CHAPTER 10 1 Supply Chain Management

Opening Case 2 3M CANADA REDUCES INVENTORY WITH SUPPLY CHAIN MANAGEMENT SYSTEM 3M Canada is one of the largest adhesives and sealants manufacturers in the country with eight manufacturing facilities in three provinces: Ontario, Manitoba, and Quebec. The Business Problem Back in the early 1980s, 3M Canada invested in a new materials resource planning (MRP) system in order to plan production more accurately and reduce inventory. However, as the company grew, it became more difficult to plan orders and it was forced to keep large inventory of products in order to satisfy customer demand.

Opening Case Discussion What is it so important for managers to have accurate demand forecasting? How can the accuracy of forecasts be increased? What is the role of other supply chain members (i.e., customers, suppliers) in producing accurate forecasts? How could information technology be used to enable the participation of extended supply chain members in producing accurate forecasts? 3

Opening Case What we learned from this case? Supply chains have become a vital component of the overall strategies of many modern organizations. To utilize supply chains efficiently, a business must become tightly integrated with its suppliers, business partners, distributors, and customers. One of the most critical aspects of this integration is the use of information systems to facilitate the exchange of information among the participants in the supply chain. 4

Agenda 10.1 The Structure of Supply Chains 10.2 Problems along the Supply Chain and their Solutions Problems Sources of problems Solutions to supply chain problems 10.3 Supply Chain Management Systems and Related Technologies Definition Benefits Technologies 5

CHAPTER OVERVIEW 6

LEARNING OBJECTIVES 1. Describe the structure of a supply chain. (10.1) 2. Identify various problems that can occur along supply chains and possible solutions to them.(10.2) 3. Explain what a supply chain management system and related technologies are.(10.3) 7

10.1 The Structure of Supply Chains A supply chain refers to the flow of materials, information, money, and services from raw material suppliers, through factories and warehouses, to the end customers. A supply chain also includes the organizations and processes that create and deliver products, information, and services to end customers. 8

Material flows are the physical products, raw materials, supplies and so forth that flow along the chain. Information flows are all data related to demand, shipments, orders, returns and schedules as well as changes in any of these data. Financial flows are all transfers of money, payments and credit-related data. 9

The supply chain involves three segments: ◦ Upstream, where sourcing or procurement from external suppliers occurs. ◦ Internal, where packaging, assembly, or manufacturing takes place. ◦ Downstream, where distribution takes place, frequently by external distributors. 10

11 Figure 10.1 Generic supply chain.

10.2 Problems along the Supply Chain and their Solutions Problems Sources of problems Solutions to supply chain problems 12

Problems Consequence of ineffective supply chains Poor customer service Poor quality products High inventory costs Loss of revenues 13

Sources of problems Uncertainties The need to coordinate several activities, internal units, and business partners. Incorrect business model 14

Supply uncertainties Demand forecast Delivery times Quality problems in materials and parts can create production delays 15

The bullwhip effect refers to erratic shifts in orders up and down the supply chain. It is a major challenge for setting accurate inventory levels 16

Solutions to supply chain problems Vertical integration Effectively using inventories Sharing information 17

Vertical integration is a business strategy in which a company buys its upstream suppliers to ensure that its essential supplies are available as soon as they are needed. Just-in-time (JIT) inventory system, which attempts to minimize inventories. That is, in a manufacturing process, JIT systems deliver the precise number of parts, called work-in-process inventory, to be assembled into a finished product at precisely the right time. Sharing information along the supply chain enables a company to implement a pull model, also known as make-to-order. Example: Dell Computers. 18

10.3 Supply Chain Management Systems and Related Technologies Definition Benefits Technologies 19

Definition SCM systems are a type of inter-organizational information system. An inter-organizational information system (IOS) involving information flowing among two or more organizations. The goal of SCM systems is to reduce the problems, or friction, along the supply chain. The function of supply chain management (SCM) consists in planning, organizing, and optimizing the various activities performed along the supply chain. As such, supply chain management systems provide support to SCM using information technology. 20

Benefits Reduce the costs of routine business transactions Improve the quality of the information flow by reducing or eliminating errors Compress the cycle time involved in fulfilling business transactions Eliminate paper processing and its associated inefficiencies and costs Make the transfer and processing of information easier for users 21

Technologies Three technologies in particular provide support for IOSs and SCM systems: ◦ Electronic Data Interchange ◦ Web Services ◦ Extranets 22

Electronic data interchange (EDI) Electronic data interchange (EDI) is a communication standard that enables business partners to exchange routine documents, such as purchasing orders, electronically. EDI benefits ◦ minimizes data entry errors ◦ reduces cycle time ◦ increases productivity ◦ enhances customer service ◦ minimizes paper usage and storage 23

Challenges to implement EDI ◦ Significant initial investment ◦ High ongoing operating cost ◦ May be inflexible for companies ◦ Many different EDI standards Problems for small businesses ◦ Require support from specialized IT experts ◦ High cost or loss of major business partner if their larger supply chain partners mandated that all participants in their supply chains invest in and use EDI technology. 24

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Web Services Web services are applications, delivered over the Internet, that users can select and combine through almost any device, from personal computers or mobile phones. By using a set of shared protocols and standards, these applications permit different systems to “talk” with one another—that is, share data and services—without requiring human beings to translate the conversations. 27

Closely related to web services is the concept of service-oriented architecture (SOA), which is an IT architecture that makes it possible to construct business applications using web services. Web services have great potential because they can be used in a variety of environments: over the Internet, on an intranet inside a corporate firewall, or on an extranet set up by business partners. 28

Extranets Extranets link business partners to one another over the Internet by providing access to certain areas of one another’s corporate intranets (see Figure 10.4). The primary goal of extranets is to foster collaboration between and among business partners. The major benefits of extranets are faster processes and information flow, improved order entry and customer service, lower costs 29

30 Figure 10.4 The structure of an extranet.

Types of Extranets 1.A Company and Its Dealers, Customers, or Suppliers 2.An Industry’s Extranet 3.Joint Ventures and Other Business Partnerships 31

A Company and Its Dealers, Customers, or Suppliers. This type of extranet is centred around a single company. An example is the FedEx extranet that allows customers to track the status of a delivery. An Industry’s Extranet. Just as a single company can set up an extranet, the major players in an industry can team up to create an extranet that will benefit all of them. Joint Ventures and Other Business Partnerships. In this type of extranet, the partners in a joint venture use the extranet as a vehicle for communications and collaboration. 32

Closing Case CHRYSLER BENEFITS FROM WEB-BASED EDI Chrysler Group, one of the largest auto manufacturers in the world, began in 1925 in Detroit, Michigan. Today, Chrysler counts assembly factories in all five continents and has almost 60,000 employees worldwide. Chrysler has a longstanding commitment to using information technologies including EDI to communicate with its business partners, especially with suppliers in order to reduce order processing time with high-volume suppliers and reduce related costs. The Business Problem However, most of Chrysler’s suppliers are small and medium enterprises with low volume transactions, which could not afford the set-up costs of EDI. Thus, processing purchase orders and invoices from small suppliers was still a paper-based and mail process that took several weeks. 33

Closing Case Discussion 1. Should a company ensure connectivity with larger supply chain partners at the risk of losing connectivity with smaller supply chain partners? Support your answer. 2. Sometimes the use of communication technologies between trading partners is imposed by the larger partner. Discuss this situation from the perspective of the supplier and the manufacturer. 3. What other business documents could be transferred using EDI? Indicate the types of business documents and business partners (e.g., supplier, government agency, customer). 34

Closing Case The Results Chrysler has benefited greatly since it introduced the exchange portal for small suppliers. The company has saved millions of dollars each year in costs related to the processing of purchase orders, invoices, and other trading documents. Suppliers have also benefited from the new technology. For example, payments from the Chrysler Group are now processed within one month instead of several months, and the follow-up time of invoices with errors (incorrect number of parts, wrong account number, etc.) has been reduced. 35

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