11
Supply Chain
Management
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
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Explain what a supply chain is and need to
manage.
Explain the increasing importance of outsourcing.
Identify the strategic, tactical, and operations
issues in supply chain management.
Describe the bullwhip effect and the reasons why
it occurs.
Discuss the critical importance of information
exchange across a supply chain.
Describe the responsibilities of purchasing.
11-2
Supply Chain Management
 Supply Chain: 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
11-3
Facilities
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Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices
11-4
Functions and Activities
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Forecasting
Purchasing
Inventory management
Information management
Quality assurance
Scheduling
Production and delivery
Customer service
11-5
Typical Supply Chains
Production
Distribution
Purchasing Receiving Storage Operations Storage
11-6
Typical Supply Chain for a
Manufacturer
Figure 11.1a
Supplier
Supplier
}
Storage
Mfg.
Storage
Dist.
Retailer
Customer
Supplier
11-7
Typical Supply Chain for a
Figure 11.1b
Service
Supplier
}
Storage
Service
Customer
Supplier
11-8
Need for Supply Chain
Management
1.Improve operations
2.Increasing levels of outsourcing
3.Increasing transportation costs
4.Competitive pressures
5.Increasing globalization
6.Increasing importance of e-commerce
7.Complexity of supply chains
8.Manage inventories
11-9
Bullwhip Effect
Figure 16.3
Demand
Initial
Supplier
Final Customer
Inventory oscillations become progressively
larger looking backward through the supply chain
11-10
Benefits of 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
11-11
Benefits of Supply Chain Management
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Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
Integrates separate organizations into a
cohesive operating system
11-12
Global Supply Chains
 Increasing more complex
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Language
Culture
Currency fluctuations
Political
Transportation costs
Local capabilities
Finance and economics
Environmental
11-13
Table 11.1
Elements of Supply Chain
Management
Element
Typical Issues
Customers
Determining what customers want
Forecasting
Predicting quantity and timing of demand
Design
Incorporating customer wants, mfg., and time
Processing
Controlling quality, scheduling work
Inventory
Meeting demand while managing inventory costs
Purchasing
Evaluating suppliers and supporting operations
Suppliers
Monitoring supplier quality, delivery, and relations
Location
Determining location of facilities
Logistics
Deciding how to best move and store materials
11-14
Logistics
 Logistics
 Refers to the movement of materials and
information within a facility and to incoming
and outgoing shipments of goods and
materials in a supply chain
11-15
Distribution Requirements
Planning
 Distribution requirements planning
(DRP) is a system for inventory
management and distribution planning
 Extends the concepts of MRPII
11-16
Uses of DRP
 Management uses DRP to plan and
coordinate:
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Transportation
Warehousing
Workers
Equipment
Financial flows
11-17
E-Business
 E-Business: the use of electronic
technology to facilitate business
transactions
 Applications include
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Internet buying and selling
E-mail
Order and shipment tracking
Electronic data interchange
11-18
Advantages E-Business
 Companies can:
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Have a global presence
Improve competitiveness and quality
Analyze customer interests
Collect detailed information
Shorten supply chain response times
Realize substantial cost savings
Create virtual companies
Level the playing field for small companies
11-19
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
11-20
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
11-21
Effective Supply Chain
 Requires linking the market, distribution
channels processes, and suppliers
 Supply chain should enable members to:
 Share forecasts
 Determine the status of orders in real time
 Access inventory data of partners
11-22
Successful Supply Chain
 Trust among trading partners
 Effective communications
 Supply chain visibility
 Event-management capability
 The ability to detect and respond to
unplanned events
 Performance metrics
11-23
RFID Technology
 Used to track goods in supply chain
 RFID tag attached to object
 Similar to bar codes but uses radio frequency
to transmit product information to receiver
 RFID eliminates need for manual counting
and bar code scanning
11-24
CPFR
 Collaborative Planning, Forecasting, and
Replenishment
 Focuses on information sharing among
trading partners
 Forecasts can be frozen and then
converted into a shipping plan
 Eliminates typical order processing
11-25
CPFR Process
Step 1 – Front-end agreement
Step 2 – Joint business plan
Steps 3-5 – Sales forecast
Steps 6-8 – Order forecast collaboration
Step 9 – Order generation/delivery execution
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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
11-27
Creating an Effective Supply
Chain
1.Develop strategic objectives and tactics
2.Integrate and coordinate activities in the
internal supply chain
3.Coordinate activities with suppliers with
customers
4.Coordinate planning and execution
across the supply chain
5.Form strategic partnerships
11-28
Supply Chain Performance Drivers
1.Quality
2.Cost
3.Flexibility
4.Velocity
5.Customer service
11-29
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
11-30
Challenges
 Barriers to integration of organizations
 Getting top management on board
 Dealing with trade-offs
 Small businesses
 Variability and uncertainty
 Long lead times
11-31
Trade-offs
1. Lot-size-inventory
 Bullwhip effect
2. Inventory-transportation costs
 Cross-docking
3. Lead time-transportation costs
4. Product variety-inventory
 Delayed differentiation
5. Cost-customer service
 Disintermediation
11-32
Trade-offs
 Bullwhip effect
 Inventories are progressively larger moving
backward through the supply chain
 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
11-33
Trade-offs
 Delayed differentiation
 Production of standard components and
subassemblies, which are held until late in
the process to add differentiating features
 Disintermediation
 Reducing one or more steps in a supply
chain by cutting out one or more
intermediaries
11-34
Supply Chain Issues
Strategic
Issues
Design of the
supply chain,
partnering
Tactical Issues
Inventory policies
Purchasing policies
Production policies
Transportation
policies
Quality policies
Operating Issues
Quality control
Production planning and
control
11-35
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.
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Goal of Purchasing
 Develop and implement purchasing
plans for products and services that
support operations strategies
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Duties of Purchasing
 Identifying sources of supply
 Negotiating contracts
 Maintaining a database of suppliers
 Obtaining goods and services
 Managing supplies
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Purchasing Interfaces
Figure 11.5
Legal
Operations
Accounting
Purchasing
Data
processing
Design
Receiving
Suppliers
11-39
Purchasing Cycle
Legal
1.Requisition received
Operations
Accounting
2.Supplier selected
3.Order is placed
Purchasing
Data
processing
4.Monitor orders
Design
5.Receive orders
Receiving
Suppliers
11-40
Centralized vs Decentralized
Purchasing
 Centralized purchasing
 Purchasing is handled by one special
department
 Decentralized purchasing
 Individual departments or separate
locations handle their own purchasing
requirements
11-41
Suppliers
 Choosing suppliers
 Evaluating sources of supply
 Supplier audits
 Supplier certification
 Supplier relationships
 Supplier partnerships
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Factors in Choosing a Supplier
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Quality and quality assurance
Flexibility
Location
Price
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Factors in Choosing a Supplier
(cont’d)
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Product or service changes
Reputation and financial stability
Lead times and on-time delivery
Other accounts
11-44
Supplier as a Partner
Table 11.9
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
High
Quality
May be unreliable;
buyer inspects
At the source;
vendor certified
Volume of business
May be low
High
Flexibility
Relatively low
Relatively high
Location
Widely dispersed
Nearness is
important
11-45