Supply Chain Management Production Planning and Control © 2006 Prentice Hall, Inc.

What is Supply Chain and Supply Chain Management? Supply Chain is a network of organizations, people, activities, and resources involved in the flow of material and information from supplier of suppliers to the end user. While Supply Chain Management (SCM) is the strategic coordination and management of the functions, activities, and resources involved in moving the raw material and information from supplier of suppliers to end customers to create a world- wide competitive infrastructure.

A Supply Chain

Supply Chain Processes

Supply-Chain Management The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer. To increase competitive advantage on a global level (competition between supply chains)

Global Supply-Chain Issues Supply chains in a global environment must be able to: React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out Staff with local specialists who handle duties, freight, customs and political issues

Supply-Chain Uncertainty and Inventory A major objective of SCM: respond to uncertainty in customer demand without creating costly excess inventory Negative effects of uncertainty lateness incomplete orders Inventory insurance against supply chain uncertainty

Supply Chain Uncertainty and Inventory Factors that contribute to uncertainty inaccurate demand forecasting long variable lead times late deliveries incomplete shipments product changes batch ordering price fluctuations and discounts inflated orders

Bullwhip Effect Occurs when slight demand variability is magnified as information moves back upstream

Risk Management Formal process for coping with supply chain uncertainty Evaluate and anticipate likelihood of supply chain disruptions Plan for possible disruptions

Risk Pooling Risks are aggregated to reduce the impact of individual risks Combine inventories from multiple locations into one Reduce parts and product variability, thereby reducing the number of product components Create flexible capacity

Supply Chain Sustainability “Going green” Meeting present needs without compromising the ability of future generations to meet their needs Sustaining human and social resources It can be cost effective and profitable Can provide impetus for product and process innovations Impetus comes from downstream in the supply chain and moves upstream to suppliers

Sustainability and Quality Management Reducing waste through quality programs helps achieve sustainability goals Improving fuel efficiency of vehicles Telecommuting Eco-friendly packing materials Energy-efficient facilities Changing thermostat settings

Supply Chain Management Levels of Decision-making Strategic Level Tactical Level Operational level Network configuration (Technology, location, capacity, etc.) Processing, distribution, material quantities, flow decisions, etc. Day-to-day scheduling on task level.

Supply-Chain Management Important activities include determining Transportation vendors Credit and cash transfers Suppliers Distributors and banks Accounts payable and receivable Warehousing and inventory Order fulfillment Sharing customer, forecasting, and production information

How Supply-Chain Decisions Impact Strategy Low-Cost Strategy Response Strategy Differentiation Strategy Supplier’s Goal Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell) Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers) Share market research; jointly develop products and options (e.g., Benetton) Primary Selection Criteria Select primarily for cost Select primarily for capacity, speed, and flexibility Select primarily for product development skills Table 11.1

How Supply-Chain Decisions Impact Strategy Low-Cost Strategy Response Strategy Differentiation Strategy Process Charact-eristics Maintain high average utilization Invest in excess capacity and flexible processes Modular processes that lend themselves to mass customization Inventory Charact-eristics Minimize inventory throughout the chain to hold down cost Develop responsive system with buffer stocks positioned to ensure supply Minimize inventory in the chain to avoid obsolescence Table 11.1

How Supply-Chain Decisions Impact Strategy Low-Cost Strategy Response Strategy Differentiation Strategy Lead-Time Charact-eristics Shorten lead time as long as it does not increase costs Invest aggressively to reduce production lead time Invest aggressively to reduce development lead time Product-Design Charact-eristics Maximize performance and minimize costs Use product designs that lead to low setup time and rapid production ramp-up Use modular design to postpone product differentiation as long as possible Table 11.1

Make-or-Buy Decisions Maintain core competence Lower production cost Unsuitable suppliers Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities Obtain desired quality Remove supplier collusion Obtain unique item that would entail a prohibitive commitment for a supplier Protect personnel from a layoff Protect proprietary design or quality Increase or maintain size of company Reasons for Making Table 11.4

Make-or-Buy Decisions Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity Reduce inventory costs Ensure alternative sources Inadequate managerial or technical resources Reciprocity Item is protected by a patent or trade secret Reasons for Buying Table 11.4

Outsourcing Transfers traditional internal activities and resources of a firm to outside vendors Utilizes the efficiency that comes with specialization Firms outsource information technology, accounting, legal, logistics, and production

Supply-Chain Strategies Negotiating with many suppliers Long-term partnering with few suppliers Vertical integration Keiretsu (few suppliers & Vertical integration) Virtual companies that use suppliers on an as needed basis

Many Suppliers Commonly used for commodity products Purchasing is typically based on price Suppliers are rough against one another Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

Few Suppliers Buyer forms longer term relationships with fewer suppliers who are more likely to understand the broad objectives of the procuring firm and the customer. Create value through economies of scale and learning curve improvements Suppliers more willing to participate in JIT programs and contribute design and technological expertise Cost of changing suppliers is huge

Computers Watches Calculators Vertical Integration Vertical Integration Examples of Vertical Integration Raw material (suppliers) Iron ore Silicon Farming Backward integration Steel Current transformation Automobiles Integrated circuits Flour milling Forward integration Distribution systems Circuit boards Finished goods (customers) Dealers Computers Watches Calculators Baked goods Figure 11.2

Vertical Integration Developing the ability to produce goods or service previously purchased Integration may be forward, towards the customer, or backward, towards suppliers Can improve cost, quality, and inventory but requires capital, managerial skills, and demand Risky in industries with rapid technological change

Keiretsu Networks A middle ground between few suppliers and vertical integration Supplier becomes part of the company coalition Often provide financial support for suppliers through ownership or loans Members expect long-term relationships and provide technical expertise and stable deliveries May extend through several levels of the supply chain

Virtual Companies Rely on a variety of supplier relationships to provide services on demand Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands Exceptionally lean performance, low capital investment, flexibility, and speed

Managing the Supply Chain There are significant management issues in controlling a supply chain involving many independent organizations Mutual agreement on goals Trust Compatible organizational cultures

Issues in an Integrated Supply Chain Local optimization - focusing on local profit or cost minimization based on limited knowledge Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale Large lots - low unit cost but do not reflect sales Bullwhip effect - stable demand becomes lumpy orders through the supply chain

Opportunities in an Integrated Supply Chain Accurate “pull” data Lot size reduction Single stage control of replenishment Vendor managed inventory Postponement

Opportunities in an Integrated Supply Chain Channel assembly Drop shipping and special packaging Blanket orders Standardization Electronic ordering and funds transfer

Information Technology: A Supply Chain Enabler Information links all aspects of supply chain E-business replacement of physical business processes with electronic ones Electronic data interchange (EDI) a computer-to-computer exchange of business documents Bar code and point-of-sale data creates an instantaneous computer record of a sale

IT: Supply Chain Enabler Radio frequency identification (RFID) technology can send product data from an item to a reader via radio waves Internet allows companies to communicate with suppliers, customers, shippers and other businesses around the world instantaneously Build-to-order (BTO) direct-sell-to-customers model via the Internet; extensive communication with suppliers and customer

E-Business & Supply Chain Management Savings due to lower transaction costs Reduction of intermediary roles Shorter supply chain response times Wider presence and increased visibility Greater choices & more info for customers Improved service Collection & analysis of huge amounts of customer data & preferences Access to global markets, suppliers & distribution channels

Electronic Data Interchange Computer-to-computer exchange of documents in a standard format Purchasing, shipping and receiving Improve customer service Reduce paperwork Increase productivity Improve billing and cost efficiency Reduce bullwhip effect through information sharing

Internet Purchasing Four Common Variations Internet used to communicate order releases against blanket purchase orders Internet replaces other forms of electronic order releases

Internet Purchasing Four Common Variations Internet used to buy non-standard items from catalogs Long-term master agreements in place Reduces order lead-time and purchasing costs

Internet Purchasing Four Common Variations Traditional purchasing system, but Internet-based Significantly speeds up requisitioning, bidding, supplier selection, and order placement

Internet Purchasing Four Common Variations Internet auctions May be used for commodity items for which long-term contracts do not exist

Internet Purchasing Individual initiates requisition Purchasing department/buyer Supplier Prepares requisition Buyer reviews requisition Receives electronic purchase order Inputs request into computer system and transmits to purchasing department Enters data into Internet system Ships good; receives electronic payment Assigns suppliers to bid; gives closing dates and conditions Collects/reviews bids submitted electronically Selects a supplier based on quality, cost, delivery performance; issues purchase order Figure 11.3

Internet Purchasing Suppliers get closer to their customers Shorter cycle times may improve cash flow Capital investment is low Buyers enjoy comparison shopping, rapid ordering, reduced transaction costs, and lower inventory May be part of an integrated Enterprise Resource Planning (ERP) system

Bar Codes Automated data collection system Bar code contains identifying information Provide instantaneous tracking information Checkout scanners create point-of-sale data Update inventory records Identify trends Order material Schedule orders Plan deliveries

Radio Frequency Identification (RFID) Use radio waves to transfer data from chip to a reader Provides complete visibility of product location Continuous inventory monitoring Reduce labor to manage inventory Reduce inventory costs RFID is not standardized yet Difficult to track between systems

RFID Capabilities

RFID Capabilities

Vendor Selection Vendor evaluation Critical decision Find potential vendors Determine the likelihood of them becoming good suppliers Vendor Development Training Engineering and production help Establish policies and procedures

Vendor Selection Negotiations Cost-Based Price Model - supplier opens books to purchaser Market-Based Price Model - price based on published, auction, or indexed price Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult

Vendor Evaluation Criteria Weights Scores (1-5) Weight x Score Engineering/research/innovation skills .20 5 1.0 Production process capability (flexibility/technical assistance) .15 4 .6 Distribution/delivery capability .05 .2 Quality systems and performance .10 2 Facilities/location .1 Financial and managerial strength (stability and cost structure) Information systems capability (e-commerce, Internet) Integrity (environmental compliance/ ethics) Total 1.00 3.9

Logistics Management Objective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities A frequent candidate for outsourcing Gain competitive advantage through reduced costs and improved customer service

Distribution Systems Trucking Railroads Moves the vast majority of manufactured goods Chief advantage is flexibility Railroads Capable of carrying large loads Little flexibility though containers and piggybacking have helped with this

Distribution Systems Airfreight Waterways Fast and flexible for light loads May be expensive Waterways Typically used for bulky, low-value cargo Used when shipping cost is more important than speed

Distribution Systems Pipelines Used for transporting oil, gas, and other chemical products

Cost of Shipping Alternatives Product in transit is a form of inventory and has a carrying cost Faster shipping is generally more expensive than slower shipping We can evaluate the two costs to better understand the trade-off

Cost of Shipping Alternatives Value of connectors = $1,750.00 Holding cost = 40% per year Second carrier is 1 day faster and $20 more expensive Daily cost of holding product = x /365 annual holding cost product value = (.40 x $1,750)/ 365 = $1.92 Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper

Logistics, Security, and JIT Borders are becoming more open in the U.S. and around the world Monitoring and controlling stock moving through supply chains is more important than ever New technologies are being developed to allow close monitoring of location, storage conditions, and movement

Benchmarking Supply-Chain Management Typical Firms Benchmark Firms Administrative costs as a percent of purchases 3.3% .8% Lead time (weeks) 15 8 Time spent placing an order 42 minutes 15 minutes Percentage of late deliveries 33% 2% Percentage of rejected material 1.5% .0001% Number of shortages per year 400 4 Table 11.6

Supply Chain Integration Share information among supply chain members Reduced bullwhip effect Early problem detection Faster response Builds trust and confidence Collaborative planning, forecasting, replenishment, and design Lower costs (material, logistics, operating, etc.) Higher capacity utilization Improved customer service levels

Supply Chain Integration Coordinated workflow, production and operations, procurement Production efficiencies Fast response Improved service Quicker to market Adopt new business models and technologies Penetration of new markets Creation of new products Improved efficiency Mass customization

Collaborative Planning, Forecasting, and Replenishment (CPFR) Two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand Parties electronically exchange past sales trends point-of-sale data on-hand inventory scheduled promotions forecasts

SCM Software Enterprise resource planning (ERP) software that integrates the components of a company by sharing and organizing information and data

Measuring Supply Chain Performance Key performance indicators Metrics used to measure supply chain performance Inventory turnover Total value (at cost) of inventory

Measuring Supply Chain Performance Days of supply Fill rate: fraction of orders filled by a distribution center within a specific time period

Computing Key Performance Indicators

Process Control and SCOR not only for manufacturing operations can be used in any processes of supply chain Supply Chain Operations Reference (SCOR) a cross industry supply chain diagnostic tool maintained by the Supply Chain Council

SCOR Model Processes

SCOR Performance Metrics

Questions?