CHAPTER 11

Supply Chain Management

Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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
Facilities

 Warehouses
 Factories
 Processing centers
 Distribution centers
 Retail outlets
 Offices
 Functions and Activities
 Forecasting
 Purchasing
 Inventory management
 Information management
 Quality assurance
 Scheduling
 Production and delivery
 Customer service
 Typical Supply Chains
Production Distribution
Purchasing Receiving Storage Operations Storage
 Typical Supply Chain for a Manufacturer

Supplier
Supplier
Supplier } Storage Mfg. Storage Dist. Retailer Customer
 Typical Supply Chain for a Service

Supplier

Supplier
} Storage Service Customer
 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
 Bullwhip Effect
Amount of
= inventory

Tier 2 Tier 1 Final

Producer Distributor Retailer
Suppliers Suppliers Customer
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
 Benefits of Supply Chain Management

 Lower inventories
 Higher productivity
 Greater agility
 Shorter lead times
 Higher profits
 Greater customer loyalty
 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
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
 Logistics
• Movement within the facility
• Incoming and outgoing shipments
• Bar coding
• EDI 0

• Distribution 214800 232087768

• JIT Deliveries
 Materials Movement
Work center
Work center Work
center

Work Storage
center

Storage

Storage
RECEIVING

Shipping
Distribution Requirements Planning

 Distribution requirements planning

(DRP) is a system for inventory
management and distribution
planning
 Extends the concepts of MRPII
Uses of DRP

 Management uses DRP to plan and

coordinate:
 Transportation
 Warehousing
 Workers
 Equipment
 Financial flows
 Electronic Data Interchange

 EDI – the direct transmission of inter-

organizational transactions, computer-
to-computer, including purchase orders,
shipping notices, and debit or credit
memos.
 Electronic Data Interchange
 Increased productivity
 Reduction of paperwork
 Lead time and inventory reduction
 Facilitation of just-in-time systems
 Electronic transfer of funds
 Improved control of operations
 Reduction in clerical labor
 Increased accuracy
Efficient Consumer Response

 Efficient consumer response (ECR)

is a supply chain management
initiative specific to the food
industry
 Reflects companies’ efforts to achieve
quick response using EDI and bar
codes
 E-Commerce

 E-Commerce: the use of electronic

technology to facilitate business
transactions
 Applications include
 Internet buying and selling
 E-mail
 Order and shipment tracking
 Electronic data interchange
 Advantages E-Commerce

 Companies can:
 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
 Disadvantages of E-Commerce

 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
 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
 SCOR Metrics

Perspective Metrics
Reliability On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment
Flexibility Supply chain response time
Upside production flexibility

Expenses Supply chain management costs

Warranty cost as a percent of revenue
Value added per employee
Assets/utilization Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
 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
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
 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
 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
 Supply Chain Performance Drivers

1. Quality
2. Cost
3. Flexibility
4. Velocity
5. Customer service
 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
 Challenges

 Barriers to integration of organizations

 Getting top management on board
 Dealing with trade-offs
 Small businesses
 Variability and uncertainty
 Long lead times
 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
 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
 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
 Supply Chain Issues

Strategic Tactical Issues Operating Issues

Issues
Design of the Inventory policies Quality control
supply chain, Purchasing policies Production planning and
partnering Production policies control
Transportation
policies
Quality policies
 Supply Chain Benefits and Drawbacks

Problem Potential Benefits Possible

Improvement Drawbacks
Large Smaller, more Reduced holding Traffic congestion
inventories frequent deliveries costs Increased costs

Long lead Delayed Quick response May not be

times differentiation feasible
Disintermediation May need absorb
functions
Large Modular Fewer parts Less variety
number of Simpler ordering
parts
Cost Outsourcing Reduced cost, Loss of control
Quality higher quality

Variability Shorter lead times, Able to match Less variety

better forecasts supply and
demand
Purchasing

 Purchasing is responsible for

obtaining the materials, parts, and
supplies and services needed to
produce a product or provide a
service.
Goal of Purchasing

 Develop and implement purchasing

plans for products and services
that support operations strategies
Duties of Purchasing

 Identifying sources of supply

 Negotiating contracts
 Maintaining a database of suppliers
 Obtaining goods and services
 Managing supplies
 Purchasing Interfaces

Legal

Operations Accounting

Data
Purchasing
processing

Design

Receiving
Suppliers
 Purchasing Cycle
Legal

1. Requisition received Operations

Accounting

2. Supplier selected
3. Order is placed Purchasing
Data
process-
ing

4. Monitor orders
5. Receive orders Design

Receiving
Suppliers
Value Analysis vs. Outsourcing

 Value analysis
 Examination of the function of
purchased parts and materials in an
effort to reduce cost and/or improve
performance
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
Suppliers

 Choosing suppliers
 Evaluating sources of supply
 Supplier audits
 Supplier certification
 Supplier relationships
 Supplier partnerships
Factors in Choosing a Supplier

 Quality and quality assurance

 Flexibility
 Location
 Price
Factors in Choosing a Supplier
(cont’d)

 Product or service changes

 Reputation and financial stability
 Lead times and on-time delivery
 Other accounts
Evaluating Sources of Supply

 Vendor analysis: Evaluating the

sources of supply in terms of price,
quality, reputation, and service
Evaluating Sources of Supply

 Vendor analysis - evaluating the

sources of supply in terms of
 Price
 Quality
 Services
 Location
 Inventory policy
 Flexibility
 Supplier Partnerships

 Ideas from suppliers could lead to improved

competitiveness
1. Reduce cost of making the purchase
2. Reduce transportation costs

3. Reduce production costs

4. Improve product quality

5. Improve product design

6. Reduce time to market

7. Improve customer satisfaction

8. Reduce inventory costs

9. Introduce new products or services

 Critical Issues
 Strategic importance
 Cost
 Quality
 Agility
 Customer service
 Competitive advantage
 Technology management
 Benefits
 Risks
 Critical Issues

 Purchasing function
 Increased outsourcing
 Increased conversion to lean production
 Just-in-time deliveries
 Globalization