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Downstream
10 – 2
Supply Chain Integration
Upstream Downstream
Tomato Tomato
Tomato Ketchup Retail
grading paste Consumers
suppliers factory sales
stations factories
Information flows
Cash flows
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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
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Supply Chain Dynamics
7,000
Consumers’
daily
5,000
demands
3,000
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Supply Chain Dynamics
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Supply Chain Dynamics
External Consumers
External Suppliers
relationship relationship
process process
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New Service or Product Development
Design
Service or
product not
profitable
Development
Post-launch
review
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Supplier Relationship Process
Sourcing
Supplier selection
Material costs
Annual material costs = pD
Freight costs
Inventory costs
Cycle inventory = Q/2
Pipeline inventory = dL
Annual inventory costs = (Q/2 + dL)H
Administrative costs
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Supplier Relationship Process
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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.
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Total Cost Analysis
Annual Freight Costs
Shipping Quantity (units/shipment)
Supplier 10,000 20,000 30,000
Belfast $380,000 $260,000 $237,000
Hong Kong $615,000 $547,000 $470,000
Shreveport $285,000 $240,000 $200,000
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Total Cost Analysis
SOLUTION
The average requirements per day are
10 – 13
Total Cost Analysis
For example, consider the Belfast option for a shipping quantity
of Q = 10,000 units. The costs are
aterial costs = pD = ($100/unit)(300,000 units)
= $30,000,000
reight costs = $380,000
nventory costs = (cycle inventory + pipeline inventory)H
= (Q/2 + dL)H
= (10,000 units/2
+ 1200 units/day(15 days))$20/unit/year
= $460,000
nistrative costs = $180,000
Annual Cost = $30,000,000 + $380,000
+=$460,000
$31,020,000
+ $180,000
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Total Cost Analysis
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
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Total Cost Analysis
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
10 – 16
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)
Carrying
Price/Unit Cost/Unit Lead Time Administrative
Supplier 2,000 10,000 (p) (H) (L)(days) Costs
Kramer $30,000 $20,000 $5.00 $1.00 5 $10,000
Sunrise $28,000 $18,000 $4.90 $0.98 9 $11,000
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Application 10.1
SOLUTION
The daily requirements for the relay switch are:
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Application 10.1
mer
2,000: ($5.00)(100,000) + $30,000
+ (2,000/2 + 400(5))($1) + $10,000 = $543,000
10,000: ($5.00)(100,000) + $20,000
+ (10,000/2 + 400(5))($1) + $10,000 = $537,000
rise
2,000: ($4.90)(100,000) + $28,000
+ (2,000/2 + 400(9))($0.98) + $11,000 = $538,508
10,000: (4.90)(100,000) + $18,000
+ (10,000/2 + 400(9))($0.98) + $11,000 = $527,428
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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
Criterion Weight Belfast Hong Kong Shreveport
Total Cost 25 5 8 9
On-Time Delivery 30 9 6 7
Consistent Quality 30 8 9 6
Environment 15 9 6 8
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Using a Performance Matrix
SOLUTION
Score
The weighted score for Criterion Weight Belfast
Hong
Shreveport
each supplier is calculated Kong
Total Cost 25 5 8 9
by multiplying the weight
On-Time
by the score for each Delivery
30 9 6 7
Similarly, the weighted score for Hong Kong is 740, and for
Shreveport, 735. Consequently, Belfast is the preferred
supplier.
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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
Criterion Weight Kramer Sunrise
Total annual cost 30 4 5
Consistent quality 40 3 4
Delivery speed 30 5 3
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Application 10.2
SOLUTION Scores
Criterion Weight Kramer Sunrise
Using the preference matrix Total annual
approach, the weighted scores cost 30 4 5
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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
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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)
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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
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Order Fulfillment Process
1 (a) 2 3
Web site JIT Inventory Traveler Sheet
1 (c) 5 Assemble
Face-to-face to order
6 Testing and
system integration
7 Boxing 8
and shipping Delivery
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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.
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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?
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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.
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Using Expected Value
C = monthly capital cost of ownership
+ variable operating cost per month + rental costs if needed
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Using Expected Value
Next, calculate the expected value for the 10 truck fleet size alternative
as follows:
Using similar logic, we can calculate the expected costs for each of
the other fleet-size options:
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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:
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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.
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Application 10.3
A table of the complete results is below.
One team
Two teams
Three teams
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Application 10.3
A table of the complete results is below.
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The Customer Relationship Process
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The Customer Relationship Process
Order placement
Execute a sale, register the specifics,
confirm acceptance, and track progress
Internet provides advantage
Customer service
Helps customers with answers to
questions, resolves problems, and,
provides general information
Call centers
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Levers for Improved Supply Chain
Performance
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
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Levers for Improved Supply Chain
Performance
Performance measures
Costs
Time
Quality
Environmental impact
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Performance Measures
TABLE 10.1 | SUPPLY CHAIN PROCESS MEASURES
Customer Relationship Order Fulfillment Supplier Relationship
Percent of orders taken Percent of incomplete Percent of suppliers’
accurately orders shipped deliveries on-time
Time to complete the Percent of orders shipped Suppliers’ lead times
order placement process on-time Percent defects in
Customer satisfaction Time to fulfill the order services and purchased
with the order placement Percent of botched materials
process services or returned items Cost of services and
Customer’s evaluation of Cost to produce the purchased materials
firm’s environmental service or item Inventory levels of
stewardship
Customer satisfaction supplies and purchased
with the order fulfillment components
process Evaluation of supplier’s
Inventory levels of work- collaboration on
in-process and finished streamlining and waste
conversion
goods
Amount of transfer of
Amount of greenhouse
gasses emitted into the air environmental
technologies to suppliers
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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
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Closed Loop Supply Chain
Recycle parts
and materials
Waste
Product information
disposal
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