1 OPERATIONS MANAGEMENT for MBAs Second Edition Prepared by Scott M. Shafer Wake Forest University Meredith and Shafer John Wiley and Sons, Inc.

2 Chapter 8 Supply Chain Management

3 Introduction

Chapter 8:Supply Chain Management4 Procter & Gamble 4 Developed its continuous replenishment program (CRP) to provide customers with quicker and more accurate stock replenishment 4 Elimination of nonvalue-adding costs 4 Reduced cycle times

Chapter 8:Supply Chain Management5 Benefits of P&G’s CRP Program 4 Reduced inventories in customer warehouses from 19 to 6 days. 4 Increased inventory turnover from 19 to Reduced administrative costs by eliminating paperwork. 4 Increased service levels from 96.4 percent to 99.2 percent.

Chapter 8:Supply Chain Management6 How CRP Works 4 Orders originating from retail stores are transmitted via EDI and collected at customer distribution centers (CDC). 4 Orders received at CDC are compared to on-hand inventory levels and sent on to customer’s headquarters where optimum order quantities are established. 4 Orders sent to both CDC and PG headquarters.

Chapter 8:Supply Chain Management7 How CRP Works continued 4 P&G headquarters forwards orders to appropriate manufacturing plants. 4 Once produced, product shipped to CDC and then on to retail store.

Chapter 8:Supply Chain Management8 B2B Networks and Private Exchanges 4 B2B Online Marketplaces 4 Private Exchanges –HP –Ace Hardware –IBM

Chapter 8:Supply Chain Management9 Dell Computer 4 Direct Model 4 Use of Information Technology –provides suppliers with access to Dell’s inventories 4 Minimum Inventory Levels

Chapter 8:Supply Chain Management10 Supply Chain Management Crusade 4 Focus is on entire value chain 4 Includes –lean production –JIT –TQM –purchasing –product/service design

Chapter 8:Supply Chain Management11 Defining Supply Chain Management 4 Coordination and integration of all supply chain activities into seamless process. 4 Enables organizations to plan and collaborate across supply chain. 4 Goal is to deliver right product to right place at right time in order to maximize profit.

Chapter 8:Supply Chain Management12 Strategic Advantages of Supply Chain 4 Supply chain management includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between its environment. 4 Goal of supply chain management is to integrate the entire process of satisfying the customer’s needs all along the supply chain.

Chapter 8:Supply Chain Management13 Strategic Advantages of Supply Chain Management continued 4 Supply chain costs often represent 50% or more of total operating costs 4 Firms that have implemented supply chain management –Have 45% supply chain cost advantage –50% lower inventory –17% faster delivery of final product –Larger market shares and higher customer loyalty

14 The Supply Chain

15 Purchasing/Procurement

Chapter 8:Supply Chain Management16 Outsourcing 4 Outsourcing often major element of SCM 4 Contract Manufactures

Chapter 8:Supply Chain Management17 Purchasing 4 Activities to reliably obtain materials by the time they are needed in the product supply process. 4 Important considerations include price, quality, lead times, and reliability. 4 Manufacturing organizations spend an average of 55 percent of revenue for outside materials and services. 4 These same organizations spend only 6 percent on labor and 3 percent on overhead.

Chapter 8:Supply Chain Management18 JIT and Purchasing Widespread use of JIT has increased importance of purchasing and procurement since delays in the receipt of materials will stop a JIT program dead in its tracks.

Chapter 8:Supply Chain Management19 Potential for Lowering Cost and Increasing Profits Total sales = $10,000,000 Purchased materials = 7,000,000 Labor and salaries = 2,000,000 Overhead = 500,000 Profit = 500,000

Chapter 8:Supply Chain Management20 To Double Profits... 4 Increase sales by 100 percent 4 Increase selling price by 5 percent 4 Decrease labor and salaries by 25 percent 4 Decrease overhead by 100 percent 4 Decrease purchase cost by 7.1 percent

Chapter 8:Supply Chain Management21 Purchasing Versus Procurement 4 Purchasing implies a monetary transaction. 4 Procurement is simply the responsibility for acquiring the goods and services the organization needs.

Chapter 8:Supply Chain Management22 Differences Between Purchasing by Individuals and Organizations 4 Organizations purchase larger volumes and dollar amounts. 4 Organization may be larger than its suppliers. 4 Very few suppliers exist for certain organizational goods, whereas many typically exist for consumer goods. 4 Certain discounts may be available to organizations.

23 Selecting a Supplier

Chapter 8:Supply Chain Management24 Characteristics of Good Suppliers 4 Deliveries made on time and are of quality and in the quantity specified. 4 Fair prices. 4 Able to respond to unforeseen changes. 4 Continually improves products and services.

Chapter 8:Supply Chain Management25 Four Major Areas in Evaluating Sources of Supply 4 Technical and Engineering Capability 4 Manufacturing Strengths 4 Financial Strengths 4 Management Capability

Chapter 8:Supply Chain Management26 Cost-Price Analysis 4 Objective is to reduce total cost. 4 Price is only one component of total cost. 4 Many organizations have found the best way to lower total cost is to work with and help key suppliers lower their costs. 4 Costs should come down in accordance with the learning curve. 4 A low price is meaningless if quality is insufficient or delivered late disrupting schedules.

Chapter 8:Supply Chain Management27 Key Elements of Effective Purchasing 4 They leverage their buying power. 4 They commit to a small number of dependable suppliers. 4 They work with and help their suppliers reduce total cost.

28 Logistics

Chapter 8:Supply Chain Management29 Logistics 4 Planning and controlling efficient, effective flows of goods, services, and information from one point to another.

Chapter 8:Supply Chain Management30 The Bullwhip Effect 4 Each segment further down the whip goes faster than the one above it. 4 Same effect often observed in supply chains.

Chapter 8:Supply Chain Management31 Trade-offs Between Transportation and Location 4 Processing Natural Resources –Large loss in size or weight during processing –High economies of scale exist –Raw material is perishable 4 Immobile Outputs

Chapter 8:Supply Chain Management32 The Problem of Location with a Single Source and Multiple Recipients

33 The Multifacility Problem

Chapter 8:Supply Chain Management34 The Multifacility Distribution Situation 4 Multiple facilitates 4 Multiple stages 4 Unspecified sites 4 Unknown quantities 4 Multiple outputs

Chapter 8:Supply Chain Management35 Distribution Requirements Planning (DRP)

36 Transportation

Chapter 8:Supply Chain Management37 Modes of Transportation and Routing 4 Water 4 Rail 4 Truck 4 Air

Chapter 8:Supply Chain Management38 Factors to Consider in Transportation Decisions 4 Cost per unit shipped 4 Ability to fill the transporting vehicle 4 Total shipment cost 4 Safety of contents 4 Shipping time 4 Availability of insurance 4 Perishability 4 Difficulty of arranging shipment 4 Delivery accommodations 4 Seasonal considerations 4 Consolidation possibilities 4 Size of product

Chapter 8:Supply Chain Management39 Production 4 Lean production 4 Channel assembly

40 The Role of Information Technology in Supply Chain Management

Chapter 8:Supply Chain Management41 E-Commerce 4 Traditional means of communication was paper 4 Electronic commerce is a term used to describe a variety of approaches for conducting business in a paperless environment –Electronic Data Interchange (EDI) –Bar Coding and Scanning –Databases – –Electronic funds transfer –Internet –Point of sale terminals –ERP systems

Chapter 8:Supply Chain Management42 Categorizing B2B Online Marketplaces

Chapter 8:Supply Chain Management43 The Beer Game Board and Initial Conditions

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