CHAPTER

Supply Chain Management 4

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 Learning Objectives

• Describe supply chains and SCM

• Describe the bullwhip effect
• Describe SCM factors
• Describe the role of vertical integration
• Solve insourcing or outsourcing problems
• Describe the role of purchasing in SCM
• Describe the role of information sharing in SCM
• Describe the technologies used in information sharing
• Describe how to implement SCM
• Describe the role of warehouses in supply chains
• Describe trends in SCM

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 What is a Supply Chain?

• A network of activities that deliver a

finished product or service to the
customer.
– The connected links of external suppliers,
internal processes, and external
distributors.

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 Components of a
Typical Supply Chain

External Internal External

Suppliers Functions Distributors

INFORMATION

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 A Basic Supply Chain

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 Supply Chain Management

• Supply Chain Management entails:

– Coordinating the movement of goods and
delivery of services.
– Sharing information between members of
the supply chain.
• For example: sales, forecasts, promotional
campaigns, and inventory levels.

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 Supply
Chain for
Milk
Products

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 External Suppliers

• External suppliers provide the necessary raw

materials, services, and component parts.
• Purchased materials & services frequently
represent 50% (or more) of the costs of
goods sold.
• Suppliers are frequently members of several
supply chains – often in different roles.

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 External Suppliers

• Tier one suppliers:

– Directly supplies materials or services to the firm that
does business with the final customer
• Tier two suppliers:
– Provides materials or services to tier one suppliers
• Tier three suppliers:
– Providers materials or services to tier two suppliers

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 Internal Functions

• Vary by industry & firm, but might include:

– Processing
– Purchasing
– Production Planning & Control
– Quality Assurance
– Shipping

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 Logistics & Distribution

• Logistics: getting the right material to the right

place at the right time in the right quantity:
– Traffic Management:
• The selection, scheduling & control of carriers (e.g.:
trucks & rail) for both incoming & outgoing materials &
products
– Distribution Management:
• The packaging, storing & handling of products in transit
to the end-user.

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 Information Sharing

• Supply chain partners can benefit by

sharing information on sales, demand
forecasts, inventory levels & marketing
campaigns
• Inaccurate or distorted information leads
to the Bullwhip Effect

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 Typical Information Flow

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 The Bullwhip Effect

• If information isn’t shared, everyone has to

guess what is going on downstream.
• Guessing wrong leads to too much or too little
inventory:
– If too much, firms hold off buying more until
inventories fall (leading suppliers to think demand
has fallen).
– If too little, firms demand a rush order & order more
than usual to avoid being caught short in the future
(leading suppliers to think demand has risen).

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 The Bullwhip Effect

• Farther away from the customer, the quality of

information gets worse & worse as supply
chain members base their guesses on the
bad guesses of their partners.
• The result is increasingly inefficient inventory
management, manufacturing, & logistics

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 Short-Circuit the Bullwhip

• Make information transparent:

– Use Electronic Data Interchange (EDI) to support
Just-In-Time supplier replenishment
– Use bar codes & electronic scanning to capture &
share point-of-sale data
• Eliminate wholesale price promotions &
quantity discounts
• Allocate scarce items in proportion to past
sales to avoid attempts to ‘game’ the system
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 Electronic Data Interchange

• The most common method of using

computer-to-computer links to exchange data
between supply chain partners in a
standardized format.
• Benefits include:
– Quick transfer of information
– Reduced paperwork & administration
– Improved data accuracy & tracking capability

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 Vertical Integration

• A measure of how much of the supply

chain is controlled by the manufacturer.
– Backward integration:
• Acquiring control of raw material suppliers.
– Forward integration:
• Acquiring control of distribution channels.

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 Outsourcing

• Entails paying third-party suppliers to provide

raw materials and services, rather than
making them in-house.
• Outsourcing is increasing as many firms try to
focus their internal operations on what they
do best.

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 Whether to Outsource?

• What volume is required?

• Are items of similar quality available in the
marketplace?
• Is long-term demand for the item stable?
• Is the item critical to success of the firm?
• Does the item represent a core competency
of the firm?

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 Breakeven Analysis

Total Cost of Outsourcin g :

TC Buy  FCBuy  VCBuy  Q 
Total Cost of Insourcing :
TC Make  FCMake  VCMake  Q 
Indifferen ce Point :
FCBuy  VCBuy  Q   FCMake  VCMake  Q 

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 Example: The Bagel Shop

• Bill & Nancy plan to open a small bagel shop.

– The local baker has offered to sell them bagels at
40 cents each. However, they will need to invest
$1,000 in bread racks to transport the bagels back
& forth from the bakery to their store.
– Alternatively, they can bake the bagels at their
store for 15 cents each if they invest $15,000 in
kitchen equipment.
– They expect to sell 60,000 bagels each year.
• What should they do?

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 Example Solved

Indifferen ce Point Calculation :

FCBuy  VCBuy  Q   FCMake  VCMake  Q 
$1,000  $0.40  Q   $15,000  $0.15  Q 
Solve for Q : Q  56,000
Interpretation:
– They anticipate selling 60,000 bagels (greater
than the indifference point of 56,000).
– Therefore, make the bagels in-house.

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 Developing a Supply Base

• How to chose between suppliers?

• One supplier or many per item?
• Whether to partner with suppliers?

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Criteria for Choosing Suppliers

• Cost:
– Cost per unit & transaction costs
• Quality:
– Conformance to specifications
• On-time delivery:
– Speed & predictability

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 Arguments for
One Supplier per Item
• May only be one practical source for the item
– Patent issues, geography, or quality considerations)
• The supply chain is integrated to support JIT or EDI
– Making multiple suppliers impractical
• Availability of quantity discounts
• Supplier may be more responsive if it’s guaranteed all
your business for the item
• Contract might bind you to using only one supplier
• Deliveries may be scheduled more easily

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 Arguments for
Multiple Suppliers per Item
• No single supplier may have sufficient capacity
• Competition may result in better pricing or service
• Multiple suppliers spreads the risk of supply chain
interruption
• Eliminates purchaser’s dependence on a single
source of supply
• Provides greater volume flexibility
• Government regulation may require multiple suppliers
– Antitrust issues
• Allows testing new suppliers without risking a
complete disruption of material flow
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 Partnering with Suppliers

• Involves developing a long-term,

mutually-beneficial relationship:
– Requires trust to share information, risk,
opportunities, & investing in compatible
technology
– Work together to reduce waste and
inefficiency & develop new products
– Agree to share the gains

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A company evaluating potential partners looks at the following
aspects of the potential partner’s business:

• ● History, sales volume, product lines, market share, number of

employees, major customers, and major suppliers.
• ● Current management team in terms of past performance,
stability, and strategic vision.
• ● Labor force in terms of skill, experience, commitment to
quality, and relations
• with the supplier.
• ● Internal cost structure, process and technology capabilities,
financial stability, information system compatibility, supplier
sourcing strategies, and long-term relationship potential.

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 The Role of Warehouses

• General Warehouses:
– Used for long-term storage of goods
• Distribution Warehouses:
– Transportation consolidation:
• Consolidate LTL into TL deliveries
– Product mixing & blending:
• Group multiple items from various suppliers
– Improve service:
• Reduced response time
• Allow for last-minute customization

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 Future Challenges

• Household Replenishment:
– Fulfilling consumer demand at the point of
use (the home).
– Often called ‘the last mile’ problem.
• Freeze Point Delay (Postponement):
– Last minute customization to provide
exactly what the consumer wants while
maintaining very small inventories
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 The End

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