Supply chain Management

1-1
 The evolution of the digital supply
chain
1800 1900 1970 2015+ 2030+
Industry 1.0 Industry 2.0 Industry 3.0 Industry 4.0 Digital Ecosystem

The Mass Electronics, IT, Digital supply Flexible and

invention of production, and industrial chain integrated value
mechanical with robotics for chain networks
production machines advanced Smart
powered by powered by automation of manufacturing Virtualized
water and electricity production processes
steam and processes Digital products,
started the combustion services, and Virtualized
first engines Electronics and business models customer
industrial IT (such as interface
revolution Introduction computers) and Data analytics
of assembly the Internet and action as a Industry
lines constitute the core collaboration as a
beginning of competency key value driver
the information
age
Transparency: Limited view of supply chain

Communication: Information delayed as it moves through each organization

Collaboration: Limited visibility to the entire chain, hindering meaningful collaboration

Responsiveness: Different planning cycles resulting in delays and unsynchronized responses

across multiple tiers
Transparency: Complete view of supply chain

Communication: Information available to all supply chain members simultaneously

Collaboration: Natural development of collaboration depth to capture intrinsic supply chain value

Flexibility: End customer demand changes information flows along the material path are rapidly assessed

Responsiveness: Real-time response on planning and execution level (across all tiers to demand changes)
 Global Supply Chain Forum process
model

Information flow
Tier 2 Tier 1 Consumer/
supplier Customer end user
supplier
Purchasing Logistics Marketing
and Sales
Product Flow
Production Finance
R&D
Customer Relationship Management
Customer Service Management
Supply Chain Demand Management
Management Order Fulfillment
Process Manufacturing Flow Management
Supplier Relationship Management
Product Development and Commercialization
Returns Management
Industry fundamentals impacting SCM,
SCOR model, Supply chain collaboration

1-6
 Strategy: Number of Supply Chains
Suppliers
Nucleus
firm
Supply chains for functional products
need:
High average utilization rate
Minimal inventory with high turns
Short lead time
Suppliers chosen for cost, quality
Products with maximum performance,
minimal cost.
Emphasize predictability and low cost
Customers
Functional products
Innovative products
Supply chains for innovative products
need:
Buffer capacity (safety stock)
Aggressive reduction of lead times
Suppliers chosen for speed, flexibility, quality
(rather than cost)
Modular design with postponement of
differentiation.
Emphasize market responsiveness
 Two Types of Supply Chain Management
Vertical Integration
Degree to which a firm directly controls
multiple links in the supply chain from raw
material extraction to retail sales
Lateral (Horizontal) Integration
Coordinated management of separately
owned links in the supply chain;
“outsourcing”

Retail sales Raw Production

Components Retail
materials Distribution
Products sales
extraction Services
Distribution

Production
Components/products/services

Raw materials extraction

1-8
 Vertical Integration
Integrated automotive company: Benefits of vertical integration
ownership, management,
marketing/sales, finance No dealing with competitors for
supplies, etc.
Showroom Customer
Enhanced visibility into operations
Distribution
Control
Plant Primary Same ownership and
materials/ management for all activities in
Component product flow supply chain
production

Raw materials

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 Lateral Integration
Information flow

Raw Components Plant Distribution Retail Customers

materials

Primary product flows Primary cash flows

Benefits of lateral integration

Economies of scale and scope
Improved business focus
Leveraging communication and
production competencies

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 Supply Chain Management

The design, planning, execution, control, and

monitoring of supply chain activities with the
objective of:
• Creating net value
• Building a competitive infrastructure
• Leveraging worldwide logistics
• Synchronizing supply with demand, and
• Measuring performance globally.
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 Strategy: Demand-Driven Enterprise
Problem: Bullwhip Effect
Demand variability among end users
increases at each stage in the chain
because of inherent inaccuracies in each
firm’s demand forecasts.
Solution: Substitute real information
for forecasts.
• Trust and collaboration among supply
chain partners.
• Access to real demand data shared
along the supply chain.
• “Agility” to respond to variability in the
flow of orders.
• Pull! Don’t push.
 Taxes and the Supply Chain
• Tax savings
• Procurement
• Logistics networks
• Information technology
• Competing values
Push/Pull View of Supply Chain
Processes
PULL Execution is initiated in
PROCESSES response to customer orders
(reactive)
Customer order arrives

PUSH Execution is initiated in

PROCESSES anticipation of customer orders
(speculative)

Processes are divided based on the timing of

their execution relative to a customer order
 Push/Pull Processes for the Supply
chain of Detergent
Customer
PULL Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle
PUSH
Manufacturer
Procurement Cycle
Supplier
 SCOR 10.0 Performance Attributes and Metrics

Performance Performance Attribute Level 1

Attribute Definition Metric
Supply chain SC performance in delivering correct product, to correct Perfect order fulfillment
reliability place, at correct time, in correct condition and packaging, in
correct quantity, with correct documentation, to correct
customer

Supply chain Speed at which SC provides products to customer Order fulfillment cycle time
responsiveness
Supply chain Ability of SC to respond to marketplace changes to gain or Upside SC flexibility
agility maintain competitive advantage Upside SC adaptability
Downside SC adaptability
Overall value at risk

Supply chain Costs associated with operating supply chain SC management cost
costs Cost of goods sold

Supply chain Effectiveness of organization in managing assets to support Cash-to-cash cycle time
asset demand satisfaction; includes management of all assets: Return on SC fixed assets
management fixed and working capital Return on working capital

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 Key Performance Indicators (KPIs)*
KPIs for Product KPIs for Merchandizing KPIs for
Introductions Products Replenishment

Internal failure rate Market share Order fill rate

External failure rate Volume growth On-time delivery

Introduction lead Total SC inventory Order fulfillment

time turns (across chain) lead time

* Apply KPIs only to processes and activities based on corporate and supply chain
strategies.

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 Goals and Benchmarking
Definition: Setting goals by comparison to another
entity or authoritative definition of excellence

Competitive Best-in-class Process

Benchmarking Benchmarking Benchmarking

Setting goals by Setting goals by Setting process goals

reference to a reference to the best by reference to an
competitor performer authoritative process
description (e.g.,
Oliver Wight checklist)

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 Customers and Products
Product definition Customer definition

Positioning Types of customers:

Breadth of product line • industrial
Price • consumer
Quality • institutional
Brand name or generic • government
Design Market segmentation
Packaging Sales channels
Returns policy Market share/profitability

Choice of manufacturing environment

Product (ETO, MTO, ATO, MTS)
design Choice of manufacturing process
(project, intermittent, repetitive flow, continuous flow)

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 Customer Expectations

Characteristics that provide value to the customer

• Price
• Quality
• Delivery
• Pre- and post-sale service
• Flexibility (product and volume)

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 Customer Expectations (cont.)

• Order qualifiers
Competitive characteristics that a firm’s products
must exhibit in order to be considered by
customers
• Order winners
Competitive characteristics that cause
customers to choose a firm’s products and
services

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 Manufacturing Environments

• Engineer-to-order (ETO)
• Make-to-order (MTO)
• Assemble-to-order (ATO)
• Make-to-stock (MTS)
• Mass customization

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 Determinants of Manufacturing
Environments
• Lead time expectations
• Product design input from customers
• Product volume and variety
• Product life cycle

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Lead Time and Manufacturing Environments

ETO delivery lead time Engineer-to-

order
Design Purchase Manufacture Assemble Ship

MTO delivery lead time

Make-to-order
Inventory Manufacture Assemble Ship

ATO delivery lead time Assemble-to-

order
Manufacture Inventory Assemble Ship
MTS delivery
lead time Make-to-stock
Manufacture Assemble Inventory Ship

1 ▪ 24
Volume and Variety Relationships
High

Engineer-to-order
Mass
customization
Make-to-order
Product variety

Assemble-to-order

Make-to-stock

Low High
Product volume

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 Product Life Cycle

Units
sold Time

Introduction Growth Maturity Decline Phase-out

1 ▪ 26
Product Life Cycle and Manufacturing Environments

Units
sold Time

Introduction Growth Maturity Decline Phase-out

ETO

MTO

ATO

MTS

Mass customization
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Choice of Processes and Layouts

• Intermittent
• Flow
– repetitive/line
– continuous
• Project

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 Advantages of Product Layout
• Little WIP inventory
• Short throughput and manufacturing lead times
• Lower unit cost

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 Production Planning and Control
Strategic and business planning

Capacity planning
Sales and operations Resource
planning planning (RP)

Rough-cut capacity
Priority planning

Master scheduling
planning (RCCP)

Material Capacity
requirements requirements
MPC activities

planning (MRP) planning (CRP)

Execution
Input/output
Execution

Production activity control

control (PAC)
Order sequencing

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 What is Demand Planning
• Demand planning is a multi-step operational
supply chain planning process used to create
reliable forecast of customer demand and align
inventory levels and supply plans to achieve the
target level of customer service desired by a
business.
 Factors that Shift Demand

Number
Of
Buyers
Consumer Price of
Income Related Goods

Demand
Tastes
And Expectations
Preferences

Demographics

16 October 2019
 Demand Planning Model
1 2 3 4 5 6
Demand Demand DP
Statistical Demand Demand
Planning Supply Performance
Forecast Input Validation
Strategy Balancing Management
◼ Define KPI’s
◼ Forecast ◼ Data ◼ Sales input ◼ Forecast ◼ Resolve
preparation exceptions imbalances ◼ Prepare forecast
◼ Planning ◼ Marketing
◼ Team ◼ Define quotas
reports
calendar ◼ Model inputs
selection meeting ◼ Measure &
◼ ABC XYZ ◼ Customer ◼ Communicate
◼ Consensus plans improve
analyses ◼ Forecast information
forecast performance
review
 Decoupling Points
Decoupling Points by Type of Supplier Inventory
Manufacturing/ Finished &/or Subassemblies
Components at
Service Buyer/product/seller packaged goods at &/or components
supplier’s supplier(s)
Environment supplier at supplier

Department store / ready-to-

Make-to-stock Ready-to-wear suits
wear suits / manufacturer

Consumer / 500-count pain 500-count

Make-to-stock
relief tablets / grocer containers

Assemble-to- Consumer or retailer / laptop Hard drives, key-

order computers / manufacturer boards, processors

Retailer / 5- and 10-packs of

Assemble-to- Packaging
disposable razors /
order materials, razors
distributor
Fabric, thread,
Consumer / men’s custom
Make-to-order buttons
(bespoke) suit / custom tailor

Engineer-to- Consumer / men’s custom Non-standard fabric,

order (bespoke) suit / custom tailor buttons, thread

Engineer-to- Cruise ship operator / cruise Components not yet

order ship / shipbuilder specified by design

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 Sources of Demand
• Forecasts
• Customer orders
• Replenishment orders from DCs
• Interplant transfers
• Other

2 ▪ 35
 Demand: Components

• Trend: linear,
Trend
geometric, exponential
• Seasonality: holidays,
weather
• Random variation: Cycle Demand Seasonality
data fluctuation caused
by random occurrences
• Cycle: increases/
decreases in economy Random
variation
 Pyramid Forecasting

Marketing and Management

Total business
sales roll-up force-down
volume ($)
forecast forecast

Product family units and $

Individual product units and $

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 What is Inventory?
“Those stocks or items used to support production,
supporting activities, and customer service…”

Activity Classes of Inventory

Production Raw materials and WIP

Maintenance, repair, and
Operations
operating supplies
Finished goods, repair parts,
Customer service
spares

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 Classifications of Inventory
– Excess
– Surplus
– Inactive
– Obsolete
– Consignment
– Vendor Managed

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 Inventory Categories
Operating Inventory Target Days Supply varies by part and is shorter
for expensive items and longer for inexpensive items.
Excess Inventory encompasses any part inventory which
exceeds the Operating Inventory level but still has a reasonable
chance of being used within the planning time frame.
Surplus Inventory may have some possibility of being
used within 12-18 months but probably would not have
been stocked based on perfect hindsight.

Inventory will probably

never be used.
Inventory Balance

Operating Excess Surplus Inactive

Inventory Inventory Inventory Inventory

Time

If the part remains in inventory until there is no longer any product or

Service part demand, any remaining balance will become “obsolete”.

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 Functions of Inventory
• Anticipation inventory
• Safety stock
• Lot-size inventory
• Transportation inventory
• Hedge inventory

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 Inventory Turns
A measure of how effectively inventory is being
used
Annual cost of goods sold
Inventory turns = Average inventory in dollars

Example:
Annual cost of goods sold = $1,000,000
Average inventory = $500,000

$1,000,000
Inventory turns = $500,000 =2

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 Days of Supply

Inventory on hand 6,000

Days of supply = = = 30 days
Average daily usage 200

• Used to measure the relationship between

usage (sales) and inventory
• In this example, 6,000 units are sold on
average over a period of 30 days at 200 units
per day
• Inventory turns every 30 days, or 12 times a
year (inventory turns are 12)
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 Variations of the EOQ Model-Monetary Unit Lot Size

• Does not require unit cost (of each item)

AD = annual usage in dollars

S = ordering cost in dollars (no change)
i = carrying cost as a decimal (no change)
EOQ = 2AS (in dollars)
i

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 Quantity Discount - Example
An item has an annual demand of 25,000 units, a unit cost of $10, an
order preparation cost of $10, and a carrying cost of 20%. It is ordered
on the basis of an EOQ, but the supplier has offered a discount of 2%
on orders of $10,000 or more. Should the offer be accepted?

*Note the discount is in dollars. It would be easier to calculate the EOQ

in dollars.

3 ▪ 45
 Perpetual Inventory Record

Order Quantity = 500 units

426254 Screw
Order points = 100 units
On
Date Received Issued On Hand Allocated Available
Order

01 500 500
02 500 400 100
03 500 500 400 100
04 500 400 100 0 100
05 500 600 600

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 Periodic Review System
Periodic Review vs. Order Point System

Order Point Periodic Review

Characteristic
System System

Interval between Varies depending Fixed and

orders on actual usage constant

Order quantity Usually fixed Varies by period

The periodic review system is also called the fixed reorder

cycle inventory model and fixed-interval order system

4 ▪ 47
 Uses of the Periodic Review System
• Used when:
– Products are perishable, with short shelf life
– Receiving deliveries of many items from one source
at one time is economical
– Tracking and posting transactions of many small
issues from inventory are costly
– Ordering costs are low; short-interval ordering is not
an issue

4 ▪ 48
Definition of Safety Stock

⚫ In general, a quantity of stock planned to be in

inventory to protect against fluctuations in demand or
supply.

5 ▪ 49
 Safety Stock
• The amount of safety stock carried depends on:
– Variability of demand during the lead time
– Frequency of ordering
– Desired service level
– Length of the lead time
– Ability to forecast and control lead times

5 ▪ 50
 The Role of Logistics in SCM

Reverse Logistics
Supply Chain Community
1 2 3 4 5 6
Raw
Manu- Distribu- Whole- End
material Retailers
facturer tors salers users
suppliers

Obtain Produce Distribute

All tasks necessary to get the Logistics functions:

right product in the right quantity Transportation
and right condition at the right Warehousing
place at the right time for the 3PLs and 4PLs
right customer at the right price Reverse logistics
 Logistics Goals and Strategies

Logistics Goals Logistics Strategies

• Rapid response capability
• Minimum variance
• Minimum inventory
expense
• Consolidated shipments
• High quality
• Product life cycle support
• Coordinating functions
• Integrating the supply chain
• Substituting information for
inventory
• Reducing number of
partners
• Pooling risks
 Integrating the Supply Chain

Locate in the right countries.

Develop an effective export-import strategy.

Select warehouse locations.

Select transportation modes and carriers.

Select the right number of partners.

Develop state-of-the-art information systems.

 Third-Party Logistics Providers (3PLs)

Machine tools 3PL rail 3PL 3PL-owned

supplier freight PLANT piggyback warehouse

Electronics 3PL air 3PL Retailer

supplier express trucker customer

Logistics manager arranges

transportation separately with several
third-party logistics providers.
 How 3PLs and 4PLs Are Related

Machine tools 3PL rail 3PL 3PL-owned

supplier freight PLANT piggyback warehouse

Electronics 4PL air 3PL Retailer

supplier express trucker customer

4PL express carrier acts as consultant,

arranges all logistics for plant, and provides
express air—its core competency.
 Export-import participants

Exporter Shipper and seller of the cargo

Importer The exporter’s customer, who buys the cargo and is responsible for
payment of import duties at customs

Freight forwarder Contractor responsible for getting goods from dock to dock and who
arranges transportation for the exporter’s cargo

NVOCC (non-vessel Non-vessel common carrier that arranges transport of cargo from port
operating common to importer and contracts for or purchases space on the ocean vessel
carrier) for resale or its own use

Consolidator Firm that consolidates shipments to load into empty vehicles for
return trip from importer’s dock to port

Customs house Has expertise to move a shipment through customs expeditiously and
broker to ensure complete documentation
 Export-import participants (continued)

EMC/ETC Company that consults with exporter on import market (EMC) or that
buys cargo and resells to importer (ETC)

Shipping Nonprofit association of smaller shippers banded together to

association negotiate better rates from carriers

Ship broker Independent contractor who brings together the exporter with a ship
operator that has a vessel available with the right services at the right
time

Ship agent Representative of a ship operator who is available to coordinate in-

port activities for the shipper with cargo to export

Export packing Specialist in packaging cargo for export so as to combine lightest

company practical weight (for reduced duties) with maximum protection
 The Role of Logistics in SCM

Reverse Logistics
Supply Chain Community
1 2 3 4 5 6
Raw
Manu- Distribu- Whole- End
material Retailers
facturer tors salers users
suppliers

Obtain Produce Distribute

All tasks necessary to get the right Logistics functions:

product in the right quantity and Transportation
right condition at the right place at Warehousing
the right time for the right 3PLs and 4PLs
customer at the right price Reverse logistics
 Transportation

Goals of five decision makers

1 Shipper Goals 2 Carrier Goals 3 Recipient Goals

Convenient schedule Convenient schedule On-time arrival
Low cost (for them) of Good revenue for Low cost (to them) of
shipping service shipping
Limit on liability for Limits on liability for No loss, damage, etc.
loss, damage, etc. loss, damage, etc.
Good infrastructure Good infrastructure Good infrastructure
(Who pays?) (Who pays?) (Who pays?)
 Transportation
Goals of five decision makers (continued)
4 Government Goals
Stable, efficient, predictable, and
affordable passenger and
commercial service
Infrastructure suitable for
national defense uses
Concerns: Ownership (public or
private?), funding (taxes?)
5 Public Goals
Stable, efficient, predictable, and
affordable passenger and
commercial service
Balance between convenience,
cost, environmental
consequences, etc.
Concerns: Ownership (public vs.
private?), funding (taxes?)
 Transportation

Major modes of transportation

Ton-Miles Percentage of
Tons Cargo Value Average Haul
Mode per Year Ton-Miles
(millions) (2000 U.S.$) Length (miles)
(billions) Total
Truck 1,449 32.1 9,197 6,660 158
Rail 1,254 27.8 1,895 388 662
Water 733 16.3 2,345 867 313
Pipeline 15 16.7 1,656 285 455
Air-Truck 753 0.3 10 777 1,429
Multimodal 266 5.0 213 1,111 1,061
Other 77 1.7 499 373 155
 Transportation

Transportation mode selection criteria

Rail Road Water Air Pipeline

Cost 3 4 2 5 1
Speed 3 2 4 1 —
Reliability 2 1 4 3 —
Capability 1 2 4 3 5
Accessibility 2 1 4 3 —
Security 3 2 4 1 2
1 = Most desirable; 5 = Least desirable
 Types of Carriers

Type of Description Benefits Drawbacks

Carrier
Common Perform bulk of • Availability, rates • Most economic
(public) shipping; required to supported by regulations to
serve commercial regulations consider
shippers. • Carrier assumes • Must publish
risk reasonable rates
Private Shipper’s own fleet of • Control of vehicles • Maintenance cost
vehicles for carrying • Possible cross- • Problems when
own goods (and licensing since business slows
possibly some other deregulation for • Core competence?
goods). backhaul loads • Empty backhauls
 Types of Carriers (continued)
Type of Description Benefits Drawbacks
Carrier
Contract Work on contract with • Low rates • Not required to
specific clients; not • Custom services provide service
required to serve all
shippers; negotiable (not
regulated) rates.
Exempt Free from most federal • Low rates (no • Limited availability
regulation (state-licensed regulation) for most products
in U.S.); restricted to • Adapted to special • Limited range of
specific markets—mostly niches operation
agriculture.
 Transportation

Hybrid modes of transportation

Capability Market Limitation

Speed—up to same-day Local and national High price—traditionally
service messages, packages limited to small, high-
Accessibility and flexible traditionally value items (package
hours for pickup, Compatible with JIT and delivery)
delivery lean
Perfect for perishable Large employer and
and high-value goods, logistics provider in EU
e.g., food and drugs Full-service logistics
consulting
 Transportation

Choosing the best “legal type” carrier

Private Common Contract Exempt

Benefits • Control of vehicles • No upkeep costs • No upkeep • No upkeep
• Possible cross- • Availability, rates costs costs
licensing since supported by • Low rates • Low rates (no
deregulation for regulations • Custom regulation)
backhaul loads • Carrier assumes services • Adapted to
risk special niches
Draw- • Maintenance cost • Most economic • Not required • Limited
backs • Problems when regulations to to provide availability for
business slows consider service most products
• Core competence? • Limited range of
• Empty backhauls operation
 What is a Warehouse?
▪ A warehouse is a commercial building that’s used to
store goods
manufacturers, importers, exporters, wholesalers, and
transport.
▪ They’re usually large plain buildings in industrial areas.
▪ They have loading docks to load and unload goods,
▪ They can be designed to receive goods directly from
railways, airports, or seaports, and are usually equipped
with cranes and forklifts for moving and organizing
goods.
▪ Some warehouses are temperature controlled,
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 What is a Distribution Center?
▪ A D.C. is a specialized building that’s designed to store products for
retailers and wholesalers, to be redistributed to another location or
directly to customers.
▪ D.C’s are an integral part of the order fulfilment process, especially
for online retailers and e-commerce businesses.
▪ The normal route of transport is usually as follows: the producer
ships the product to the distribution center, and then the product is
shipped from there to the customer. They’re usually thought of as
being demand-driven, since products move in and out at a fast pace.
▪ D.C.s are often located in areas that are easily accessible, like near
main roadways and highways; this makes it easier for transport
trucks to drop off and pick up items more efficiently. Many D.C’s are
part of a larger network of distributors, set up to serve a large area.
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Warehousing and Total cost of Logistics

• Firm’s objective is to achieve customer service targets with

minimum ‘Total cost of Logistics’.

Total Cost

Customer Service Inventory Cost

Cost

Warehousing Cost

Transportation Cost

Cost of lost sales

Number of warehouses
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 Warehousing Functions
Typical warehousing functions and flows

Replenishment Replenishment

Broken case
Case picking
Reserve storage and pallet picking
picking

Accumulation, sortation, packing, and

unitization

Receiving Cross Docking Shipping

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 Warehousing Functions
Basic Categories:

• Movement:
- Receiving
- Transfer or put-away
- Order picking / selection
- Cross docking
- Shipping
• Storage
- Temporary storage
- Semi-permanent Storage
• Information Transfer
- Activity capture
- Updating of records
- Statutory compliance

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 Warehousing Functions
Basic Capabilities:

• Consolidation of materials for shipping:

Consolidation occurs when a warehouse receives materials from more than
one location and combines them into shipments to a specific customer.

Process:
Smaller shipments (LTL) come into warehouse from various sources and
are consolidated into CL or TL shipments to specific customers.

Benefits:
Consolidation reduces logistics through economics of scale. Congestion at
customer's dock is reduced.

Tradeoffs:
Warehouse may need to add sorting and in some cases assembly
capabilities.
Different skill sets are required thus hiring and training costs.
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 Warehousing Functions
Basic Capabilities:

• Break-bulk and Cross-dock facilities:

Operations carried out in both cases are similar except for the way order
information is received and handled.

Process:
In Bulk-break facility, a shipment comes from one supplier and is broken
sown into smaller shipments for specific customers.
In a cross-dock facility, shipments come in from many suppliers, are sorted
out by customer, and then are moved across the dock for shipping to those
customers.

Benefits:
Both inbound and outbound CL and TL shipments are possible. Storage
costs are minimal.

Tradeoffs:
Warehouse may need to change layout and equipment.
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Sophisticated information systems may be required.
 Warehousing Functions
Basic Capabilities:

• Postponement and processing:

Process:
Goods enter postponement center fully or partially disassembled for later
mass customization. Final configuration is postponed unlit an order comes
in, allowing parts to be assembled to fit specific requirements in the order.

Benefits:
Components are stored more efficiently than finished product. Safety stock
needs are reduced. More variety can be offered to customer.

Tradeoffs:
Training and hiring the staff with final assembly skills.
Processing at warehouse may be expensive then at the plant.

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 Warehousing Functions
Basic Capabilities:

• Stockpiling:
Process:
Seasonal inventory such as winter wear, agriculture provisions arrive in
large amount at the warehouse in anticipation of heavy demand to come.

Benefits:
Production and be carried out in ‘level’ mode to achieve efficient production.

Tradeoffs:
More warehouse capacity is required for stockpiling.

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 Warehousing Functions
Basic Capabilities:

• Spot stocking:
Spot stocking is similar to stockpiling and is favored by manufacturers with
very limited or strictly seasonal product lines.

Process:
Advance shipments from a plant are sent to key markets to be sure they are
close to the customers in season.

Benefits:
Customers and producers benefit from spot stocking of items in key markets
to be certain there is no shortage during the peak demand periods.

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 Warehousing Functions
Basic Capabilities:

• Assortment:
Process:
Assortment resembles spot stocking but with a wider range of seasonal
goods.

Benefits:
Assortment benefits the Customer by reducing the number of suppliers it
has to deal with to acquire the assorted goods. It also reduced the transport
costs by allowing larger shipment quantities.

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 Warehousing Functions
Basic Capabilities:

• Mixing:
Process:
Mixing resembles bulk-break but involves shipments from more than one
manufacturer. In a typical mixing set up, warehouse receives TL shipments
from different manufacturers, with each shipment receiving the full-load
discount.
At the warehouse, shipments are broken down and assembled into the
product mix desired by each customer or market.

Benefits:
Mixing provides a service to customers who would otherwise receive
smaller shipments of each manufacturer’s product.
It also makes efficient use of storage space in the warehouse.

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 Warehousing Objectives

Objective Warehousing Contribution

Rapid response Strategic placement, optimal numbers facilitate response to markets and
order changes.

Minimize Technology and automation aid efficient handling to promote predictable

variances service.

Minimize Determine most efficient number of warehouses to reduce inventory,

inventory prevent stockouts.
Consolidation of Warehouse placement, transportation interface, efficient materials handling all
movement required for effective consolidation of shipments.

High quality Subject all aspects of warehousing to continuous improvement.

Life cycle support Place warehouses for returns, repairs, etc., as well as to support product
movement during growth, development, and maturity.
 Warehousing

The effects of adding warehouses

Customer service improves. Total

Pro
Transportation costs decline with cost
shorter distances to travel.
Total cost
Rapid delivery may improve
competitive position. Inventory cost
Centralized system allows better
service to small customers. Warehousing
cost

Transportation
Inventory costs rise with redundant cost
Con
functions, safety stock.
Setup and overhead costs go up. Cost of lost
sales

Number of Warehouses
 Warehousing

Where should warehouses be located?

Neighborhood Consider available space, soil support, nearness to market; not

restricted to warehouse districts
Availability of services is most important factor
Services
Services, location (urban costs more), taxes, insurance,
Costs transportation (tradeoff with cheaper land)
Tax incentives, infrastructure support, trained and available
Community workforce
inducements
Environmental impact statements can slow constructions, inflate
Regulations costs
 Warehouse Capabilities
Warehousing activities Warehouse functions
• Receiving • Consolidation
• Prepackaging • Break-bulk and cross-dock
• Put-away • Postponement and
• Storing processing
• Order picking • Stockpiling seasonal
• Moving inventory
• Shipping • Spot stocking advance
shipments
– Packaging
– Packing and marking • Assortment
• Cycle counting • Mixing
 Identify Opportunities and Benefits for
Rationalizing the Supplier Base

• SWOT analysis
– Refers to identifying organizational strengths, weaknesses,
opportunities and threats
– Can be used to optimize the supplier base
• Data mining tools
– Refers to organizing data such that it becomes useful
information
– Information can originate from the ERP system,
accounting, supplier portals, commodity councils and the
suppliers themselves
– Using data mining in supplier base optimization requires
that suppliers pass a series of qualifying hurdles
• Quality, delivery, technical capability, size, etc.

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 Identify Opportunities and Benefits for
Rationalizing the Supplier Base – Cont.

• Supply base rationalization

– Refers to the process of determining the right mix
and number of suppliers to meet organizational
requirements
– Critical success factors in supplier base
rationalization include
• Adequate time for the effort
• Use of cross-functional teams
• Useful information on suppliers and a supplier measurement
system
• Strategy that considers the value of supplier base
optimization
• A clear vision for the supplier base
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 Identify Opportunities and Benefits for
Rationalizing the Supplier Base – Cont.
• Supply base rationalization – Cont.
– Too many suppliers leads to a fractured spend and low
economies-of-scale
– Benefits from an optimized supplier base include
• Identification of the best suppliers and the value that results
• Lower transaction and other administrative costs
• Purchasing leverage through volume aggregation and
standardization
• Identification and pursuit of value-adding activities
• Reduced supplier base risk

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 Identify Opportunities and Benefits for
Rationalizing the Supplier Base – Cont.
• Supplier categories
– Categorizing suppliers facilitates use of prioritizing
techniques
– Typical supplier categories include
• Approved suppliers
• Preferred suppliers
• Partnered suppliers
• Certified suppliers
• Pre-qualified suppliers
• Certifiable suppliers
• Disqualified suppliers
• Debarred suppliers
• Diverse suppliers

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 Identify Opportunities and Benefits for
Rationalizing the Supplier Base – Cont.
• Supplier segmentation
– Segmenting suppliers into categories according to competencies
helps leverage value from supplier relationships
– Lack of a sound supplier segmentation process often leads to
• Difficulty in evaluating the relationship from a value perspective
• Inability to focus resources to optimize a supplier relationship
• Less effective supplier management
– Important tactics for segmenting suppliers
• Identify segmentation criteria and assess each supplier’s potential
• Segment according to the strategic value of the relationship
• Invest to develop and use effective supplier management tools
– Three categories of supplier relationships
• Transactional – standard low value/low risk items
• Collaborative – an important, but not strategic, ongoing relationship
• Strategic – implies a long-term, critical, mutually beneficial
relationship
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 Segmenting Suppliers
ABC Supplier Relationship Model
(Suppliers Segmented According to Value and Spend)
Level of
Items Commodities Included Supply Management Staff
A ❖High value items – value Commodity teams with
>$5 million strategic skills
❖Critical mass items; e.g.,
raw materials
B ❖Mid-range items – value $1 Commodity teams with mid-
million to $5 million level strategic skills
❖Supplies; e.g., specific
packaging items
C ❖Low value items – value Commodity teams with
<$1 million transactional and tactical
❖MRO items skills
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 Supplier Selection

Supplier’s perspective Buyer’s perspective

Traditional • Highest profit margin • Lowest price
thinking • Disregard customer needs • Disregard supplier impact
• Short-term transactions • Short-term transactions
Supply • Strategic view of sourcing
chain • Long-term success of all partners in SC
thinking • Cooperatively established:
✓ Pricing
✓ Discounts
✓ Delivery timing
• Ongoing relationships or alliances
• Total cost of ownership and reputation effects

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 Negotiating Contracts

Level of relationship will

dictate type of contract
Contract
that is needed.
Trading details
Bilateral partner
contract agreement Pricing
Annualized
contract Delivery requirements
CISG
Incoterms® Payment terms

PO Performance criteria Quality assurance

Order requirements Incentives and penalties
Status reporting Problem resolution Security
Language Contract termination Legal authority
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 Contract Performance
Contract deployment
 Navigate legal details.
 Communicate with winner.
 Promote new agreements with
internal buyers.
 Contract management
database entry.
 Order-to-payment procedures.
 Train users/suppliers.
 Validate performance.
 Use transaction management.
 Audit invoices.
Compliance management
 Concentrate purchases with
preferred suppliers.
 Measure compliance vs. off-
contract purchases.
 Report findings.
 Monitor/report supplier KPIs.
 Audit supplier pricing.
 Monitor contract expirations,
renewals, and discount usage.
 Continually improve.
 Establish baselines.
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 Steps in Implementing SRM Strategy

1. Define 2. Develop 3. Prepare 4. Conduct 5. Imple- 6. Monitor

SRM criteria partners. pilot. ment full and
strategy. and program. improve.
enroll
partners.

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 Why Some Alliances Fail and Some Succeed

Integration Information
Shift in corporate strategy

Immature IT Poor monitoring

Institutionalization Investment
Uncertain Inadequate
marketplace resources
Interdependence Importance
Treat like
merger (event) Poor management

Individual Integrity
excellence
Interpersonal skills

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 Ten Steps to Successful Alliances
1. Align 2. Select the proper 3. Negotiate a 4. Establish
internally. partners. win/win deal. ground rules.

5. Appoint a dedicated 6. Encourage 7. Engage in a collaborative

alliance manager. collaboration. corporate mindset.

8. Manage multifaceted 9. Conduct pulse 10. Plan for

relationships. checks. change.

Planning Execution Feedback

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 Measuring SRM
• Monitor not just each order but overall supplier
performance.
• Supplier performance measurement systems:
➢ Track performance of all suppliers to some extent,
with focus on critical component suppliers or suppliers
with prior quality issues.
➢ Collaborate on measures, reporting, improvements.
➢ Automate key supplier measures.
➢ Standardize measures.

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 Supplier Performance Measurement
• Performed for critical data
such as delivery,
reliability, quality,
technology, and cost.
• Verify supplier’s:
➢Promptness, flexibility,
consistency
➢Reliability
➢Commitment to QA
➢Financial stability
➢Technology investment.
• Set goals and incentives.
• Apply SCOR metrics to
suppliers.
• Measure internal
customer satisfaction by
interviewing users of
supplier’s products.
• Communicate level of
satisfaction.
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 Supplier Rating Systems
Rating systems
• Use data from SC
information systems.
• Can be ongoing, real-time
rating based on:
– Conformation rates
– Number of floor failure events
– Amounts of conditionally
accepted materials
– Time line performance.
Communicating ratings
• Suppliers know ratings
and when they trigger
corrective action.
• Automated systems can
allow them to self-correct.
• Scorecards, performance
alerts, surveys.
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 Performance Report
Date: January 201X
Supplier No. 100 Acme Mfg. Co. Purchase Order No. 100
Purchase
Product Qty Qty Qty UM Std Purchase Date Date Variance
Price
Ordered Rec’d Rejected Cost Price Due Rec’d
Variance
Tires 250 250 0 ea 60.00 62.00 2.00 1/5 1/7 +2
Rims 250 248 2 ea 30.00 29.00 <1.00> 1/5 1/5 0
Spokes 5,000 5,012 0 ea 5.00 5.00 0 1/5 1/5 0
Reliability Quality Cost Lead time

Quality rating = A–

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 Emerging Trend and Technology
• Integrated Business Planning
• Internet of Things(IOT)
• Machine Learning
• Block Chain
• Artificial Intelligence
• Control Tower

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