Supply Chain Integration Chapter 12 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

What is Supply Chain Integration? Supply Chain Integration The effective coordination of supply chain processes though the seamless flow of information up and down the supply chain Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Supply Chain Integration Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Upstream Tier 3Tier 2Tier 1 Downstream Information flows Cash flows Tomato suppliers Tomato paste factories Tomato grading stations Retail sales Consumers Ketchup factory

Supply Chain Dynamics Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall The Bullwhip Effect 9,000 7,000 5,000 3,000 0 Order quantity Month of April Day 1 Day 30Day 1 Day 30 Day 1Day 30 Day 1Day 30 Consumers’ daily demands Retailers’ daily orders to manufacturer Manufacturer’s weekly orders to package supplier Package supplier’s weekly orders to cardboard supplier

External Disruptions Volume Changes Service and Product Mix Changes Late Deliveries Underfilled shipments Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Internal Disruptions Internally Generated Shortages Engineering Changes Order Batching New Service or Production Introductions Service or Product Promotions Information Errors Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Annual Volume versus Variability Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall12- 07

Integrated Supply Chains External Supply Chain Linkages First-Tier SupplierService/Product Provider Support Processes External Suppliers Support Processes Supplier relationship process New service/ product development process Order fulfillment process Business- to-business (B2B) customer relationship process External Consumers Supplier relationship process New service/ product development process Order fulfillment process Business- to-business (B2B) customer relationship process Business-to- consumer (B2C) customer relationship process Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Integrated Supply Chains SCOR Model – Plan – Source – Make – Delivery – Return Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

SCOR Model Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall12- 10

New Service/Product Development Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Design Analysis Development Full Launch  Service or product not profitable  Need to rethink the new offering or production process  Post-launch review

Supplier Relationship Process Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.1 Compton Electronics manufactures laptops for major computer manufacturers. A key element of the laptop is the keyboard. Compton has identified three potential suppliers for the keyboard, each located in a different part of the world. Important cost considerations are the price per keyboard, freight costs, inventory costs, and contract administrative costs. The annual requirements for the keyboard are 300,000 units. Assume Compton has 250 business days a year. Managers have acquired the following data for each supplier. Which supplier provides the lowest annual total cost to Compton? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.1 Annual Freight Costs Shipping Quantity (units/shipment) Supplier10,00020,00030,000 Belfast$380,000$260,000$237,000 Hong Kong$615,000$547,000$470,000 Shreveport$285,000$240,000$200,000 Keyboard Costs and Shipping Lead Times Annual Inventory Shipping Administrative SupplierPrice/UnitCarrying Cost/UnitLead Time (days)Costs Belfast$100$ $180,000 Hong Kong$96$ $300,000 Shreveport$99$19.805$150,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.1 The average requirements per day are: d =d = 300,000/250 = 1,200 keyboards Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.1 BELFAST: Q = 10,000 units. Material costs= pD = Freight costs= $380,000 Administrative costs= $180,000 Total Annual Cost= = (10,000 units/ units/day(15 days))$20/unit/year = $460,000 = $31,020,000 $30,000,000 + $380,000 + $460,000 + $180,000 = $30,000,000 ($100/unit)(300,000 units) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

The total costs for all three shipping quantity options are similarly calculated and are contained in the following table. Example 12.1 Total Annual Costs for the Keyboard Suppliers Shipping Quantity Supplier10,00020,00030,000 Belfast Hong Kong Shreveport Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

The total costs for all three shipping quantity options are similarly calculated and are contained in the following table. Example 12.1 Total Annual Costs for the Keyboard Suppliers Shipping Quantity Supplier10,00020,00030,000 Belfast Hong Kong Shreveport Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall $31,020,000$31,000,000$31,077,000 $30,352,800$30,406,800$30,465,800 $30,387,000$30,415,000$30,434,000

Green Purchasing Green purchasing – The process of identifying, assessing, and managing the flow of environmental waste and finding ways to reduce it and minimize its impact on the environment. – Choose environmentally conscious suppliers. – Use and substantiate claims such as green, biodegradable, natural, and recycled. – Use sustainability as criteria for certification. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.2 The management of Compton Electronics has done a total cost analysis for three international suppliers of keyboards (see Example 12.1). Compton also considers on-time delivery, consistent quality, and environmental stewardship in its selection process. Each criterion is given a weight (total of 100 points), and each supplier is given a score (1 = poor, 10 = excellent) on each criterion. The data are shown in the following table. Score CriterionWeightBelfastHong KongShreveport Total Cost25589 On-Time Delivery Consistent Quality Environment Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.2 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Belfast = (25  5) + (30  9) + (30  8) + (15  9) = 770 Hong Kong = (25  8) + (30  6) + (30  9) + (15  6) = 740 Shreveport = (25  9) + (30  7) + (30  6) + (15  8) = 735 Preferred For example, the Belfast weighted score is: The weighted score for each supplier is calculated by multiplying the weight by the score for each criterion and arriving at a total.

Supplier Relationship Process Design collaboration – Early supplier involvement – Pre-sourcing – Value analysis Negotiation – Competitive orientation – Cooperative orientation Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Supplier Relationship Process Buying – Electronic Data Interchange (EDI) – Catalog Hubs – Exchanges – Auctions – Locus of Control Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Supplier Relationship Process Information Exchange – Radio Frequency Identification (RFID) – Vendor Managed Inventory (VMI) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Order Fulfillment Process Customer Demand Planning Supply Planning Production Logistics – Ownership – Facility location – Mode selection – Capacity – Cross-docking Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.3 Tower Distributors provides logistical services to local manufacturers. Tower picks up products from the manufacturers, takes them to its distribution center, and then assembles shipments to retailers in the region. Tower needs to build a new distribution center; consequently, it needs to make a decision on how many trucks to have. The monthly amortized capital cost of ownership is $2,100 per truck. Operating variable costs are $1 per mile for each truck owned by Tower. If capacity is exceeded in any month, Tower can rent trucks at $2 per mile. Each truck Tower owns can be used 10,000 miles per month. The requirements for the trucks, however, are uncertain. Managers have estimated the following probabilities for several possible demand levels and corresponding fleet sizes. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.3 If Tower Distributors wants to minimize the expected cost of operations, how many trucks should it have? Requirements (miles/month) 100,000150,000200,000250,000 Fleet Size (trucks) Probability Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.3 C =monthly capital cost of ownership + variable operating cost per month + rental costs if needed C(100,000 miles/month) = C(150,000 miles/month) = C(200,000 miles/month) = C(250,000 miles/month) = ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) = $121,000 ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(150,000 miles – 100,000 miles) = $221,000 ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(200,000 miles – 100,000 miles) = $321,000 ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(250,000 miles – 100,000 miles) = $421,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Example 12.3 Next, calculate the expected value for the 10 truck fleet size alternative as follows: Expected Value (10 trucks) = Using similar logic, we can calculate the expected costs for each of the other fleet-size options: Expected Value (15 trucks) = Expected Value (20 trucks) = Expected Value (25 trucks) = 0.2($121,000) + 0.3($221,000) + 0.4($321,000) + 0.1($421,000) = $261, ($131,500) + 0.3($181,500) + 0.4($281,500) + 0.1($381,000) = $231, ($142,000) + 0.3($192,000) + 0.4($242,000) + 0.1($342,000) = $217, ($152,500) + 0.3($202,500) + 0.4($252,500) + 0.1($302,500) = $222,500 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall The preferred option is 20 trucks.

The Customer Relationship Process Marketing – Business-to-Consumer Systems – Business-to-Business Systems Order Placement – Cost reduction – Revenue flow increase – Global access – Pricing flexibility Customer Service Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

The levers – Sharing data – Collaborative activities – Reduce replenishment lead times – Reduce order lot sizes – Ration short supplies – Use everyday low pricing (EDLP) – Be cooperative and trustworthy Levers for Improved Supply Chain Performance Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Performance measures – Costs – Time – Quality – Environmental impact Levers for Improved Supply Chain Performance Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Performance Measures Customer RelationshipOrder FulfillmentSupplier Relationship  Percent of orders taken accurately  Time to complete the order placement process  Customer satisfaction with the order placement process  Customer’s evaluation of firm’s environmental stewardship  Percent of incomplete orders shipped  Percent of orders shipped on-time  Time to fulfill the order  Percent of botched services or returned items  Cost to produce the service or item  Customer satisfaction with the order fulfillment process  Inventory levels of work-in- process and finished goods  Amount of greenhouse gasses emitted into the air  Percent of suppliers’ deliveries on-time  Suppliers’ lead times  Percent defects in services and purchased materials  Cost of services and purchased materials  Inventory levels of supplies and purchased components  Evaluation of suppliers’ collaboration on streamlining and waste conversion  Amount of transfer of environmental technologies to suppliers Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall12- 33

Solved Problem 1 ABC Electric Repair is a repair facility for several major electronic appliance manufactures. ABC wants to find a low-cost supplier for an electric relay switch used in many appliances. The annual requirements for the relay switch ( D ) are 100,000 units. ABC operates 250 days a year. The following data are available for two suppliers. Kramer and Sunrise, for the part: Freight Costs Shipping Quantity (Q) Supplier2,00010,000 Price/Unit (p) Carrying Cost/Unit (H) Lead Time (L)(days) Administrative Costs Kramer$30,000$20,000$5.00$1.005$10,000 Sunrise$28,000$18,000$4.90$0.989$11, Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 1 The daily requirements for the relay switch are: 100,000/250 = 400 units d = We must calculate the total annual costs for each alternative: Total annual cost = Material costs + Freight costs + Inventory costs + Administrative costs Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 1 Kramer Q = 2,000: Q = 10,000: The analysis reveals that using Sunrise and a shipping quantity of 10,000 units will yield the lowest annual total costs. Sunrise Q = 2,000: Q = 10,000: ($5.00)(100,000) + $30,000 + (2,000/ (5))($1) + $10,000 = $543,000 ($5.00)(100,000) + $20,000 + (10,000/ (5))($1) + $10,000 = $537,000 ($4.90)(100,000) + $28,000 + (2,000/ (9))($0.98) + $11,000 = $533,508 (4.90)(100,000) + $18,000 + (10,000/ (9))($0.98) + $11,000 = $527, Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 2 ABC Electric Repair wants to select a supplier based on total annual cost, consistent quality, and delivery speed. The following table shows the weights management assigned to each criterion (total of 100 points) and the scores assigned to each supplier (Excellent = 5, Poor = 1). Scores CriterionWeightKramerSunrise Total annual cost3045 Consistent quality4034 Delivery speed3053 Which supplier should ABC select, given these criteria and scores? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 2 Using the preference matrix approach, the weighted scores for each supplier are: Scores CriterionWeightKramerSunrise Total annual cost3045 Consistent quality4034 Delivery speed3053 WS Kramer = WS Sunrise = (30  4) + (40  3) + (30  5) = 390 (30  5) + (40  4) + (30  3) = Preferred Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 3 Schneider Logistics Company has built a new warehouse in Columbus, Ohio, to facilitate the consolidation of freight shipments to customers in the region. How many teams of dock workers he should hire to handle the cross docking operations and the other warehouse activities? Each team costs $5,000 a week in wages and overhead. Extra capacity can be subcontracted at a cost of $8,000 a team per week. Each team can satisfy 200 labor hours of work a week. Management has estimated the following probabilities for the requirements: Requirements (hours/wk) Number of teams123 Probability How many teams should Schneider hire? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 3 We use the expected value decision rule by first computing the cost for each option for each possible level of requirements and then using the probabilities to determine the expected value for each option. The option with the lowest expected cost is the one Schneider will implement. We demonstrate the approach using the “one team” in-house option. One Team In-House C(200) = C(400) = C(600) = Expected Value = 0.20($5,000) ($13,000) ($21,000 ) = $13,800 $5,000 + $8,000 + $8,000 = $21,000 $5,000 + $8,000 = $13,000 $5,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 3 A table of the complete results is below. Weekly Labor Requirements In-House200 hrs400 hrs600 hrsExpected Value One team Two teams Three teams Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 3 A table of the complete results is below. Based on the expected value decision rule, Schneider should employ two teams at the warehouse. $5,000$13,000$21,000$13,800 $10,000 $18,000$12,400 $15,000 Weekly Labor Requirements In-House200 hrs400 hrs600 hrsExpected Value One team Two teams Three teams Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.