Supply-Chain Management

- Objective: Coordinate activities within the supply chain to maximize the supply chain’s
competitive advantage and benefits to the ultimate customer
- Aimed at productivity and efficiency

Supply Chain’s Strategic Importance

- Coordination of all supply chain activities, starting with raw materials and ending with a satisfied
customer
- Includes suppliers, manufacturers and/or service providers, distributors, wholesalers, retailers
and final customer
- Large portion of sales (pesos) spent on purchases
- Supplier relationships increasingly integrated and long-term
o Improve innovation, speed design, reduce costs
- Managing supplier relationships has added emphasis

How Corporate Strategy Impacts Supply Chain Decisions

Primary Supplier Selection Criteria

- Low cost strategy – cost

- Response strategy – capacity, speed, flexibility
- Differentiation Strategy – product development skills, willing to share info., jointly and rapidly
develop products

Supply Chain Inventory

- Low cost strategy – minimize inventory to hold down costs

- Response Strategy – use buffer stocks to ensure speedy supply
- Differentiation strategy – minimize inventory to avoid product obsolescence

Distribution Network

- Low Cost – inexpensive transportation, sell through discount distributors/retailers

- Response – fast transportation, provide premium customer service
- Differentiation – gather and communicate market research data, knowledgeable sales staff

Product design characteristics

- Low cost – maximize performance, minimize cost

- Response – low setup time, rapid production ramp-up
- Differentiation – modular design to aid product differentiation

Sourcing Issues

1. Make-or buy vs. outsourcing

- Choosing between obtaining products and services externally as opposed to producing them
internally
2. Outsourcing
 - Transfer traditional internal activities and resources to outside vendors
- Efficiency in specialization
- Focus on core competencies

Vertical Integration

- Developing the ability to produce goods or services previously purchased

- Integration may be forward (towards the customers) or backward (towards suppliers)
- Can improve cost, quality and inventory but requires capital, managerial skills and demand
- Risky in industries with rapid technological change

Six Sourcing Strategies

1. Many suppliers
2. Few suppliers
3. Vertical Integration
4. Joint ventures
5. Keiretsu networks
6. Virtual companies

1. Many Suppliers
- Commonly used for commodity products
- Purchasing is typically based on price
- Suppliers compete with one another
- Supplier is responsible for technology, expertise, forecasting, cost, quality and delivery
2. Few Suppliers
- buyer forms longer term relationships with fewer suppliers
- create value through economies of scale and learning curve improvements
- suppliers more willing to participate in JIT programs and contribute design and technological
expertise
- cost of changing suppliers is huge
- trade secrets and other alliances
3. Joint Venture
- Formal collaboration
o Enhance skills
o Secure supply
o Reduce costs
- Cooperation without diluting brand or conceding competitive advantage
4. Keiretsu networks
- Middle ground between few suppliers and vertical integration
- Supplier becomes part of the company coalition
- Often provide financial support for suppliers through ownership or loans
- Members expect long-term relationships and provide technical expertise and stable deliveries
- May extend through several levels of the supply chain
5. Virtual Companies
 - Rely on a variety of supplier relationships to provide services on demand
- Fluid organizational boundaries that allow the creation of unique enterprises to meet changing
market demands
- Relationships may be short- or long-term
- Exceptionally lean performance, low capital investment, flexibility and speed

Supply Chain Risk

- More reliance on supply chain means more risk

- Fewer suppliers increase dependence
- Compounded by globalization and logistical complexity
- Vendor reliability and quality risks
- Political and currency risks

Risk and Mitigation Tactics

- Research and assess possible risks

- Innovative planning
- Reduce potential disruptions
- Prepare responses for negative events
- Flexible, secure supply chains
- Diversified supplier base

Risk #1: Supplier failure to deliver

- Use multiple suppliers; effective contracts with penalties; subcontractors on retainer; pre-
planning

Risk #2: Supplier quality failure

- Careful supplier selection, training, certification and monitoring

Risk #3: Logistics delays or damage

- Multiple/redundant transportation modes and warehouses; secure packaging; effective

contracts with penalties

Risk #4: Distribution

- Careful selection, monitoring, and effective contracts with penalties

Risk #5: Information loss or distortion

- Redundant databases; secure IT systems; training of supply chain partners on the proper
interpretations and uses of information

Risk #6: Political

- Political risk insurance; cross-country diversification; franchising and licensing

Risk #7: Economic

 - Hedging to combat exchange rate risk; purchasing contracts that address price fluctuations

Risk #7: Natural Catastrophes

- Insirance; alternate sourcing; cross-country diversification

Risk #8: Theft, Vandalism and terrorism

- Insurance; patent protection; security measures, including RFID and GPS; diversification

Security and JIT

- Shipments get misrouted, stolen, damaged or excessively delayed

- Technological innovations are improving security and inventory management
o Location, motion sensors, broken seals, temperature
- Tracking can help expedite shipments

Managing the Integrated Supply Chain

- Issues
o Local optimization can magnify fluctuations
o Incentives push merchandise into the supply chain for sales that have not occurred
o Large lots reduce shipping costs but increase inventory holding and do not reflect actual
sales
- Bullwhip effect – when orders are relayed through the supply chain increasing at each step
- Opportunities
o Accurate “pull” data, shared information
o Lot size reduction, shipping, discounts, reduced ordering costs
o Single stage control of replenishment
 Single supply chain member responsible for ordering
o Vendor managed inventory (VMI)
o Collaborative planning, forecasting, and replenishment (CPFR) through the supply chain
o Blanket orders against which actual orders are released
o Standardization
o Postponement withholds modification as long as possible
o Electronic ordering and funds transfer – speed transactions and reduce paperwork
o Drop shipping and special packaging – bypasses the seller and reduces costs

Building the Supply Base

- Supplier Evaluation
o Finding potential suppliers
o Determine the likelihood of their becoming good suppliers
- Supplier Certification
1. Qualification
2. Education
3. Certification
- Supplier Development
 o Integrate the supplier into the system
 Quality requirements
 Product specifications
 Schedules and delivery
 Procurement policies
 Training
 Engineering and production help
 Information transfer procedures
- Negotiation
o Significant element in purchasing
o Highly valued skills
 Cost-based priced model
 Supplier opens books
 Market-based price model
 Based on published, auction or indexed prices
 Competitive bidding
 Common policy for many purchases
 Does not generally foster long-term relationships
- Contracting
o Share risks, benefits, create incentives
- Centralized purchasing
o Leverage volume
o Develop specialized staff
o Develop supplier relationships
o Maintain professional control
o Devote resources to selection and negotiation
o Reduce duplication of tasks
o Promote standardization
- E-Procurement
o Speeds purchasing, reduces costs, integrates supply chain
- Online catalogs and exchanges
o Standard items or industry-specific web sites
- Online auctions
o Low barriers to entry
o Reverse auctions for buyers
o Price not always the most important factor

Logistics Management

- Objective: obtain efficient operations through the integration of all material acquisition,
movement and storage activities
- Frequent candidate for outsourcing
- Allows competitive advantage to be gained through reduced costs and improved customer
service
Shipping systems

- Trucking
o Moves the vast majority of manufactured goods
o Chief advantage is flexibility
- Railroads
o Capable of carrying loads
o Little flexibility through containers and piggybacking have helped with this
- Airfreight
o Fast and flexible for light loads
o May be expensive
- Waterways
o Typically used for bulky, low-value cargo
o Used when shipping cost is more important
- Pipelines
o Used for transporting oil, gas and other chemical products
- Multimodal
o Combines shipping methods
o Common, especially in international shipments
o Aided by standardized containers

Cost and Speed of Shipments

- Faster shipping is generally more expensive than slower shipping

- Faster methods tend to involve smaller shipment sizes while slower methods involve very large
shipment sizes

Warehousing

- May be expensive, but alternatives may be more so

- Fundamental purpose is to store goods
- May provide other functions:
o Consolidation
o Break-bulk
o Cross-docking
o Channel assembly

Third-party logistics

- Can reduce inventory, costs and improve delivery reliability and speed
- Coordinate supplier inventory with delivery services
- May provide warehousing, assembly, testing, shipping, customs

Distribution Management

- The outbound flow of products

1. Rapid Response
2. Product choice
 3. Service
- Increasing the no. of facilities generally improves response time and customer satisfaction
- Total costs are important
- Facilities, packaging and logistics
- Selection and development of dealers or retailers
- Downstream management as important as upstream management

Ethics and Sustainable Supply Chain Management

- Personal Ethics
o Critical to long-term success of an organization
o Supply chains particularly susceptible
- Ethics within supply chain
- Ethical behavior regarding the environment

Institute for Supply Management Principles and Standards

- Promote & uphold responsibilities to one’s employer

- Positive supplier and customer relationships
- Sustainability and social responsibility
- Protection of confidential and proprietary information
- Applicable laws, regulations and trade agreements
- Development of professional competence
- Avoid
o Perceived impropriety
o Conflicts of interest
o Behaviors that negatively influence supply chain decisions
o Improper reciprocal agreements

ISM Ethical Standards

1. Perceived impropriety
- Prevent the intent and appearance of unethical or compromising conduct in relationships,
actions and communications
2. Conflicts of Interest
- Ensure that any personal, business or other activity do not conflict with the lawful interests of
your employer
3. Issues of influence
- Avoid behaviors or actions that may negatively influence or appear to influence, supply
management decisions
4. Responsibilities to your employer
- Uphold fiduciary and other responsibilities using reasonable care and granted authority to
deliver value to your employer
5. Supplier and customer relationships
- Promote positive supplier and customer relationships
6. Sustainability and social responsibility
- Champion social responsibility and sustainability practices in supply management
 7. Confidential and proprietary information
- Protect confidential and proprietary information
8. Reciprocity
- Avoid improper reciprocal agreements
9. Applicable laws, regulations and trade agreements
- Know and obey the letter and spirit of laws, regulations and trade agreements applicable to
supply management
10. Professional Competence
- Develop skills, expand knowledge and conduct business that demonstrates competence and
promotes the supply management profession

Establishing Sustainability in Supply Chains

- Return or reverse logistics

o Sending returned products back up the supply chain for resale, repair, reuse,
remanufacture, recycling or disposal
- Closed-loop supply chain
o Proactive design of a supply chain that tries to optimize all forward and reverse flows
o Prepares for returns prior to product introduction

Issue: Forecasting

- Forward: relatively straightforward

- Reverse: more uncertain

Issue: Product Quality

- Forward: Uniform
- Reverse: Not uniform

Issue: Product Packaging

- Forward: Uniform
- Reverse: Not damaged

Issue: Pricing

- Forward: Relatively Uniform

- Reverse: Dependent on many factors

Issue: Speed

- Forward: Often very important

- Reverse: often not a priority

Issue: Distribution Costs

- Forward: Easily Visible

- Backward: less directly visible

Issue: Inventory Management

 - Forward: Consistent
- Backward: Not consistent

Measuring Supply Chain Performance

Benchmarking the Supply Chain

- Comparison with benchmark firms

The SCOR Model

- Processes, metrics and best practices

- Plan: Demand/Supply planning and management
- Source: Identify, select, manage and assess resources
- Make: Manage production execution, testing and packaging
- Deliver: Invoice, warehouse, transport and install
- Return: raw materials, finished goods

Performance Attribute: Supply chain reliability

Sample metric: perfect order fulfilment
Calculation = (total perfect orders)/(total number of orders)

Performance Attribute: Supply chain responsiveness

Sample Metric: average order fulfilment cycle time
Calculation = (sum of actual cycle times for all orders delivered)/(total number of orders delivered)

Performance Attribute: Supply Chain Agility

Sample Metric: Upside supply chain flexibility
Calculation = time required to achieve an unplanned 20% increase in delivered quantities

Performance Attribute: Supply chain costs

Sample metric: Supply chain management costs
Calculation = cost to plan + cost to source + cost to deliver + cost to return

Performance Attribute: Supply chain management costs

Sample metric: Cash-to-cash cycle time
Calculation = Inventory days of supply + Days receivables outstanding – Days of payable outstanding

Benchmarking the Supply Chain

- Benchmarking useful
- May not be adequate
- Audits may be necessary
o Continuing communication, understanding trust, performance, corporate strategy
- Foster a mutual belief that “we are in this together”

Transportation:

- Uses transportation hub to reduce the cost of transportation

 - Cross docking to transfer goods to last-mile delivery
- Needs to accumulate goods in term of region zone – takes longer time to complete strategy
- Solution: introduced diff delivery option (free super saver delivery in order to get longer lead
times/available to promise day)
- Goods are not available to customer on time – time spent to accumulate them took longer than
it should be when the demand is high

Technology

- A9 – provides product search engines and search inside the books

- One click ordering – speed up ordering process and introduce product recommendations, which
determine customer interest from previous purchases
- Problem: need innovation to support back-end supply chain integration and execution