McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

CHAPTER 8

SUPPLY CHAIN MANAGEMENT

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Chapter Eight Overview• SECTION 8.1 – SUPPLY CHAIN FUNDAMENTALS

– Basics of Supply Chain– Information Technology’s Role in the Supply Chain– Supply Chain Management Success Factors– SCM Success Stories

• SECTION 8.2 – APPLYING A SUPPLY CHAIN DESIGN– Using Information Technology to Drive the Supply Chain– Facilities Driver– Inventory Driver– Transportation Driver– Information Driver– Applying a Supply Chain Design– Future Supply Chain Trends

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

SECTION 8.1

SUPPLY CHAIN FUNDAMENTALS

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LEARNING OUTCOMES

1. List and describe the components of a typical supply chain

2. Define the relationship between decision making and supply chain management

3. Identify the factors driving supply chain management

4. Summarize the best practices for implementing a successful supply chain management system

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BASICS OF SUPPLY CHAIN

• The average company spends nearly half of every dollar that it earns on production

• In the past, companies focused primarily on manufacturing and quality improvements to influence their supply chains

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BASICS OF SUPPLY CHAIN

• The supply chain has three main links:1. Materials flow from suppliers and their

“upstream” suppliers at all levels2. Transformation of materials into

semifinished and finished products through the organization’s own production process

3. Distribution of products to customers and their “downstream” customers at all levels

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BASICS OF SUPPLY CHAIN• Organizations must embrace technologies

that can effectively manage supply chains

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BASICS OF SUPPLY CHAIN

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INFORMATION TECHNOLOGY’S ROLE IN THE SUPPLY CHAIN

• IT’s primary role is to create integrations or tight process and information linkages between functions within a firm

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INFORMATION TECHNOLOGY’S ROLE IN THE SUPPLY CHAIN

Factors Driving SCM

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Visibility

• Supply chain visibility – the ability to view all areas up and down the supply chain

• Bullwhip effect – occurs when distorted product demand information passes from one entity to the next throughout the supply chain

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Consumer Behavior

• Companies can respond faster and more effectively to consumer demands through supply chain enhances

• Demand planning software – generates demand forecasts using statistical tools and forecasting techniques

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Competition

• Supply chain planning (SCP) software– uses advanced mathematical algorithms to improve the flow and efficiency of the supply chain

• Supply chain execution (SCE) software – automates the different steps and stages of the supply chain

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Competition

• SCP and SCE in the supply chain

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Speed

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SUPPLY CHAIN MANAGEMENT SUCCESS FACTORS

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SUPPLY CHAIN MANAGEMENT SUCCESS FACTORS

• SCM industry best practices include:1. Make the sale to suppliers2. Wean employees off traditional business

practices3. Ensure the SCM system supports the

organizational goals4. Deploy in incremental phases and measure

and communicate success5. Be future oriented

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SCM SUCCESS STORIES• Top reasons why more and more executives are turning to

SCM to manage their extended enterprises

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SCM SUCCESS STORIES• Numerous decision support systems (DSSs) are

being built to assist decision makers in the design and operation of integrated supply chains

• DSSs allow managers to examine performance and relationships over the supply chain and among:– Suppliers– Manufacturers– Distributors– Other factors that optimize supply chain performance

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SCM SUCCESS STORIES

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OPENING CASE QUESTIONSDell’s Famous Supply Chain

1. How might Dell use each of the five basic SCM components?

2. How had Dell influenced visibility, consumer behavior, competition, and speed though the use of IT in its supply chain?

3. Explain the seven principles of SCM in reference to Dell’s business model

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

SECTION 8.2

APPLYING A SUPPLY CHAIN

DESIGN

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LEARNING OUTCOMES

5. List and describe the four drivers of supply chain management

6. Explain supply chain management strategies focused on efficiency

7. Explain supply chain management strategies focused on effectiveness

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USING IT TO DRIVE THE SUPPLY CHAIN

• The four primary drivers of supply chain management

1. Facilities2. Inventory3. Transportation4. Information

• Organizations use these four drivers to support either a supply chain strategy focusing on efficiency or a supply chain strategy focusing on effectiveness

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USING IT TO DRIVE THE SUPPLY CHAIN

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FACILITIES DRIVER

• Facility – processes or transforms inventory into another product, or it stores the inventory before shipping it to the next facility

• Three primary facilities components1. Location2. Capacity3. Operational design

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FACILITIES 1: Location

• Location efficiency – centralize the location to gain economies of scale, which increases efficiency

• Location effectiveness – decentralize the locations to be closer to the customers, which increases effectiveness

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FACILITIES 2: Capacity

• Capacity efficiency – minimal excess capacity with the ability to produce only what is required

• Capacity effectiveness – large amounts of excess capacity which can handle wide swings in demand

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FACILITIES 3: Operational Design

• Operational design efficiency – product focus design allows the facility to become highly efficient at producing one single product, increasing efficiency

• Operational design effectiveness – functional focus design allows the facility to perform a specific function on many different types of products, increasing effectiveness

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FACILITIES DRIVER

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INVENTORY DRIVER

• Inventory – offsets discrepancies between supply and demand

• Inventory management and control software – provides control and visibility to the status of individual items maintained in inventory

• Two primary inventory components1. Cycle inventory2. Safety inventory

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INVENTORY 1: Cycle Inventory

• Cycle inventory – the average amount of inventory held to satisfy customer demands between inventory deliveries

– Cycle inventory efficiency – holding small amounts of inventory and receiving orders weekly or even daily

– Cycle inventory effectiveness – holding large amounts of inventory and receiving inventory deliveries only once a month

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INVENTORY 2: Safety Inventory

• Safety inventory – extra inventory held in the event demand exceeds supply

– Safety inventory efficiency – holding small amounts of safety inventory

– Safety inventory effectiveness – holding large amounts of safety inventory

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INVENTORY DRIVER

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TRANSPORTATION DRIVER

• Transportation – moves inventories between the different stages in the supply chain

• Two primary inventory components1. Method of transportation2. Transportation route

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TRANSPORTATION 1: Method of Transportation

• Global inventory management system – provides the ability to locate, track, and predict the movement of every component or material anywhere upstream or downstream in the supply chain

– Method of transportation efficiency– Method of transportation effectiveness

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TRANSPORTATION 2: Transportation Route

• Transportation planning software – tracks and analyzes the movement of materials and products to ensure the delivery of materials and finished goods at the right time, the right place, and the lowest cost

• Distribution management software – coordinates the process of transporting materials from a manufacturer to distribution centers to the final customer

– Transportation route efficiency– Transportation route effectiveness

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TRANSPORTATION DRIVER

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INFORMATION DRIVER

• Information – an organization must decide how and what information it wants to share with its supply chain partners

• Two primary information components1. Information sharing2. Push verses pull strategy

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INFORMATION 1: Information Sharing

• Information sharing efficiency – freely share lots of information to increase the speed and decrease the costs of supply chain processing

• Information sharing effectiveness – share only selected information with certain individuals, which will decrease the speed and increase the costs of supply chain processing

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INFORMATION 2: Push vs. Pull Information Strategy

• Pull information strategy (efficiency) – supply chain partners are responsible for pulling all relevant information

– Pull technology – pulls information

• Push information strategy effectiveness – organization takes on the responsibility to push information out to its supply chain partners

– Push technology – sends information

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INFORMATION DRIVER

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APPLYING A SUPPLY CHAIN DESIGN

• Wal-Mart’s supply chain management strategy emphasizes efficiency, but also maintains adequate levels of effectiveness

– Facilities focus – Efficiency– Inventory focus – Efficiency– Transportation focus – Effectiveness– Information focus - Efficiency

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APPLYING A SUPPLY CHAIN DESIGN

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FUTURE SUPPLY CHAIN TRENDS

• Fastest growing SCM components– Supply chain event management (SCEM)– Selling chain management – Collaborative engineering– Collaborative demand planning

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OPENING CASE QUESTIONSDell’s Famous Supply Chain

4. Identify the four primary drivers of SCM and explain how Dell uses each one to gain efficiency or effectiveness in its supply chain

5. Choose one of the fast growth SCM components and explain how Dell can use it to increase business operations

6. What is RFID and how could Dell use the technology to improve its supply chain?

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CLOSING CASE ONEBudNet

1. How can an SCM system help a distributor such as Anheuser-Busch make its supply chain more effective and efficient?

2. SCM is experiencing explosive growth. Explain why this statement is true using BudNet as an example

3. Evaluate BudNet’s effect on each of the five factors that are driving SCM success

4. List and describe the components of a typical supply chain along with its ability to help Budweiser make effective decisions

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CLOSING CASE TWOListerine’s Journey

1. Summarize SCM and describe Warner-Lambert’s supply chain strategy. Diagram the SCM components

2. Detail Warner-Lambert’s facilities strategy

3. Detail Warner-Lambert’s inventory strategy

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CLOSING CASE TWOListerine’s Journey

4. What would happen to Warner-Lambert’s business if a natural disaster in Saudi Arabia depletes its natural gas resources?

5. Assess the impact to Warner-Lambert’s business if the majority of the eucalyptus crop was destroyed in a natural disaster

6. Detail Warner-Lambert’s information strategy

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CLOSING CASE THREELevi’s

1. How did Levi Strauss achieve business success through the use of supply chain management?

2. What might have happened to Levi’s if its top executives had not supported investments in SCM?

3. David Bergen, Levi’s CIO, put together a cross-functional team of key managers from IT, finance, and sales to transform Levi’s systems to meet Wal-Mart’s requirements. Analyze the relationships between these three business areas and SCM systems. How can an SCM system help support these three critical business areas?

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CLOSING CASE THREELevi’s

4. Describe the five basic SCM components in reference to Wal-Mart’s business model

5. Explain RFID and provide an example of how Levi’s could use the technology to increase its business operations