Chapter 7

Supply Chain Management

Introduction

Palm Inc.

During the year 2000, Palm Inc. was selling every PDA (computerized Personal Digital Assistant) that wasnt nailed down. In the last few years, Palm has developed a strategic supply chain management function. They have gone from doing business with hundreds of suppliers to developing deep relationships with only a few suppliers
Chapter 7: Supply Chain Management 3

Palm Inc. continued

The secret to driving the cost so low was working closely with their suppliers to hit tight cost targets for the display, the processor, the memory, the battery, and the mechanicals. The result of their new strategic emphasis on supply chain management has been a 20-30 percent reduction in materials costs and a 27 percent reduction in overall costs, an increase in inventory turns from 3 to 22, and a 30 percent increase in profit margins.
Chapter 7: Supply Chain Management 4

B2B Networks and Private Exchanges

B2B Online Marketplaces Private Exchanges

HP Ace Hardware IBM

Chapter 7: Supply Chain Management

B2B Online Internet Marketplaces

When the Internet revolution began, a number of organizations rushed to establish B2B online marketplaces for entire industries including steel, automobile manufacturing, and electronics. More recently, however, a number of firms including HP, IBM, and Wal-Mart created their own private exchanges (also called corporate marketplaces).
Chapter 7: Supply Chain Management 6

B2B Online Internet Marketplaces continued

These links allow the parties to collaborate and manage the supply chain in real time. Ace Hardware provides another example. Ace's motivation for the development of its system was the desire to manage its inventory more efficiently and be able to collaborate with suppliers in real time.
Chapter 7: Supply Chain Management 7

B2B Online Internet Marketplaces continued

Ace used its supply chain management software to link the computer systems located in its 14 distribution centers with nine suppliers. IBM's system provides links to over 20,000 of its suppliers. IBM further estimates that it realized almost $400 million in savings that year due to the increased efficiency of its Web-based procurement system.
Chapter 7: Supply Chain Management 8

Dell Computer

Direct Model Use of Information Technology

provides suppliers with access to Dells inventories

Minimum Inventory Levels

Chapter 7: Supply Chain Management

Dell Computer

Classic case in supply chain management. Established in 1984, Dell experienced supply problems in 1993 and thereupon completely redesigned its supply chain process along the lines of what its founder, Michael Dell, called the direct model. Between 1993 and 1998, Dell's earnings subsequently grew at 65 percent per year.
Chapter 7: Supply Chain Management 10

Dell Computer continued

Dell's supply chain redesign was based on the following elements. First, Dell sells directly to customers, eliminating the wholesaler and retailer. Second, Dell also takes advantage of new information technologies in their communications with suppliers who can access Dell's component inventories, production plans, and forecasts in real time and thus keep their production precisely matched to Dell's needs. Third, Dell deliberately maintains absolute minimum inventory levels at every stage of production, averaging 4 days overall
Chapter 7: Supply Chain Management 11

Supply Chain Management Crusade

Focus is on entire value chain Includes

lean production JIT TQM purchasing product/service design

Chapter 7: Supply Chain Management 12

Defining Supply Chain Management

Coordination and integration of all supply chain activities into seamless process. Enables organizations to plan and collaborate across supply chain. Goal is to deliver right product to right place at right time in order to maximize profit.
Chapter 7: Supply Chain Management 13

Strategic Advantages of Supply Chain

Supply chain management includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between its environment. Goal of supply chain management is to integrate the entire process of satisfying the customers needs all along the supply chain.

Chapter 7: Supply Chain Management

14

Strategic Advantages of Supply Chain Management continued

Supply chain costs often represent 50% or more of total operating costs Firms that have implemented supply chain management Have 45% supply chain cost advantage 50% lower inventory 17% faster delivery of final product Larger market shares and higher customer loyalty
Chapter 7: Supply Chain Management 15

Supply Chain Strategy

Supply chain strategy needs to be tailored to meet the needs of its customers which isnt always the lowest cost. In situations where the goods are basic commodities with standard benefits (food, home supplies, standard clothing), then cost reduction will be the focus. In fashion goods, timeliness should be the focus of the supply chain.
Chapter 7: Supply Chain Management 16

Strategic Need for Supply Chain Management

Total supply chain costs represent better than half, and in some cases three-quarters, of the total operating expenses for most organizations. The broader concept of the supply chain includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between it and its environment.
Chapter 7: Supply Chain Management 17

Strategic Need for Supply Chain Management continued

As organizations have continued to adopt more efficient production techniques such as lean manufacturing, total quality management, inventory reduction techniques to reduce costs and improve the quality, functionality, and speed of delivery of their products and services to customers, the costs and delays of procuring the requisite inputs and distributing the resulting goods and services are taking a greater and greater fraction of the total cost and time.
Chapter 7: Supply Chain Management 18

Other Factors Driving Need to Better Manage Supply Chain

Increasing global competition Outsourcing E-commerce Shorter life cycles Greater supply chain complexity

Chapter 7: Supply Chain Management

19

Measures of Supply Chain Performance

Lower inventories, will be reflected in less need for working capital (WC) and a higher return on asset (ROA) ratio. Lower cost to carry these inventories will be seen in a reduced cost of goods sold (CGS), and thus a higher contribution margin, return on sales (ROS), and operating income.
Chapter 7: Supply Chain Management 20

Operations-Oriented Measures

Performance measures related to inventory reduction: First we calculate the aggregate inventory value (at cost) on average for the year (AAIV): AAIV = raw materials + work-in-process + finished goods % Assets in Inventories = AAIV/total assets Another inventory measure is the inventory turnover (or turns, as it is sometimes called): Inventory turnover (turns) = annual cost of goods sold/AAIV

Chapter 7: Supply Chain Management

21

Supply Chain Design

The supply chain consists of the network of organizations that supply inputs to the business unit, the business unit itself, and the customer network.

Chapter 7: Supply Chain Management

22

The Supply Chain

Chapter 7: Supply Chain Management

23

Logistics

Logistics

Planning and controlling efficient, effective flows of goods, services, and information from one point to another.

Chapter 7: Supply Chain Management

25

The Bullwhip Effect

Each segment further down the whip goes faster than the one above it. Same effect often observed in supply chains.

Chapter 7: Supply Chain Management

26

Transportation

Modes of Transportation and Routing

Water Rail Truck Air

Chapter 7: Supply Chain Management

28

Factors to Consider in Transportation Decisions

Cost per unit shipped Ability to fill the transporting vehicle Total shipment cost Safety of contents Shipping time Availability of insurance Perishability

Difficulty of arranging shipment Delivery accommodations Seasonal considerations Consolidation possibilities Size of product
29

Chapter 7: Supply Chain Management

Location

Besides distributing outputs to customers by transporting them, if there is a facilitating good, we can also locate where our customers can easily obtain them. Advances in information and telecommunications technology have allowed some pure service organizations (i.e., those without a facilitating good) to reach their recipients through phone, cable, the Internet, or microwave links.
Chapter 7: Supply Chain Management 30

Trade-offs Between Transportation and Location

Processing Natural Resources

Large loss in size or weight during processing High economies of scale exist Raw material is perishable

Immobile Outputs
Chapter 7: Supply Chain Management 31

Processing Natural Resources

Organizations that process natural or basic resources as raw materials or other essential inputs to obtain their outputs will locate near their resource if one of the following conditions holds:

There is a large loss in size or weight during processing. High economies of scale exist for the product. The raw material is perishable.
Chapter 7: Supply Chain Management 32

Immobile Outputs

The outputs of some organizations may be relatively immobile, such as dams, roads, buildings, and bridges. The organization locates itself at the construction site and transports all required inputs to that location

Chapter 7: Supply Chain Management

33

Distribution Requirements Planning

The distribution process is illustrated on the next slide where retailers order from local warehouses, the warehouses are supplied from regional centers, and the regional centers draw from the central distribution facility, which gets its inventory directly from the factory.
Chapter 7: Supply Chain Management 34

Distribution Requirements Planning (DRP)

Chapter 7: Supply Chain Management

35

Purchasing/Procurement

Purchasing

Activities to reliably obtain materials by the time they are needed in the product supply process. Important considerations include price, quality, lead times, and reliability. Manufacturing organizations spend an average of 55 percent of revenue for outside materials and services. These same organizations spend only 6 percent on labor and 3 percent on overhead.
Chapter 7: Supply Chain Management 37

Purchasing Versus Procurement

Purchasing implies a monetary transaction. Procurement is simply the responsibility for acquiring the goods and services the organization needs.

Chapter 7: Supply Chain Management

38

Potential for Lowering Cost and Increasing Profits

Total sales = $10,000,000 Purchased materials = Labor and salaries = Overhead = Profit = 7,000,000 2,000,000 500,000 500,000

Chapter 7: Supply Chain Management

39

To Double Profits ...

Increase sales by 100 percent Increase selling price by 5 percent Decrease labor and salaries by 25 percent Decrease overhead by 100 percent Decrease purchase cost by 7.1 percent
Chapter 7: Supply Chain Management 40

JIT and Purchasing

Widespread use of JIT has increased importance of purchasing and procurement since delays in the receipt of materials will stop a JIT program dead in its tracks.

Chapter 7: Supply Chain Management

41

Differences Between Purchasing by Individuals and Organizations

Organizations purchase larger volumes and dollar amounts. Organization may be larger than its suppliers. Very few suppliers exist for certain organizational goods, whereas many typically exist for consumer goods. Certain discounts may be available to organizations.
Chapter 7: Supply Chain Management 42

Value Analysis

A special responsibility of purchasing, or purchasing working jointly with engineering/design and operations (and sometimes even the supplier), is to regularly evaluate the function of purchased items or services, especially those that are expensive or used in high volumes. The goal is to either reduce the cost of the item or improve its performance.
Chapter 7: Supply Chain Management 43

Key Elements of Effective Purchasing

They leverage their buying power. They commit to a small number of dependable suppliers. They work with and help their suppliers reduce total cost.

Chapter 7: Supply Chain Management

44

Supplier Management

Supplier Selection and Vendor Analysis

Characteristics of a good supplier are:

Deliveries are made on time and are of the quality and in the quantity specified. Prices are fair, and efforts are made to hold or reduce the price. Able to react to unforeseen changes. Supplier continually improves products and services. Supplier is willing to share information and be an important link in the supply chain.
Chapter 7: Supply Chain Management 46

Supplier Relationships

In the past, most customers purchased from the lowest bidders who could meet their quality and delivery needs. Customers are seeking a closer, more cooperative relationship with their suppliers.

Chapter 7: Supply Chain Management

47

Supplier Certification and Audits

Sole-sourcing arrangements are becoming virtual partnerships with the customer. This means longer-term relationships. Suppliers are being certified or qualified so that their shipments do not need to be inspected by the customerthe items go directly to the production line.
Chapter 7: Supply Chain Management 48

Outsourcing and Global Sourcing

Outsourcing is the process of contracting with external suppliers for goods and services that were formally provided internally. Global sourcing is an important aspect of supply chain outsourcing strategy and we see it occurring more and more.
Chapter 7: Supply Chain Management 49

Primary Reasons Outsourcing Occurring

1. The fall of communism and the economic insulation it had maintained. 2. The advent of telecommunications and computer technology that physically allowed work that previously had to be done locally or regionally to now be conducted overseas. Outsourcing in general is a major strategic element of SCM these days, not just for production materials but for a wide range of services as well.
Chapter 7: Supply Chain Management 50

The Role of Information Technology in Supply Chain Management

Role of Information Technology

In the not-too-distant past, the primary means of communication between members of a supply chain was paper. One problem with paper-based systems has been the time and money that is wasted rekeying the same information into different computer systems. Much of this problem has been solved with UPC and RFID being used extensively.
Chapter 7: Supply Chain Management 52

Role of Information Technology

More and more computing power is becoming available for less and less money, hence it is becoming omnipresent, appearing everywhere we go and in everything we buy. Growth of networks. As a result the growth of computers, which support networks, and networks that support peoples needs (business transactions, communication, blogging, etc.), has exploded.
Chapter 7: Supply Chain Management 53

Electronic Business

(e-business) is the use of electronic information technology to help various groups of business people communicate and conduct business transactions. Three primary advantages:

enhanced productivity and reduced costs Speed creation of new value opportunities
Chapter 7: Supply Chain Management 54

E-Commerce

Traditional means of communication was paper Electronic commerce is a term used to describe a variety of approaches for conducting business in a paperless environment Electronic Data Interchange (EDI) Bar Coding and Scanning Databases Email Electronic funds transfer Internet Point of sale terminals ERP systems RFID

Chapter 7: Supply Chain Management

55

Internet

The most significant information technology development for supply chain management. The Web will be the global infrastructure for electronic commerce. The Web will allow various forms of purchasing fulfillment to take place, from placing electronic catalogues on a Web site to holding joint purchasing bazaars, exchanges, and auction marketplaces involving massive amounts of materials
Chapter 7: Supply Chain Management 56

Intranets

Web-based networks that allow all employees of a firm to intercommunicate. They are usually firewall protected and use existing Internet technologies to create portals for company-specific information and communication, such as newsletters, training, human resource information and forms, product information, and so on.
Chapter 7: Supply Chain Management 57

Extranets

Private networks to allow the organization to securely interact with external parties. They use Internet protocols and public telecommunication systems to work with external vendors, suppliers, dealers, customers, and so on.
Chapter 7: Supply Chain Management 58

Customer Relationship Management (CRM) Systems

Designed to collect and interpret customer-based data. CRM systems provide comprehensive customer data so the firm can provide better customer service and design and offer the most appropriate products and services for them.

Chapter 7: Supply Chain Management

59

Enterprise Resource Planning (ERP) Systems

Facilitate communication throughout the supply chain and over the Internet. The ERP system embodies much more than just the supply chain, it also includes all the electronic information concerning the various parts of the firm.
Chapter 7: Supply Chain Management 60

Successful Supply Chain Management

The basic requirements for successful supply chain management are trustworthy partners, good communication, appropriate performance measures, and competent managers with vision.

Chapter 7: Supply Chain Management

61

Examples of Visionary SCM Innovations

Dells direct model and Palms strategic sourcing. Wal-Marts cross-docking technique of offloading goods from incoming trucks at a warehouse directly into outbound distribution trucks instead of being placed into inventory. delayed differentiation where final modules are either inventoried for lastminute assembly to customer order, or differentiating features are added to the final product upon receipt of the customers order.
Chapter 7: Supply Chain Management 62

Examples of Visionary SCM Innovations continued

Sport Obermeyers and HewlettPackards postponement approach to delayed differentiation where variety and customization is delayed until as late in the production process as possible, sometimes even arranging with the carrier to perform the final customization (called channel assembly).
Chapter 7: Supply Chain Management 63

Chapter 7: Supply Chain Management

64

Copyright
Copyright 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Chapter 7: Supply Chain Management

65