11 Supply Chain Management McGraw-Hill/Irwin Copyright 2007 by

Explain what a supply chain is. Explain the need to manage a supply chain and the potential benefits of doing so. Explain the increasing importance of outsourcing. State the objective of supply chain management. List the elements of supply chain management. Identify the strategic, tactical, and operations issues in supply chain management. Describe the bullwhip effect and the reasons why it occurs. 11-2 Learning Objectives

Explain the value of strategic partnering. Discuss the critical importance of information exchange across a supply chain. Outline the key steps, and potential challenges, in creating an effective supply chain. Explain the importance of the purchasing function in business organizations. Describe the responsibilities of purchasing. Explain the term value analysis. Identify several guidelines for ethical behavior in purchasing. 11-3

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 11-4 Facilities

Warehouses Factories Processing centers Distribution centers Retail outlets Offices 11-5 Functions and Activities

Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service 11-6 Typical Supply Chains Production

Distribution Purchasing Receiving Storage Operations Storage 11-7 Typical Supply Chain for a Manufacturer Figure 11.1a Supplier Supplier Supplier } Storage

Mfg. Storage Dist. Retailer Customer 11-8 Typical Supply Chain for a Figure 11.1b Service Supplier

} Storage Service Customer Supplier 11-9 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 11-10 Figure 16.3 Bullwhip Effect Demand Initial Supplier Final Customer

Inventory oscillations become progressively larger looking backward through the supply chain 11-11 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 11-12 Benefits of Supply Chain Management

Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Integrates separate organizations into a cohesive operating system 11-13

Global Supply Chains Increasing more complex Language Culture Currency fluctuations Political Transportation costs

Local capabilities Finance and economics Environmental 11-14 Elements of Supply Chain Management Table 11.1 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 11-15 Strategic or Operational

Two types of decisions in supply chain management Strategic design and policy Operational day-today activities Major decisions areas Location Production Inventory Distribution 11-16

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 11-17 Logistics Movement within the facility Incoming and outgoing shipments Bar coding EDI Distribution JIT Deliveries

0 214800 232087768 11-18 Materials Movement Figure 11.4 Work center Work center Work center Storage Work

center Storage RECEIVING Storage Shipping 11-19 Distribution Requirements Planning Distribution requirements planning (DRP) is a system for inventory management and distribution planning

Extends the concepts of MRPII 11-20 Uses of DRP Management uses DRP to plan and coordinate: Transportation Warehousing Workers Equipment

Financial flows 11-21 E-Business E-Business: the use of electronic technology to facilitate business transactions Applications include Internet buying and selling E-mail Order and shipment tracking

Electronic data interchange 11-22 Advantages E-Business 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 11-23 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 11-24 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 11-25

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 11-26 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 11-27 Table 11.4 Perspective SCOR Metrics 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 11-28

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 11-29 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 11-30 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 11-31 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 11-32 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 11-33 Supply Chain Performance Drivers 1.Quality 2.Cost 3.Flexibility 4.Velocity 5.Customer service 11-34 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 11-35 Challenges Barriers to integration of organizations Getting top management on board Dealing with trade-offs Small businesses Variability and uncertainty Long lead times 11-36

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 11-37 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 suppliers truck and loaded onto outbound trucks Avoids warehouse storage 11-38 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 11-39 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 11-40 Supply Chain Benefits and Drawbacks Table 11.5 Problem

Potential Improvement Benefits Possible Drawbacks Large inventories Smaller, more frequent deliveries Reduced holding costs

Traffic congestion Increased costs Long lead times Delayed differentiation Disintermediation Quick response May not be feasible May need absorb functions

Large number of parts Modular Fewer parts Simpler ordering Less variety Cost Quality Outsourcing

Reduced cost, higher quality Loss of control Variability Shorter lead times, better forecasts Able to match supply and demand Less variety 11-41

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. 11-42 Goal of Purchasing Develop and implement purchasing plans for products and services that support operations strategies

11-43 Duties of Purchasing Identifying sources of supply Negotiating contracts Maintaining a database of suppliers Obtaining goods and services Managing supplies 11-44 Figure 11.5 Purchasing Interfaces Legal Operations

Accounting Purchasing Data processing Design Suppliers Receiving 11-45 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 11-46 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 11-47 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 11-48 Suppliers Choosing suppliers Evaluating sources of supply Supplier audits Supplier certification

Supplier relationships Supplier partnerships 11-49 Factors in Choosing a Supplier Quality and quality assurance Flexibility Location Price 11-50

Factors in Choosing a Supplier (contd) Product or service changes Reputation and financial stability Lead times and on-time delivery Other accounts 11-51 Evaluating Sources of Supply Vendor analysis: Evaluating the sources of supply in terms of price,

quality, reputation, and service 11-52 Evaluating Sources of Supply Vendor analysis - evaluating the sources of supply in terms of Price Quality Services

Location Inventory policy Flexibility 11-53 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 11-54 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 11-55 Critical Issues Strategic importance Cost Quality Agility Customer service

Competitive advantage Technology management Benefits Risks 11-56 Critical Issues Purchasing function Increased outsourcing Increased conversion to lean production Just-in-time deliveries

Globalization 11-57 Video: Tech Logistics 11-58 Video: Tracking, GPS 11-59 Video: Intermodel Transp. 11-60