Course Name: Inventory Management Topic 6: Supply Chain Management Objectives At the end of this topic, you will

be able to: ! ! ! ! • describe a supply chain and identify the flow of materials, information, order and cash between the component parties in the chain. identify Supply Chain Performance explain the key issues in supply chain management define the Bullwhip Effect and discuss extensively the various innovative solutions to counteract it. identify the important tools for coping with demand and supply uncertainty.

Abstract Supply chain management is a hot topic in business today. The idea is to apply a total systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer. The term supply chain comes from a picture of how organizations are linked together as viewed from a particular company. This topic begins with the definition of supply chain than followed by developing some terminology that will be useful for measuring supply chain performance; then we look to the key issues and the bullwhip effect in supply chain. Following this, we describe strategies that are important to large companies operating in global markets. These strategies involve outsourcing of work and postponing assembly in the supply chain. 6.1. Introduction In today’s highly competitive and dynamic markets, customers are driving the new dimensions of business: choice, convenience and control. They want more choices, mass customization, faster delivery, on-time delivery, flexible ways to make procurement, and low inventory exposure. These high expectations from the customers have forced business enterprises to invest in, and focus attention on their supply chain. This, together with the advancement in transportation and communication technologies, has resulted in a great improvement in the continuous evolution of the supply chain and of the systems to manage it.

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Course Name: Inventory Management Topic 6: Supply Chain Management

6.2. What is Supply Chain Management? Supply chain management is a typical supply chain, as illustrated by the graphic below.

Figure 6.1: Typical Supply Chain

A typical supply chain is an integration of the activities that procure raw materials, transform them into intermediate goods & final products, and deliver them through a distribution system to the customers. These activities include the traditional purchasing function plus many other activities that are important to the relationship between suppliers and distributors. The supply chain consists of suppliers, manufacturing plants, warehouses, distribution centers, and retail outlets, as well as raw materials, work-in-process inventory, and finished products that flow between the facilities. Supply chain management includes determining: 1. Transportation vendors 2. Credit and cash transfers 3. Suppliers 4. Distributors and banks 5. Accounts payable and receivable 6. Warehousing and inventory levels 7. Order fulfillment, and 8. Sharing customer, forecasting, and production information.

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warehouses. good quality. inventory cost and also the reject rate. and at the right time. service after sale. promotion. and retail stores.Course Name: Inventory Management Topic 6: Supply Chain Management All the activities in supply chain management are aimed to achieve two major objectives: 1. To maximize the value to the ultimate customers. Value is refer to multifunction product. with the objectives of minimizing the whole system costs while satisfying customer requirements. 2. so that products are manufactured and distributed at the right quantity. However. To reduce cost or waste The cost or waste need to be reduced is including waiting time. fast delivery. manufacturers. competitive price. it is difficult to efficiently integrate the whole supply chain and the main reasons are: © UNITAR 2005 Page 3 of 24 . transportation cost. Definition of Supply Chain Management Supply chain management is defined as the management approaches used to integrate suppliers. good customer service. product warranty and others. to the right customers.

Details are provided in the table below. Example: Inventory Turnover Calculation Dell Computer reported the following information in its 1999 annual report: © UNITAR 2005 Page 4 of 24 .Course Name: Inventory Management Topic 6: Supply Chain Management Measuring Supply Chain Performances Two common measures to evaluate supply chain efficiency are inventory turnover and weeksof-supply. These essentially measure the same thing and mathematically are the inverse of one another.

as explained below. there are a couple of concerns that need to be thought through. what inventory turnover ratio should be used? ii) Distribution Strategies Wal-Mart’s success highlights the importance of a particular distribution strategy referred to as cross docking. is there anything we can do to reduce it? How frequently should we order and what is the quantity that we should order? And.Course Name: Inventory Management Topic 6: Supply Chain Management The inventory turnover calculation is: The weeks of supply calculation is: 6. Basically. The following is the success story of Wal-Mart: © UNITAR 2005 Page 5 of 24 .3. the supermarket can use only historical data to predict the demand. The supermarket’s objective is to decide at what point to reorder a new batch of product. and how much to order so as to minimize inventory ordering and holding costs. why should a retailer keep inventory? Is it due to the fluctuations of the customer demand or some other reasons? If it is due to the uncertainty in customer demand. In the first place. Key Issues in Supply Chain Management There are several key issues in supply chain management. i) Inventory Management Imagine a supermarket that keeps an inventory of a specific product and when the customer demand changes over time.

goods are continuously delivered to WalMart's warehouses from where they are dispatched to stores without ever sitting in inventory. Wal-Mart is the largest and highest profit-making retailer in the world.25 million. the classical distribution strategy in which inventory is kept at the warehouses. How did Wal-Mart do it? The starting point was to focus on satisfying customer needs. These are the questions regarding distribution strategies: Which strategy should a company use the cross-docking strategy. Wal-Mart had transformed itself into a major player in the retail industry. most companies are forced to integrate their supply chain and engage in strategic partnering. This was done by using a logistics technique known as cross docking. or direct shipping. in today’s competitive markets. Today. In this strategy. a strategy in which items are shipped from suppliers directly to store. with 1891 stores and average revenues per store of US$7. At that time. Within 10 years. Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those Kmart stores. Information sharing and operational planning are the keys to a successfully integrated supply chain. Important considerations are: ! ! ! ! ! What information should be shared? How should it be used? How does information affect the design and operation of the supply chain? What level of integration is needed within the organization and with external partners? What types of partnerships can be implemented? © UNITAR 2005 Page 6 of 24 . This strategy reduced Wal-Mart's cost of sales significantly and made it possible to offer everyday low prices to their customers. In 1992 it had the highest sales per square foot and the highest inventory turnover and operating profit of any discount retailer.Course Name: Inventory Management Topic 6: Supply Chain Management In 1979 Kmart was one of the leading companies in the retail industry. Wal-Mart's goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. However. it is not easy to integrate the supply chain due to its dynamic and conflicting objectives employed by different partners. This pressure comes from both their customers and their supply chain partners. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. iii) Supply Chain Integration and Strategic Partnering As discussed earlier.

Course Name: Inventory Management Topic 6: Supply Chain Management iv) Product Design Effective design plays a critical role in the supply chain. Some critical © UNITAR 2005 Page 7 of 24 . Indeed. that is. much of the current interest in supply chain management is motivated by the opportunities brought about by the abundance of data and the savings that can be achieved through analysis of these data. effective supply chain management is critical if a firm wishes to fulfill customer needs and provide value. services. In recent years. which data are significant for supply chain management and which data can be safely ignored? Some pertinent issues in applying information technology to supply chain management are: ! How should the data be analyzed and used? What is the impact of the Internet? ! What is the role of electronic commerce? ! Since information technology and decision-support systems are both available. and intangibles. What role does supply chain management play in the successful implementation of these concepts? v) Information Technology and Decision Support System Information technology is a critical enabler of effective supply chain management. then what is preventing others from using the same technology? vi) Customer Value Customer value is the measure of a company's contribution to its customer. based on the entire range of products. Important considerations related to product design are: ! Is it worthwhile to redesign your products just to reduce your logistics costs or supply chain lead-time? ! Is it possible to leverage product design to compensate for uncertainty in customer demand? ! Can all these savings resulting from product design be quantified? ! New concepts such as mass customization are increasingly popular. while other designs may result in shorter manufacturing lead-time. The primary issue in supply chain management is not whether data can be received. this measure has superseded measures such as quality and customer satisfaction. Some designs may increase inventory holding or transportation costs relative to other designs. Obviously. but what data should be transferred. can these technologies be viewed as the main tools used to achieve competitive advantage in the market? ! If they can.

and. finally. a wholesaler. IBM. and shortages and delays occur at others. General Motors in automobiles.4. The retailer’s orders to the wholesaler display greater variability than the end-consumer sales. Hewlett Packard. The Bullwhip Effect Figure 6. the wholesaler is forced to carry more safety stock than the retailer or else to maintain a © UNITAR 2005 Page 8 of 24 . and Eli Lilly in pharmaceuticals. Since variability in orders placed by the retailer is significantly higher than variability in customer demand. resembling the result of a flick of a bullwhip handles. This bullwhip effect has been observed by many firms in numerous industries.2: Typical Order Patterns in Supply Chain Management The above figure shows that typical order patterns faced by each node in a supply chain that consists of a manufacturer. affect supply chain management? 6. The effect indicates a lack of synchronization among supply chain members.Course Name: Inventory Management Topic 6: Supply Chain Management issues relating to customer value are: ! How is customer value measured? ! How is information technology used to enhance customer value in the supply chain? ! How does supply chain management contribute to customer value? ! How do the latest trends in customer value. such as development of relationships and experiences. Even a slight change in consumer sales ripples backward in the form of magnified oscillations upstream. including Campbell Soup and Procter & Gamble in consumer products. and Motorola in electronics. the manufacturer's orders to its suppliers are the most volatile. inventory accumulates at various stages. Because the supply patterns do not match the demand patterns. This phenomenon of variability magnification as we move from the customer to the producer in the supply chain is often referred to as the bullwhip effect. the wholesaler's orders to the manufacturer show even more oscillations. and a retailer.

If the bullwhip effect occurs in a supply chain. The aim of supply chain management to meet the consumer’s demand in a cost-effective way cannot be reached. The bullwhip effect is defined as the growing variance of the supply chain member’s order quantities comparative to the variance of the consumer’s demand. This analysis can be carried over to the distributor as well as the factory. The potential benefits of supply chain management remain unused. to control the increase in variability in the supply chain.Course Name: Inventory Management Topic 6: Supply Chain Management higher capacity than the retailer in order to meet the same service level as the retailer. Definition of Bullwhip Effect The bullwhip effect is a phenomenon characterized by the fact that the flows of material and information in a supply chain do not correspond with the demand of the consumer although the consumer’s demand is decisive for the supply chain. For this purpose. It is important to identify techniques and tools that will allow us to control the bullwhip effect. that is. the flows of material and information will be disturbed. we need to first understand the following main factors contributing to the increase in variability in the supply chain: © UNITAR 2005 Page 9 of 24 . resulting in even higher inventory levels and therefore higher costs.

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Example: Dell’s Direct Business Model Michael Dell started a computer business in his dormitory room in 1984 with this simple insight: He could bypass the dealer channel through-which personal computers were being sold and instead sell directly to customers and build their personal computers (PCs) to order. Couple that information with technology. both sites can use the same set of raw data. there is still variability in the demand order placed with the upstream partners. allows us to leverage our relationships with both suppliers and customers.Course Name: Inventory Management Topic 6: Supply Chain Management 6. To counteract this issue. Wal-Mart and Flextronics use either VMI or CRP. Dell Computer Corporation. the upstream partners can take control of the re-supply or replenishment from the upstream to downstream partners.5. eliminated the cost of inventory and the reselling expenses. the upstream partners would have access to the demand and inventory data at the downstream site and update the necessary forecasts and replenishment data for the downstream partners. In this kind of arrangement. P&G. in turn. However. Therefore. For example. Seagate. even if all the supply chain partners are using the same set of raw data to forecast. Another approach is to get the demand information directly from the end customers. This idea. "You actually get to have a relationship with the customer. One remedy to the repetitive processing of demand data in a supply chain is to make demand data at a downstream site available to the upstream site. it can be seen that the "Bullwhip Effect" is counter-productive. and you have the infrastructure to revolutionize the fundamental business models of major global companies. This practice is known as vendor-managed inventory (VMI) or a continuous replenishment program (CRP). Many companies such as M&M. now called the direct business model. Counteracts for the bullwhip effect are as below: i) Information Sharing Bullwhip effects result from members from different supply chain stages/levels processing the demand input from their immediate downstream member in their forecasting scheme. "and this creates valuable information which. " © UNITAR 2005 Page 11 of 24 . the point-of-sale (POS) data of convenience stores are available to their suppliers." Michael Dell explains. The model had other benefits that were not apparent when Dell founded his company. which sell all their computers directly to the end customers without going through the distribution channel. Transferring pas data from the retailer to its supplier can help reduce lead times significantly because the supplier can anticipate an incoming order by studying the pas data. One good example is Dell Computers' "Direct Model". How to Counteract The Bullwhip Effect From the discussions above. Supply chain managers have to develop some innovative solutions to counteract this.

Texas facility." Furthermore. The results are impressive. Dell tries to be a few steps ahead of change. IBM. For some clients. Dell has segmented its customer base so that it can offer value-added services to different customers. By spending time with customers and following technological trends. with various build-to-order plans. while Dell maintain just eight days of inventory. Dell does not keep any inventory but has UPS or Airborne Express pick up the monitors from Sony's Mexican factory. Technology enhances the economic incentives to collaborate because it makes it possible to share design databases and methodologies and speed the time to market. Dell's use of technology and information to blur the traditional boundaries in the supply chain between suppliers. Dell suppliers benefit from the real-time information about demand and a commitment from Dell for a certain level of purchases. "The whole idea behind virtual integration is that it lets you meet customers' needs faster and more efficiently than any other model. The decision not to manufacture the computer components has relieved Dell of the burden of owning assets. [Reference: Magretta. it allows Dell to be efficient and responsive to change at the same time. In some cases. such as Sony monitors.Course Name: Inventory Management Topic 6: Supply Chain Management Dell computer's model involves building computers based on components that are available in the market. each component is marked with a date stamp. Most are moving to a target inventory level of four weeks. Dell configures PCs and supports them for large customers. and Hewlett-Packard all announced plans in late 1998 to emulate portion of Dell's business model. and even create and shape it. It will also load standard software and place asset stickers on the machine based on customer requests. manufacturers. research and development risks. To achieve the advantages of an integrated company. and managing a large number of employees. Accumulating inventory in the fast moving PC industry is a high-risk proposition since the components can become obsolete very quickly. Dell measure inventory velocity. processes were vertically integrated. On the customer side. "The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell. The disadvantage was the high risk and costs of development and the ownership of assets in a volatile industry. and end users. the computer from Dell's Austin. Their systems are linked in real time to Dell's system and their employees participate in design teams and product launches. March-April 1998.] © UNITAR 2005 Page 12 of 24 . manufacturing. While Compaq. Dell has on-site team that assists in PC purchasing and servicing. has been named virtual integration. development. the reciprocal of the average amount of time a product spends in inventory. all have has difficulty in making the transition. For this purpose. J. In a traditional computer company such as Digital Computer. and distribution capabilities in-house. allowing it to turn over inventory 46 times a year." Harvard Business Review. This allowed for a high level of communication and ability to develop products based on the company's interaction with its clients. with all the research. Dell treats suppliers and service providers as if they were inside the company. and then match and deliver them to the customers. Spreading the development and manufacturing risk among several suppliers allowed Dell to grow much faster than if these functions were perform inside the company.

which is fast and accurate.334. EDI can reduce the cost of paperwork and administration in generating an order. EDI Usage in Consumer Products Industry [Source: The Economist. The following chart shows its popularity in the consumer products industry in United States. Using EDI. vol. This distinction is important because order lead-time can be reduced through the use of cross docking and JIT implementation while information lead-time can be reduced through the use of EDI (electronic data interchange). and © UNITAR 2005 Page 13 of 24 . Lead times typically include two portions: ! ! Order lead-time is the time it takes to produce and ship the item. Information lead-time is the time it takes to process an order. One of the reasons why order batches are large or order-frequencies low is the relatively high cost of placing an order and replenishing it. EDI has gained its popularity in the 1990s. some companies are able to perform paperless ordering.Course Name: Inventory Management Topic 6: Supply Chain Management ii) Electronic Data Interchange (EDI) Lead-time can significantly cause the "bullwhip effect". 1995] iii) Break Order Batches Companies need to devise strategies that break the order into smaller batches or replenishment the supply more frequently.

special handling. v) Avoid Shortage Gaming When a supplier faces a shortage. © UNITAR 2005 Page 14 of 24 . even though this leads to infrequent replenishment and higher inventory holding. Therefore. but the savings often outweigh the costs. Customers then have no incentive to exaggerate their orders. This will reduce forward buying. iv) Stabilize Prices The easiest way to control bullwhip effect caused by price fluctuations is to reduce both the frequency and the level of wholesale price discounting and trade promotion. Apart from that.Course Name: Inventory Management Topic 6: Supply Chain Management therefore allowing their customers to order more frequently. The differences in the costs of full truckloads and less-than-truckloads are so much that companies find it more economical to order full truckloads. ABC systems can provide the accounting of the costs of inventory. Using third-party logistics companies (3PL) also helps make small batch replenishments economical. retailers and distributors can negotiate with their suppliers for everyday low cost (EDLC). companies such as P&G give discounts to its distributors that are willing to order mixed-SKU (stock-keeping unit) loads of any of its products. Definitely there are additional costs incurred by engaging the third-party logistics companies. which is commonly known as everyday low price (EDLP). a company can realize full truckload economies without the batches coming from the same supplier. In order to solve this problem. they can help reduce the negative effect of order batching. and transportation that previously were hidden and which often outweigh the benefits of promotions. At the same time. The manufacturer can reduce the incentives for retail forward buying by establishing a uniform wholesale pricing policy. instead of allocating products based on orders. storage. By consolidating loads from multiple suppliers located near each other. when customers spread their periodic orders or replenishments evenly over time. Another reason for large order batches is the cost of transportation. activity-based costing (ABC) systems enable companies to recognize the excessive costs of forward buying. it can allocate in proportion to past sale records.

Because of shorter and shorter product life cycles. Finally. Currently. retailers will continue to exaggerate their needs and later cancel orders. as well. Innovative products with unpredictable demand and an evolving supply process face a major challenge. Through better understanding of the causes of the bullwhip effect. Some manufacturers work with customers to place order well ahead of the peak sales season. However. The terms of the agreement are established in a contract. a lot of computer manufacturers are beginning to enforce stricter return and cancellation policies. the manufacturer can adjust production capacity or scheduling with better knowledge of the product demand. This will help reduce customers' worry and lessen their need to engage in this gaming. global sourcing. the generous return policies that manufacturers offer retailers make things worse. Taking complete © UNITAR 2005 Page 15 of 24 . the pressure for dynamically adjusting and adopting a company’s supply chain strategy is great. The responsibilities for making decisions over certain elements of the activities are transferred. either we find a way to conquer the bullwhip effect or it paralyzes us. One solution is to share the capacity and inventory information. Thus. the key to the integration of the different supply chain stages is information. We have discussed that bullwhip effect is not easy to overcome. and postponement. we would be able to counteract the effects more effectively because the choice is clear. Outsourcing goes beyond the more common purchasing and consulting contracts because not only are the activities transferred. facilities. but also resources that make the activities occur. mass customization. However.Course Name: Inventory Management Topic 6: Supply Chain Management Customers will usually play the "shortage game" during shortage peaks when customers have little data on the manufacturers' supply situation. Without a penalty. including people. sharing such information is not enough when there is a real shortage in the market. In the following we explore the concepts of outsourcing. vii) Outsourcing What is outsourcing? Outsourcing is the act of moving some of a firm's internal activities and decision responsibility to outside providers. These are important tools for coping with demand and supply uncertainty. technology. and other assets. equipment. are transferred. vi) Supply Chain Strategy Demand and supply uncertainty is a good framework for understanding supply chain strategy.

Improve management and control. Thus. Identifying a function as a potential outsourcing target. shorten cycle times. outsourcing the logistics function in operation. and shareholder value. and systems. Organizationally-Driven Reasons # # Enhance effectiveness by focusing on do best. Expand sales and production capacity during periods when such expansion cannot be financed. Below are the six important reasons to outsource and the benefits. Why company decides to outsource? The reasons why a company decides to outsource can vary greatly. Transform the organization. with the rest kept in-house. Cost-Driven Reasons ! Reduce costs through superior provider performance and the provider’s lower cost 6. Commercially exploit existing skills. Increase commitment and energy in non-core © UNITAR 2005 Page 16 of 24 . Revenue-Driven Reasons o o Gain market access and business opportunities through the provider’s network. Employee-Driven Reasons • • Give employees a stronger career path. for example. processes. many of whom manage the full supply chain. even including distribution and repair. o o 5. Increase product and service value. allows decision makers to determine which activities are strategic or critical and should remain in-house and which can be outsourced like commodities. Acquire innovative ideas. An entire function may be outsourced. and a third party may perform some less expensively. the company can create a competitive advantage while reducing cost.Course Name: Inventory Management Topic 6: Supply Chain Management responsibility for this is a specialty of contract manufacturers such as Flextronics and Solectron. As an example. what you business services. Improve credibility and image by associating with superior providers. some may be critical. In the electronics industry. Improve risk management. perform 11% of manufacturing. For example. 3. Reasons & Benefits to Outsource 1. Obtain expertise. satisfaction. 2. some of the elements of information technology may be strategic. Financially-Driven Reasons % % Reduce investments in assets and free up these resources for other purposes. and so on). skills and technologies that are not otherwise available. or some elements of an activity may be outsourced. such contract manufacturers. Increase flexibility to meet changing conditions. 4. Outsourcing allows a firm to focus on activities that represent its core competencies. demand for products and and technologies. and then breaking that function into its components. Improvement-Driven Reasons $ $ $ # # customer $ $ $ Improve operating performance (increase quality and productivity. Accelerate expansion by tapping into the provider’s developed capacity. Generate cash by transferring assets to the provider.

companies must rethink and integrate the designs of their products. might be available in South America while the least expensive labor is in China. The Breakthrough Box titled "Supply Chain Management. and so on. © UNITAR 2005 Page 17 of 24 . the maker of highquality tennis shoes. China is a huge market and is now a powerful trading partner. Europe. transportation.Course Name: Inventory Management Topic 6: Supply Chain Management ! structure. Europe. production. locations that are on opposite sides of the globe. and new markets in Turkey. To make matters worse. These locations are far removed from the major markets for the shoes in the United States. though.6. Companies that face such diverse sourcing. those customers in the United States. the issuance of the Euro currency. India. warehousing. Mass Customization Definition of Mass Customization The term mass customization has been used to describe the ability of a company to deliver highly customized products and services to different customers around the world. We have seen the results of agreements such as the North American Free Trade Agreement and the General Agreement on Tariffs and Trade. Let’s take the example of Nike. companies can operate at maximum efficiency and quickly meet customers’ orders with a minimum amount of inventory. which is available from many sources around the world. Hong Kong Style" gives great insight into how global sourcing works in the quickly changing and competitive fashion industry. the processes used to make and deliver those products. and Japan do not even agree on what they want. Of course. and the configuration of the entire supply network. In order to do this. this network must be designed with consideration of outsourcing alternatives as described earlier in this topic. For Nike a key raw material is leather. Global sourcing We are in the middle of a major change in the global economy. production. areas. and Japan. The key to mass customizing effectively is postponing the task of differentiating a product for a specific customer until the latest possible point in the supply network. Great opportunities are available because of the collapse of communism in the Eastern Bloc. 6. Turn fixed costs into variable costs. Managers face an interesting predicament. and distribution decisions need to weigh the costs associated with materials. By adopting such a comprehensive approach. South Africa. and distribution to develop a comprehensive network designed to minimize costs. The lowest-cost leather.

How to make an effective mass customization program successful? Making decisions like these is not easy. It involves people from at least five areas of the company: marketing. distribution. These five groups must play the following roles to support an effective mass customization program: © UNITAR 2005 Page 18 of 24 . and finance. research and development. manufacturing.Course Name: Inventory Management Topic 6: Supply Chain Management Principles of Effective Mass Customization Program As explained in the graphic below.

their attempts to optimize their own performance may hurt the company’s ability to create the most efficient supply network that can deliver a customized product at the lowest cost. to a large extent. is evaluated on revenue growth. Finance must provide activity-based cost information and financial analyses of the alternatives. and manufacturing and distribution want to make one product at a stable volume. The different measures focus the groups on different objectives. and costs.Course Name: Inventory Management Topic 6: Supply Chain Management ! ! ! Marketing must determine the extent to which mass customization is needed to fulfill customers’ requirements. Research and development must redesign the product so that it can be customized at the most efficient point in the supply network. Marketing wants to offer as many product options as possible to attract more customers. Manufacturing and distribution must coordinate both the supply and redesign of materials and situate manufacturing or assembly processes in the most efficient locations. with the goal being to decide to do what is best for the company as a whole. for example. Today such relationships tend to be long-term. in all cases. and manufacturing and distribution on the cost of assembling and delivering a product to the customer. ! Each group at any company has its own measures of performance. research and development wants to offer the product with the greatest possible functionality at the lowest possible cost. Electronic information flow has shifted routine activities to the vendor by allowing direct access to point-of-sales data and giving responsibility for forecasting and delivery of product directly to the vendor. A supply chain links all of the stages together from raw materials through production to the consumer. © UNITAR 2005 Page 19 of 24 . the frequency and speed of communicating information through the chain has a great effect on inventory levels. research and development on a product’s functionality and the cost of its components. Managing the supply chain is being shifted. efficiencies. The supply chain is coordinated with an electronic information system. Negotiations among these groups are critical. but one can speculate whether the relationships will be long-term in the future. If the groups are not properly coordinated. Many options define the logic of these systems. Marketing. Purchasing contracts are now tied to delivery schedules. to the vendor.

and b. b. and production information. Suppliers. e. Material Costs. Manufacturing Costs. d. Warehousing and inventory levels. f. Sharing customer. • Activities in supply chain management are aimed to achieve two major objectives. Transportation Costs. g. Order fulfillment. which are: a. Warehouse & Distribution Centers. c. b. Distributors and banks. warehouses. d. you have learnt: • A typical supply chain consists of the followings: a. To maximize the value to the ultimate customers. c. and retail stores. To reduce cost or waste. Credit and cash transfers. forecasting. Suppliers. and h. and h. and © UNITAR 2005 Page 20 of 24 . • Supply chain management includes determining: a. Inventory Costs. Customers. e. g.Course Name: Inventory Management Topic 6: Supply Chain Management Summary In this topic. Accounts payable and receivable. manufacturers. Manufacturers. f. • Supply chain management is defined as the management approaches used to integrate suppliers. • It is difficult to efficiently integrate the whole supply chain because of these two reasons: a) Different parties in the supply chain may have different and conflicting objectives. Transportation vendors.

Course Name: Inventory Management Topic 6: Supply Chain Management b) The supply chain has evolved rapidly over time and supplier relationships have also changed drastically. • Counteracts for the bullwhip effect are as follow: a) Information sharing. • • Supply chain performance can be measured using inventory turnover or weeks of supply. b) Lead-time. and g) Outsourcing. c) Supply chain integration and strategic partnering. c) Order batching. and e) Shortage gaming / inflated orders. which are: a) Inventory management. • The term mass customization has been used to describe the ability of a company to deliver highly customized products and services to different customers around the world. b) Distribution strategies. d) Price fluctuations. d) Stabilize prices. There are a number of key issues in supply chain management. The bullwhip effect is defined as the growing variance of the supply chain member’s order quantities comparative to the variance of the consumer’s demand. • There are several factors contributing to the increase in variability in supply chain. c) Break order batches. f) Supply chain strategy. © UNITAR 2005 Page 21 of 24 . e) Information technology and decision-support systems. and f) • Customer value. e) Avoid shortage gaming. b) Electronic data interchange. and they are: a) Demand forecasting. d) Product design.

© UNITAR 2005 Page 22 of 24 . o Research and development must redesign the product so that it can be customized at the most efficient point in the supply network. it must have the flexibility and the responsiveness to take individual customers' orders and deliver the finished. number.Course Name: Inventory Management Topic 6: Supply Chain Management • There are three principles of effective mass customization program. c) Principle 3: The supply network-the positioning of inventory and the location. Second. • These five groups must play the following roles to support an effective mass customization program: o Marketing must determine the extent to which mass customization is needed to fulfill customers’ requirements. First. which are: a) Principle 1: A product should be designed so it consists of independent modules that can be assembled into different forms of the product easily and inexpensively. manufacturing. it must be able to supply the basic product to the facilities performing the customization in a cost-effective manner. o Finance must provide activity-based cost information and financial analyses of the alternatives. b) Principle 2: Manufacturing and service processes should be designed so that they consist of independent modules that can be moved or rearranged easily to support different distribution network designs. and structure of service. and distribution facilities-should be designed to provide two capabilities. o Manufacturing and distribution must coordinate both the supply and redesign of materials and situate manufacturing or assembly processes in the most efficient locations. customized well quickly.

http://www.lim.beergame.html ! Mass Customization: The Proactive Management of Variety http://www.info/Leser_Abonnenten/Abstracts/Heft1_04_engl.org/def_scm.htm • Learn all about inventory turnover.com/1/inventory-turnover.html • Top Inventory Turnover Directory http://www. http://retail.com/mc.ethz.logistik-management. http://www.build-to-order-consulting.com/69335_inventory_turnover.inventorysolutions.articleinsider.ch • A very brief article on supply chain management.htm • The Beer Distribution Game: A simulation of a supply chain.inventory-directory.Course Name: Inventory Management Topic 6: Supply Chain Management Additional Readings: Links: • The Bullwhip Effect http://www.htm © UNITAR 2005 Page 23 of 24 .

6 _____ is the act of m oving som e of a firm 's internal activities and decision responsibility to outside providers. 16 Supply chain m anagem ent is defined as the m anagem ent approaches used to _____ suppliers. . with the objectives of m inim izing the whole system costs while _____ custom er requirem ents. the flows of m aterial and inform ation will be disturbed. 12 All activities in SCM are aim ed to achieve two m ajor objectives: to reduce cost or waste and to _____ the value to the ultim ate custom ers. and at the right tim e. 4 Process _____ is the term used to describe delay of the process step that differentiates the product to as late in the supply chain as possible. 9 VMI or CRP is a situation where the _____ partners would have access to the dem and and inventory data at the downstream site and update the necessary forecasts and replenishm ent data for the downstream partner. 8 There are two com m on m easures to evaluate supply chain efficiency: inventory _____ and weeks-of-supply. 2 Inform ation lead-tim e can be reduced through the use of electronic data _____ (EDI). skills and technologies that are not otherwise available is one of the elem ents of _____driven reasons. 13 Increase com m itm ent and energy in non-core areas is one of the elem ents of _____-driven reasons. m anufacturers. True / F alse. products are m anufactured and sidtributed at the right quantity. 10 O btain expertise. 18 Inform ation technology is a critical _____ of effective SCM. 17 These groups play im portant roles to support an effective m ass custom ization program : m arketing. 14 The cost of goods sold is the annual xost for a com pany to produce the goods or services provided to custom ers. If the bullwhip effect occurs in a supply chain. 5 The _____ effect is defined as the growing variance of the supply chain m em ber's order quantities com parative to the variance of the consum er's dem and. to the right custom ers. and is som etim es referred to as the cost of _____. 3 In SCM. 7 [Average aggregate inventory value / cost of goods sold] 52 weeks: This is a form ula for weeks-ofsupply. m anufacturing and _____. warehouse and retail stores. 11 Bullwhip effects result from m em bers from different supply chain stages processing the dem and input from their im m ediate _____ m em ber in their forecasting schem e.Course Name: Inventory Management Topic 6: Supply Chain Management CROSSWORD PUZZLE TOPIC 6: SUPPLY CHAIN MANAGEMENT 1 2 3 4 5 6 8 10 11 7 9 12 13 14 15 16 17 18 © UNITAR 2005 Page 24 of 24 I N F N F L B A U T L E L D OW H M I A P X I M I N T Z E N A O R M O U T N S T O U R C I N E G R B L E R P A T I O N S N A O S T P O N E M E N T E I T R U E S T C U F U H I P Y R E A M M S I N N P T N O G R R G V E M P L O Y E E E V A R E V E N U E M C M O A T E E R F I N A N C E T ACROSS 1 _____ sharing and operational planning are the keys to a successful integrated supply chain. research. 15 O utsourcing allows a firm to focus on activities that represent its _____ com petencies. DOWN 1 Shortage gam ing or _____ orders is one of the factors contributing to the increase in variability in supply chain.

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