CHAPTER 8: 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.

SUPPLY CHAIN MANAGEMENT - 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 chain managers are people at various levels of the organization
who are responsible for managing supply and demand both within and across business
organizations. They are involved with planning and coordinating activities that include sourcing
and procurement of materials and services, transformation activities, and logistics.

LOGISTICS - the part of a supply chain involved with the forward and reverse flow of goods,
services, cash, and information.

Supply chains are sometimes referred to as value chains, a term that reflects the concept that
value is added as goods and services progress through the chain.

TWO COMPONENTS OF THE SUPPLY/VALUE CHAIN

1. Supply component - starts at the beginning of the chain and ends with the internal
operations of the organization.
2. Demand component - starts at the point where the organization’s output is delivered to
its immediate customer and ends with the final customer in in the chain. The demand
chain is the sales and distribution portion of the value chain.

KEY ASPECTS RELATING TO SUPPLY CHAIN MANAGEMENT:

1. Determining the appropriate level of outsourcing
2. Managing procurement
3. Managing suppliers
4. Managing customer relationships
5. Being able to quickly identify problems and respond to them

FLOW MANAGEMENT

● PRODUCT AND SERVICE FLOW - involves the movement of goods or services from
suppliers to customers.
● INFORMATION FLOW - involves sharing forecast and sales data, transmitting orders,
tracking shipments, and updating order status.
● FINANCIAL FLOW - involves credit terms, payments, and consignment and title
ownership arrangements.
TRENDS IN SUPPLY CHAIN MANAGEMENT
1. Measuring supply chain ROI - enables managers to incorporate economics into
outsourcing and other decisions, giving them a rational basis for managing their supply
chains
2. Greening the supply chain - may involve redesigning products and services, reduce
packaging, near-sourcing to reduce pollution from transportation, choosing “green”
suppliers, managing returns, and implementing end-of-life programs, particularly for
appliances and electronic equipment
3. Reevaluating outsourcing
BENEFITS OF OUTSOURCING INCLUDE:
● The ability to focus on core strengths
● Converting fixed costs to variable costs
● Freeing up capital to devote to other needs
● Shifting some risks to suppliers
● Taking advantage of supplier expertise
● Ease of expansion outside the home country
POTENTIAL DIFFICULTIES INCLUDE:
● Inflexibility due to longer lead times for delivery of goods with distant suppliers
● Increased transportation costs
● Language and cultural differences
● Loss of jobs
● Loss of control
● Lower productivity
● Loss of ability to do the work internally and loss of business knowledge
● Knowledge transfer
● Concerns about intellectual property security
● Increased effort needed to manage the supply chain
4. Integrating IT - produces real-time data that can enhance strategic planning and help
businesses to control costs, measure quality and productivity, respond quickly to
problems, and improve supply chain operations.
5. Managing risks - it is essential for a business to be able to adopt procedures for
managing risks because some businesses see supply chain as a major source of risk.
6. Adopting lean principles - in too many instances, business processes are not linked to
suppliers’ or customers’ needs. Therefore, applying lean principles to supply chains can
overcome this weakness by:
● Eliminating non-value-added processes
● Improving product flow by using pull systems
● Using fewer suppliers and supplier certification programs
● Adopting the lean attitude of never ceasing to improve the system
7. Being agile - a supply chain is flexible enough to be able to respond fairly quickly to
unpredictable changes or circumstances.
RISK MANAGEMENT - involves identifying risks, assessing their likelihood of occuring and
their potential impact, and then developing strategies for addressing those risks.

RESILIENCY - the ability of a business to recover from an event that negatively impacts the
supply chain.

Key elements of successful risk management include:

● Know your suppliers.

● Provide supply chain visibility.
Supply chain visibility - means that a major trading partner can connect to any
part of its supply chain to access data in real time on inventor levels, shipment status, and
similar key information. This requires data sharing.
● Develop event-response capability.
Event-response capability - the ability to detect and respond to unplanned
events.
Four capabilities of an event management system
1. Monitoring the system
2. Notifying when certain planned or unplanned events occur
3. Simulating potential solutions when an unplanned event occurs
4. Measuring the long-term performance of suppliers, transporters, and other supply
chain partners
● Simplify (shorten) the supply chain if need be.

A positive factor of globalization has been the set of technological advances in communications:
the ability to link operations around the world with real-time information exchange.
Consequently, information technology has a key role in integrating operations across global
supply chains.

ERP AND SUPPLY CHAIN MANAGEMENT

ERP encompasses supply chain management activities such as planning for demand and
managing supply, inventory replenishment, production, warehousing, and transportation.

ERP software provides the ability to coordinate, monitor, and manage a supply chain. It is an
integrated system that provides for system wide visibility of key activities and events in areas
such as supplier relationships, performance management, sales and order fulfillment, and
customer relationships.
 · Supplier Relationship Management - ERP integrates purchasing, receiving,
information about vendor ratings and performance, lead times, quality,
electronic funds disbursements, simplifying processes, and enabling analysis of
those processes.
· Performance management - This aspect of ERP pulls together information on
costs, and profits, productivity, quality performance, and customer satisfaction.
· Sales and order fulfillment - ERP includes the ability to provide inventory and
quality management, track returns, and schedule and monitor production,
packaging and distribution.
· Customer relationship management - An ERP system not only centralizes
basic contact information, details on contracts, payment terms, credit history,
and shipping preferences, it also provides information on purchasing patterns,
service and returns.

ETHICS AND THE SUPPLY CHAIN

Unethical behavior involving supply chains include bribing government of company officials to
secure permits or favorable status. Every company should develop an ethical supply chain to
guide behavior. A code should cover behaviors that involve customers, suppliers, suppliers’
behaviors, contract negotiation, recruiting, and the environmental issues.

A major risk of unethical behavior is that when such behavior is exposed to the media,
consumers tend to blame the major company or brand in the supply chain associated with the
ethical infractions that were actually committed by legally independent companies in the supply
chain. The problem is particularly difficult to manage when supply chains are global, as they
often re manufacturing operations. With global manufacturing and distribution, supply chain
scrutiny should include all supply chain activities from purchasing, manufacturing assembly and
transportation to service and repair operations and eventually to proper disposal of products at
the end of their useful life.

Key steps companies can take to reduce the risk of damages due to unethical supplier behavior:
· Choose those that have a reputation for good ethical behavior
· Incorporate compliance with labor standards in supplier contracts
· Develop direct, long-term relationships with ethical suppliers
· Address quickly any problems that occur.

SMALL BUSINESSES

Three aspects of supply chain management that are often of concern to small businesses are:
1. Inventory management
 2. Reducing risks
3. International trade

Inventories can be an issue for small businesses. They can tie up capital and take up space.
Another area that often needs attention is risk management. The key to reducing risks is
managing suppliers.

Important steps in managing suppliers:

· Use only reliable suppliers
· Determine which suppliers are critical, get to know them, and the challenges they
have
· Measure supplier performance
· Recognize warning signs of supplier issues
· Have plans in place to manage supply chain problems

Importing can have benefits for small businesses. The Small Business Administration has some
tips for using foreign suppliers:

1. Work with someone who has expertise to help oversee suppliers, preferable
someone who spends a good deal of time in that country.
2. Describe buying patterns and schedules to set expectations for demand and
timing.
3. Don’t rely on a single supplier; a backup supplier can reduce risk and provide
bargaining leverage.
4. Building goodwill can have benefits in negotiations and resolving problems
when they arise.
5. Consider using domestic supplier if the risks or other issues with foreign
suppliers are formidable.
Management Responsibilities
- A corporate management responsibilities that has legal, economic, and ethical
aspects. Other specific areas includes strategy, tactics and operations.
· Legal responsibilities include being knowledgeable about laws and regulations
of the countries.
· Economic responsibilities include supplying products and services to meet
demand as efficiently as possible.
· Ethical responsibilities include conducting business in ways that are consistent
with the moral standards of society.

Strategic Responsibilities
- Strategies that has a major impact on the success of both supply chain management and
the business itself. Includes the following strategies:
 · Supply chain strategy alignment: Aligning supply and distribution strategies
with organizational strategy and deciding on the degree to which outsourcing will
be employed.
· Network configuration: Determining the number and location of suppliers,
warehouses, production/operations facilities, and distribution centers.
· Information technology: Integrating systems and processes throughout the
supply chain to share information, including forecasts, inventory status, tracking
of shipments, and events.
· Products and services: Making decisions on new product and services selection
and design.
· Capacity planning: Assessing long-term capacity needs, including when and
how much will be needed and the degree of flexibility to incorporate.
· Strategic partnerships: Partnership choices, level of partnering, and degree of
formality.
· Distribution strategy: Deciding whether to use centralized or decentralized
distribution, and deciding whether to use the organization’s own facilities and
equipment for distribution or to use third-party logistics providers.
· Uncertainty and risk reduction: Identifying potential sources of risk and
deciding the amount of risk that is acceptable.

Tactical Responsibilities
1. Prepare and evaluate forecasts. (Forecasting)
2. Choose suppliers and some make-or-buy decisions. (Sourcing)
3. Coordinate the external supply chain and internal operations. (Operations planning)
4. Decide where in the supply chain to store the various types of inventory. (Managing
Inventory)
5. Match capacity with demand. (Transportation planning)
6. Work with supply chain partners to coordinate plans. (Collaborating)

Operational Responsibilities
1. Scheduling
2. Receiving
3. Transforming
4. Order fulfilling
5. Managing Inventory
6. Shipping
7. Information Sharing
8. Controlling

Purchasing Interfaces
 - Purchasing has interfaces with a number of other functional areas, as well as with
outside suppliers. It is the connecting link between the organization and its suppliers, it
exchanges information with suppliers and functional areas.
· Operations- Constitute the main source of requests for purchased materials, and
close cooperation between these units.
· Accounting- Responsible for handling payments to suppliers and must be notified
promptly when goods are received in order to take advantage of possible
discounts. It also handles data processing-keeps inventory records, checks
invoices, and monitors vendor performance.
· Design and Engineering- Prepare material specifications, which must be
communicated to purchasing.
· Receiving- checks incoming shipments of purchased items to determine whether
quality, quantity, and timing objectives have been met.
· Suppliers- Also known as vendors work closely with purchasing to learn what
materials will be purchased and what kinds of specifications will be required in
terms of quality, quantity, and deliveries.

The Purchasing Cycle

- Begins with a request from within the organization to purchase material, equipment,
supplies, or other items from outside the organization, and the cycle ends when the
purchasing department is notified that a shipment has been received in satisfactory condition.
The main steps in the cycle are the following:
1. Purchasing receives the requisition: includes (a) description of item or material
desired, (b) quantity and quality, (c) delivery date, (d) who purchased?
2. Purchasing selects a supplier: The purchasing department must identify
suppliers who have the capability of supplying the desired goods.
3. Purchasing places the order with a vendor: Small purchases may be handled
directly between the operating unit requesting a purchased item and the supplier,
although some control should be exercised over those purchases so they don’t get
out of hand.
4. Monitoring orders: Routine follow-up on orders.
5. Receiving orders: Receiving must check incoming shipments for quality and
quantity.
** If the goods are not satisfactory, they may have to be returned to the supplier or subjected to
further inspection.

Centralized Purchasing
- Purchasing is handled by one special department.

Decentralized Purchasing
- Individual departments or separate locations handle their own purchasing requirements.
Ethics in Purchasing
1. Perceived Impropriety
2. Conflicts of Interest
3. Issues of Influence
4. Responsibilities to Your Employer
5. Supplier and Customer Relationships
6. Sustainability and Social Responsibility
7. Confidential and Proprietary Information
8. Reciprocity
9. Applicable Laws, Regulations, and Trade Agreements
10. Professional Competence

E-Business
- Refers to the use of electronic technology to facilitate business transactions. E-business,
or e-commerce, involves the interaction of different business organizations as well as the
interaction of individuals with business organizations.
- There are two essential features of e-business: the website and order fulfillment.
Companies may invest considerable time and effort in front-end design (the website), but the
back end (order fulfillment) is at least as important. It involves order processing, billing,
inventory management, warehousing, packing, shipping, and delivery.
SUPPLIER MANAGEMENT
Two ways for a supplier to contribute to an effective operation; time delivery and high
quality goods and services.
Purchasing manager – external operations manager that coordinates supplier operations and
buyer needs.
Aspects of supplier Management:
· Choosing suppliers
- A company considers price, quality, the supplier’s reputation, past experience
with the supplier and service after the sale.
- The company provides supplier with detailed specifications of the materials or
parts it wants instead of buying items off the shelf.
- Vendor analysis – conducted periodically or whenever there is a significant
change in the weighting assigned to various factors.
· Supplier Audits
- Means of keeping current on suppliers’ production capabilities, quality and delivery
problems and resolutions, and suppliers’ performance on other criteria.
- If an audit reveals problem areas, the buyer can attempt to find a solution before more
serious problems develop.
- An important first step in supplier certification programs.
· Supplier certification
- Detailed examination of the policies and capabilities of a supplier.
- Particularly important when buyer seeks to have long-term relationship with suppliers.
- Certification process – verifies if the supplier meets or exceeds the requirements.
- Certified suppliers – world class suppliers. Advantage: buyer can eliminate testing and
inspection of delivered goods; much less risk.
- ISO 9000 – most widely used international certification; standard industry certification.
· Supplier relationship management
- Purchasing has the responsibility of maintaining good supplier relationship.
- Type of relationship = length of a contract between buyers and sellers. Short-
term for competitive bidding, medium-term involves on-going relationship and
long-term often evolves into a partnership.
- Supplier forums – used to educate potential suppliers about the organization’s
policies and requirements.
- Supplier code of conduct – requires suppliers to maintain safe working
conditions, etc.
- Keeping good relations with suppliers is increasingly recognized as an
important factor in maintaining a competitive edge.
· Supplier partnership
- There are number of obstacles in supplier partnership because many of the
benefits go to the buyer.
- Another possibility is that the culture of the buyer and supplier might be
different and not lend themselves to such an arrangement.
· Strategic partnering
- Two or more business organizations that have complementary products or
services join so that each may realize a strategic benefit.
- Collaborative planning, forecasting and replenishment (CPFR) – a
contractual agreement used to achieve supply chain integration by cooperative
management of inventory in the supply chain.

INVENTORY MANAGEMENT
Inventories – key component of a supply chain.
Inventory velocity – speed at which goods move through a supply chain.
Bullwhip effect – inventory oscillations become progressively larger looking backward
through the supply chain.
Vendor-managed inventory (VMI) – vendors monitor goods and replenish retail
inventories when supplies are low.
Bullwhip effect: demand variations begin at the customer end of the chain and become
increasingly large as they radiate backward through the chain. See illustration below:
ORDER FULFILLMENT - processes involved in responding to customer orders.
Fulfillment time can be an important criterion for customers.
COMMON APPROACHES:
v Engineer-to-order (ETO) - products are designed and built according to customer
specifications.
- used for large-scale construction projects; custom homebuilding, home remodeling, for
products made in job shops.
Fulfillment time: Relatively lengthy
v Make-to-order (MTO) - standard product design is used but production of final product
is linked to customer's final specification.
-used by aircraft manufacturers, like Boeing.
Fulfillment time: Fairly long
v Assemble-to-order (ATO) - products are assembled to customer specification from a
stock of standard and modular component.
-used by computer manufacturers, like Dell Operate.
Fulfillment time: Fairly short
v Make-to-stock (MTS) - production is based on a forecast.
-used by department stores and supermarkets.
Fulfillment time: Immediate

LOGISTICS
Logistics – refers to the movement of materials, services, cash, and information in a supply
chain. It includes movement within a facility, overseeing incoming and outgoing shipments
of goods and materials, and information flow throughout the supply chain.
Movement within a Facility
Movement of goods within a manufacturing facility is part of production control.
The following are the steps where materials move within a manufacturing facility:
1. from incoming vehicles to receiving
2. from receiving to storage
3. from storage to the point of use (e.g. a work center)
4. from one work center to the next or to temporary storage
5. from the last operation to the final storage
6. from storage to packaging/shipping
7. from shipping to outgoing vehicles
In some instances, the goods being moved are supplies; in other instances, the
goods are actual products or partially completed products; and in still other instances, the
goods are raw materials or purchased parts.

Wegmans’ Shipping System

 The Wegmans’ supermarket chain has been cited as a leader in supply chain
management in the grocery industry. They operate a number of warehouses that are used to
supply its stores
Distribution – there are a variety of methods used to replenish stores’ inventories, and
several of these avoid the need for warehouse storage, saving the company storage and
handling costs. Those methods are:
1. Cross-dock: A full inbound pallet is redirected to an outbound shipment
2. Cross-distribution: An inbound pallet is broken down into cases right on the dock, and
then the cases are immediately distributed to outbound pallets.
3. Vendor-managed inventory: Vendors of some non-store brand items such as bread and
soft drinks handle replenishment, and those items come directly from the vendor’s warehouse
to the stores.
Warehouse replenishment items are handled as full pallets, or broken down into
cases, depending on quantities ordered:
1. Block pick: An entire pallet of goods in the warehouse is placed on an outbound truck
2. Case pick: Individual cases or packages are pulled from inventory, placed on pallets and
shrink wrapped, and then placed on outbound trucks.
Warehoused Items – classified for either conveyor belt or non-conveyor belt handling.
Collaboration with Vendors – Wegmans collaborate with vendors in an effort to improve
packaging design
Forecasting – low pricing program reduced the number of promotional and sale items,
reduced much of the volatility in demand, and made forecasting and inventory planning
easier
New Approaches – Wegmans is now using RFID tags, which are very small micro chips

Incoming and Outgoing Shipments

Overseeing the shipment of incoming and outgoing goods comes under the
heading of traffic management. This function handles schedules and decisions on shipping
method and times, taking into account costs of various alternatives, government regulations,
the needs of the organization relative to quantities and timing, and external factors such as
potential shipping delays or disruptions.

Tracking Goods: RFID

Advances in technology are revolutionizing the way businesses track goods in
their supply chains. Radio frequency identification (RFID) is a technology that uses radio
waves to identify objects, such as goods in supply chains.
RDIF tag – has an integrated circuit and antenna project information or other data to
network-connected RFID readers using radio waves.

Evaluating Shipping Alternatives

 Evaluation of shipping alternatives is an important component of supply chain
management. Considerations include not only shipping costs, but also coordination of
shipments with other supply chain activities, flexibility, speed, and environmental issues.
The incremental holding cost incurred by using the slower alternative is computed
as
Incremental holding cost =
where
H = Annual earning potential of shipped item
d = Difference (in days) between shipping alternatives
Comparing Costs of Shipping Alternatives
Determine which shipping alternative, once day or three days, is best when holding cost of an
item is $1,000 per year, the one-day shipping cost is $40, and the three-day shipping cost is:
a. $35
b. $30
H = $1,000 per year
Time savings = 2 days using 1-day shipping
Holding cost for additional 2 days = $1,000 x (2/365) = $5.48
a. Cost savings = $5. Because the actual savings of $5 is less than the holding cost ($5.48),
use the one-day alternative.
b. Cost savings = $10. Because the actual savings of $10 exceeds the savings in the holding
cost of $5.48, use the three-day alternative.

3-PL
Third-party logistics (3-PL) is the term used to describe the outsourcing of logistics
management. According to the website of the Council of Supply Chain Management
Professionals, 3PL is “A person who solely receives, holds, or otherwise transports a
consumer product in the ordinary course of business but who does not take title to the
product.:

CREATING AN EFFECTIVE SUPPLY CHAIN

Strategic sourcing – systematic process for analyzing the purchase of products and services
ti reduce costs by reducing waste and non-value added activities, increase profits, reduce
risks, and improve supplier performance
The SCOR® (Supply Chain Operations Reference) model (www.supply-
chain.org/SCOR) provides steps that can be used to create an effective supply chain:
1. Plan. Develop a strategy for managing all resources that go into meeting expected
customer demanded for a product or service, including a set of metrics to monitor the supply
chain.
2. Source. Select suppliers that will provide the goods and services needed to create products
or support services. Also, develop a system for delivery, receiving, and verifying shipments
or services. Structure payment along with metrics for monitoring and, if necessary,
improving relationships.
3. Make. Design the processes necessary for providing services or producing, testing, and
packaging goods. Monitor quality, service levels or production output, and worker
productivity.
4. Deliver. Establish systems for coordinating receipt of shipments from vendors; develop a
network of warehouses; select carriers to transport goods to customers; set up an invoicing
system to receive payments; and devise a communication system for two-way flow of
information among supply chain partners.
5. Manage returns. Create a responsive and flexible network for receiving defective and
excess products from customers.
Achieving an effective supply chain requires integration of all aspects of the
supply chain. These important aspects of this are effective communication, the speed with
which information moves through the supply chain, and having performance metrics.
Effective communication. Effective supply chain communication requires integrated
technology and standardized ways and means of communicating among partners.
Information velocity. This is important; the faster information flows (two-way), the better.
It is the speed at which information is communicated in a supply chain.
Performance metrics. Performance metrics are necessary to confirm that the supply chain is
functioning as expected, or that there are problems that must be addressed.

Managing Returns
Products are returned to companies or third-party handlers for a variety of reasons, and in a
variety 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
Reverse logistics – the process of physically transporting returned items
Gatekeeping – screening returned goods to prevent incorrect acceptance of goods
Avoidance – finding ways to minimize the number of items that are returned

Challenges
The often dynamic supply chain environment and the complexity of supply chains
can make managing them very challenging.
Barriers to Integration of Science Organization. Organizations, and their functional areas,
have traditionally had an inward focus. They set up buffers between themselves and their
suppliers.
Getting CEOs, Boards of Directors, Managers, and Employees “Onboard.” CEOs and
boards of directors need to be convinced of the potential payoffs from supply chain
management.
Making the Supply Chain More Efficient.
1. Large vs. small lot sizes. Compare the benefits and costs of large lots (quantity discounts
and lower setup costs, but larger carrying costs) with the benefits and risks of small lots
(agility, the possibility of shorter lead times from not needing to wait for production of
larger lot quantities, and lower carrying costs, but increased risk of stockouts).
2. Saving cost and time by using cross-docking. Cross-docking is a technique whereby
goods arriving at a warehouse from a supplier are unloaded from the supplier’s truck and
immediately loaded onto outbound trucks, thereby avoiding warehouse storage.
3. Increase the perception of variety while taking advantage of the benefits of low
variety by using delayed differentiation. Delayed differentiation is a production of
standard components and subassemblies, which are held until late in the process to add
differentiating features.
4. Ship directly to the customer to reduce waiting time. Reducing one or more steps in a
supply chain by cutting out one or more intermediaries is referred to as
disintermediation.
Small Businesses. Small businesses may be reluctant to embrace supply chain management
because it can involve specialized, complicated software as well as sharing sensitive
information with outside companies.
Variability and Uncertainty. Variations create uncertainty, thereby causing inefficiencies in
a supply chain.
Response Time. Long lead times impair the ability of a supply chain to quickly respond to
changing conditions, such as changes in the quantity or timing of demand, changes in product
or service design, and quality or logistics problems.

STRATEGY
Effective supply chains are critical to the success of business organizations. Development
of supply chains should be accorded strategic importance. Achieving an effective supply
chain requires integration of all aspects of the chain. Collaboration and joint planning and
coordination are keys to supply chain success. In that regard, a systems view of the supply
chain is essential.
Many businesses are employing principles of lean operations and six sigma methodology
to improve supply chain performance. However lean supply chains can increase supply chain
risk and may necessitate increased inventories to offset those risks.