Supply Chain Management

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Supply Chain Management
Operations Management
William J. Stevenson
8th edition
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CHAPTER
16
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. Stevenson

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights
16-3
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
16-4
Facilities
Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices
16-5
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
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Typical Supply Chain for a Manufacturer

Figure 16.1a
Supplier
Supplier
Supplier
Storage
Mfg.
Storage
Dist.
Retailer
Customer
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Typical Supply Chain for a Service
Figure 16.1b
Supplier
Supplier
Storage
Service
Customer
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Need for Supply Chain Management

1.
2.
3.
4.
5.
6.
7.
8.
Improve operations
Increasing levels of outsourcing
Increasing transportation costs
Competitive pressures
Increasing globalization
Increasing importance of e-commerce
Complexity of supply chains
Manage inventories
16-10 Supply Chain Management
Bullwhip Effect
Figure 16.3
Tier 2
Suppliers
Tier 1
Suppliers
Producer
Distributor
Amount of
inventory
Retailer
Final
Customer
Benefits of Supply Chain 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
Benefits of Supply Chain Management

Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
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
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
Logistics
Movement within the facility

Incoming and outgoing shipments
Bar coding
EDI
Distribution
JIT Deliveries
0
214800 232087768
Materials Movement
Figure 16.4
Work center
Work center
Work
center
Storage
Work
center
Storage
RECEIVING
Storage
Shipping
Distribution Requirements Planning
Distribution requirements planning (DRP) is

a system for inventory management and
distribution planning
Extends the concepts of MRPII
Uses of DRP
Management uses DRP to plan and

coordinate:
Transportation
Warehousing
Workers
Equipment
Financial flows
Electronic Data Interchange
EDI the direct transmission of

interorganizational transactions, computer-tocomputer, including purchase orders,
shipping notices, and debit or credit memos.
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
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
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
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-Commerce
Customer expectations
Order fulfillment
Order quickly -> fast delivery
Order rate often exceeds ability to fulfill it
Inventory holding
Outsourcing loss of control
Internal holding costs
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
SCOR Metrics
Table 16.4
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
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
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
Nabisco and Wegmans
CPFR Results
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 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
Supply Chain Performance Drivers

1.
Quality
2.
Cost
3.
Flexibility
4.
Velocity
5.
Customer service
Inventory velocity
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
Challenges
Barriers to integration of organizations
Getting top management on board
Dealing with trade-offs
Small businesses
Variability and uncertainty
Long lead times
Trade-offs
1.
Lot-size-inventory
2.
Bullwhip effect
Inventory-transportation costs
Cross-docking
3.
Lead time-transportation costs
4.
Product variety-inventory
5.
Delayed differentiation
Cost-customer service
Disintermediation
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 suppliers truck and
loaded onto outbound trucks
Avoids warehouse storage
Trade-offs
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
Supply Chain Issues
Strategic
Issues
Design of the
supply chain,
partnering
Tactical Issues
Inventory policies
Purchasing policies
Production policies
Transportation
policies
Quality policies
Operating Issues
Quality control
Production planning and
control
Supply Chain Benefits and Drawbacks
Table 16.5
Problem
Potential
Improvement
Benefits
Possible
Drawbacks
Large
inventories
Smaller, more frequent

deliveries
Reduced holding
costs
Traffic congestion
Increased costs
Long lead
times
Disintermediation
Quick response
May not be feasible

May need absorb
functions
Large number
of parts
Modular
Fewer parts
Simpler ordering
Less variety
Cost
Quality
Outsourcing
Reduced cost,
higher quality
Loss of control
Variability
Shorter lead times,

better forecasts
Able to match
supply and demand
Less variety
Purchasing
Purchasing is responsible for obtaining the

materials, parts, and supplies and services
needed to produce a product or provide a
service.
Goal of Purchasing
Develop and implement purchasing plans for

products and services that support operations
strategies
Duties of Purchasing
Identifying sources of supply
Negotiating contracts
Maintaining a database of suppliers
Obtaining goods and services
Managing supplies
Purchasing Interfaces
Figure 16.5
Legal
Operations
Accounting
Purchasing
Data
processing
Design
Suppliers
Receiving
Purchasing Cycle
1.
Requisition received
2.
Supplier selected
3.
Order is placed
4.
Monitor orders
5.
Receive orders
Legal
Operations
Accounting
Purchasing
Design
Receiving
Suppliers
Data
processing
Value Analysis vs. Outsourcing
Value analysis
Examination of the function of purchased

parts and materials in an effort to reduce cost
and/or improve performance
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
Suppliers
Choosing suppliers
Evaluating sources of supply
Supplier audits
Supplier certification
Supplier relationships
Supplier partnerships
Factors in Choosing a Supplier
Quality and quality assurance

Flexibility
Location
Price
Factors in Choosing a Supplier (contd)

Product or service changes
Reputation and financial stability
Lead times and on-time delivery
Other accounts
Evaluating Sources of Supply
Vendor analysis: Evaluating the sources of

supply in terms of price, quality, reputation,
and service
Evaluating Sources of Supply
Vendor analysis - evaluating the sources of

supply in terms of
Price
Quality
Services
Location
Inventory policy
Flexibility
Supplier as a Partner
Table 16.9
Aspect
Adversary
Partner
Number of suppliers
Many
One or a few
Length of relationship
May be brief
Long-term
Low price
Major consideration
Moderately important
Reliability
May not be high
High
Openness
Low
High
Quality
May be unreliable;
buyer inspects
At the source; vendor

certified
Volume of business
May be low
High
Flexibility
Relatively low
Relatively high
Location
Widely dispersed
Nearness is important
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
Critical Issues
Strategic importance
Cost
Quality
Agility
Customer service
Competitive advantage
Technology management
Benefits
Risks
Critical Issues
Purchasing function
Increased outsourcing
Increased conversion to lean production
Just-in-time deliveries
Globalization

Supply Chain Management

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