Supply Chain Management 11 Supply Chain Management

Learning Objectives Explain what a supply chain is. Explain the need to manage a supply chain and the potential benefits of doing so. Explain the increasing importance of outsourcing. State the objective of supply chain management. List the elements of supply chain management. Identify the strategic, tactical, and operations issues in supply chain management. Describe the bullwhip effect and the reasons why it occurs.

Learning Objectives Explain the value of strategic partnering. Discuss the critical importance of information exchange across a supply chain. Outline the key steps, and potential challenges, in creating an effective supply chain. Explain the importance of the purchasing function in business organizations. Describe the responsibilities of purchasing. Explain the term value analysis. Identify several guidelines for ethical behavior in purchasing.

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

Facilities Warehouses Factories Processing centers Distribution centers Retail outlets Offices

Functions and Activities Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service

Typical Supply Chains Purchasing Receiving Storage Operations Production Distribution

Typical Supply Chain for a Manufacturer Figure 11.1a Supplier Storage } Mfg. Dist. Retailer Customer

Typical Supply Chain for a Service Figure 11.1b Supplier } Storage Service Customer

Need for Supply Chain Management Improve operations Increasing levels of outsourcing Increasing transportation costs Competitive pressures Increasing globalization Increasing importance of e-commerce Complexity of supply chains Manage inventories

Bullwhip Effect Figure 16.3 Demand Initial Supplier Final Customer Inventory oscillations become progressively larger looking backward through the supply chain

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

Benefits of Supply Chain Management Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Integrates separate organizations into a cohesive operating system

Global Supply Chains Increasing more complex Language Culture Currency fluctuations Political Transportation costs Local capabilities Finance and economics Environmental

Elements of Supply Chain Management Table 11.1 Deciding how to best move and store materials Logistics Determining location of facilities Location Monitoring supplier quality, delivery, and relations Suppliers Evaluating suppliers and supporting operations Purchasing Meeting demand while managing inventory costs Inventory Controlling quality, scheduling work Processing Incorporating customer wants, mfg., and time Design Predicting quantity and timing of demand Forecasting Determining what customers want Customers Typical Issues Element

Strategic or Operational Two types of decisions in supply chain management Strategic – design and policy Operational – day-today activities Major decisions areas Location Production Inventory Distribution

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

Logistics Movement within the facility Incoming and outgoing shipments Bar coding EDI Distribution JIT Deliveries 214800 232087768

Materials Movement Figure 11.4 Work center Work center Storage RECEIVING Storage Work center Work center Shipping

Distribution Requirements Planning Distribution requirements planning (DRP) is a system for inventory management and distribution planning Extends the concepts of MRPII

Uses of DRP Management uses DRP to plan and coordinate: Transportation Warehousing Workers Equipment Financial flows

E-Business E-Business: the use of electronic technology to facilitate business transactions Applications include Internet buying and selling E-mail Order and shipment tracking Electronic data interchange

Advantages E-Business 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

Disadvantages of E-Business 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

Reverse Logistics Reverse logistics – the backward flow of goods returned to the supply chain Processing returned goods Sorting, examining/testing, restocking, repairing Reconditioning, recycling, disposing Gatekeeping – screening goods to prevent incorrect acceptance of goods Avoidance – finding ways to minimize the number of items that are returned

Effective Supply Chain Requires linking the market, distribution channels processes, and suppliers Supply chain should enable members to: Share forecasts Determine the status of orders in real time Access inventory data of partners

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

SCOR Metrics Table 11.4 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

RFID Technology Used to track goods in supply chain RFID tag attached to object Similar to bar codes but uses radio frequency to transmit product information to receiver RFID eliminates need for manual counting and bar code scanning

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

CPFR Process Step 1 – Front-end agreement Step 2 – Joint business plan Steps 3-5 – Sales forecast Steps 6-8 – Order forecast collaboration Step 9 – Order generation/delivery execution

CPFR Results Nabisco and Wegmans Wal-mart and Sara Lee 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

Creating an Effective Supply Chain Develop strategic objectives and tactics Integrate and coordinate activities in the internal supply chain Coordinate activities with suppliers with customers Coordinate planning and execution across the supply chain Form strategic partnerships

Supply Chain Performance Drivers Quality Cost Flexibility Velocity Customer service

Velocity Inventory velocity Information 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

Challenges Barriers to integration of organizations Getting top management on board Dealing with trade-offs Small businesses Variability and uncertainty Long lead times

Trade-offs Lot-size-inventory Inventory-transportation costs Bullwhip effect Inventory-transportation costs Cross-docking Lead time-transportation costs Product variety-inventory Delayed differentiation Cost-customer service Disintermediation

Trade-offs Bullwhip effect Cross-docking 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

Trade-offs Delayed differentiation Disintermediation 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

Supply Chain Issues Operating Issues Tactical Issues Strategic Issues Quality control Production planning and control Inventory policies Purchasing policies Production policies Transportation policies Quality policies Design of the supply chain, partnering Operating Issues Tactical Issues Strategic Issues

Supply Chain Benefits and Drawbacks Table 11.5 Problem Potential Improvement Benefits Possible Drawbacks Large inventories Smaller, more frequent deliveries Reduced holding costs Traffic congestion Increased costs Long lead times Delayed differentiation Disintermediation Quick response May not be feasible May need absorb functions Large number of parts Modular Fewer parts Simpler ordering Less variety Cost Quality Outsourcing Reduced cost, higher quality Loss of control Variability Shorter lead times, better forecasts Able to match supply and demand

Purchasing Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. Purchasing cycle: Series of steps that begin with a request for purchase and end with notification of shipment received in satisfactory condition.

Goal of Purchasing Develop and implement purchasing plans for products and services that support operations strategies

Duties of Purchasing Identifying sources of supply Negotiating contracts Maintaining a database of suppliers Obtaining goods and services Managing supplies

Purchasing Interfaces Figure 11.5 Purchasing Legal Accounting Operations Data processing Design Receiving Suppliers

Purchasing Cycle Requisition received Supplier selected Legal Accounting Operations Data process- ing Design Receiving Suppliers Requisition received Supplier selected Order is placed Monitor orders Receive orders

Value Analysis vs. Outsourcing Examination of the function of purchased parts and materials in an effort to reduce cost and/or improve performance

Centralized vs Decentralized Purchasing Purchasing is handled by one special department Decentralized purchasing Individual departments or separate locations handle their own purchasing requirements

Suppliers Choosing suppliers Evaluating sources of supply Supplier audits Supplier certification Supplier relationships Supplier partnerships

Factors in Choosing a Supplier Quality and quality assurance Flexibility Location Price

Factors in Choosing a Supplier (cont’d) Product or service changes Reputation and financial stability Lead times and on-time delivery Other accounts

Evaluating Sources of Supply Vendor analysis: Evaluating the sources of supply in terms of price, quality, reputation, and service

Evaluating Sources of Supply Vendor analysis - evaluating the sources of supply in terms of Price Quality Services Location Inventory policy Flexibility

Supplier as a Partner Aspect Adversary Partner Table 11.9 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 Quality May be unreliable; buyer inspects At the source; vendor certified Volume of business May be low Flexibility Relatively low Relatively high Location Widely dispersed Nearness is important

Supplier Partnerships Ideas from suppliers could lead to improved competitiveness Reduce cost of making the purchase Reduce transportation costs Reduce production costs Improve product quality Improve product design Reduce time to market Improve customer satisfaction Reduce inventory costs Introduce new products or services

Critical Issues Strategic importance Technology management Cost Quality Agility Customer service Competitive advantage Technology management Benefits Risks

Critical Issues Purchasing function Increased outsourcing Increased conversion to lean production Just-in-time deliveries Globalization