1. Supply Chain Management
Chapter 15
MIS 373: Basic Operations Management

2. Learning Objectives After this lecture, students will be able to
Explain the terms supply chain and logistics
Discuss the importance of supply chain management
Describe what bullwhip effect is
Explain the causes and remedies for the bullwhip effect
MIS 373: Basic Operations Management

3. Starbucks Global Supply Chain
[YouTube] A Behind the Scenes Look at Starbucks Global Supply Chain

4. Supply Chain Supply Chain: Logistics:
the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service
Sometimes referred to as value chains
Value is added as goods and services progress through the chain.
Logistics:
the part of a supply chain involved with the forward and reverse flow of goods, services, cash, and information.
MIS 373: Basic Operations Management

5. Typical Supply Chains
Supplier
Storage
Manufacturing
Distributor
Customer
Retailer
Supplier
Storage
Service
Customer
Every business organization is part of at least one supply chain, and many are part of multiple supply chains
MIS 373: Basic Operations Management

6. Supply Chain Management
Supply Chain Management (SCM)
The strategic coordination of business functions within a business organization and throughout its supply chain for the purpose of integrating supply and demand management
Supply:
From the beginning of the chain to the internal operations of the organization
Demand:
From the organization's output delivery to its immediate customer to the final customer in the chain
MIS 373: Basic Operations Management

7. Supply Chain Management
Supply chain strategy alignment
Aligning supply and distribution strategies with organizational strategy.
Deciding on the degree to which outsourcing will be employed.
Network configuration
Determining the number and location of suppliers, warehouses, production/operations facilities, distribution centers.
MIS 373: Basic Operations Management

8. Why so much interest in SCM?
As manufacturing becomes more efficient (or is outsourced), companies look for ways to reduce costs
Several significant success stories. Efficient SCM gives Walmart & others an important edge
Web-based models for supply chains:
Online retailers
B2B business models.
MIS 373: Basic Operations Management

9. Key SCM Issues
The goal of SCM is to match supply to demand as effectively and efficiently as possible
Key issues:
Determining appropriate levels of outsourcing
Managing procurement
Managing suppliers
Managing customer relationships
Being able to quickly identify problems and respond to them
Managing risk
MIS 373: Basic Operations Management

10. Flow Management Three types of flow management
Product and service flow
Involves movement of goods and services from suppliers to customers as well as handling customer service needs and product returns
Information flow
Involves sharing forecasts and sales data, transmitting orders, tracking shipments, and updating order status
Financial flow
involves credit terms, payments, and consignment and title ownership arrangements
MIS 373: Basic Operations Management

11. Outsourcing
Transfer or contracting (non productive) internal activities (process) to outside vendors
e.g.: IT, accounting, legal, logistics
Utilize the efficiency that comes with specialization
Make-or-Buy analysis
MIS 373: Basic Operations Management

12. Benefits & Risks of Outsourcing
Lower prices may result from lower labor costs
The ability of the organization to focus on its core strengths
Permits the conversion of some fixed costs to variable costs
It can free up capital to address other needs
Some risks can be shifted to the supplier
The ability to take advantage of a supplier’s expertise
Makes it easier to expand outside of the home country
Risks
Inflexibility due to longer lead times
Increased transportation costs
Language and cultural differences
Loss of jobs
Loss of control
Lower productivity
Loss of business knowledge
Knowledge transfer and intellectual property concerns
Increased effort required to manage the supply chain
MIS 373: Basic Operations Management

13. Supply Chain Risks Supply Chain Risks Supply chain disruption
Natural disasters
Supplier problems
Quality issues
Another form of disruption that may disrupt supplies and lead to product recalls, liability claims, and negative publicity
Loss of control of sensitive information
If suppliers divulge sensitive information to competitors, it can weaken a firm’s competitive position
MIS 373: Basic Operations Management

14. Risk Management Risk management
Involves identifying risks, assessing their likelihood of occurring and their potential impact and then developing strategies for addressing those risks.
Strategies for addressing risk include:
Risk avoidance
Risk reduction
Risk sharing
Key elements of successful risk management include:
Know your suppliers
Provide supply chain visibility
Develop event-response capability
MIS 373: Basic Operations Management

15. Global Supply Chains Global supply chains Complexities
Product design often uses inputs from around the world
Some manufacturing and service activities are outsourced to countries where labor and/or materials costs are lower
Products are sold globally
Complexities
Language and cultural differences
Currency fluctuations
Political instability
Increasing transportation costs and lead times
Increased need for trust amongst supply chain partners
MIS 373: Basic Operations Management

16. Management Responsibility: Tactical and Operational
Forecasting
Sourcing
Operations Planning
Managing inventory
Transportation planning
Collaborating
Operational
Scheduling
Receiving
Transforming
Order fulfilling
Managing inventory
Shipping
Information sharing
Controlling
MIS 373: Basic Operations Management

17. Supplier Management Vendor analysis Supplier audit
Evaluating the sources of supply in terms of price, quality, reputation, and service
Supplier audit
A means of keeping current on suppliers’ production (or service) capabilities, quality and delivery problems and resolutions, and performance on other criteria
Supplier certification
Involves a detailed examination of a supplier’s policies and capabilities
The process verifies the supplier meets or exceeds the requirements of a buyer
MIS 373: Basic Operations Management

18. Supplier Relationship Management
Type of relationship is often governed by the duration of the trading relationship
Short-term
Oftentimes involves competitive bidding
Minimal interaction
Medium-term
Often involves an ongoing relationship
Long-term
Often involves greater cooperation that evolves into a partnership
MIS 373: Basic Operations Management

19. Choosing Suppliers Quality and quality assurance Flexibility Location
Procedures for quality assurance and quality control
Flexibility
For changes in delivery schedules, quantity, product or service changes
Location
Nearby?
Price
Competitiveness, willingness to negotiate, cooperate to reduce prices
Reputation and Financial Stability
Supplier reputation, its financial stability
Lead times and on-time delivery
Procedures to assure on-time delivery and problem correction
Other accounts
Dependence on other customers and their priority
MIS 373: Basic Operations Management

20. Supplier Partnerships
More organizations are seeking to establish partnerships with others in their supply chain:
Fewer suppliers, long term relationships, sharing of information (forecasts, sales data, problem alerts), cooperation in planning
Benefits:
improved operations: higher quality, increased delivery speed and reliability, lower inventories, lower costs, higher profits. Higher supplier flexibility in accepting changes (delivery schedules, quality, quantity), suppliers can help in identifying problems and offer suggestions
Aspect
Adversary
Partner
Number of suppliers
Many; play one against the others
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 due to many suppliers
Flexibility
Relatively low
Relatively high
Location
Widely dispersed
Nearness is important for short lead time and quick service
MIS 373: Basic Operations Management

21. Strategic SCM Information technology Strategic partnerships
Integrating systems and sharing information (forecasts, inventory status, shipments etc.) throughout the SC.
Strategic partnerships
Choice of partners, level of partnership.
Distribution strategy
Centralized or decentralized distribution. In-house distribution or third-party logistics.
Uncertainty and risk reduction
Identifying potential risks and deciding on acceptable risk level.
Capacity planning
Assessing long term capacity needs and the degree of flexibility
Products and services
New products and services selection and design.
MIS 373: Basic Operations Management

22. Logistics Logistics Logistics Management
The part of the SC involved with the forward and reverse flow of goods, services, cash, and information.
Logistics Management
Management of :
inbound and outbound transportation
material handling
Warehousing
Inventory
order fulfillment and distribution
third party logistics
reverse logistics (return from customers)
MIS 373: Basic Operations Management

23. Inventory Management Inventory issues in SCM Inventory location
Centralized inventories
Lower overall inventory, lower cost, lower stock-out risk
Decentralized inventories
Faster delivery, lower shipping cost
Inventory velocity
The speed at which goods move through a supply chain
The greater the velocity the lower the holding cost and the faster orders are fulfilled and goods are turned into cash.
The bullwhip effect
Inventory oscillations that become increasingly larger looking backward through the supply chain
MIS 373: Basic Operations Management

24. Creating an Effective Supply Chain
It begins with 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
There must be
Trust
Effective communication
Information velocity
Supply chain visibility
Event management capability
Performance metrics
MIS 373: Basic Operations Management

25. Trade-Offs Lot-size-inventory trade-off
Large lot sizes yield benefits in terms of quantity discounts and lower annual setup costs, but it increases the amount of safety stock (and inventory carrying costs) carried by suppliers
Inventory-transportation cost trade-off
Suppliers prefer to ship full truckloads instead of partial loads to spread shipping costs over as many units as possible. This leads to greater holding costs for customers
Cross-docking
A technique whereby goods arriving at a warehouse from a supplier are unloaded from the suppliers truck and loaded onto outbound truck, thereby avoiding warehouse storage
MIS 373: Basic Operations Management

26. Trade-Offs Lead time-transportation costs trade-off
Suppliers like to ship in full loads, but waiting for sufficient orders and/or production to achieve a full load may increase lead time
Product variety-inventory trade-off
Greater product variety usually means smaller lot sizes and higher setup costs, as well as higher transportation and inventory management costs
Delayed differentiation
Production of standard components and subassemblies which are held until late in the process to add differentiating features
MIS 373: Basic Operations Management

27. Trade-Offs Cost-customer service trade-off
Producing and shipping in large lots reduces costs, but increases lead time
Disintermediation
Reducing one or more steps in a supply chain by cutting out one or more intermediaries
MIS 373: Basic Operations Management

28. The Bullwhip Effect
First noticed by P&G executives examining the order patterns for Pampers disposable diapers.
Although the customer demand is pretty steady, they noticed that order variation increased dramatically as one moved from retailers to distributors to the factory.

29. Bullwhip Effect - Problems
High demand fluctuations.
Variation in demand along the supply chain requires:
Shipment capacity
Production capacity to cope with peaks.
Inventory capacity
Most of the time this capacity will be idle.
There’s significant cost and investments attached!
Low service level (backorders)
High cost
In the end: high overall cost in the supply chain
MIS 373: Basic Operations Management

30. Bullwhip Effect - Causes
Information (lack of)
Game simulates SC with low levels of trust, where little information is shared among the parties
Only order amounts are perpetuated up the supply chain; information about customer demand is lost upstream.
Without actual customer demand data, all forecasts rely solely on the incoming orders at each stage of the SC.
SC structure
The longer the lead time the stronger the bullwhip effect (the reorder point is calculated by multiplying the forecasted demand by the lead time plus the safety stock)
Local optimization
Local individual cost optimization, and a lack of cooperation
Ordering involves fix cost. There is an incentive for individual players to hold back and only place aggregate/batch orders. This aggravates the problem of demand forecasting as little information about actual demand is conveyed.
MIS 373: Basic Operations Management

31. Mitigating the Bullwhip Effect
Good supply chain management can overcome the bullwhip effect:
Information sharing
Replenishment based on need
Vendor-managed inventory
Vendors monitor goods and replenish retail inventories when supplies are low
Lower ordering costs
Short lead times
Cooperation
Competition is now supply chain against supply chain and Network against network
MIS 373: Basic Operations Management

32. Order fulfillment
Order fulfillment refers to the processes involved in responding to customer orders.
Engineer-to-Order (ETO)
Products are designed and built according to customer specifications. This approach is frequently used for large-scale construction projects, custom homebuilding, home remodeling, and for products made in job shops.
Make-to-Order (MTO)
A standard product design is used, but production of the final product is linked to the final customer's specifications. This approach is used by aircraft manufacturers such as Boeing. Fulfillment time is generally less than with ETO fulfillment, but still fairly long.
Assemble-to-Order (ATO)
Products are assembled to customer specifications from a stock of standard and modular components. Computer manufacturers such as Dell operate using this approach. Fulfillment times are fairly short, often a week or less.
Make-to-Stock (MTS)
Production is based on a forecast, and products are sold to the customer from finished goods stock. This approach is used in department stores and supermarkets. The order fulfillment time is immediate.
MIS 373: Basic Operations Management

33. SMALL BUSINESSES
Small businesses do not always give adequate attention to their supply chains.
Three aspects of supply chain management that are often of concern to small businesses are:
Inventory management
Reducing risks
International trade
Why the three are of concern to small businesses?
How to mitigate the concerns?
MIS 373: Basic Operations Management

34. Supply Chain Performance Measures
Financial
Return on assets
Cost
Cash flow
Profits
Suppliers
Quality
On-time delivery
Cooperation
Flexibility
Operations
Productivity
Inventory
Average value
Turnover
Weeks of supply
Order fulfillment
Order accuracy
Time to fill orders
% of orders delivered on time
Customers
Customer satisfaction
% of customer complaints
MIS 373: Basic Operations Management

35. Managing Returns
Products are returned to companies or third-party handlers for a variety of reasons, and in a variety of conditions. Among them are the following:
Defective products
Recalled products
Obsolete products
Unsold products returned from retailers
Parts replaced in the field
Items for recycling
Waste
In the US, the annual value of returns is estimated to be in the neighborhood of $100 billion
MIS 373: Basic Operations Management

36. Managing Returns
Reverse logistics is the process of physically transporting returned items.
This involves either retrieving items from the field or moving items from the point of return to a facility where they will be inspected and sorted and then transporting to their final destination.
Two key elements of managing returns
Gatekeeping oversees the acceptance of returned goods with the intent of reducing the cost of returns by screening returns at the point of entry into the system and refusing to accept goods that should not be returned or goods that are returned to the wrong destination.
Avoidance refers to finding ways to minimize the number of items that are returned.
MIS 373: Basic Operations Management

37. Trends in SCM Trends affecting supply chain design and management:
Measuring supply chain performance
Incorporating economic metrics into decisions (e.g., inventory velocity, inventory turnover)
“Greening” the supply chain
Redesigning products and services to reduce pollution from transportation, choosing “green” suppliers, managing returns, end-of-life programs (e.g., appliances)
Re-evaluating outsourcing
Reconsidering outsourcing due to long lead time, increased transportation costs, language, culture, job loss, control loss, lower productivity, loss of ability to perform work internally, loss of business knowledge, management efforts.
MIS 373: Basic Operations Management

38. Trends in SCM Trends affecting supply chain design and management:
Integrating IT
Real time data to enhance strategic planning, control costs, measure quality and productivity, respond quickly to problems, improve SC operations
Managing risks
Identifying risks, assessing likelihood of occurrence, potential impacts, prioritizing, developing management strategies (avoidance, reduction, transference).
Adopting lean principles
Eliminating non value-added processes, using “pull” systems to improve product flow, using fewer suppliers, continuous improvement.
MIS 373: Basic Operations Management

39. Operations Strategy
Effective supply chains are necessary for organizational success
Requires integration of all aspects of the chain
Supplier relationships are a critical component of supply chain strategy
Lean operations to improve supply chain success
Future Supply Chains
MIS 373: Basic Operations Management

40. Exercise: Concept Map
Work with a partner or two and develop a concept map based on the following two articles about supply chain:
Don't Let Your Supply Chain Control Your Business
Don't Tweak your Supply Chain--Rethink It End to End
Concept Map Examples

41. Key Points
Supply chains are a vital part of every business organization and need to be managed effectively to achieve a balance of supply and demand.
There are a number of trade-offs to be made by supply chain managers.
Effective supply chains involve trust, communication, a rapid, two-way flow of information, visibility, and event-response capability.
Among important trends in supply chain management are measuring ROI, “greening” the supply chain, reevaluating outsourcing, integrating IT, managing risks, and adopting lean principles.
MIS 373: Basic Operations Management