Time
(b)
Figure 8.5
M
a
t
e
r
i
a
l
s

r
e
q
u
i
r
e
m
e
n
t
s

Causes
What causes bullwhip effect in the chain:
demand forecasting updating,
order batching,
price fluctuations,
rationing and gaming

Consequence
Consequences of bullwhip effect:
Increased inventory / production at each
spot of a supply chain due to erroneous
demand information.
Getting more serious when going upstream
of the supply chain.
Counteracting Bullwhip Effect
Cooperation and information sharing
among companies in supply chain:
Make order calculation information available at all
levels of the supply chain.
Share real demand information.
Replace order batching with improvisatory order
Stabilize pricing with increased cooperation
Eliminate gaming with cooperation and mutual
trust

B2B
In B2B e-commerce, companies sell and
buy products to and from other business
through Internet.
B2B facilitates purchasing research
(electronic storefront and net
marketplace) and automates purchasing
transaction process.
B2C
B2C refers to the on-line business in
which a company reaches individual
consumers directly through Internet.
B2C models:
Advertising revenue model
Subscription revenue model
Transaction fee model
Sales revenue model
Affiliate revenue model
Intranet, Extranet, Internet
An intranet is a computer network exclusively
for internal use of a company.
An extranet is a computer network exclusively
for a company and its suppliers / customers.
Internet is an open computer network.
Role of Purchasing
Purchasing departments play an
important role in SCM and are
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

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Traditional Purchasing Process
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E-purchasing Process
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Sourcing Issues
Which products to produce in-house and
which are provided by other supply chain
members (make-or-buy decision)
Role of Warehouse
A warehouse is for storage and/or
distribution.
Transportation consolidation
Product mixing
Service improving
Crossdocking refers to the sole distribution
function of a warehouse with eliminated
storage and order-picking.
Characteristics of Crossdocking
Warehouse plays the role of transfer station
where less-than-truckload (LTL) quantities are
consolidated into truckload (TL), or items from
different suppliers are consolidated and
shipped to one customer.
No storage and order picking.
Crossdocking is carried out within 24 hours.
Warehouse knows who are the owners of the
inbound items before they arrive.
Types of Crossdocking
Based on purpose of crossdocking and
customers of the warehouse, four types:
Manufacturing crossdocking
Distribution crossdocking
Transportation crossdocking
Retail crossdocking
Vertical Integration
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 component
parts
Forward integration owning or control the
channels of distribution

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Insourcing vs. Outsourcing
Insourcing to make in-house.
Outsourcing to make by other
companies
Considerations in sourcing decision
making:
Is product critical to firms success?
Is product a core competency?
Is it something your company must do to
survive?
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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

make buy
buy make
Make Make Buy Buy
Make Buy
VC VC
FC FC
Q VC FC Q VC FC
TC TC

Q
: is That
: point ce indifferen at Q quantity find To
point) breakeven (or point ce indifferen At
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Example (p.121)
Mary and Sue decide to open a bagel shop. They
need to decide whether they should make bagels on-
site or buy bagels from a local bakery. If they buy
from the local bakery they will need airtight
containers at a fixed cost of $1,000 annually. They
can buy the bagels for $0.40 each. If they make
bagels in-house they will need a small kitchen at a
fixed cost of $15,000 annually. It will cost them
$0.15 per bagel to make. They believe they will sell
60,000 bagels.
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Example Solved
Let Q be the quantity at indifference point
(breakeven point)
FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
$1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)
Solve it for Q, we have


So, make or buy?

bagels 000 , 56
25 . 0
000 , 14
15 . 0 4 . 0
000 , 1 000 , 15

Q
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Developing Supplier Relationship
A strong supplier base is critical to the
success of many organizations
Top three criteria for choosing suppliers
are:
Price
Quality
On-time delivery
Win-Win Partnership Relations
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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
Efficient supply chain


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Ethics in Supply Management
Global Standards of Supply Management
Conduct from ISM:
Loyalty to your organization
Justice to those with whom you deal
Faith in your profession
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Supply Chain Metrics
Measuring supply chain performance
Traditional measures include:
Return on investment
Profitability
Market share
Revenue growth
Additional measures
Customer service levels
Inventory turnover
Weeks of supply
Inventory obsolescence