Supply Chain Management

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

Components of Supply (Value) Chains
Supply Component: Starts at the beginning of the SC and ends with the internal operations of the organization. Demand Component: Starts ath the point where the organization’s output is delivered to its immediate cusotmer and ends withp the final customer in the chain. Demand chain is the sales and distributon portion of the value chain

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

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

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

The Supply-Chain Material Flow Credit Flow Supplier Manufacturer
VISA Material Flow Credit Flow Supplier Manufacturer Retailer Consumer Supplier Wholesaler Retailer Order Cash Schedules Flow Flow

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

Typical Supply Chain for a Service
Supplier } Storage Service Customer

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 as well as the associated information flows.

Key Issues Related to SCM
Determining the appropriate level of outsourcing Managing procurement Managing suppliers Managing customer relationships Being able to quickly identify problems and respond to them Flow management Managing risk

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

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

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

Strategic &Operational Decisions in Supply Chains
Two types of decisions in supply chain management Strategic – design and policy Operational – day-today activities

Supply Chain Issues Operating Issues Tactical Issues Strategic Issues
Quality control Production planning and control Inventory policies Purchasing policies Production policies Transportation policies Quality policies Design of the supply chain, partnering Operating Issues Tactical Issues Strategic Issues

Processes Involved in SCM
Acquiring customer orders Procuring materials and components from suppliers Producing or manufacturing products Filling customer orders Logistics ( thepart of the SC involved with the forward and reverse flow of goods, services, cash and information

Typical Supply Chain Activities
Purchasing Receiving Storage Operations Production Distribution Major decision areas: Location Production Inventory Distribution

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

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

Trends in SCM Reevaluation of outsourcing Risk management
Inventory management Lean supply chains Sustainability

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

Factors That Contribute to the Increased Need for Effective Supply Chain Management:
need toimprove 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
Organization Benefit Campbell Soup Doubled inventory turnover rate Hewlett-Packard Cut supply costs 75% Sport Obermeyer Doubled profits and increased sales 60% National Bicycle Increased market share from 5% to 29% Wal-Mart Largest and most profitable retailer in the world

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 Inventory velocity Event-management capability The ability to detect and respond to unplanned events Measuring SC Performance: Performance metrics

Creating an Effective Supply Chain
An Effective Supply Chain requires linking the market, distribution channels processes, and suppliers Develop strategic objectives and tactics Integrate and coordinate activities in the internal supply chain Coordinate activities with suppliers and with distributors Coordinate planning and execution across the supply chain Form strategic partnerships

Strategic Sourcing Analyzing the procurement process to lower costs by reducing waste and non-value-added activities, increase profits, reduce risks and improve supplier performance

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

Supply Chain Performance Drivers
Quality Cost Flexibility Velocity Customer service

Measuring SC Performance: SCOR Metrics
Perspective Metrics Reliability On-time delivery Order fulfillment lead time Fill rate (fraction of demand met from stock) Perfect order fulfillment Flexibility Supply chain response time Upside production flexibility Expenses Supply chain management costs Warranty cost as a percent of revenue Value added per employee Assets/utilization Total 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

Inventory Management within a SC
Use of centralized inventories Use of decentralized inventories

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

Inventories in a SC: Bullwhip Effect
The magnification of variability in orders in the supply-chain Wholesaler’s Orders Manufacturer’s Orders Retailer’s Orders Quantity Order Quantity Order Quantity Order Time Time Time 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
Amount of inventory = Tier 2 Suppliers Tier 1 Suppliers Producer Distributor Retailer Final Customer

Vendor-Managed Inventories
The use of a local supplier to maintain inventory for the manufacturer Stocking information is accessed using EDI A first step towards supply chain collaboration Increased speed, reduced errors, and improved service

Order Fulfillment Approaches to order fulfillment Engineer-to-Order
Make-to-Order Assemble-to-Order Make-o-Stock

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

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 documentsincluding purchase orders, shipping notices, and debit or credit memos) 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

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

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)

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

Build-to-Order Cars over the Internet

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

Advantages of E-Business (1 of 2)
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 (2 of 2)
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

Disadvantages of E-Business
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

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

Procurement Development and implementation of purchasing plans for products and services that support operations strategies

Purchasing 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.

Importance of Purchasing
Purchasing is important because: - it is a major cost center - affect quality of final product - aids strategy of low cost, response and differentiation

Goals of Purchasing Develop and implement purchasing plans for products and services that support operations strategies. Develop, evaluate, and determine the best supplier, price, and delivery for the products and services that can be best obtained externally

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

Purchasing Interfaces
Legal Accounting Operations Data processing Design Receiving Suppliers

Purchasing Cycle Requisition received Supplier selected
Legal Accounting Operations Data processing Design Receiving Suppliers Requisition received Supplier selected Order is placed Orders are monitored Orders are received

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

Suppliers Choosing suppliers
Evaluating sources of supply (vendor analysis) Supplier audits Supplier certification Supplier relationships Supplier partnerships Strategic partnering

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

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

Supplier as a Partner Aspect Adversary Partner Number of suppliers
Many One or a few Length of relationship May be brief Long-term Low price Major consideration Moderately important Reliability May not be high High Openness Low Quality May be unreliable; buyer inspects At the source; vendor certified Volume of business May be low Flexibility Relatively low Relatively high Location Widely dispersed Nearness is important

Supplier Partnerships
Ideas from suppliers could lead to improved competitiveness Reduce cost of making the purchase Reduce transportation costs Reduce production costs Improve product quality Improve product design Reduce time to market Improve customer satisfaction Reduce inventory costs Introduce new products or services

Collaborative Planning, Forecasting, and Replenishment
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 Eliminates typical order processig

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

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

Logistics Wall-Mart Case
Wal-Mart has a satellite network for electronic data interchange that allows vendors to directly access point-of-sale data in real time, enabling them to improve their forecasting and inventory management. Wal-Mart also uses the system for issuing purchase orders and receiving invoices from its vendors.

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

Logistics Refers to the movement of materials, services, cash and information within a facility and to incoming and outgoing shipments of goods and materials in a supply chain. Includes: movement within a facility, overseeing incoming and outgoing shipments of goods and materials, and information flow throughout the supply chain (RFID to track goods)

Logistics Management Integrates all materials functions Purchasing
Inventory management Production control Inbound (incoming, outgoing) traffic Warehousing and stores Incoming quality control Objective: Efficient, low cost operations

Materials Movement RECEIVING Storage Work center Work center Shipping

Figure 7.5 Order 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

Transportation The movement of products and materials 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

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 Lead times 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

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

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

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

Trade-offs in SCM Lot-size-inventory (bullwhip)
Inventory-transportation costs Cross-docking Lead time-transportation costs Product variety-inventory Delayed differentiation Cost-customer service Disintermediation

Techniques to Increase SC Efficiency
Delayed differentiation Postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network. Production of standard components and subassemblies, which are held until late in the process to add differentiating features Channel assembly (sending distributors the individual components and modules rather than finished goods) Disintermediation Reducing one or more steps in a supply chain by cutting out one or more intermediaries + Cross Docking + Drop Shipping (supplier shipping directly to the end customer, rather than the seller)

Other Techniques to Increase SC Efficiency
Outsourcing Blanket orders (a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship Vendor managed inventory systems Electronic ordering and funds transfer (paperless ordering, payment by wire) Internet purchasing (e-procurement)

Potential Solutions to SC Problems
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 Cost Quality Outsourcing Reduced cost, higher quality Loss of control Variability Shorter lead times, better forecasts Able to match supply and demand

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

Supply-Chain Performance Compared
Typical Firms Benchmark Firms Administrative costs as percent of purchases 3.3% 0.8% Lead time (weeks) 15 8 Time spent in placing 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

Supply Chain Management

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