1. Copyright 2009 John Wiley & Sons, Inc. Beni Asllani University of Tennessee at Chattanooga Supply Chain Management Operations Management - 6 th Edition Chapter 10 Roberta Russell & Bernard W. Taylor, III

2. Copyright 2009 John Wiley & Sons, Inc. Principles of good process design -- REVIEW  Start with a vision  Decide upon approach  As few people as possible involved in the final process  Lots of involvement, empowerment and ownership  Measure before and after the change

3. Copyright 2009 John Wiley & Sons, Inc. Principles of good process design, Cont’d  Simplicity, simplicity, simplicity  Make it fun, make it easy  Focus on outcomes Shortened cycle times Shortened cycle times Lower cost Lower cost Higher quality Higher quality Higher throughput Higher throughput  Simulate the prototype

4. Copyright 2009 John Wiley & Sons, Inc.6-4 BPR (and INNOVATION) VS PROCESS IMPROVEMENT  IMPROVEMENTBUS PROCESS REENG  Level of changeIncrementalRadical  Starting pointExisting processClean slate  Freq of changeContinuousOne-time  Time requiredshortlong  Participationbottom-uptop-down  Typical scopeNarrowBroad  RiskModerateHigh  Primary enablerStatistical controlInformation technology  Type of changeculturalcultural / structural

5. Copyright 2006 John Wiley & Sons, Inc.6-5 Process Innovation  Breakthrough Improvement  Continuous improvement refines the breakthrough  Continuous improvement activities peak; time to reengineer process  Total redesign of a process for breakthrough improvements

6. Copyright 2009 John Wiley & Sons, Inc.10-6 Lecture Outline   Supply Chain Management   Information Technology: A Supply Chain Enabler   Supply Chain Integration   Suppliers

7. Copyright 2009 John Wiley & Sons, Inc.10-7 Lecture Outline (cont.)   E-Procurement   Distribution   Supply Chain Management Software   Measuring Supply Chain Performance   Global Supply Chain

8. Copyright 2009 John Wiley & Sons, Inc.10-8 Supply Chain  All facilities, functions, activities, associated with the flow and transformation of goods and services from raw materials to the customer, as well as the associated information flows  An integrated group of processes to “source,” “make,” and “deliver” products

9. Copyright 2009 John Wiley & Sons, Inc.10-9 Supply Chain Illustration

10. Copyright 2009 John Wiley & Sons, Inc.10-10 Supply Chain for Denim Jeans (cont.)

11. Copyright 2009 John Wiley & Sons, Inc.10-11 Supply Chain Processes

12. Copyright 2009 John Wiley & Sons, Inc.10-12 Measuring Supply Chain Performance   Key performance indicators inventory turnover cost of annual sales per inventory unit The more turns, the better inventory days of supply total value of all items being held in inventory The fewer days of supply, the better fill rate fraction of orders filled by a distribution center within a specific time period (like one day)

13. Copyright 2009 John Wiley & Sons, Inc.10-13 Inventory turns/yr = Average aggregate value of inventory Cost of goods sold/yr Average aggregate value of inventory = = Σ(average inventory for item i) X (unit value item i ) Days of supply = (Costs of goods sold)/(365 days) Average aggregate value of inventory Key Performance Indicators

14. Copyright 2009 John Wiley & Sons, Inc.10-14 Inventory Turns  The more, the better  GM: 11.6 roughly, per year  Toyota: used to be in the 60’s when all their manufacturing was in Japan—now its in the low teens  DELL: > 50 turns a year  PALM: increased its turns from 12 to 26  Pfizer: 1.5 turns – needs to be fixed!

15. Copyright 2009 John Wiley & Sons, Inc.10-15 Days of Supply (Units are ‘days’)  Years of supply = 1/(Inventory turns/yr)  Days of supply = 365 * Years of supply  Days of supply = (365 days/yr)/(Inventory turns/yr)

16. Copyright 2009 John Wiley & Sons, Inc.10-16 Key Performance Indicators: Example Inventory turns = $34,416,000 $425, 000, 000 Days of supply = ($425,000,000)/(365) $34,416,000 = 12.3 per year = 29.6 1. 1.Cost of goods sold: $425 million per year 2. 2.Production materials and parts: $4,629,000 3. 3.Work-in-process: $17,465,000 4. 4.Finished goods: $12,322,000 5. 5.Total average aggregate value of inventory (2+3+4): $34,416,000

17. Copyright 2009 John Wiley & Sons, Inc.10-17 Other Measures of Supply Chain Performance  Process Control used to monitor and control any process in supply chain used to monitor and control any process in supply chain  Supply Chain Operations Reference (SCOR) establish targets to achieve “best in class” performance establish targets to achieve “best in class” performance

18. Copyright 2009 John Wiley & Sons, Inc.10-18 Supply Chain for Service Providers  More difficult than manufacturing  Does not focus on the flow of physical goods  Focuses on human resources and support services  More compact and less extended

19. Copyright 2009 John Wiley & Sons, Inc.10-19 Supply Chain Management (SCM)   Managing flow of information through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs   Keys to effective SCM information communication cooperation trust

20. Copyright 2009 John Wiley & Sons, Inc.10-20 Value Chains   Value chain every step from raw materials to the eventual end user ultimate goal is delivery of maximum value to the end user   Supply chain activities that get raw materials and subassemblies into manufacturing operation ultimate goal is same as that of value chain   Demand chain increase value for any part or all of chain   Terms are used interchangeably  Value creation of value for customer is important aspect of supply chain management creation of value for customer is important aspect of supply chain management

21. Copyright 2009 John Wiley & Sons, Inc.10-21 Supply Chain Uncertainty   One goal in SCM: respond to uncertainty in customer demand without creating costly excess inventory   Negative effects of uncertainty lateness incomplete orders   Inventory insurance against supply chain uncertainty   Factors that contribute to uncertainty inaccurate demand forecasting long variable lead times late deliveries incomplete shipments product changes batch ordering price fluctuations and discounts inflated orders

22. Copyright 2009 John Wiley & Sons, Inc.10-22 Bullwhip Effect Occurs when slight demand variability is magnified as information moves back upstream

23. Copyright 2009 John Wiley & Sons, Inc.10-23 Risk Pooling  Risks are aggregated to reduce the impact of individual risks Combine inventories from multiple locations into one Combine inventories from multiple locations into one Reduce parts and product variability, thereby reducing the number of product components Reduce parts and product variability, thereby reducing the number of product components Create flexible capacity Create flexible capacity

24. Copyright 2009 John Wiley & Sons, Inc.10-24 Information Technology: A Supply Chain Enabler   Information links all aspects of supply chain   E-business replacement of physical business processes with electronic ones   Electronic data interchange (EDI) a computer-to-computer exchange of business documents   Bar code and point-of-sale data creates an instantaneous computer record of a sale   Radio frequency identification (RFID) technology can send product data from an item to a reader via radio waves   Internet allows companies to communicate with suppliers, customers, shippers and other businesses around the world, instantaneously

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26. Copyright 2009 John Wiley & Sons, Inc.10-26 E-business and Supply Chain   Cost savings and price reductions   Reduction or elimination of the role of intermediaries (disintermediation) Dell’s Direct Marketing to the customer   Shortening supply chain response and transaction times   Gaining a wider presence and increased visibility for companies   Greater choices and more information for customers

27. Copyright 2009 John Wiley & Sons, Inc.10-27 E-business and Supply Chain (cont.)   Improved service as a result of instant accessibility to services   Collection and analysis of voluminous amounts of customer data and preferences   Creation of virtual companies   Leveling playing field for small companies   Gaining global access to markets, suppliers, and distribution channels

28. Copyright 2009 John Wiley & Sons, Inc.10-28 Supply Chain Evolution at Nabisco Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.

29. Copyright 2009 John Wiley & Sons, Inc.10-29 Supply Chain Evolution at Nabisco (cont.) Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.

30. Copyright 2009 John Wiley & Sons, Inc.10-30 Supply Chain Evolution at Nabisco (cont.) Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.

31. Copyright 2009 John Wiley & Sons, Inc.10-31 RFID Capabilities

32. Copyright 2009 John Wiley & Sons, Inc.10-32 RFID Capabilities (cont.)

33. Copyright 2009 John Wiley & Sons, Inc.10-33 Build-to-order cars over the Internet

34. Copyright 2009 John Wiley & Sons, Inc.10-34   Customer sales   Production   Distribution   Customer relationship   Customer sales   Production   Distribution   Customer relationship   Push—sell from inventory stock   Goal of even and stable production   Mass approach   Dealer-owned E-Automotive E-automotive Supply Chain   Pull—build-to-order   Focus on customer demand, respond with supply chain flexibility   Fast, reliable, and customized to get cars to specific customer location   Shared by dealers and manufacturers Automotive Past Supply Chain Processes

35. Copyright 2009 John Wiley & Sons, Inc.10-35   Managing uncertainty   Procurement   Product design   Managing uncertainty   Procurement   Product design   Large car inventory at dealers   Batch-oriented; dealers order based on allocations   Complex products don’t match customer needs E-Automotive E-automotive Supply Chain (cont.)   Small inventories with shared information and strategically placed parts inventories   Orders made in real time based on available-to- promise information   Simplified products based on better information about what customers want Automotive Past Supply Chain Processes

36. Copyright 2009 John Wiley & Sons, Inc.10-36 Supply Chain Integration   Information sharing among supply chain members Reduced bullwhip effect Early problem detection Faster response Builds trust and confidence   Collaborative planning, forecasting, replenishment, and design Reduced bullwhip effect Lower Costs (material, logistics, operating, etc.) Higher capacity utilization Improved customer service levels

37. Copyright 2009 John Wiley & Sons, Inc.10-37   Coordinated workflow, production and operations, procurement Production efficiencies Fast response Improved service Quicker to market   Adopt new business models and technologies Penetration of new markets Creation of new products Improved efficiency Mass customization Supply Chain Integration (cont.)

38. Copyright 2009 John Wiley & Sons, Inc.10-38 Collaborative Planning, Forecasting, and Replenishment   Process for two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand   Parties electronically exchange past sales trends point-of-sale data on-hand inventory scheduled promotions forecasts

39. Copyright 2009 John Wiley & Sons, Inc.10-39 Suppliers   Procurement purchase of goods and services from suppliers   On-demand (direct response) delivery requires supplier to deliver goods when demanded by customer   Continuous replenishment supplying orders in a short period of time according to a predetermined schedule   Cross-enterprise teams coordinate processes between company and supplier

40. Copyright 2009 John Wiley & Sons, Inc.10-40 Outsourcing   Sourcing selection of suppliers   Outsourcing purchase of goods and services from an outside supplier   Core competencies what a company does best   Single sourcing a company purchases goods and services from only a few (or one) suppliers

41. Copyright 2009 John Wiley & Sons, Inc.10-41 Original Equipment Manufacturer (OEM) Maintenance Repair and Operation (MPO) Corporate Services

42. Copyright 2009 John Wiley & Sons, Inc.10-42 E-Procurement   Direct purchase from suppliers over the Internet   Direct products go directly into production process; indirect products do not   E-marketplaces web sites where companies and suppliers conduct business-to-business activities www.covisint.com   Reverse auction a company posts orders on the Internet for suppliers to bid on

43. Copyright 2009 John Wiley & Sons, Inc.10-43 Online Sourcing/ Procurement Process

44. Copyright 2009 John Wiley & Sons, Inc.10-44 Online Sourcing/ Procurement Process (cont.)

45. Copyright 2009 John Wiley & Sons, Inc.10-45 Online Sourcing/ Procurement Process (cont.)

46. Copyright 2009 John Wiley & Sons, Inc.10-46 Source: Adapted from Garrison Wieland for “Wal-Mart’s Supply Chain,” Harvard Business Review 70(2; March–April 1992), pp. 60–71. Relationship between Facilities and Functions along the Wal-Mart Supply Chain

47. Copyright 2009 John Wiley & Sons, Inc.10-47 Distribution  Encompasses all channels, processes, and functions, including warehousing and transportation, that a product passes on its way to final customer  Often called logistics  Logistics  transportation and distribution of goods and services  Driving force today is speed  Particularly important for Internet dot-coms

48. Copyright 2009 John Wiley & Sons, Inc.10-48 Amazon.com

49. Copyright 2009 John Wiley & Sons, Inc.10-49 Distribution Centers (DC) and Warehousing  DCs are some of the largest business facilities in the United States  Trend is for more frequent orders in smaller quantities  Flow-through facilities and automated material handling  Postponement  final assembly and product configuration may be done at the DC

50. Copyright 2009 John Wiley & Sons, Inc.10-50 Warehouse Management Systems  Highly automated system that runs day-to-day operations of a DC  Controls item putaway, picking, packing, and shipping  Features  transportation management  order management  yard management  labor management  warehouse optimization

51. Copyright 2009 John Wiley & Sons, Inc.10-51 A WMS

52. Copyright 2009 John Wiley & Sons, Inc.10-52 Vendor-Managed Inventory  Manufacturers generate orders, not distributors or retailers  Stocking information is accessed using EDI  A first step towards supply chain collaboration  Increased speed, reduced errors, and improved service

53. Copyright 2009 John Wiley & Sons, Inc.10-53 Transportation   Rail low-value, high-density, bulk products, raw materials, intermodal containers not as economical for small loads, slower, less flexible than trucking   Trucking main mode of freight transport in U.S. small loads, point-to-point service, flexible More reliable, less damage than rails; more expensive than rails for long distance

54. Copyright 2009 John Wiley & Sons, Inc.10-54 Transportation (cont.)   Air most expensive and fastest, mode of freight transport lightweight, small packages <500 lbs high-value, perishable and critical goods less theft   Package Delivery small packages fast and reliable increased with e-Business primary shipping mode for Internet companies

55. Copyright 2009 John Wiley & Sons, Inc.10-55 Transportation (cont.)   Water low-cost shipping mode primary means of international shipping U.S. waterways slowest shipping mode   Intermodal combines several modes of shipping- truck, water and rail key component is containers   Pipeline transport oil and products in liquid form high capital cost, economical use long life and low operating cost

56. Copyright 2009 John Wiley & Sons, Inc.10-56 Internet Transportation Exchanges  Bring together shippers and carriers  Initial contact, negotiations, auctions  Examples  www.nte.com www.nte.com  www.freightquote.com www.freightquote.com

57. Copyright 2009 John Wiley & Sons, Inc.10-57 SCM Software   Enterprise Resource Planning (ERP) software that integrates components of a company by sharing and organizing information and data SAP was first ERP software mySAP.com web enabled modules that allow collaboration between companies along the supply chain

58. Copyright 2009 John Wiley & Sons, Inc.10-58 Linking Supply Chain with SAP

59. Copyright 2009 John Wiley & Sons, Inc.10-59 SCOR Model Processes Plan Develop a course of action that best meets sourcing, production and delivery requirements Source Procure goods and services to meet planned or actual demand Make Transform product to a finished state to meet planned or actual demand Deliver Provide products to meet demand, including order management, transportation and distribution Return products, post-delivery customer support

60. Copyright 2009 John Wiley & Sons, Inc.10-60 Number of days to achieve an unplanned 20% change in orders without a cost penalty Production flexibility Number of days for supply chain to respond to an unplanned significant change in demand without a cost penalty Supply chain response time Supply Chain Flexibility Number of days from order receipt to customer delivery Order fulfillment lead time Supply Chain Responsivenes s Percentage of orders delivered on time and in full, perfectly matched with order with no errors Perfect order fulfillment Percentage of orders shipped within24 hours of order receipt Fill rate Percentage of orders delivered on time and in full to the customer Delivery performance Supply Chain Delivery Reliability DefinitionPerformance Metric Performance Attribute SCOR: Customer Facing

61. Copyright 2009 John Wiley & Sons, Inc.10-61 DefinitionPerformance Metric Performance Attribute SCOR: Internal Facing Revenue divided by total assets including working capital and fixed assets Asset turns Number of days that cash is tied up as inventoryInventory days of supply Number of days that cash is tied up as working capital Cash-to-cash cycle time Supply Chain Asset Management Efficiency Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory Warranty/returns processing cost Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee Value-added productivity Direct cost of material and labor to produce a product or service Cost of goods sold Direct and indirect cost to plan, source and deliver products and services Supply chain management cost Supply Chain Cost

62. Copyright 2009 John Wiley & Sons, Inc.10-62 Global Supply Chain  To compete globally requires an effective supply chain  Information technology is an “enabler” of global trade  Nations form trading groups  No tariffs or duties

63. Copyright 2009 John Wiley & Sons, Inc.10-63 Obstacles to Global Chain Transactions   Increased documentation for invoices, cargo insurance, letters of credit, ocean bills of lading or air waybills, and inspections   Ever changing regulations that vary from country to country that govern the import and export of goods   Trade groups, tariffs, duties, and landing costs   Limited shipping modes   Differences in communication technology and availability

64. Copyright 2009 John Wiley & Sons, Inc.10-64 Obstacles to Global Chain Transactions (cont.)   Different business practices as well as language barriers   Government codes and reporting requirements that vary from country to country   Numerous players, including forwarding agents, custom house brokers, financial institutions, insurance providers, multiple transportation carriers, and government agencies   Since 9/11, numerous security regulations and requirements

65. Copyright 2009 John Wiley & Sons, Inc.10-65 Duties and Tariffs  Proliferation of trade agreements  Group members charge uniform tariffs  Member nations have a competitive advantage within the group   Trade specialists   include freight forwarders, customs house brokers, export packers, and export management and trading companies

66. Copyright 2009 John Wiley & Sons, Inc.10-66 Duties and Tariffs (cont.) APEC ASEAN ANZCERTA FTAA NAFTA CALM ATPA MERCOSUR TAFTA

67. Copyright 2009 John Wiley & Sons, Inc.10-67 Landed Cost  Total cost of producing, storing, and transporting a product to the site of consumption   Value added tax (VAT) an indirect tax assessed on the increase in value of a good at any stage of production process from raw material to final product   Clicker shock Occurs when an order is placed with a company that does not have the capability to calculate landed cost

68. Copyright 2009 John Wiley & Sons, Inc.10-68 Web-based International Trade Logistic Systems   International trade logistics web-based software systems reduce obstacles to global trade convert language and currency provide information on tariffs, duties, and customs processes attach appropriate weights, measurements, and unit prices to individual products ordered over the Web incorporate transportation costs and conversion rates calculate shipping costs online while a company enters an order track global shipments

69. Copyright 2009 John Wiley & Sons, Inc.10-69 Recent Trends in Globalization for U.S. Companies  Two significant changes passage of NAFTA passage of NAFTA admission of China in WTO admission of China in WTO  Electronic Industry 70% of cost is in components 70% of cost is in components major supply chains have moved to China major supply chains have moved to China  Proliferation of counterfeit parts

70. Copyright 2009 John Wiley & Sons, Inc.10-70 Effects of 9/11 on Global Chains  Increase security measures added time to supply chain schedules added time to supply chain schedules Increased supply chain costs Increased supply chain costs  24 hours rules for “risk screening” extended documentation extended documentation extend time by 3-4 days extend time by 3-4 days  Inventory levels have increased 5%  Other costs  Other costs include: new people, technologies, equipment, surveillance, communication, and security systems, and training necessary for screening at airports and seaports around the world

71. Copyright 2009 John Wiley & Sons, Inc.10-71 Copyright 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.

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77. Copyright 2009 John Wiley & Sons, Inc.10-77 Collaborative Logistics and Distribution Outsourcing  Collaborative planning, forecasting, and replenishment create greater economies of scale  Internet-based exchange of data and information  Significant decrease in inventory levels and more efficient logistics  Companies focus on core competencies