1. 10 – 1 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Integration 10 For Operations Management, 9e by Krajewski/Ritzman/Malhotra © 2010 Pearson Education PowerPoint Slides by Jeff Heyl

2. 10 – 2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Integration The effective coordination of supply chain processes through the seamless flow of information up and down the supply chain A river that flows from raw material suppliers to consumers Upstream Downstream Mitigating the effects of supply chain disruptions

3. 10 – 3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Integration Upstream Tier 3Tier 2Tier 1 Downstream Information flows Cash flows Tomato suppliers Tomato paste factories Tomato grading stations Retail sales Consumers Ketchup factory Figure 10.1 – Supply Chain for a Ketchup Factory

4. 10 – 4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Dynamics Bullwhip effect Upstream members must react to the demand Slightest change in customer demand can ripple through the entire chain External causes Internal causes

5. 10 – 5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Dynamics Consumers daily demands Retailers daily orders to manufacturer Manufacturers weekly orders to package supplier Package suppliers weekly orders to cardboard supplier 9,000 7,000 5,000 3,000 0 Order quantity Month of April Day 1Day 30Day 1Day 30Day 1Day 30Day 1Day 30 Figure 10.2 – Supply Chain Dynamics for Facial Tissue

6. 10 – 6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Dynamics Integrated supply chains High degree of functional and organizational integration minimizes disruptions Integration must include linkages between the firm, its suppliers, and its customers SCOR model Plan Source Make Deliver Return

7. 10 – 7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Dynamics First-Tier SupplierService/Product Provider Support Processes External Suppliers Support Processes Supplier relationship process New service/ product development process Order fulfillment process Business- to-business (B2B) customer relationship process External Consumers Supplier relationship process New service/ product development process Order fulfillment process Business- to-business (B2B) customer relationship process Figure 10.3 – External Supply Chain Linkages

8. 10 – 8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. New Service or Product Development DesignAnalysisDevelopmentFull Launch Service or product not profitable Need to rethink the new offering or production process Post-launch review Figure 10.4 – New Service/Product Development Process

9. 10 – 9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supplier Relationship Process Sourcing Supplier selection Material costs Freight costs Inventory costs Annual material costs = pD Cycle inventory = Q /2 Pipeline inventory = dL Annual inventory costs = ( Q /2 + dL ) H Administrative costs

10. 10 – 10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supplier Relationship Process Total Annual Cost = pD + Freight costs + ( Q /2 + dL ) H + Administrative costs The total annual cost for a supplier is the sum of these costs: Other supplier selection criteria Green purchasing Supplier certification and evaluation

11. 10 – 11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Total Cost Analysis EXAMPLE 10.1 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?

12. 10 – 12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Total Cost Analysis Annual Freight Costs Shipping Quantity (units/shipment) Supplier10,00020,00030,000 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 Annual Inventory Shipping Administrative SupplierPrice/UnitCarrying Cost/UnitLead Time (days)Costs Belfast$100$20.0015$180.000 Hong Kong$96$19.2025$300.000 Shreveport$99$19.805$150.000

13. 10 – 13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Total Cost Analysis SOLUTION The average requirements per day are Each option must be evaluated with consideration for the shipping quantity using the following equation: Total Annual Cost =Material costs + Freight costs + Inventory costs + Administrative costs = pD + Freight costs + ( Q /2 + dL ) H + Administrative costs d = 300,000/250 = 1,200 keyboards

14. 10 – 14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Total Cost Analysis For example, consider the Belfast option for a shipping quantity of Q = 10,000 units. The costs are Material costs= pD = Freight costs= $380,000 Administrative costs= $180,000 Total Annual Cost= = (10,000 units/2 + 1200 units/day(15 days))$20/unit/year = $460,000 = $31,020,000 $30,000,000 + $380,000 + $460,000 + $180,000 = $30,000,000 ($100/unit)(300,000 units) Inventory costs= (cycle inventory + pipeline inventory) H = ( Q /2 + dL ) H

15. 10 – 15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. The total costs for all three shipping quantity options are similarly calculated and are contained in the following table. Total Cost Analysis Total Annual Costs for the Keyboard Suppliers Shipping Quantity Supplier10,00020,00030,000 Belfast Hong Kong Shreveport

16. 10 – 16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Total Annual Costs for the Keyboard Suppliers Shipping Quantity Supplier10,00020,00030,000 Belfast Hong Kong Shreveport The total costs for all three shipping quantity options are similarly calculated and are contained in the following table. Total Cost Analysis $30,387,000$30,415,000$30,434,000 $31,020,000$31,000,000$31,077,000 $30,352,800$30,406,800$30,465,800

17. 10 – 17 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.1 ABC Electric Repair is a repair facility for several major electronic appliance manufactures. ABC 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. ABC operates 250 days a year. The following data are available for two suppliers. Kramer and Sunrise, for the part: Freight Costs Shipping Quantity ( Q ) Supplier2,00010,000 Price/Unit ( p ) Carrying Cost/Unit ( H ) Lead Time ( L )(days) Administrative Costs Kramer$30,000$20,000$5.00$1.005$10,000 Sunrise$28,000$18,000$4.90$0.989$11,000

18. 10 – 18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.1 SOLUTION The daily requirements for the relay switch are: 100,000/250 = 400 units d = 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

19. 10 – 19 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.1 Kramer Q = 2,000: Q = 10,000: The analysis reveals that using Sunrise and a shipping quantity of 10,000 units will yield the lowest annual total costs. Sunrise Q = 2,000: Q = 10,000: ($5.00)(100,000) + $30,000 + (2,000/2 + 400(5))($1) + $10,000 = $543,000 ($5.00)(100,000) + $20,000 + (10,000/2 + 400(5))($1) + $10,000 = $537,000 ($4.90)(100,000) + $28,000 + (2,000/2 + 400(9))($0.98) + $11,000 = $538,508 (4.90)(100,000) + $18,000 + (10,000/2 + 400(9))($0.98) + $11,000 = $527,428

20. 10 – 20 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using a Performance Matrix The management of Compton Electronics has done a total cost analysis for three international suppliers of keyboards (see Example 10.1). 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 CriterionWeightBelfastHong KongShreveport Total Cost25589 On-Time Delivery30967 Consistent Quality30896 Environment15968

21. 10 – 21 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using a Performance Matrix SOLUTION 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 Score CriterionWeightBelfast Hong Kong Shreveport Total Cost25589 On-Time Delivery 30967 Consistent Quality 30896 Environment15968 WS = Similarly, the weighted score for Hong Kong is 740, and for Shreveport, 735. Consequently, Belfast is the preferred supplier. (25 5) + (30 9) + (30 8) + (15 9) = 770

22. 10 – 22 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.2 ABC 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 CriterionWeightKramerSunrise Total annual cost3045 Consistent quality4034 Delivery speed3053 Which supplier should ABC select, given these criteria and scores?

23. 10 – 23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.2 SOLUTION Using the preference matrix approach, the weighted scores for each supplier are: Scores CriterionWeightKramerSunrise Total annual cost 3045 Consistent quality 4034 Delivery speed 3053 WS Kramer = WS Sunrise = Based on the weighted scores, ABC should select Sunrise even though delivery speed performance would be better with Kramer. (30 4) + (40 3) + (30 5) = 390 (30 5) + (40 4) + (30 3) = 400

24. 10 – 24 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supplier Relationship Process Design collaboration Early supplier involvement Presourcing Value analysis Negotiation Obtain an effective contract that meets the price, quality, and delivery requirements Competitive orientation Cooperative orientation

25. 10 – 25 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supplier Relationship Process Buying Procurement of the service or material from the supplier e-purchasing Loss of control Information exchange Radio frequency identification (RFID) Vendor managed inventories (VMI)

26. 10 – 26 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Order Fulfillment Process Customer demand planning Facilitates collaboration Demand forecasts Supply planning Inventory management Operations planning and scheduling Resource planning Production Logistics Ownership Facility location Mode selection Capacity Cross-docking

27. 10 – 27 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 4 Kitting 8 Delivery 7 Boxing and shipping Order Fulfillment Process 6 Testing and system integration 3 Traveler Sheet 2 JIT Inventory 1 (d) Direct relationship sales 1 (a) Web site 1 (b) Voice-to-voice 1 (c) Face-to-face 5 Assemble to order Figure 10.5 – Dells Order Fulfillment Process

28. 10 – 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Expected Value EXAMPLE 10.3 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.

29. 10 – 29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Expected Value Notice that the sum of the probabilities must equal 1.0. If Tower Distributors wants to minimize the expected cost of operations, how many trucks should it have? Requirements (miles/month)100,000150,000200,000250,000 Fleet Size (trucks)10152025 Probability0.20.30.40.1

30. 10 – 30 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Expected Value SOLUTION We use the expected value decision rule to evaluate the alternative fleet sizes where we want to minimize the expected monthly cost. To begin, the monthly cost, C, must be determined for each possible combination of fleet size and requirements. The cost will depend on whether additional capacity must be rented for the month. For example, consider the 10 truck fleet size alternative, which represents a capacity of 100,000 miles per month.

31. 10 – 31 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Expected Value C =monthly capital cost of ownership + variable operating cost per month + rental costs if needed C (100,000 miles/month) = C (150,000 miles/month) = C (200,000 miles/month) = C (250,000 miles/month) = ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) = $121,000 ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(150,000 miles – 100,000 miles) = $221,000 ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(200,000 miles – 100,000 miles) = $321,000 ($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(250,000 miles – 100,000 miles) = $421,000

32. 10 – 32 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Expected Value Next, calculate the expected value for the 10 truck fleet size alternative as follows: Expected Value (10 trucks) = Using similar logic, we can calculate the expected costs for each of the other fleet-size options: Expected Value (15 trucks) = Expected Value (20 trucks) = Expected Value (25 trucks) = 0.2($121,000) + 0.3($221,000) + 0.4($321,000) + 0.1($421,000) = $261,000 0.2($131,500) + 0.3($181,500) + 0.4($281,500) + 0.1($381,000) = $231,500 0.2($142,000) + 0.3($192,000) + 0.4($242,000) + 0.1($342,000) = $217,000 0.2($152,500) + 0.3($302,500) + 0.4($252,500) + 0.1($302,500) = $222,500

33. 10 – 33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.3 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 he should 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)200400600 Number of teams123 Probability0.200.500.30 How many teams should Schneider hire?

34. 10 – 34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.3 SOLUTION 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 (One Team) = 0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800 $5,000 + $8,000 + $8,000 = $21,000 $5,000 + $8,000 = $13,000 $5,000

35. 10 – 35 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.3 A table of the complete results is below. Weekly Labor Requirements In-House200 hrs400 hrs600 hrsExpected Value One team Two teams Three teams

36. 10 – 36 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 10.3 A table of the complete results is below. Based on the expected value decision rule, Schneider should employ two teams at the warehouse. $5,000$13,000$21,000$13,800 $10,000 $18,000$12,400 $15,000 Weekly Labor Requirements In-House200 hrs400 hrs600 hrsExpected Value One team Two teams Three teams

37. 10 – 37 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. The Customer Relationship Process Customer relationship management (CRM) programs identify, attract, and build relationships with customers Marketing Electronic commerce (e-commerce) Business-to-Consumer (B2C) systems Business-to-Business (B2B) systems

38. 10 – 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. The Customer Relationship Process Customer service Helps customers with answers to questions, resolves problems, and, provides general information Call centers Order placement Execute a sale, register the specifics, confirm acceptance, and track progress Internet provides advantage

39. 10 – 39 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. The levers Sharing data Collaborative activities Reduce replenishment lead times Reduce order lot sizes Ration short supplies Use everyday low pricing (EDLP) Be cooperative and trustworthy Levers for Improved Supply Chain Performance

40. 10 – 40 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Performance measures Costs Time Quality Environmental impact Levers for Improved Supply Chain Performance

41. 10 – 41 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Performance Measures TABLE 10.1 | SUPPLY CHAIN PROCESS MEASURES Customer RelationshipOrder FulfillmentSupplier Relationship Percent of orders taken accurately Time to complete the order placement process Customer satisfaction with the order placement process Customers evaluation of firms environmental stewardship 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 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

42. 10 – 42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chains and the Environment Sustainability Environmental stewardship Environmental protection Productivity improvement Risk minimization Innovation Reverse logistics Planning, implementing, and controlling flows from consumption back to origin Closed-loop supply chain

43. 10 – 43 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Closed Loop Supply Chain Waste disposal Recycle parts and materials RemanufactureDirect reuseRepair Product information Forward logistics flow Reverse logistics flow Returns processor Figure 10.6 – Flows in a Closed-Loop Supply Chain CustomersDistribution/RetailersProduction process New service/product development process

44. 10 – 44 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.