1. Integrating the Supply Chain Chapter 14

2. What is Supply Chain Integration?
The effective coordination of supply chain processes though the seamless flow of information up and down the supply chain.

3. Supply Chain Integration
Upstream
Downstream
Tier 3
Tier 2
Tier 1
Tomato suppliers
Tomato paste factories
Tomato grading stations
Retail sales
Consumers
Ketchup factory
Information flows
Cash flows
Figure 14.1

4. Supply Chain Disruptions
External Causes
Environmental Disruptions
Supply Chain Complexity
Loss of Major Accounts
Loss of Supply
Customer-Induced Volume Changes
Service and Product Mix Changes
Late Deliveries
Underfilled Shipments

5. Supply Chain Disruptions
Internal Causes
Internally Generated Shortages
Quality Failures
Poor Supply Chain Visibility
Engineering Changes
Order Batching
New Service or Production Introductions
Service or Product Promotions
Information Errors

6. Supply Chain Dynamics Bullwhip Effect
The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the chain.

7. Supply Chain Dynamics The Bullwhip Effect Order quantity
Package supplier’s weekly orders to cardboard supplier
Retailers’ daily orders to manufacturer
Manufacturer’s weekly orders to package supplier
Consumers’ daily demands
9,000
7,000
5,000
3,000
Order quantity
Month of April
Day 1
Day 30
The Bullwhip Effect
Figure 14.2

8. Integrated Supply Chains
External Supply Chain Linkages
First-Tier Supplier
Service/Product Provider
Support Processes
External Suppliers
Supplier relationship process
New service/ product development process
Order fulfillment process
Business-to-business (B2B) customer relationship process
External Consumers
Business-to-consumer (B2C) customer relationship process
Figure 14.3

9. Integrated Supply Chains
SCOR Model
Plan
Source
Make
Delivery
Return

10. SCOR Model
Figure 14.4

11. New Service/Product Development
Design
Service or product not profitable
Need to rethink the new offering or production process
Analysis
Development
Post-launch review
Full Launch
Figure 14.5

12. Supplier Relationship Process
Supplier selection
Material costs
Annual material costs = pD
Freight costs
Inventory costs
Cycle inventory = Q/2
Pipeline inventory = 𝒅 L
Annual inventory costs = (Q/2 + 𝒅 L) H
Administrative costs
Total Annual Cost =
pD + Freight costs + (Q/2 + 𝒅 L) H + administrative costs.

13. Example 14.1
Compton Electronics manufactures laptops for major computer manufacturers. A key element of the laptop is the keyboard. Compton has identified three potential suppliers for the keyboard, each located in a different part of the world. Important cost considerations are the price per keyboard, freight costs, inventory costs, and contract administrative costs. The annual requirements for the keyboard are 300,000 units. Assume Compton has 250 business days a year. Managers have acquired the following data for each supplier. Which supplier provides the lowest annual total cost to Compton?

14. Example 14.1 Annual Freight Costs Shipping Quantity (units/shipment)
Supplier
10,000
20,000
30,000
Belfast
$380,000
$260,000
$237,000
Hong Kong
$615,000
$547,000
$470,000
Shreveport
$285,000
$240,000
$200,000
Keyboard Costs and Shipping Lead Times
Supplier
Price/Unit
Annual Inventory Carrying Cost/Unit
Shipping Lead Time (days)
Administrative Costs
Belfast
$100
$20.00 15
$180,000
Hong Kong
$96
$19.20 25
$300,000
Shreveport
$99
$19.80 5
$150,000

15. Example 14.1 d = 300,000/250 = 1,200 keyboards Total Annual Cost =
The average requirements per day are:
d =
300,000/250 = 1,200 keyboards
Total Annual Cost =
pD + Freight costs + (Q/2 + dL)H + Administrative costs

16. Example 14.1 BELFAST: Q = 10,000 units. Material costs = pD =
= $30,000,000
($100/unit)(300,000 units)
Freight costs = $380,000
Inventory costs = (cycle inventory + pipeline inventory)H
= (Q/2 + 𝒅 L)H
= (10,000 units/ units/day(15 days))$20/unit/year
= $460,000
Administrative costs = $180,000
Total Annual Cost =
= $31,020,000
$30,000,000 + $380, $460,000 + $180,000

17. Total Annual Costs for the Keyboard Suppliers
Example 14.1
The total costs for all three shipping quantity options are similarly calculated and are contained in the following table.
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier
10,000
20,000
30,000
Belfast
Hong Kong
Shreveport

18. Total Annual Costs for the Keyboard Suppliers
Example 14.1
The total costs for all three shipping quantity options are similarly calculated and are contained in the following table.
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier
10,000
20,000
30,000
Belfast
Hong Kong
Shreveport
$31,020,000
$31,000,000
$31,077,000
$30,387,000
$30,415,000
$30,434,000
$30,352,800
$30,406,800
$30,465,800

19. Green Purchasing
Green purchasing – The process of identifying, assessing, and managing the flow of environmental waste and finding ways to reduce it and minimize its impact on the environment.
Choose environmentally conscious suppliers.
Use and substantiate claims such as green, biodegradable, natural, and recycled.
Use sustainability as criteria for certification.

20. Example 14.2
The management of Compton Electronics has done a total cost analysis for three international suppliers of keyboards (see Example 14.1). Compton also considers on-time delivery, consistent quality, and environmental stewardship in its selection process. Each criterion is given a weight (total of 100 points), and each supplier is given a score (1 = poor, 10 = excellent) on each criterion. The data are shown in the following table.
Score
Criterion
Weight
Belfast
Hong Kong
Shreveport
Total Cost 25 5 8 9
On-Time Delivery 30 6 7
Consistent Quality
Environment 15

21. Example 14.2
The weighted score for each supplier is calculated by multiplying the weight by the score for each criterion and arriving at a total.
For example, the Belfast weighted score is:
Belfast =
(25  5) + (30  9) + (30  8) + (15  9) = 770
Preferred
Hong Kong =
(25  8) + (30  6) + (30  9) + (15  6) = 740
Shreveport =
(25  9) + (30  7) + (30  6) + (15  8) = 735

22. Supplier Relationship Process
Design collaboration
Early supplier involvement
Presourcing
Value analysis
Negotiation
Competitive orientation
Cooperative orientation

23. Supplier Relationship Process
Buying
Electronic Data Interchange (EDI)
Catalog Hubs
Exchanges
Auctions
Locus of Control

24. Supplier Relationship Process
Information Exchange
Radio Frequency Identification (RFID)
Vendor-Managed Inventories (VMI)

25. Order Fulfillment Process
Customer Demand Planning
Supply Planning
Production
Logistics
Ownership
Facility location
Mode selection
Capacity level
Cross-docking

26. Example 14.3
Tower Distributors provides logistical services to local manufacturers. Tower picks up products from the manufacturers, takes them to its distribution center, and then assembles shipments to retailers in the region. Tower needs to build a new distribution center; consequently, it needs to make a decision on how many trucks to have. The monthly amortized capital cost of ownership is $2,100 per truck. Operating variable costs are $1 per mile for each truck owned by Tower. If capacity is exceeded in any month, Tower can rent trucks at $2 per mile. Each truck Tower owns can be used 10,000 miles per month. The requirements for the trucks, however, are uncertain. Managers have estimated the following probabilities for several possible demand levels and corresponding fleet sizes.

27. Example 14.3
Requirements (miles/month)
100,000
150,000
200,000
250,000
Fleet Size (trucks) 10 15 20 25
Probability
0.2
0.3
0.4
0.1
If Tower Distributors wants to minimize the expected cost of operations, how many trucks should it have?

28. Example 4.3
C = monthly capital cost of ownership + variable operating cost per month + rental costs if needed
C(100,000 miles/month) =
($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) = $121,000
C(150,000 miles/month) =
($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(150,000 miles – 100,000 miles)
= $221,000
C(200,000 miles/month) =
($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(200,000 miles – 100,000 miles)
= $321,000
C(250,000 miles/month) =
($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(250,000 miles – 100,000 miles)
= $421,000

29. Example 14.3
Next, calculate the expected value for the 10 truck fleet size alternative as follows:
Expected Value (10 trucks) =
0.2($121,000) + 0.3($221,000) ($321,000) + 0.1($421,000) = $261,000
Using similar logic, we can calculate the expected costs for each of the other fleet-size options:
Expected Value (15 trucks) =
0.2($131,500) + 0.3($181,500) ($281,500) + 0.1($381,000) = $231,500
Expected Value (20 trucks) =
0.2($142,000) + 0.3($192,000) ($242,000) + 0.1($342,000) = $217,000
Expected Value (25 trucks) =
0.2($152,500) + 0.3($202,500) ($252,500) + 0.1($302,500) = $222,500
The preferred option is 20 trucks.

30. The Customer Relationship Process
Marketing
Business-to-Consumer Systems
Business-to-Business Systems
Order Placement
Cost Reduction
Revenue Flow Increase
Global Access
Pricing Flexibility
Customer Service

31. Supply Chain Risk Management
The practice of managing the risk of any factor or event that can materially disrupt a supply chain, whether within a single firm or across multiple firms.

32. Supply Chain Risk Management
Operational Risks – Threats to the effective flow of materials, services, and products in a supply chain
Strategic Alignment
Upstream/Downstream Supply Chain Integration
Visibility
Flexibility and Redundancy
Short Replenishment Lead Times
Small Order Lot Sizes
Rationing Short Supplies
Everyday low pricing (EDLP)
Cooperation and Trustworthiness

33. Supply Chain Risk Management
Financial Risks – Threats to the financial flows in a supply chain, such as prices, costs, and profits.
Low Cost Hopping
Hedging
Production Shifting
Futures Contract

34. Supply Chain Risk Management
Security Risks - Threats to a supply chain that could potentially damage stakeholders, facilities, or operations.
Access Control
Physical Security
Shipping and Receiving
Transportation Service Provider
ISO 28000

35. Performance Measures Customer Relationship Order Fulfillment
Supplier Relationship
Percent of orders taken accurately
Time to complete the order placement process
Customer satisfaction with the order placement process
Customer’s evaluation of firm’s environmental stewardship
Percent of business lost because of supply chain disruptions
Percent of incomplete orders shipped
Percent of orders shipped on-time
Time to fulfill the order
Percent of botched services or returned items
Cost to produce the service or item
Customer satisfaction with the order fulfillment process
Inventory levels of work-in-process and finished goods
Amount of greenhouse gasses emitted into the air
Number of security breaches
Percent of suppliers’ deliveries on-time
Suppliers’ lead times
Percent defects in services and purchased materials
Cost of services and purchased materials
Inventory levels of supplies and purchased components
Evaluation of suppliers’ collaboration on streamlining and waste conversion
Amount of transfer of environmental technologies to suppliers

36. Carrying Cost/Unit (H)
Solved Problem 1
Eagle Electric Repair is a repair facility for several major electronic appliance manufactures. Eagle wants to find a low-cost supplier for an electric relay switch used in many appliances. The annual requirements for the relay switch (D) are 100,000 units. Eagle operates 250 days a year. The following data are available for two suppliers. Kramer and Sunrise, for the part:
Freight Costs
Shipping Quantity (Q)
Supplier
2,000
10,000
Price/Unit (p)
Carrying Cost/Unit (H)
Lead Time (L)(days)
Administrative Costs
Kramer
$30,000
$20,000
$5.00
$1.00 5
$10,000
Sunrise
$28,000
$18,000
$4.90
$0.98 9
$11,000

37. We must calculate the total annual costs
Solved Problem 1
The daily requirements for the relay switch are:
d =
100,000/250 = 400 units
We must calculate the total annual costs
for each alternative:
Total annual cost = Material costs + Freight costs + Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL) H + Administrative costs

38. Solved Problem 1
Kramer
Q = 2,000:
Q = 10,000:
($5.00)(100,000) + $30,000 + (2,000/ (5))($1) + $10,000
= $543,000
($5.00)(100,000) + $20,000 + (10,000/ (5))($1) + $10,000
= $537,000
Sunrise
Q = 2,000:
Q = 10,000:
($4.90)(100,000) + $28,000 + (2,000/ (9))($0.98) + $11,000
= $533,508
(4.90)(100,000) + $18, (10,000/ (9))($0.98) + $11,000
= $527,428
The analysis reveals that using Sunrise and a shipping quantity of 10,000 units will yield the lowest annual total costs.

39. Solved Problem 2
Eagle Electric Repair wants to select a supplier based on total annual cost, consistent quality, and delivery speed. The following table shows the weights management assigned to each criterion (total of 100 points) and the scores assigned to each supplier (Excellent = 5, Poor = 1).
Scores
Criterion
Weight
Kramer
Sunrise
Total annual cost 30 4 5
Consistent quality 40 3
Delivery speed
Which supplier should Eagle select, given these criteria and scores?

40. Solved Problem 2
Using the preference matrix approach, the weighted scores for each supplier are:
Scores
Criterion
Weight
Kramer
Sunrise
Total annual cost 30 4 5
Consistent quality 40 3
Delivery speed
WSKramer =
(30  4) + (40  3) + (30  5) = 390
WSSunrise =
(30  5) + (40  4) + (30  3) = 400
Preferred

41. Solved Problem 3 How many teams should Schneider hire?
Schneider Logistics Company has built a new warehouse in Columbus, Ohio, to facilitate the consolidation of freight shipments to customers in the region. How many teams of dock workers should he hire to handle the cross docking operations and the other warehouse activities? Each team costs $5,000 a week in wages and overhead. Extra capacity can be subcontracted at a cost of $8,000 a team per week. Each team can satisfy 200 labor hours of work a week. Management has estimated the following probabilities for the requirements:
Requirements (hours/wk)
200
400
600
Number of teams 1 2 3
Probability
0.20
0.50
0.30
How many teams should Schneider hire?

42. Solved Problem 3
We use the expected value decision rule by first computing the cost for each option for each possible level of requirements and then using the probabilities to determine the expected value for each option. The option with the lowest expected cost is the one Schneider will implement. We demonstrate the approach using the “one team” in-house option.
One Team In-House
C(200) =
C(400) =
C(600) =
Expected Value =
$5,000
$5,000 + $8,000 = $13,000
$5,000 + $8,000 + $8,000 = $21,000
0.20($5,000) ($13,000) ($21,000) = $13,800

43. Weekly Labor Requirements
Solved Problem 3
A table of the complete results is below.
Weekly Labor Requirements
In-House
200 hrs
400 hrs
600 hrs
Expected Value
One team
Two teams
Three teams

44. Weekly Labor Requirements
Solved Problem 3
A table of the complete results is below.
Weekly Labor Requirements
In-House
200 hrs
400 hrs
600 hrs
Expected Value
One team
Two teams
Three teams
$5,000
$13,000
$21,000
$13,800
$10,000
$18,000
$12,400
$15,000
Based on the expected value decision rule,
Schneider should employ two teams at the warehouse.