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. Supply chain connects suppliers, producers and final customers together in a tework that is essential to the creation and delivery of goods and services. (Value chains are the chain of activities and functions WITHIN a single organization.)

Benefits of Supply Chain Management Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty

Supply Chain Management (SCM) The strategic coordination of the supply chain for the purpose of intergating supply and demand management.

Logistics The part of a supply chain involved with the forward and reverse flow of goods, services, cash and information. Movement within the facility Incoming and outgoing shipments Distribution

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

Key issues of SCM Determinate the appropriate level of outsourcing Managing procurement Managing suppliers Managing customer relationships Being able to quickly identify and respond to problems Managing risks and uncertainty

Typical Supply Chains Purchasing Receiving Storage Operations Production Distribution

Typical Supply Chain for a Manufacturer Supplier Storage } Mfg. Dist. Retailer Customer

A farm-to-market supply chain Farm (wheat) Suppliers: equipment, repair, feed, seed, fertilizer, pesticides, energy/fuel Mill (flour) equipment, repair, energy Bakery (bread) equipment, repair, energy, other ingredients Supermarket (bread sold to the final customer) T r a n s p o r t

Typical Supply Chain for a Service Supplier } Storage Service Customer

Supply chain and Cash flow Goods and services Cash flow Reverse logistics Suppliers Consumers Marketing Customers Production Design Logistics

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

Global supply chains Product design Products sold globally Outsourcing to low labor cost countries Difficulties: language, culture, currency fluctuations, increased tratnsportation costs and lead time, increased need for trust

PROCUREMENT Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. Goal: to develop and implement purchasing plans for products and services that support operations strategies. Duties: Identifying sources of supply Negotiating contracts Maintaining a database of suppliers Obtaining goods and services Managing supplies Purchasing cycle: series of steps that begin with a request for purchase and end with notification of shipment recieved in satisfactory condition.

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

Centralized vs. decentralized purchasing Purchasing is handled by one special department Lower prices, better service and closer attention from suppliers, employing specialists Decentralized purchasing Individual departments or separate locations handle their own purchasing requirements Aware to different local needs, quicker response

Trade-offs Lot-size vs. inventory Bullwhip effect Inventory vs. transportation costs (reducing average costs) Cross-docking Lead time vs. transportation costs Product variety vs. inventory Delayed differentiation Cost vs. customer service Disintermediation

Trade-offs Bullwhip effect Demand variations begin at the customer end of the chain and become increasingly large as they radiate backwards through the chain. Inventories are progressively larger moving backward through the supply chain.

Bullwhip Effect Demand Initial supplier Final customer Backward effect

Bullwhip Effect = Amount of inventory Tier 2 Suppliers Tier 1 Producer Distributor Retailer Final Customer

Trade-offs Cross-docking Goods arriving at a warehouse from a supplier are unloaded from the supplier’s truck and loaded immediately onto outbound trucks. Avoids warehouse storage. Reduces holding costs and lead times.

Trade-offs Delayed differentiation Disintermediation Production of standard components and subassemblies, which are held until late in the process to add differentiating features (expl. automobiles produced without extras) Disintermediation Reducing one or more steps in a supply chain by cutting out one or more intermediaries.

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 in final products Cost Quality Outsourcing Reduced cost, higher quality Loss of control (even on quality) Variability Shorter lead times, better forecasts Able to match supply and demand Less variety

Successful Supply Chain Trust among trading partners Effective communications Supply chain visibility Event-management capability The ability to detect and respond to unplanned events (uncertainty) Performance metrics

LOGISTICS The movement of materials, services, cash, and information in a supply chain. Movement within a facility Incoming and outgoing shipments (traffic managemment)

Movement within a facility From incoming vehicles to receiving From receiving to storage From storage to work centres Between work centres (or temporary storages) From operations to final storage From storage to packing/shipping From shipping to outgoing vehicles

Location planning

Nature of Location Decisions Strategic Importance Long term commitment/costs Impact on investments, revenues, and operations Supply chains Objectives Profit potential No single location may be better than others Identify several locations from which to choose Options Expand existing facilities Add new facilities Move

Making Location Decisions Decide on the criteria Identify the important factors Develop location alternatives Evaluate the alternatives Make selection

Location Decision Factors Community Considerations Regional Factors Site-related Factors Multiple Plant Strategies

Seminar

Evaluating shipping alternatives Problem solving in logistics Evaluating shipping alternatives

Additional examples

Solutions Example 1: Example 2: The best choice is the 6-days freight. H(d)/365 = (2000*10)(5-2)/365 = 164.38 164.38 < 135 Use the 2 days freight. Example 2: Between overnight and 2-days freights: H(d)/365 = (200*0.3*80)(1)/365 = 13.15 Price difference between frights: 300-260 = 40 The 2-days freight is better than the overnight-freight [13.15 < 40]. Between 2-days and 6-days freights: H(d)/365 = (200*0.3*80)(4)/365 = 52.60 Price difference between frights: 260-180 = 80 The 6-days freight is better than the 2-days-freight [52.60<(260-180)]. The best choice is the 6-days freight.

Problem solving in Location Planning with CPV Analysis

Locational Cost-Profit-Volume Analysis Numerical and graphical analysis are both feasible. We focus on the graphical one. The steps: Determine the fixed and variable costs for each location Plot the total-cost lines for all location alternatives on the same graph Determine which location will have the lowest total cost for the expected level of output. Alternatively, determine which location will have the highest profit.

Assumptions of the Cost-Profit-Volume (CPV) Analysis Fixed costs are constant for the range of probable output Variable costs are linear for the range of probable output The required level of output can be closely estimated Only one product is involved

The total cost curve TC = FC + VC = FC + v*Q Total cost = VC + FC Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC)

Alternatively, the total profit is TP = Q * (R – v) – FC

A simple problem from the text-book Location Fixed cost (FC) Variable cost per unit (v) A 250,000 11 B 100,000 30 C 150,000 20 D 200,000 35

Plotting the total-cost lines

Calculate the break-even output levels For the crossing of lines B and C: 100,000 + 30*Q = 150,000 + 20*Q Q = 5,000 For the crossing of lines C and A: 150,000 + 20*Q = 250,000 + 11*Q Q = 11,111

Which location is the best? The expected long-term volume Best location > 11,111 A 5,000 < Exp. vol. < 11,111 C < 5,000 B

Another problem for the same method Location Fixed cost (FC) Variable cost per unit (v) A 10000 30 B 20000 20 C 35000 15 D 25000 40

Solution: Step 1: The plot

Solution: Step 2 For the crossing of lines A and B: 10,000 + 30*Q = 20,000 + 20*Q Q = 1,000 For the crossing of lines B and C: 20,000 + 20*Q = 35,000 + 15*Q Q = 3,000 Conclusion: if the volume is below 1,000 units, then we have to choose location A; with a volume between 1,000 and 3,000 B is the best alternative; while volumes greater than 3,000 requires C to minimize the total cost.

Thank you for your attention!