11

Supply Chain
Management

McGraw-Hill/Irwin

Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Explain what a supply chain is.

Explain the need to manage a supply chain and
the potential benefits of doing so.
Explain the increasing importance of outsourcing.
State the objective of supply chain management.
List the elements of supply chain management.
Identify the strategic, tactical, and operations
issues in supply chain management.
Describe the bullwhip effect and the reasons why
it occurs.
11-2

Learning Objectives

Explain the value of strategic partnering.

Discuss the critical importance of information
exchange across a supply chain.
Outline the key steps, and potential challenges, in
creating an effective supply chain.
Explain the importance of the purchasing function
in business organizations.
Describe the responsibilities of purchasing.
Explain the term value analysis.
Identify several guidelines for ethical behavior in
purchasing.
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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

11-4

Facilities

Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices

11-5

Functions and Activities

Forecasting
Purchasing
Inventory management
Information management
Quality assurance
Scheduling
Production and delivery
Customer service
11-6

Typical Supply Chains

Production

Purchasing

Distribution

Receiving Storage Operations Storage

11-7

Typical Supply Chain for a

Manufacturer
Figure 11.1a
Supplier
Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

Supplier

11-8

Typical Supply Chain for a

Figure 11.1b
Service
Supplier

Storage

Service

Customer

Supplier

11-9

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
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Bullwhip Effect
Figure 16.3

Demand

Initial
Supplier

Final Customer

Inventory oscillations become progressively

larger looking backward through the supply chain
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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
Integrates separate organizations into a
cohesive operating system
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Global Supply Chains

Increasing more complex

Language
Culture
Currency fluctuations
Political
Transportation costs
Local capabilities
Finance and economics
Environmental
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Table 11.1

Elements of Supply Chain

Management

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

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Strategic or Operational
Two types of decisions in supply chain
management
Strategic design and policy
Operational day-today activities

Major decisions areas

Location
Production
Inventory
Distribution
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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

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Logistics
Movement within the facility

Incoming and outgoing shipments

Bar coding
EDI
Distribution
JIT Deliveries

214800 232087768

11-18

Materials Movement
Figure 11.4
Work center

Work center

Work
center

Storage

Work
center

Storage

RECEIVING

Storage

Shipping

11-19

Distribution Requirements
Planning
Distribution requirements planning
(DRP) is a system for inventory
management and distribution planning
Extends the concepts of MRPII

11-20

Uses of DRP
Management uses DRP to plan and
coordinate:

Transportation
Warehousing
Workers
Equipment
Financial flows

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E-Business
E-Business: the use of electronic
technology to facilitate business
transactions
Applications include

Internet buying and selling

E-mail
Order and shipment tracking
Electronic data interchange

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Advantages E-Business
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

11-23

Disadvantages of E-Business
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

11-24

Reverse Logistics
Reverse logistics the backward flow of
goods returned to the supply chain
Processing returned goods
Sorting, examining/testing, restocking, repairing
Reconditioning, recycling, disposing

Gatekeeping screening goods to prevent

incorrect acceptance of goods
Avoidance finding ways to minimize the
number of items that are returned
11-25

Effective Supply Chain

Requires linking the market, distribution
channels processes, and suppliers
Supply chain should enable members to:
Share forecasts
Determine the status of orders in real time
Access inventory data of partners

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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
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SCOR Metrics
Table 11.4
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
11-28

RFID Technology
Used to track goods in supply chain
RFID tag attached to object
Similar to bar codes but uses radio frequency
to transmit product information to receiver
RFID eliminates need for manual counting
and bar code scanning

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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

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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

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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
11-32

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
11-33

Supply Chain Performance Drivers

1.Quality
2.Cost
3.Flexibility
4.Velocity
5.Customer service

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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

11-35

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

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Trade-offs
1. Lot-size-inventory
Bullwhip effect

2. Inventory-transportation costs
Cross-docking

3. Lead time-transportation costs

4. Product variety-inventory
Delayed differentiation

5. Cost-customer service
Disintermediation
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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

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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

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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

11-40

Supply Chain Benefits and

Drawbacks
Table 11.5
Problem

Potential
Improvement

Benefits

Possible
Drawbacks

Large
inventories

Smaller, more
frequent deliveries

Reduced holding
costs

Traffic congestion
Increased costs

Long lead
times

Delayed
differentiation
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
11-41

Purchasing
Purchasing is responsible for obtaining
the materials, parts, and supplies and
services needed to produce a product
or provide a service.
Purchasing cycle: Series of steps that
begin with a request for purchase and
end with notification of shipment
received in satisfactory condition.

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Goal of Purchasing
Develop and implement purchasing
plans for products and services that
support operations strategies

11-43

Duties of Purchasing
Identifying sources of supply

Negotiating contracts
Maintaining a database of suppliers
Obtaining goods and services
Managing supplies

11-44

Purchasing Interfaces
Figure 11.5
Legal
Operations

Accounting

Purchasing

Data
processing

Design
Receiving
Suppliers

11-45

Purchasing Cycle
Legal

1.Requisition received

Operations

Accounting

2.Supplier selected
3.Order is placed

Purchasing

Data
processing

4.Monitor orders
Design

5.Receive orders
Receiving
Suppliers

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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

11-47

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

11-48

Suppliers
Choosing suppliers
Evaluating sources of supply
Supplier audits
Supplier certification
Supplier relationships
Supplier partnerships

11-49

Factors in Choosing a Supplier

Quality and quality assurance

Flexibility
Location
Price

11-50

Factors in Choosing a Supplier

(contd)

Product or service changes

Reputation and financial stability
Lead times and on-time delivery
Other accounts

11-51

Evaluating Sources of Supply

Vendor analysis: Evaluating the
sources of supply in terms of price,
quality, reputation, and service

11-52

Evaluating Sources of Supply

Vendor analysis - evaluating the
sources of supply in terms of

Price
Quality
Services
Location
Inventory policy
Flexibility

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Supplier as a Partner
Table 11.9

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

11-54

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

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Critical Issues
Strategic importance

Cost
Quality
Agility
Customer service
Competitive advantage

Technology management
Benefits
Risks

11-56

Critical Issues
Purchasing function

Increased outsourcing
Increased conversion to lean production
Just-in-time deliveries
Globalization

11-57