CHAPTER 13- SUPPLY CHAIN PROCESS INTEGRATION Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

© 2005 Thomson Business and Professional Publishing Learning Objectives You should be able to: Discuss the overall importance of process integration in supply chain management. Describe advantages & obstacles of process integration. Understand the important issues of internal & external process integration. Understand the role of information systems in creating information visibility along the supply chain. Describe integration needs along the supply chain. Understand the causes of the bullwhip effect & their impact on process integration. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Chapter Thirteen Outline Supply Chain Mgmt (SCM) Integration Model Identify Key SC Trading Partners Review & Establish SC Strategies Align SC Strategies w/Objectives Develop Performance Measures Improve Internal Integration of SC Processes Develop SC Measures for Key Processes Improve External Integration & SC Performance Extend Integration to 2nd-Tier SC Partners Reevaluate Integration Model Annually Obstacles to Process Integration Along the SC The Silo Mentality Lack of SC Visibility Lack of Trust Lack of Knowledge Activities Causing the Bullwhip Effect Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Introduction Primary Goal of Supply Chain Management- create value for the end customers as well as the firms in the supply chain network. Firms in the supply chain network must integrate process activities internally & with other firms in the network. Process integration means coordinating & sharing information & resources to jointly manage a process. Process integration is often a difficult task & requires: Training Willing & competent partners Trust Organizational culture change Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Supply Chain Management Integration Model Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Supply Chain Management Integration Model- Cont. Identify Critical Supply Chain Trading Partners Enable sale & delivery of end products to final customers Identifying primary trading partners allows the firm to concentrate on managing these links Review & Establish Supply Chain Strategies regarding: Parts purchased & suppliers Shop layout & manufacturing processes Design of the products manufactured Mode of transportation Warranty & return services Employee training methods Types of information technologies used Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Supply Chain Management Integration Model- Cont. Align SC Strategies with Key SC Process Objectives Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Supply Chain Management Integration Model- Cont. Develop Internal Performance Measures for Key Processes Performance should be continuously measured w/metrics for each process. ERP systems support internal performance measures Firm is able to track progress for each of the key processes. Assess & Improve Internal Integration of Key SC Processes. Internal integration requires: Empowered teams & cooperation across all functions Management support & resources ERP system an understanding of the internal supply chain Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Supply Chain Management Integration Model- Cont. Develop SC Performance Measures for Key Processes Monitor the links with trading partners in the key SCM processes. Trading partners should monitor a number of cost-oriented measures averaged across the member firms for each of the key supply chain processes. Assess & Improve External Process Integration & Performance Build, maintain & strengthen relationships Share information concerning: Sales, forecast information, new products, expansion plans, new processes, & new marketing campaigns process integration will enable firms to collaborate & share this information. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Supply Chain Management Integration Model- Cont. Extend Process Integration to Second-Tier SC Partners Integrate process to second-tier partners & beyond Radio-frequency identification (RFID) tag- Microchip device relays information on product’s whereabouts as it moves through the supply chain. Price of RFID tags is economical (about 5 cents each). Reevaluate the Integration Model Annually Trading partners should revisit the integration model annually to identify changes within supply chains & to assess the impact these changes have on integration efforts. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain The Silo Mentality “I win, you lose” Using the cheapest suppliers. Ignoring customers. Assigning few resources to new product & service design. Firm must strive to align SC goals & the goals & incentives of the firm Performance reviews of managers must include their ability to integrate processes internally & externally. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. Lack of Supply Chain Visibility In a 2002 survey, 67% of manufacturers had not yet successfully synchronized their supply chain operations with those of their trading partners And 67% said they used different supply chain management applications than their partners 1 RFID technology promises to add real-time information visibility to supply chains. Technology boards & user boards are being formed now to develop standards & electronic product codes (ePCs) for the RFID industry. [1] Anonymous, “Survey Finds Manufacturers’ Supply Chains Come Up Short,” Logistics Management 41, no. 9 (2002): 19-20. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. Lack of Trust Successful process integration between partners requires trust. Trust occurs over time- Partners earn trust. Creating collaboration & trust are based on: Start small: Pick a project likely to provide a quick return. Look inward: establishing trust with internal constituents. Gather ‘round: meet face-to-face. Go for the win-win: optimize business for all SC members. Do not give away the store: Some information should remain proprietary Just do it: Simple start - sharing information. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. Lack of Knowledge In a survey of 122 executives practicing SCM, 43 % said lack of core SCM skills & knowledge was the greatest obstacle within their own organizations, & 54 % echoed this opinion for their trading partners.1 Firms successfully managing their supply chains must spend significant time influencing & increasing the capabilities of themselves & their partners. [1] Bachelor, B “Implementation Imperative Information Week (28 April 2003), 62-66 Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. Bullwhip Effect Forecasts & their corresponding orders along the supply chain can become amplified and accumulate, causing what is termed the bullwhip effect. Variations in demand lead to problems in capacity planning, inventory control, & workforce & production scheduling. Ultimately, these variations result in lower levels of customer service & higher total supply chain costs. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. To Avoid Bullwhip Effect- Demand Forecast Updating Make actual demand data available to suppliers. Vendor-managed inventory (VMI) Reduce the length of the supply chain. Reduce the lead times from order to delivery Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. To Avoid Bullwhip Effect- Monitor Order Batching Safety stocks, & the desire to order full container loads of materials causes orders to be placed monthly or even less often, or at varying time interval. Order batching occurs when sales reps fill end-of-period sales quotas, or when buyers spend end-of-year budgets. Solution: use frequent & smaller order sizes. Firms can order smaller quantities of a variety of items from a supplier or use a freight forwarder to consolidate small shipments. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. To Avoid Bullwhip Effect- Reduce price fluctuations through forward buying activities to take advantage of the low price offers between: retailers & consumers. distributors & retailers. manufacturers & distribution. Eliminate price discounting. Many retailers have adopted everyday low prices (EDLP). Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Obstacles to Process Integration Along the Supply Chain- Cont. To Avoid Bullwhip Effect- Rationing & Shortage Gaming Rationing- occurs when demand exceeds the availability of a supplier’s finished goods. To provide a partial supply to all customers, goods are rationed to customers. Buyers tend to inflate their orders to satisfy their real needs. Shortage gaming- occurs when production capacity eventually equals demand & orders are filled completely, demand suddenly drops to less-than-realistic levels, as the buying firms try to unload their excess inventories. Solution: sellers should allocate short supplies based on the demand histories of their customers. Sharing future order plans with suppliers allows suppliers to increase capacity if needed, thus avoiding a rationing situation. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing