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?