Supply Chain Management MGT3303 Reading: Chapter 7

Learning Objectives Understand the meaning and importance of supply chains Understand the strategic issues in supply chain management Understand the operational challenges, solutions, and techniques of supply chain operations

Example of a Supply Chain Suppliers Manufacturer Wholesalers Retailers, e-commerce

Typical Supply Chain Structure Example Direction of flow of demand Direction of flow of product Manufacturers Tier-I Suppliers Distribution Centers Tier-II Suppliers Retailers Customers E-tailers Typical Supply Chain Structure

Supply Chain Suppliers Manufacturing Warehousing Customers

Supply Chain Examples It takes a box of cereal 3+ months from factory to supermarket. Efficient Consumer Response (ECR) initiative - estimates $30 billion opportunity by streamlining grocery supply chain Matching supply and demand: “Boeing lost $2.6 billion in Oct. 97 due to raw material, internal, and supplier shortages…” (W.S.J., 10-23-97) Supply chain management is closely tied to strategic partnerships and logistics Cross-docking logistics & inventory practices at Walmart helped them beat Kmart)

Supply Chain Management Efficiently integrating suppliers, manufacturers, warehouses, and customers so that products are produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements. every player in the system has to be considered minimize costs across the system efficient integration includes all activities from strategic to operational level information flow is upstream (from retailer to supplier), but product flow goes downstream Notion of Demand Chain Management

Supply Chain Management Supply Chain Design Supply Chain Management Supply Chain Performance Supplier Selection Purchasing Relationship Management Logistical Management

Key Issues in Supply Chain Management Dependence customers depend on suppliers in terms of punctuality of delivery, quality, reliability, etc. How can this dependence be managed? Relationship/Trust By opposition to a contractual relationship What is a good approach? Effectiveness/Productivity Supply chain performance Comparative advantage Key issue of responsibility/equity

Key Issues in Supply Chain Management Integration How can one co-ordinate independent companies with: Secretive corporate cultures An orientation toward competition Different perceptions of operations (i.e. inventory) Bargaining power System dynamics: Bullwhip effect

Bullwhip Effect Demand propagates from the lower levels of the supply chain (consumer end) to the upper levels (supplier end). Unfortunately, variability does the same and is amplified by each echelon of the chain. Terms for this include Information distortion Bullwhip Effect Modest movement at the whip handle (representing consumer demand fluctuations) leads to wild swings at the whip’s tip (demand experienced by the supplier). Bullwhip cracks are loud because of the Doppler effect (e.g. as seen visibly in a boat’s wake) which generates a small sonic boom as the whip tip breaks the sound barrier at about 800 mph. The supply chain bullwhip crack can be heard through bankruptcy filings as vulnerable suppliers and manufacturers experience deadly cash flow variability.

Procter & Gamble P&G Pampers disposable diapers - best selling product sales of the product at retail stores were fluctuating, but the variabilities were not excessive. Reason & data suggest that diaper sales should be fairly constant because birth rate is constant over a year! orders placed by the distributors to P&G exhibited a much greater variability P&G orders to supplier, 3M, had even greater swings and variability!

The Bullwhip Effect

The Bullwhip Effect

Causes of the Bullwhip Effect Demand Forecast Updating Order Batching Price Fluctuations & Promotions Shortage Gaming (Inflated orders during shortages) Others: Long lead times (increase variability) Ineffective IT or lack of partnerships keep everyone starved for real, consistent information

Current Trends in Supply Chain Management Strategic Sourcing (Single sourcing) Reduction of the number of suppliers Centralisation and optimisation of data/decisions Virtual communities Strategic alliances long term commitment, open book, profit sharing, exchange of workers Integration of linkages: Project managers EDI, Internet ERP with SAP

Supply Chain System Design Several management decision models Extensions of the traditional accounting make or buy decision frameworks

Transaction Cost Theory

Core Competencies Theory

Supply Chain System Design

Logistical Management The operational management of the supply chain Similar in most respect to standard operations management Quality management, planning and scheduling, etc. But increased importance of co-ordination Role of IT systems, especially ERP Looking for optimal solutions and practices Unique features: Standardisation and specifications Purchasing management / Procurement E-procurement Transportation Management

Specifications The task of detailing precisely the characteristics of the product/service to be purchased Usually as an appendix to a contract Strict legal liability – not such thing as a fuzzy specification Use of standards reduce the cost of specifications An example of a transaction cost

Procurement

Purchasing Management How should problems/delays be dealt with? Penalties Increased communication, collaboration Switch supplier Multiple sourcing

Transportation Management Network design More a strategic issue Mode selection Which mode of transport Rail, air, road, water, etc. Which routes Transportation method

Transportation Method SCM – Part III Transportation Method

Transportation Method 500 800 700 400 900 200 * Belgium Germany Netherlands The Hague Amsterdam Antwerp Nancy Liege Tilburg Leipzig Miles 100 50 Source Destination

Transportation Costs Minimize Unit transportation costs from harbors to plants Minimize the transportation costs involved in moving the motors from the harbors to the plants

Transportation Model

Building a Solver Model Tools | Solver… Set Target Cell: The cell holding the value you want to minimize (cost) or maximize (revenue) Equal to: Choose Max to maximize or Min to minimize this By Changing Cells: The cells or variables the model is allowed to adjust In the Transportation spreadsheet that’s G19 - the total transportation cost In the Transportation spreadsheet we choose Min to minimize transport cost In the Transportation spreadsheet that is C9:F11 - the Shipment volumes

Building a Solver Model Subject to the Constraints: The constraints that limit the choices of the values of the adjustable cells Click on Add Cell Reference is a cell that holds a value calculated from the adjustables Constraint is a cell that holds a value that constraints the Cell Reference. <=, =, => is the sense of the constraint. Choose one In the Transportation spreadsheet for example, G9 is the total volume shipped out of Amsterdam In the Transportation spreadsheet for example, H9 is the total volume we can ship out of Amsterdam <= in this case. Don’t ship more than we have in AMS

What are the constraints? Supply Constraints Amsterdam: G9 <= H9 Antwerp: G10 <= H10 The Hague: G11 <= H11 Demand Constraints Leipzig: C12 => C13 Nancy: D12 => D13 Liege: E12 => E13 Tilburg: F12 => F13 G9 is the total volume shipped from Amsterdam Short cut: G9:G11 <= H9:H11 C12 is the total volume shipped to Leipzig Short cut: C12:F12 => C13:F13

The Model

Solution

Suggested Homework How developed are supply chain management practices in Morocco? Describe: The extent to which outsourcing takes place The state of the art of logistical and transportation management The factors that hinder transportation management effectiveness Is transaction cost theory relevant in the case of Morocco? Problem 7-1, p. 313