Supply Chain Management To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.

Supply Chain (Definition of) The sequence of organizations- their facilities, functions, processes and activities- that are involved in producing and delivering a product or service Sometimes referred to as value chain

The Supply Chain Products and Services Customers Total satisfaction with quality, price, delivery, and service Distributors Package and delivery Inventory Producers Finished goods, end products and services Inventory Suppliers Materials, parts, sub- assemblies, and services Downstream SC members

The Supply Chain Information Products and Services Customers Total satisfaction with quality, price, delivery, and service Distributors Package and delivery Inventory Producers Finished goods, end products and services Inventory Suppliers Materials, parts, sub- assemblies, and services

The Supply Chain Information Cash Products and Services Customers Total satisfaction with quality, price, delivery, and service Distributors Package and delivery Inventory Producers Finished goods, end products and services Inventory Suppliers Materials, parts, sub- assemblies, and services

Typical Supply Chain for a Manufacturer Typical Supply Chain for a Manufacturer Supplier Storage } Mfg.StorageDist.RetailerCustomer

Supplier } StorageService Customer Typical Supply Chain for a Service Typical Supply Chain for a Service

Supply Chain Management  A total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end user (planning, organizing, directing and controlling flows of materials)  Encompasses all activities associated with the flow and transformation of goods and services from raw materials to the end user, the customer

Goals of Supply Chain Management (1 of 2) Synchronization of activities required to achieve maximum competitive benefits Coordination, cooperation, and communication and timing among SC members Ensuring rapid flow of information among members

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Goals of Supply Chain Management (2 of 2) Linking the market, distribution channels, processes and suppliers so that market demand is met as efficiently as possible across the chain Matching supply and demand at each stage of the chain Ultimate goal: Achieving customer satisfaction

 Warehouses  Factories  Processing centers  Distribution centers  Retail outlets  Offices Facilities Involved in SCM

Strategic or Operational Two types of decisions in supply chain management – Strategic – design and policy – Operational – day-today activities

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Typical Supply Chain Activities Typical Supply Chain Activities Purchasing ReceivingStorageOperationsStorage ProductionDistribution Major decision areas: Location Production Inventory Distribution

Functions and Activities Involved in SCM  Forecasting  Scheduling  Purchasing  Inventory management  Information management  Quality assurance  Production and delivery  Logistics  Customer service

Elements of Supply Chain Management Deciding how to best move and store materialsLogistics Determining location of facilitiesLocation Monitoring supplier quality, delivery, and relations Suppliers Evaluating suppliers and supporting operationsPurchasing Meeting demand while managing inventory costsInventory Controlling quality, scheduling workProcessing Incorporating customer wants, mfg., and timeDesign Predicting quantity and timing of demandForecasting Determining what customers wantCustomers Typical IssuesElement

Processes Involved in SCM  Acquiring customer orders  Procuring materials and components from suppliers  Producing or manufacturing products  Filling customer orders

Supply-Chain Costs as a Percent of Sales All industry Automobile Food Lumber Paper Petroleum Transportation 52% 67% 60% 61% 55% 79% 62% Industry Percent of Sales

Factors That Contribute to the Increased Need for Effective Supply Chain Management:  improve operations  increased levels of outsourcing  increasing transportation costs  competitive pressures  increasing globalization  increasing importance of e-commerce  increasing complexity of supply chains  increasing pressure to decrease inventories

Benefits of Supply Chain Management  Lower inventories  Lower costs  Higher productivity  Greater agility  Shorter lead times  Higher profits  Greater customer loyalty  Integration of seperate organizations into a cohesive operating system

Actual Benefits Gained by Supply Chain Management OrganizationBenefit Campbell SoupDoubled inventory turnover rate Hewlett-PackardCut supply costs 75% Sport ObermeyerDoubled profits and increased sales 60% National BicycleIncreased market share from 5% to 29% Wal-MartLargest and most profitable retailer in the world

Effective Supply Chain Requires linking the market, distribution channels processes, and suppliers

Requirements of a Successful Supply Chain  Trust among trading partners  Effective communications Supply chain should enable members to 1) share forecasts, 2) determine the status of orders in real time, 3) access inventory data of partners  Supply chain visibility  Event-management capability  The ability to detect and respond to unplanned events  Measuring SC Performance: Performance metrics

Measuring SC Performance: Inventory Turnover One of the most commonly used measures is “Inventory Turnover”

Measuring SC Performance: SCOR Metrics PerspectiveMetrics ReliabilityOn-time delivery Order fulfillment lead time Fill rate (fraction of demand met from stock) Perfect order fulfillment FlexibilitySupply chain response time Upside production flexibility ExpensesSupply chain management costs Warranty cost as a percent of revenue Value added per employee Assets/utilizationTotal inventory days of supply Cash-to-cash cycle time Net asset turns

Supply Chain Uncertainty Forecasting, lead times, batch ordering, price fluctuations, and inflated orders contribute to variability Inventory is a form of insurance Distorted information is one of the main causes of uncertainty

Bullwhip Effect Final Customer Initial Supplier Demand Inventory oscillations become progressively larger moving backward through the supply chain

Inventories in a SC: Bullwhip Effect Order Quantity Time Retailer’s Orders Order Quantity Time Wholesaler’s Orders Order Quantity Time Manufacturer’s Orders The magnification of variability in orders in the supply-chain A lot of retailers each with little variability in their orders…. … can lead to greater variability for a fewer number of wholesalers, and… … can lead to even greater variability for a single manufacturer.

Inventories in a SC: Bullwhip Effect Tier 2 Suppliers Tier 1 Suppliers ProducerDistributorRetailer Final Customer Amount of inventory =

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Role of Information in the Supply Chain (1 of 2) Centralized coordination of information flows Integration of transportation, distribution, ordering, and production Direct access to domestic and global transportation and distribution channels Locating and tracking the movement of every item in the supply chain

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Role of Information in the Supply Chain (2 of 2) Data interchange Data acquisition at the point of origin and point of sale Intercompany and intracompany information access Instantaneous updating of inventory levels

Some IT Applications for SCM (1 of 3)  Electronic Business (replacement of physical processes with electronic ones)  Electronic Data Interchange (a computer-to-computer exchange of business documents in a standard format)  Bar Coding (computer readable codes attached to items flowing through the SC). Generates point-of-sale data which is useful for determining sales trends, ordering, production scheduling, and delivery plans

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Some IT Applications for SCM (2 of 3)  RFID Technology Used to track goods in supply chain RFID tags attached to objects Similar to bar codes but uses radio frequency to transmit product information to receiver RFID eliminates need for manual counting and bar code scanning

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Some IT Applications for SCM (3 of 3)  Internet (provides instant access to organizations, individuals and information sources; fundamentaly changes the way organizations do business; add speed and accessibility to the SC)  Intranets (internet-like networks that operate within a single organization)  Extranets (intranets that can be connected to the global internet & that include a company’s suppliers and customers; they allow limited access)

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. The Internet Instant global access to organizations, individuals, and information sources Fundamentally changes the way organizations do business Removed geographic barriers Adds speed and accessibility to the supply chain

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Build-to-Order Cars over the Internet

E-Business : the use of electronic technology to facilitate business transactions Applications include: – Internet buying and selling – – Order and shipment tracking – Electronic data interchange E-Business

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.

 Global presence and increased visibility  Global access to markets and customers  Improved competitiveness, quality and service  Greater choices and more information for customers  Collection and analysis of customer data and preferences  Shortened supply chain response times Advantages of E-Business (1 of 2)

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.  Shorten transaction times for ordering and delivery  Cost and price reductions  Virtual companies with lower prices  Leveling the playing field for small companies  Reducing or eliminating intermediaries  Improved service Advantages of E-Business (2 of 2)

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 Disadvantages of E-Business

IT Issues Increased benefits and sophistication come with increased costs Efficient web sites do not necessarily mean the rest of the supply chain will be as efficient Security problems are very real Partnership and trust are important elements that may be new to business relationships

Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. Purchasing cycle : Series of steps that begin with a request for purchase and end with notification of shipment received in satisfactory condition. Purchasing

Identifying sources of supply Negotiating contracts Maintaining a database of suppliers Obtaining goods and services Managing supplies Duties of Purchasing

Purchasing Interfaces Purchasing Legal Accounting Operations Data processing Design Receiving Suppliers

Purchasing Cycle 1.Requisition received 2.Supplier selected 3.Order is placed 4.Orders are monitored 5.Orders are received Purchasing Legal Accounting Operations Dataprocess-ing Design Receiving Suppliers

Centralized purchasing – Purchasing is handled by one special department Decentralized purchasing – Individual departments or separate locations handle their own purchasing requirements Centralized vs Decentralized Purchasing

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Choosing suppliers Evaluating sources of supply Supplier audits Supplier certification Supplier relationships Supplier partnerships Suppliers

Sourcing Sourcing is the selection of suppliers Relationship between customers and suppliers focuses on collaboration and cooperation Outsourcing has become a long-term strategic decision Organizations focus on core competencies Single-sourcing is increasingly a part of supplier relations

Suppliers Purchased materials account for about half of manufacturing costs Materials, parts, and service must be delivered on time, of high quality, and low cost Suppliers should be integrated into their customers’ supply chains Partnerships should be established On-demand delivery (JIT) is a frequent requirement

Evaluating the sources of supply in terms of: Price Quality Flexibility Location Product or service changes Reputation and financial stability Lead times and on-time delivery Inventory policy Services (such as technical support) provided Vendor Analysis

Supplier as a Partner AspectAdversaryPartner Number of suppliersManyOne or a few Length of relationshipMay be briefLong-term Low priceMajor considerationModerately important ReliabilityMay not be highHigh OpennessLowHigh QualityMay be unreliable; buyer inspects At the source; vendor certified Volume of businessMay be lowHigh FlexibilityRelatively lowRelatively high LocationWidely dispersedNearness is important

Ideas from suppliers could lead to improved competitiveness 1.Reduce cost of making the purchase 2.Reduce transportation costs 3.Reduce production costs 4.Improve product quality 5.Improve product design 6.Reduce time to market 7.Improve customer satisfaction 8.Reduce inventory costs 9.Introduce new products or services Supplier Partnerships

E-Procurement Business-to-business commerce conducted on the Internet Benefits include lower transaction costs, lower prices, reduce clerical labor costs, and faster ordering and delivery times Currently used more for indirect goods E-Marketplaces service industry-specific companies and suppliers

The Wal-Mart Supply Chain

Centralized Supply at Honda America

Distribution System Encompasses all of the distribution channels, processes and functions, including warehousing and transportation, that a product passes through on its way to the final customer.

Distribution The actual movement of products and materials between locations Handling of materials and products at receiving docks, storing products, packaging, and shipping Often called logistics Driving force today is speed Particularly important for Internet dot-coms

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

Materials Movement RECEIVING Storage Work center Work center Storage Work center Storage Shipping

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved. Figure 7.5Order Fulfillment at Amazon.com

Third-Party Logistics The term used to describe the outsourcing of logistics management.

Reverse Logistics Reverse logistics – the backward flow of goods returned to the supply chain Processing returned goods – Sorting, examining/testing, restocking, repairing – Reconditioning, recycling, disposing Gatekeeping – screening goods to prevent incorrect acceptance of goods Avoidance – finding ways to minimize the number of items that are returned

Distribution Centers and Warehousing Trend is for more frequent orders in smaller quantities Flow-through facilities and automated material handling Final assembly and product configuration may be done at the DC

Warehouse Management Systems Highly automated systems Controls item putaway, picking, packing, and shipping 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

A WMS

Vendor-Managed Inventory Stocking information is accessed using EDI A first step towards supply chain collaboration Increased speed, reduced errors, and improved service

Transportation The movement of a product from one location to another as it makes its way to the end-use customer Important element, often overlooked Common methods are railroads, trucking, water, air, intermodal, package carriers, and pipelines

Linking the Supply Chain with SAP

SC Design System: CPFR Collaborative Planning, Forecasting, and Replenishment  A system based on the notion that there should be cooperation among supply chain partners in planning, coordination of activities and information sharing, which in turn requires partners to agree on common goals (goal sharing)

CPFR Process Internet-based exchange of data and information Significant decrease in inventory levels and more efficient logistics Companies focus on core competencies

CPFR Results Nabisco and Wegmans – 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

Global Supply Chain Problems National and regional differences Customs, business practices, and regulations Foreign markets are not homogeneous Quality can be a major issue

Some Issues in Global Supply Chains – Language – Culture – Currency fluctuations – Political – Transportation costs – Local capabilities – Finance and economics – Environmental

Infrastructure Obstacles to Global Trade Some emerging markets lack suitable distribution systems, i.e. roads, rail systems Existing roads and ports may be inadequate Market instability, political instability Vertical integration is a common solution

1.Develop strategic objectives and tactics 2.Integrate and coordinate activities in the internal supply chain 3.Coordinate activities with suppliers & with customers 4.Coordinate planning and execution across the supply chain 5.Form strategic partnerships Creating an Effective Supply Chain

Supply Chain Performance Drivers 1.Quality 2.Cost 3.Flexibility 4.Velocity 5.Customer service

Velocity Inventory 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

 Barriers to integration of organizations  Getting top management on board  Small businesses  Variability and uncertainty  Long lead times  Dealing with trade-offs Challenges to Optimizing SCs

1.Lot-size-inventory 2.Inventory-transportation costs – Cross-docking 3.Lead time-transportation costs 4.Product variety-inventory – Delayed differentiation 5.Cost-customer service – Disintermediation Trade-offs in SCM

Techniques to Increase SC Efficiency Delayed differentiation – 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 + Cross Docking + Drop Shipping

Potential Solutions to SC Problems ProblemPotential Improvement BenefitsPossible Drawbacks Large inventories Smaller, more frequent deliveries Reduced holding costs Traffic congestion Increased costs Long lead times Delayed differentiation Disintermediation Quick responseMay not be feasible May need absorb functions Large number of parts ModularFewer parts Simpler ordering Less variety Cost Quality OutsourcingReduced cost, higher quality Loss of control VariabilityShorter lead times, better forecasts Able to match supply and demand Less variety

Critical Issues in SCM Increased strategic importance Emphasis on cost, quality,agility and customer service Technology management Increased conversion to lean production Just-in-time deliveries Few suppliers and vendor integration Increased outsourcing Globalization