14-1 Supply Chain Management

Operations Management

William J. Stevenson

8th edition
14-2 Supply Chain Management

Supply Chain Management

• 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

14-3 Supply Chain Management

Facilities

• Warehouses
• Factories

• Processing centers

• Distribution centers

• Retail outlets

• Offices
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Functions and Activities

• Forecasting
• Purchasing

• Inventory management

• Information management

• Quality assurance

• Scheduling

• Production and delivery

• Customer service
14-5 Supply Chain Management

Typical Supply Chains

Production Distribution
Purchasing Receiving Storage Operations Storage
14-6 Supply Chain Management

Typical Supply Chain for a Manufacturer

Figure 14.1a

Supplier

Supplier

Supplier
} Storage Mfg. Storage Dist. Retailer Customer
14-7 Supply Chain Management

Typical Supply Chain for a Service

Figure 14.1b

Supplier

Supplier
} Storage Service Customer
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Need for Supply Chain Management

1. Improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-commerce
7. Complexity of supply chains
8. Manage inventories
14-9 Supply Chain Management

Bullwhip Effect
Figure 14.3

Amount of
= inventory

Tier 2 Tier 1 Final

Producer
DistributorRetailer
SuppliersSuppliers Customer
14-10 Supply Chain Management

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

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Benefits of Supply Chain Management

• Lower inventories
• Higher productivity

• Greater agility

• Shorter lead times

• Higher profits

• Greater customer loyalty

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Elements of Supply Chain Management

Table 14.1

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
14-13 Supply Chain Management

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
14-14 Supply Chain Management

Logistics

• Movement within the facility

• Incoming and outgoing shipments
• Bar coding
• EDI
0
• Distribution
• JIT Deliveries 214800 232087768
14-15 Supply Chain Management

Materials Movement
Figure 14.4
Work center
Work center Work
center

Work Storage
center

Storage

Storage
RECEIVING

Shipping
14-16 Supply Chain Management

Distribution Requirements Planning

• Distribution requirements planning (DRP) is
a system for inventory management and
distribution planning
• Extends the concepts of MRPII
14-17 Supply Chain Management

Uses of DRP

• Management uses DRP to plan and coordinate:

• Transportation
• Warehousing

• Workers

• Equipment

• Financial flows
14-18 Supply Chain Management

Electronic Data Interchange

• EDI – the direct transmission of

interorganizational transactions, computer-to-
computer, including purchase orders,
shipping notices, and debit or credit memos.
14-19 Supply Chain Management

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
14-20 Supply Chain Management

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
14-21 Supply Chain Management

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

14-22 Supply Chain Management

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
14-23 Supply Chain Management

Disadvantages of E-Commerce

• Customer expectations
• Order quickly -> fast delivery
• Order fulfillment
• Order rate often exceeds ability to fulfill it
• Inventory holding
• Outsourcing loss of control
• Internal holding costs
14-24 Supply Chain Management

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
14-25 Supply Chain Management

SCOR Metrics
Table 14.4
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
14-26 Supply Chain Management

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
14-27 Supply Chain Management

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
14-28 Supply Chain Management

CPFR Results

• Nabisco and Wegmans

• 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
14-29 Supply Chain Management

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
14-30 Supply Chain Management

Supply Chain Performance Drivers

1. Quality
2. Cost
3. Flexibility
4. Velocity
5. Customer service
14-31 Supply Chain Management

Velocity

• Inventory 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
14-32 Supply Chain Management

Challenges
• Barriers to integration of organizations
• Getting top management on board
• Dealing with trade-offs
• Small businesses
• Variability and uncertainty
• Long lead times
14-33 Supply Chain Management

Trade-offs
1. Lot-size-inventory
• Bullwhip effect
1. Inventory-transportation costs
• Cross-docking
1. Lead time-transportation costs
2. Product variety-inventory
• Delayed differentiation
1. Cost-customer service
• Disintermediation
14-34 Supply Chain Management

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 supplier’s truck and
loaded onto outbound trucks
• Avoids warehouse storage
14-35 Supply Chain Management

Trade-offs
• Delayed differentiation
• 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
14-36 Supply Chain Management

Supply Chain Issues

Strategic Tactical Issues Operating Issues

Issues
Design of the Inventory policies Quality control
supply chain, Purchasing policies Production planning and
partnering Production policies control
Transportation
policies
Quality policies
14-37 Supply Chain Management

Supply Chain Benefits and Drawbacks

Table 14.5
Problem Potential Benefits Possible
Improvement Drawbacks

Large Smaller, more frequent Reduced holding Traffic congestion

inventories deliveries costs Increased costs
Long lead times Delayed differentiation Quick response May not be feasible
Disintermediation May need absorb
functions
Large number of Modular Fewer parts Less variety
parts Simpler ordering
Cost Outsourcing Reduced cost, higher Loss of control
Quality quality
Variability Shorter lead times, better Able to match supply Less variety
forecasts and demand
14-38 Supply Chain Management

Purchasing

• Purchasing is responsible for obtaining the

materials, parts, and supplies and services
needed to produce a product or provide a
service.
14-39 Supply Chain Management

Goal of Purchasing

• Develop and implement purchasing plans for

products and services that support operations
strategies
14-40 Supply Chain Management

Duties of Purchasing

• Identifying sources of supply

• Negotiating contracts
• Maintaining a database of suppliers
• Obtaining goods and services
• Managing supplies
14-41 Supply Chain Management

Purchasing Interfaces
Figure 14.5

Legal

Operations Accounting

Data
Purchasing
processing

Design

Receiving
Suppliers
14-42 Supply Chain Management

Purchasing Cycle
Legal
1. Requisition received
Operations
Accounting

2. Supplier selected
3. Order is placed Purchasing
Data
process-
ing

4. Monitor orders
5. Receive orders Design

Receiving
Suppliers
14-43 Supply Chain Management

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
14-44 Supply Chain Management

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
14-45 Supply Chain Management

Suppliers

• Choosing suppliers
• Evaluating sources of supply
• Supplier audits
• Supplier certification
• Supplier relationships
• Supplier partnerships
14-46 Supply Chain Management

Factors in Choosing a Supplier

• Quality and quality assurance

• Flexibility

• Location

• Price
14-47 Supply Chain Management

Factors in Choosing a Supplier (cont’d)

• Product or service changes

• Reputation and financial stability

• Lead times and on-time delivery

• Other accounts
14-48 Supply Chain Management

Evaluating Sources of Supply

• Vendor analysis: Evaluating the sources of

supply in terms of price, quality, reputation,
and service
14-49 Supply Chain Management

Evaluating Sources of Supply

• Vendor analysis - evaluating the sources of

supply in terms of
• Price
• Quality
• Services
• Location
• Inventory policy
• Flexibility
14-50 Supply Chain Management

Supplier as a Partner
Table 14.9
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 At the source; vendor
inspects certified
Volume of business May be low High
Flexibility Relatively low Relatively high
Location Widely dispersed Nearness is important
14-51 Supply Chain Management

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
14-52 Supply Chain Management

Critical Issues
• Strategic importance
• Cost
• Quality
• Agility

• Customer service
• Competitive advantage

• Technology management
• Benefits
• Risks
14-53 Supply Chain Management

Critical Issues

• Purchasing function
• Increased outsourcing
• Increased conversion to lean production

• Just-in-time deliveries

• Globalization