16-1 Supply Chain Management

Operations Management

William J. Stevenson

8th edition
16-2 Supply Chain Management

CHAPTER
16

Supply Chain Management

Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
16-3 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

16-4 Supply Chain Management

Facilities

 Warehouses
 Factories

 Processing centers

 Distribution centers

 Retail outlets

 Offices
16-5 Supply Chain Management

Functions and Activities

 Forecasting
 Purchasing

 Inventory management

 Information management

 Quality assurance

 Scheduling

 Production and delivery

 Customer service
16-6 Supply Chain Management

Typical Supply Chains

Production Distribution
Purchasing Receiving Storage Operations Storage
16-7 Supply Chain Management

Typical Supply Chain for a Manufacturer

Figure 16.1a

Supplier

Supplier

Supplier
} Storage Mfg. Storage Dist. Retailer Customer
16-8 Supply Chain Management

Typical Supply Chain for a Service

Figure 16.1b

Supplier

Supplier
} Storage Service Customer
16-9 Supply Chain Management

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
16-10 Supply Chain Management

Bullwhip Effect
Figure 16.3

Amount of
= inventory

Tier 2 Tier 1 Final

Producer Distributor Retailer
Suppliers Suppliers Customer
16-11 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

16-12 Supply Chain Management

Benefits of Supply Chain Management

 Lower inventories
 Higher productivity

 Greater agility

 Shorter lead times

 Higher profits

 Greater customer loyalty

16-13 Supply Chain Management

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
16-14 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
16-15 Supply Chain Management

Logistics

• Movement within the facility

• Incoming and outgoing shipments
• Bar coding
• EDI
• Distribution 0

• JIT Deliveries 214800 232087768

16-16 Supply Chain Management

Materials Movement
Figure 16.4
Work center
Work center Work
center

Work Storage
center

Storage

Storage
RECEIVING

Shipping
16-17 Supply Chain Management

Distribution Requirements Planning

 Distribution requirements planning (DRP) is

a system for inventory management and
distribution planning
 Extends the concepts of MRPII
16-18 Supply Chain Management

Uses of DRP

 Management uses DRP to plan and

coordinate:
 Transportation
 Warehousing

 Workers

 Equipment

 Financial flows
16-19 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.
16-20 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
16-21 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
16-22 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

16-23 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
16-24 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
16-25 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
16-26 Supply Chain Management

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
16-27 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
16-29 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
16-30 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
16-31 Supply Chain Management

Supply Chain Performance Drivers

1. Quality
2. Cost
3. Flexibility
4. Velocity
5. Customer service
16-32 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
16-33 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
16-34 Supply Chain Management

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
16-35 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
16-36 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
16-37 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
16-39 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.
16-40 Supply Chain Management

Goal of Purchasing

 Develop and implement purchasing plans for

products and services that support operations
strategies
16-41 Supply Chain Management

Duties of Purchasing

 Identifying sources of supply

 Negotiating contracts
 Maintaining a database of suppliers
 Obtaining goods and services
 Managing supplies
16-42 Supply Chain Management

Purchasing Interfaces
Figure 16.5

Legal

Operations Accounting

Data
Purchasing
processing

Design

Receiving
Suppliers
16-43 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
16-44 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
16-45 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
16-46 Supply Chain Management

Suppliers

 Choosing suppliers
 Evaluating sources of supply
 Supplier audits
 Supplier certification
 Supplier relationships
 Supplier partnerships
16-47 Supply Chain Management

Factors in Choosing a Supplier

 Quality and quality assurance

 Flexibility

 Location

 Price
16-48 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
16-50 Supply Chain Management

Evaluating Sources of Supply

 Vendor analysis - evaluating the sources of

supply in terms of
 Price
 Quality
 Services
 Location
 Inventory policy
 Flexibility
16-51 Supply Chain Management

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; At the source; vendor
buyer inspects certified
Volume of business May be low High
Flexibility Relatively low Relatively high
Location Widely dispersed Nearness is important
16-52 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
16-53 Supply Chain Management

Critical Issues

 Strategic importance
 Cost
 Quality
 Agility
 Customer service
 Competitive advantage

 Technology management
 Benefits
 Risks
16-54 Supply Chain Management

Critical Issues

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

 Just-in-time deliveries

 Globalization
14-1 JIT and Lean Operations

Operations Management

William J. Stevenson

8th edition
 14-2 JIT and Lean Operations

CHAPTER
14

JIT and
Lean Operations

Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
14-3 JIT and Lean Operations

JIT/Lean Production

 Just-in-time (JIT): A highly coordinated

processing system in which goods move
through the system, and services are
performed, just as they are needed,
 JIT   lean production
 JIT  pull (demand) system
 JIT operates with very little “fat”
14-4 JIT and Lean Operations

Goal of JIT

The ultimate goal of JIT is a balanced

system.

Achieves a smooth, rapid flow of materials

through the system
14-5 JIT and Lean Operations

Summary JIT Goals and Building Blocks

Figure 14.1

Ultimate A
Goal balanced
rapid flow

Supporting
Goals Eliminate disruptions
Make the system flexible Eliminate waste

Product Process Personnel Manufactur- Building

Design Design Elements ing Planning Blocks
14-6 JIT and Lean Operations

Supporting Goals

 Eliminate disruptions
 Make system flexible
 Eliminate waste, especially excess
inventory
14-7 JIT and Lean Operations

Sources of Waste

 Overproduction
 Waiting time
 Unnecessary transportation
 Processing waste
 Inefficient work methods
 Product defects
14-8 JIT and Lean Operations

Big vs. Little JIT

 Big JIT – broad focus

 Vendor relations
 Human relations
 Technology management
 Materials and inventory management
 Little JIT – narrow focus
 Scheduling materials
 Scheduling services of production
14-9 JIT and Lean Operations

JIT Building Blocks

 Product design
 Process design
 Personnel/organizational
elements
 Manufacturing
planning and control
14-10 JIT and Lean Operations

Product Design

 Standard parts
 Modular design
 Highly capable production systems
 Concurrent
engineering
14-11 JIT and Lean Operations

Process Design

 Small lot sizes

 Setup time reduction
 Manufacturing cells
 Limited work in process
 Quality improvement
 Production flexibility
 Little inventory storage
14-12 JIT and Lean Operations

Benefits of Small Lot Sizes

Reduces inventory
Less rework
Less storage space
Problems are more apparent
Increases product flexibility
Easier to balance operations
14-13 JIT and Lean Operations

Production Flexibility

 Reduce downtime by reducing

changeover time
 Use preventive maintenance to reduce
breakdowns
 Cross-train workers to help clear
bottlenecks
14-14 JIT and Lean Operations

Production Flexibility (cont’d)

 Use many small units of capacity

 Use off-line buffers

 Reserve capacity for important customers

14-15 JIT and Lean Operations

Quality Improvement

 Autonomation
 Automatic detection of defects during
production
 Jidoka
 Japanese term for autonomation
14-16 JIT and Lean Operations

Personnel/Organizational Elements

 Workers as assets
 Cross-trained workers
 Continuous
improvement
 Cost accounting
 Leadership/project
management
14-17 JIT and Lean Operations

Manufacturing Planning and Control

 Level loading
 Pull systems
 Visual systems
 Close vendor relationships
 Reduced transaction
processing
 Preventive maintenance
14-18 JIT and Lean Operations

Pull/Push Systems

 Pull system: System for moving work where

a workstation pulls output from the preceding
station as needed. (e.g. Kanban)
 Push system: System for moving work where
output is pushed to the next station as it is
completed
14-19 JIT and Lean Operations

Kanban Production Control System

 Kanban: Card or other device that

communicates demand for work or materials
from the preceding station
 Kanban is the Japanese word meaning
“signal” or “visible record”
 Paperless production control system
 Authority to pull, or produce comes
from a downstream process.
14-20 JIT and Lean Operations

Kanban Formula

DT(1+X)
N =
C
N = Total number of containers
D = Planned usage rate of using work center
T = Average waiting time for replenishment of parts
plus average production time for a
container of parts
X = Policy variable set by management
- possible inefficiency in the system
C = Capacity of a standard container
14-21 JIT and Lean Operations

Traditional Supplier Network

Figure 14.4a

Buyer
Supplier Supplier
Supplier

Supplier Supplier Supplier Supplier

14-22 JIT and Lean Operations

Tiered Supplier Network

Figure 14.4b
Buyer

First Tier Supplier Supplier

Second Tier Supplier Supplier Supplier

Third Tier Supplier Supplier Supplier Supplier Supplier

14-23 JIT and Lean Operations

Comparison of JIT and Traditional

Table 14.3

Factor Traditional JIT

Inventory Much to offset forecast Minimal necessary to operate
errors, late deliveries
Deliveries Few, large Many, small

Lot sizes Large Small

Setup; runs Few, long runs Many, short runs

Vendors Long-term relationships Partners

are unusual
Workers Necessary to do the Assets
work
14-24 JIT and Lean Operations

Transitioning to a JIT System

 Get top management commitment

 Decide which parts need most effort
 Obtain support of workers
 Start by trying to reduce setup times
 Gradually convert operations
 Convert suppliers to JIT
 Prepare for obstacles
14-25 JIT and Lean Operations

Obstacles to Conversion

 Management may not be committed

 Workers/management may not be
cooperative
 Suppliers may
resist
 Why?
14-26 JIT and Lean Operations

JIT in Services

The basic goal of the demand flow technology in

the service organization is to provide optimum
response to the customer with the highest quality
service and lowest possible cost.
 Eliminate disruptions
 Make system flexible
 Reduce setup and lead times
 Eliminate waste
 Minimize WIP
 Simplify the process
14-27 JIT and Lean Operations

JIT II

 JIT II: a supplier representative works right

in the company’s plant, making sure there is
an appropriate supply on hand.
14-28 JIT and Lean Operations

Benefits of JIT Systems

 Reduced inventory levels

 High quality
 Flexibility
 Reduced lead times
 Increased productivity
14-29 JIT and Lean Operations

Benefits of JIT Systems (cont’d)

 Increased equipment utilization

 Reduced scrap and rework
 Reduced space requirements
 Pressure for good vendor relationships
 Reduced need for indirect labor
14-30 JIT and Lean Operations

Elements of JIT
Table 14.4
 Smooth flow of work (the ultimate goal)
 Elimination of waste
 Continuous improvement
 Eliminating anything that does not add
value
 Simple systems that are easy to manage
 Use of product layouts to minimize moving
materials and parts
 Quality at the source
14-31 JIT and Lean Operations

Elements of JIT (cont’d)

Table 14.4
 Poka-yoke – fail safe tools and methods
 Preventative maintenance

 Good housekeeping

 Set-up time reduction

 Cross-trained employees
 A pull system