Supply Chain Management CHAPTER 11 Supply Chain Management Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

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 Supplier Storage } Mfg. Dist. Retailer Customer

Typical Supply Chain for a Service 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 = Amount of inventory Tier 2 Suppliers Tier 1 Producer Distributor Retailer Final Customer

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

Elements of Supply Chain Management 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

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 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

Electronic Data Interchange EDI – the direct transmission of inter-organizational transactions, computer-to-computer, including purchase orders, shipping notices, and debit or credit memos.

Electronic Data Interchange Increased productivity Reduction of paperwork Lead time and inventory reduction Facilitation of just-in-time systems Electronic transfer of funds Improved control of operations Reduction in clerical labor Increased accuracy

Efficient Consumer Response Efficient consumer response (ECR) is a supply chain management initiative specific to the food industry Reflects companies’ efforts to achieve quick response using EDI and bar codes

E-Commerce E-Commerce: 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-Commerce 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-Commerce 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

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 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

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 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.

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 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 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

Technology management Critical Issues Strategic importance 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