supply chain management © 2006 prentice hall, inc. production planning and control
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Supply Chain ManagementSupply Chain Management
© 2006 Prentice Hall, Inc.
Production Planning and Control
• Supply Chain is a network of organizations, people, activities, and resources involved in the flow of material and information from supplier of suppliers to the end user.
• While Supply Chain Management (SCM) is the strategic coordination and management of the functions, activities, and resources involved in moving the raw material and information from supplier of suppliers to end customers to create a world-wide competitive infrastructure.
What is Supply Chain and Supply Chain Management?
A Supply Chain
Material costs
Suppliers
Transportation costs
Manufacturing costs
Transportation costs
Manufacturers Warehouses & Distribution
Customers
Inventory costs
Shipping costs
Material costs
Suppliers
Transportation costs
Manufacturing costs
Transportation costs
Manufacturers Warehouses & Distribution
Customers
Inventory costs
Shipping costs
Supply Chain Processes
Supply-Chain Management
• The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer.
• To increase competitive advantage on a global level (competition between supply chains)
Global Supply-Chain Issues
React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates
Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out
Staff with local specialists who handle duties, freight, customs and political issues
Supply chains in a global environment must be able to:
• A major objective of SCM:• respond to uncertainty in customer demand without
creating costly excess inventory• Negative effects of uncertainty
• lateness• incomplete orders
• Inventory• insurance against supply chain uncertainty
Supply-Chain Uncertainty and Inventory
Supply ChainUncertainty and Inventory
• Factors that contribute to uncertainty• inaccurate demand forecasting• long variable lead times• late deliveries• incomplete shipments• product changes• batch ordering • price fluctuations and discounts• inflated orders
Bullwhip Effect
• Occurs when slight demand variability is magnified as information moves back upstream
Risk Management
• Formal process for coping with supply chain uncertainty
• Evaluate and anticipate likelihood of supply chain disruptions
• Plan for possible disruptions
Risk Pooling
• Risks are aggregated to reduce the impact of individual risks
• Combine inventories from multiple locations into one• Reduce parts and product variability, thereby reducing the
number of product components• Create flexible capacity
Supply Chain Sustainability
• “Going green”• Meeting present needs without compromising the ability of future
generations to meet their needs• Sustaining human and social resources• It can be cost effective and profitable• Can provide impetus for product and process innovations• Impetus comes from downstream in the supply chain and moves
upstream to suppliers
Sustainability and Quality Management
• Reducing waste through quality programs helps achieve sustainability goals
• Improving fuel efficiency of vehicles• Telecommuting• Eco-friendly packing materials• Energy-efficient facilities• Changing thermostat settings
Strategic Level
Tactical Level
Operational level
Network configuration (Technology, location, capacity, etc.)
Processing, distribution, material quantities, flow decisions, etc.
Day-to-day scheduling on task level.
Supply Chain Management Levels of Decision-making
Supply-Chain Management
1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors and banks
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and production information
Important activities include determining
How Supply-Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Supplier’s Goal
Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell)
Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers)
Share market research; jointly develop products and options (e.g., Benetton)
Primary Selection Criteria
Select primarily for cost
Select primarily for capacity, speed, and flexibility
Select primarily for product development skills
Table 11.1
How Supply-Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Process Charact-eristics
Maintain high average utilization
Invest in excess capacity and flexible processes
Modular processes that lend themselves to mass customization
Inventory Charact-eristics
Minimize inventory throughout the chain to hold down cost
Develop responsive system with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence
Table 11.1
How Supply-Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Lead-Time Charact-eristics
Shorten lead time as long as it does not increase costs
Invest aggressively to reduce production lead time
Invest aggressively to reduce development lead time
Product-Design Charact-eristics
Maximize performance and minimize costs
Use product designs that lead to low setup time and rapid production ramp-up
Use modular design to postpone product differentiation as long as possible
Table 11.1
Make-or-Buy Decisions
1. Maintain core competence2. Lower production cost3. Unsuitable suppliers4. Assure adequate supply (quantity or delivery)5. Utilize surplus labor or facilities6. Obtain desired quality7. Remove supplier collusion8. Obtain unique item that would entail a prohibitive
commitment for a supplier9. Protect personnel from a layoff10. Protect proprietary design or quality11. Increase or maintain size of company
Reasons for Making
Table 11.4
Make-or-Buy Decisions
1. Frees management to deal with its primary business2. Lower acquisition cost3. Preserve supplier commitment4. Obtain technical or management ability5. Inadequate capacity6. Reduce inventory costs7. Ensure alternative sources8. Inadequate managerial or technical resources9. Reciprocity10. Item is protected by a patent or trade secret
Reasons for Buying
Table 11.4
Outsourcing
Transfers traditional internal activities and resources of a firm to outside vendors
Utilizes the efficiency that comes with specialization
Firms outsource information technology, accounting, legal, logistics, and production
Supply-Chain Strategies
Negotiating with many suppliers Long-term partnering with few suppliers Vertical integration Keiretsu (few suppliers & Vertical integration) Virtual companies that use suppliers on an
as needed basis
Many Suppliers
Commonly used for commodity products Purchasing is typically based on price Suppliers are rough against one another Supplier is responsible for technology,
expertise, forecasting, cost, quality, and delivery
Few Suppliers
Buyer forms longer term relationships with fewer suppliers who are more likely to understand the broad objectives of the procuring firm and the customer.
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
Vertical Integration
Figure 11.2
Raw material (suppliers) Iron ore Silicon Farming
Backward integration Steel
Current transformation Automobiles Integrated
circuits Flour milling
Forward integration Distribution systems Circuit boards
Finished goods (customers) Dealers
Computers Watches
CalculatorsBaked goods
Vertical Integration Examples of Vertical Integration
Vertical Integration
Developing the ability to produce goods or service previously purchased
Integration may be forward, towards the customer, or backward, towards suppliers
Can improve cost, quality, and inventory but requires capital, managerial skills, and demand
Risky in industries with rapid technological change
Keiretsu Networks A 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
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
Exceptionally lean performance, low capital investment, flexibility, and speed
Managing the Supply Chain
Mutual agreement on goals Trust Compatible organizational cultures
There are significant management issues in controlling a supply chain involving many independent organizations
Issues in an Integrated Supply Chain
Local optimization - focusing on local profit or cost minimization based on limited knowledge
Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale
Large lots - low unit cost but do not reflect sales
Bullwhip effect - stable demand becomes lumpy orders through the supply chain
Opportunities in an Integrated Supply Chain
Accurate “pull” data Lot size reduction Single stage control of
replenishment Vendor managed inventory Postponement
Opportunities in an Integrated Supply Chain
Channel assembly Drop shipping and special
packaging Blanket orders Standardization Electronic ordering and funds
transfer
Information Technology: A Supply Chain Enabler
• Information links all aspects of supply chain• E-business
• replacement of physical business processes with electronic ones
• Electronic data interchange (EDI)• a computer-to-computer exchange of business documents
• Bar code and point-of-sale• data creates an instantaneous computer record of a sale
IT: Supply Chain Enabler
• Radio frequency identification (RFID)• technology can send product data from an item to a reader
via radio waves
• Internet• allows companies to communicate with suppliers,
customers, shippers and other businesses around the world instantaneously
• Build-to-order (BTO)• direct-sell-to-customers model via the Internet; extensive
communication with suppliers and customer
E-Business & Supply Chain Management
• Savings due to lower transaction costs• Reduction of intermediary roles• Shorter supply chain response times• Wider presence and increased visibility• Greater choices & more info for customers• Improved service• Collection & analysis of huge amounts of customer data
& preferences• Access to global markets, suppliers & distribution
channels
Electronic Data Interchange• Computer-to-computer exchange of documents in a
standard format• Purchasing, shipping and receiving• Improve customer service• Reduce paperwork• Increase productivity• Improve billing and cost efficiency• Reduce bullwhip effect through information sharing
Internet Purchasing
Internet used to communicate order releases against blanket purchase orders Internet replaces other forms of
electronic order releases
Four Common Variations
Internet Purchasing
Internet used to buy non-standard items from catalogsLong-term master agreements in
placeReduces order lead-time and
purchasing costs
Four Common Variations
Internet Purchasing
Traditional purchasing system, but Internet-basedSignificantly speeds up
requisitioning, bidding, supplier selection, and order placement
Four Common Variations
Internet Purchasing
Internet auctionsMay be used for commodity items
for which long-term contracts do not exist
Four Common Variations
Ships good;receives
electronicpayment
Receiveselectronic
purchase order
Selects a supplierbased on quality,
cost, deliveryperformance;
issues purchaseorder
Collects/reviewsbids submittedelectronically
Assigns suppliersto bid; givesclosing dates
and conditions
Enters data intoInternet system
Buyer reviewsrequisition
Inputs request intocomputer systemand transmits to
purchasingdepartment
Internet Purchasing
Figure 11.3
Individual initiatesrequisition
Purchasingdepartment/buyer Supplier
Prepares requisition
Internet Purchasing
Suppliers get closer to their customers Shorter cycle times may improve cash flow Capital investment is low Buyers enjoy comparison shopping, rapid
ordering, reduced transaction costs, and lower inventory
May be part of an integrated Enterprise Resource Planning (ERP) system
Bar Codes• Automated data collection system• Bar code contains identifying information• Provide instantaneous tracking information• Checkout scanners create point-of-sale data
• Update inventory records• Identify trends• Order material• Schedule orders• Plan deliveries
Radio Frequency Identification (RFID)
• Use radio waves to transfer data from chip to a reader• Provides complete visibility of product location• Continuous inventory monitoring• Reduce labor to manage inventory• Reduce inventory costs
• RFID is not standardized yet• Difficult to track between systems
RFID Capabilities
RFID Capabilities
Vendor Selection
Vendor evaluation Critical decision Find potential vendors Determine the likelihood of them
becoming good suppliers Vendor Development
Training Engineering and production help Establish policies and procedures
Vendor Selection
Negotiations Cost-Based Price Model - supplier opens
books to purchaser Market-Based Price Model - price based
on published, auction, or indexed price Competitive Bidding - used for infrequent
purchases but may make establishing long-term relationships difficult
Vendor Evaluation
Criteria WeightsScores
(1-5)Weight x Score
Engineering/research/innovation skills.20
51.0
Production process capability (flexibility/technical assistance) .15
4.6
Distribution/delivery capability.05
4.2
Quality systems and performance.10
2.2
Facilities/location.05
2.1
Financial and managerial strength (stability and cost structure) .15
4.6
Information systems capability (e-commerce, Internet) .10
2.2
Integrity (environmental compliance/ ethics) .20
51.0
Total1.00 3.9
Logistics Management
Objective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities
A frequent candidate for outsourcing Gain competitive advantage through
reduced costs and improved customer service
Distribution Systems
Trucking Moves the vast majority of
manufactured goods Chief advantage is flexibility
Railroads Capable of carrying large loads Little flexibility though containers
and piggybacking have helped with this
Distribution Systems
Airfreight Fast and flexible for light loads May be expensive
Waterways Typically used for bulky, low-value
cargo Used when shipping cost is more
important than speed
Distribution Systems
Pipelines Used for transporting oil, gas, and
other chemical products
Cost of Shipping Alternatives
Product in transit is a form of inventory and has a carrying cost
Faster shipping is generally more expensive than slower shipping
We can evaluate the two costs to better understand the trade-off
Cost of Shipping AlternativesValue of connectors = $1,750.00Holding cost = 40% per yearSecond carrier is 1 day faster and $20 more expensive
Daily cost of holding product = x /365
annual holding cost product value
= (.40 x $1,750)/ 365 = $1.92
Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper
Logistics, Security, and JIT
Borders are becoming more open in the U.S. and around the world
Monitoring and controlling stock moving through supply chains is more important than ever
New technologies are being developed to allow close monitoring of location, storage conditions, and movement
Benchmarking Supply-Chain Management
Table 11.6
Typical FirmsBenchmark
Firms
Administrative costs as a percent of purchases 3.3% .8%
Lead time (weeks) 15 8
Time spent placing an order 42 minutes 15 minutes
Percentage of late deliveries 33% 2%
Percentage of rejected material 1.5% .0001%
Number of shortages per year 400 4
Supply Chain Integration
• Share information among supply chain members• Reduced bullwhip effect• Early problem detection• Faster response• Builds trust and confidence
• Collaborative planning, forecasting, replenishment, and design
• Reduced bullwhip effect• Lower costs (material, logistics, operating, etc.)• Higher capacity utilization• Improved customer service levels
Supply Chain Integration
• Coordinated workflow, production and operations, procurement
• Production efficiencies• Fast response• Improved service• Quicker to market
• Adopt new business models and technologies• Penetration of new markets• Creation of new products• Improved efficiency• Mass customization
Collaborative Planning, Forecasting, and Replenishment (CPFR)
• Two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand
• Parties electronically exchange• past sales trends• point-of-sale data• on-hand inventory• scheduled promotions• forecasts
SCM Software
• Enterprise resource planning (ERP)• software that integrates the components of a company by
sharing and organizing information and data
Measuring Supply Chain Performance• Key performance indicators
• Metrics used to measure supply chain performance
inventory of valueaggregate Average
sold goods ofCost
turnsInventory
) item e(unit valu) itemfor inventory (average
inventory of valueaggregate Average
ii
• Inventory turnover
• Total value (at cost) of inventory
Measuring Supply Chain Performance
• Days of supply
• Fill rate: fraction of orders filled by a distribution center within a specific time period
days) sold)/(365 goods of(Cost
inventory of valueaggregate Average
supply of Days
Computing Key Performance Indicators
Process Control and SCOR
• Process Control• not only for manufacturing operations• can be used in any processes of supply chain
• Supply Chain Operations Reference (SCOR)• a cross industry supply chain diagnostic tool maintained
by the Supply Chain Council
SCOR Model Processes
SCOR Performance Metrics
Questions?
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