Chapter 4 Supply Chain Management

Supply Chain A supply chain is the network of all the activities involved in delivering a finished product/service to the customer.

Inventory at Different Stocking Points SupplierManufacturing plantDistribution centerRetailer Figure 8.1 Raw materials Work in process Finished goods

Supply-Chain for a Manufacturing Firm Figure 8.2 Supplier of materialsSupplier of services Tier 1 Tier 3 Tier 2 Legend Customer Distribution center Manufacturer

Components Internal processor External suppliers External distributors

Supply-Chain for a Service Firm Figure 8.3 Electric power utility Home customers Commercial customers Other electric utilities Electric transformers Facility maintenance services Janitorial services Programming services Electric energy backup power Office supplies Fuel supplies

Bullwhip Effect in a Supply Chain Bullwhip effect is the inaccurate or distorted demand information magnified upstream in the supply chain.

Bullwhip Effect (a) Customer Firm A Firm B Firm C Firm A Time (b) Figure 8.5 Materials requirements

Causes What causes bullwhip effect in the chain: – demand forecasting updating, – order batching, – price fluctuations, – rationing and gaming

Consequence Consequences of bullwhip effect: – Excessive inventory / production at each spot of a supply chain due to erroneous percept of demand information. – Getting more serious when going upstream of the supply chain.

Counteracting Bullwhip Effect Cooperation and information sharing among companies in supply chain: – Make order calculation information available at all levels of the supply chain. – Share real demand information. – Replace order batching with improvisatory order – Stabilize pricing with increased cooperation – Eliminate gaming with cooperation and mutual trust

B2B In B2B e-commerce, companies sell and buy products to and from other business through Internet. B2B facilitates purchasing research (electronic storefront and net marketplace) and automates purchasing transaction process.

B2C B2C refers to the on-line business in which a company reaches individual consumers directly through Internet. B2C models: – Advertising revenue model – Subscription revenue model – Transaction fee model – Sales revenue model – Affiliate revenue model

Intranet, Extranet, Internet An intranet is a computer network exclusively for internal use of a company. An extranet is a computer network exclusively for a company and its suppliers / customers. Internet is an open computer network.

Intranet

Extranet

Internet

Role of Purchasing Purchasing departments play an important role in SCM and are responsible for: – Selecting suppliers – Negotiating and administering long-term contracts – Monitoring supplier performance – Placing orders to suppliers – Developing a responsible supplier base – Maintaining good supplier relations

© 2010 Wiley21 Traditional Purchasing Process

© 2010 Wiley22 E-purchasing Process

© 2010 Wiley23 Sourcing Issues Which products to produce in-house and which are provided by other supply chain members (make-or-buy decision)

Role of Warehouse A warehouse is for storage and/or distribution. – Transportation consolidation – Product mixing – Service improving Crossdocking refers to the sole distribution function of a warehouse with eliminated storage and order-picking.

Management functions in a warehouse

Cross docking at a warehouse

Characteristics of Crossdocking Warehouse plays the role of transfer station where less-than-truckload (LTL) quantities are consolidated into truckload (TL), or items from different suppliers are consolidated and shipped to one customer. No storage and order picking. Crossdocking is carried out within 24 hours. Warehouse knows who are the owners of the inbound items before they arrive.

Types of Crossdocking Based on purpose of crossdocking and customers of the warehouse, four types: – Manufacturing crossdocking – Distribution crossdocking – Transportation crossdocking – Retail crossdocking

Stocking Pallets

Stock-Keeping Unit (SKU) SKU, like UPC (universal product code), is a identification system for stored items in a warehouse. For example, SKU 12345bX refers to a box of 100 units of black staplers from supplier X, SKU 12345rY refers to a box of 75 red staplers from supplier Y.

Vertical Integration Vertical integration – a measure of how much of the supply chain is owned or operated by the manufacturer Backward integration – owning or controlling of sources of raw material and component parts Forward integration – owning or control the channels of distribution

© 2010 Wiley32 Insourcing vs. Outsourcing Insourcing – to make in-house. Outsourcing – to make by other companies Considerations in sourcing decision making: – Is product critical to firm’s success? – Is product a core competency? – Is it something your company must do to survive?

What could be outsourced?

From a survey 2008

© 2010 Wiley35 Make or Buy Analysis Analysis will look at the expected sales levels and cost of internal operations vs. cost of purchasing the product or service

© 2010 Wiley36 Example (p.121) Mary and Sue decide to open a bagel shop. They need to decide whether they should make bagels on- site or buy bagels from a local bakery. If they buy from the local bakery they will need airtight containers at a fixed cost of $1,000 annually. They can buy the bagels for $0.40 each. If they make bagels in-house they will need a small kitchen at a fixed cost of $15,000 annually. It will cost them $0.15 per bagel to make. They believe they will sell 60,000 bagels.

© 2010 Wiley37 Example Solved Let Q be the quantity at indifference point (breakeven point) FC Buy + (VC Buy x Q) = FC Make + (VC Make x Q) $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q) Solve it for Q, we have So, make or buy?

© 2010 Wiley38 Developing Supplier Relationship A strong supplier base is critical to the success of many organizations Top three criteria for choosing suppliers are: – Price – Quality – On-time delivery

Win-Win Partnership Relations © 2010 Wiley39 Benefits of Partnering – Early supplier involvement (ESI) in the design process – Using supplier expertise to develop and share cost improvements and eliminate costly processes – Shorten time to market – Efficient supply chain

© 2010 Wiley40 Ethics in Supply Management Global Standards of Supply Management Conduct from ISM: – Loyalty to your organization – Justice to those with whom you deal – Faith in your profession

© 2010 Wiley41 Supply Chain Metrics Measuring supply chain performance – Traditional measures include: Return on investment Profitability Market share Revenue growth – Additional measures Customer service levels Inventory turnover Weeks of supply Inventory obsolescence