Supply Chain Management To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved

Supply Chain Supply Chain ManagementManagement

To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved.


Introduction to Supply Chains Introduction to Supply Chains andand

Supply Chain ManagementSupply Chain Management

Supply ChainSupply Chain (Definition of) (Definition of)

The sequence of organizations- their facilities, functions, processes and activities- that are involved in producing and delivering a product or service

Sometimes referred to as value chain

Components of Supply (Value) ChainsComponents of Supply (Value) Chains

• Supply Component: Starts at the beginning of the SC and ends with the internal operations of the organization.

• Demand Component: Starts at the point where the organization’s output is delivered to its immediate customer and ends with the final customer in the chain. Demand chain is the sales and distributon portion of the value chain

The length of each component depends on where a particular organization is in the chain

The Supply ChainThe Supply Chain

Products and Services



CustomersCustomers

Total satisfaction with quality, price, delivery, and service

DistributorsDistributors

Package and delivery

Inventory

ProducersProducers

Finished goods, end products and services

Inventory

SuppliersSuppliers

Inventory

Materials, parts, sub-assemblies, and services

Downstream SC membersUpstream SC members


Information




CustomersCustomers




Inventory

ProducersProducers


Inventory

SuppliersSuppliers

Inventory



Information

Cash




CustomersCustomers




Inventory

ProducersProducers


Inventory

SuppliersSuppliers

Inventory


Consumer

Retailer

Manufacturer

Material Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlowSchedules

The Supply-ChainThe Supply-Chain


Flow ManagementFlow Management

Three types of flow– Product and service flow

• Involves movement of goods and services from suppliers to customers as well as handling customer service needs and product returns

– Information flow• Involves sharing forecasts and sales data, transmitting

orders, tracking shipments, and updating order status

– Financial flow• Involves credit terms, payments, and consignment and

title ownership arrangements

Typical Supply Chain for a Typical Supply Chain for a ManufacturerManufacturer

Supplier

Supplier

Supplier

Storage} Mfg. Storage Dist. Retailer Customer

Supplier

Supplier

} Storage Service Customer

Typical Supply Chain for a ServiceTypical Supply Chain for a Service

Supply Chain ManagementSupply Chain Management (Definition of) (Definition of)(1 of 2) (1 of 2)

A total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end user (planning, organizing, directing and controlling flows of materials)

Managing all activities associated with the flow and transformation of goods and services from raw materials to the end user, the customer, as well as the associated information flows


The strategic coordination of business functions within a business organization and throughout its supply chain for the purpose of integrating supply and demand management

The process of planning, implementing and controlling supply chain operations.

Supply Chain ManagementSupply Chain Management(Definition of)(Definition of)(2 of 2) (2 of 2)

Goals of Goals of Supply Chain ManagementSupply Chain Management (1 of 2) (1 of 2)

Synchronization of activities required to achieve maximum competitive benefits

Coordination, cooperation, and communication and timing among SC members

Ensuring rapid flow of information among members

Goals of Goals of Supply Chain ManagementSupply Chain Management(2 of 2) (2 of 2)

Linking the market, distribution channels, processes and suppliers so that market demand is met as efficiently as possible across the chain

Matching supply and demand at each stage of the chain as effectively and efficiently as possible

Ultimate goal: Achieving customer satisfaction and maximizing supply chain profits

FacilitiesFacilities Involved in SCM Involved in SCM

The sequence of the supply chain begins with basic suppliers and extends all the way to the final customer Warehouses Factories Processing centers Distribution centers Retail outlets Offices


Elements of Supply Chain Elements of Supply Chain ManagementManagement

Deciding how to best move and store materialsLogistics

Determining location of facilitiesLocation

Monitoring supplier quality, delivery, and relationsSuppliers

Evaluating suppliers and supporting operationsPurchasing

Meeting demand while managing inventory costsInventory

Controlling quality, scheduling workProcessing

Incorporating customer wants, mfg., and timeDesign

Predicting quantity and timing of demandForecasting

Determining what customers wantCustomers

Typical IssuesElement


Supply Chain ManagementSupply Chain Management Issues Issues (1 of 3) (1 of 3)

Determining what customers want

Predicting (forecasting) quantity and timing of demand

Incorporating customer wants to product design

Determining appropriate levels of outsourcing

Managing procurement (purchasing)

Managing and evaluating suppliers (monitoring supplier quality, delivery and relations)


Supply Chain ManagementSupply Chain Management Issues Issues(2 of 3)(2 of 3)

Determining the location of facilities

Managing customer relationships

Information management

Managing supporting operations

Managing risk

Managing flows

Quality assurance and control


Supply Chain ManagementSupply Chain Management Issues Issues(3 of 3)(3 of 3)

Production planning, scheduling and control

Inventory management (meeting demand while managing inventory costs)

Logistics

Deciding how best to move and store materials (distribution and delivery)

Cstomer service

Identifying problems and responding to them

Strategic Strategic &&OperationalOperationalDecisions in Supply Chains Decisions in Supply Chains

Three types of decisions in supply chain management– Strategic – design and policy– Tactical– Operational – day-today activities


Supply Chain IssuesSupply Chain Issues

Quality controlProduction planning and control

Inventory policiesPurchasing policiesProduction policiesTransportation policiesQuality policies

Design of the supply chain, partnering

Operating IssuesTactical IssuesStrategic Issues


Strategic ResponsibilitiesStrategic Responsibilities

Supply chain strategy alignment Network configuration Information technology Products and services Capacity planning Strategic partnerships Distribution strategy Uncertainty and risk reduction


Tactical ResponsibilitiesTactical Responsibilities

ForecastingSourcingOperations planningInventory policiesQuality policiesTransportation planningCollaborating


Operational ResponsibilitiesOperational ResponsibilitiesSchedulingReceivingTransformingOrder fulfillingManaging inventoryShippingInformation sharingControlling

Typical Supply ChainTypical Supply Chain Activities Activities

PurchasingReceiving Storage Operations Storage

Production Distribution

Processes involved in SCM•Acquiring customer orders•Procuring materials and components from suppliers (sourcing and procurement)•Producing or manufacturing products (transformation activities) •Filling customer orders•Logistics (the part of the SC involved with the forward and reverse flow of goods, services, cash and information)

Trends in SCMTrends in SCM• Reevaluation of outsourcing• Risk management• Inventory management• Lean supply chains• Sustainability

As a result of these trends, organizations are likely to give serious thought to reconfiguring their supply chains to• reduce risks, • improve flow, • increase profits and • increase customer satisfaction

As a result of these trends, organizations are likely to give serious thought to reconfiguring their supply chains to• reduce risks, • improve flow, • increase profits and • increase customer satisfaction

Supply-Chain Costs as a Percent of SalesSupply-Chain Costs as a Percent of Sales

• All industry• Automobile• Food• Lumber• Paper• Petroleum• Transportation

• 52%• 67%• 60%• 61%• 55%• 79%• 62%

Industry Percent of Sales

Factors That Contribute to the Increased Factors That Contribute to the Increased Need for Effective Supply Chain Need for Effective Supply Chain

ManagementManagementneed to improve operations increased levels of outsourcingincreasing transportation costscompetitive pressuresincreasing globalizationincreasing importance of e-commerceincreasing complexity of supply chainsincreasing pressure to decrease inventories

Benefits of Supply Chain ManagementBenefits of Supply Chain Management

Lower inventoriesLower costs Higher productivityGreater agilityShorter lead timesHigher profitsGreater customer loyaltyIntegration of seperate organizations into a cohesive

operating system

Actual Actual BenefitsBenefits Gained by Gained by Supply Chain Supply Chain ManagementManagement

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

Requirements of a Requirements of a Successful Supply ChainSuccessful Supply ChainIt begins with strategic sourcing

Analyzing the procurement process to lower costs by reducing waste and non-value-added activities, increasing profits, reducing risks and improving supplier performance

Trust among trading partners

Effective cooperation and communications

Supply chain should enable members to 1) share forecasts, 2) determine the status of orders in real time, 3) access inventory data of partners

Supply chain visibility

Inventory velocity

Event-management capability

The ability to detect and respond to unplanned events

Measuring SC Performance: Performance metrics

Creating an Effective Supply ChainCreating an Effective Supply Chain

An Effective Supply Chain requires linking the market, distribution channels processes, and suppliers

1. Develop strategic objectives and tactics

2. Integrate and coordinate activities in the internal supply chain

3. Coordinate activities with suppliers and with distributors

4. Coordinate planning and execution across the supply chain

5. Form strategic partnerships


SC Performance MeasuresSC Performance Measures

Supply Chain Performance DriversSupply Chain Performance Drivers

1. Quality

2. Cost

3. Flexibility

4. Velocity (inventory velocity, information velocity)

5. Customer service


Supply Chain PerformanceSupply Chain Performance Measures Measures

1. Financial• Return on assets• Cost• Cash flow• Profits

2. Suppliers• Quality• On-time deliveriy• Cooperation• flexibility

3. Operations• Productivity• Quality


Supply Chain PerformanceSupply Chain Performance Measures Measures

4. Inventory• Avarage value• Turnover• Weeks of supply

5. Order fulfillment• Order accuracy• Time to fill orders• Percentage of incompete orders shipped• Percentage of orders delivered on time

6. Customers.• Costomer satisfaction• Percentage of customer complaints


Measuring SC PerformanceMeasuring SC Performance: Inventory : Inventory TurnoverTurnover

• One of the most commonly used measures is “Inventory Turnover”

valueinventory aggregate Average

sold goods ofCost turnoverInventory

valueinventory aggregate Average

sold goods ofCost turnoverInventory

Measuring SC PerformanceMeasuring SC Performance: : SCOR MetricsSCOR Metrics

Perspective Metrics

Reliability On-time deliveryOrder fulfillment lead timeFill rate (fraction of demand met from stock)Perfect order fulfillment

Flexibility Supply chain response timeUpside production flexibility

Expenses Supply chain management costsWarranty cost as a percent of revenueValue added per employee

Assets/utilization Total inventory days of supplyCash-to-cash cycle timeNet asset turns


Inventory ManagementInventory Management

Supply Chain UncertaintySupply Chain Uncertainty

Forecasting, lead times, batch ordering, price fluctuations, and inflated orders contribute to variability

Inventory is a form of insurance

Distorted information is one of the main causes of uncertainty


Inventory ManagementInventory Management within A SC within A SC

Inventory issues in SCM– Inventory location

• Centralized inventories• Decentralized inventories

– Inventory velocity• The speed at which goods move through a supply chain

– The effect of demand variability on inventories

The bullwhip effect• Inventory oscillations that become increasingly larger

looking backward through the supply chain


The Bullwhip EffectThe Bullwhip Effect• Variations in demand cause inventories to fluctuate and get

out of control• Results in higher costs and lower customer satisfaction

– Inventory fluctuation can be magnified by• Periodic ordering• Dverreactions to stockouts• Quality problems• Labor problems• Unusual weather cnoditions• Delays in shipments of goods• Communication delays• Incomplete communications • Lack of coordination of activities among organizations • Forecast inaccuracies• Order batching• Product mix changes• Sales incentives and promotions• Liberal product return policies

Bullwhip EffectBullwhip Effect

Final CustomerInitialSupplier

Demand

Demand variations begin at the customer end of the chain and become increasingly large as they radiate backwards through the chain (nventory oscillations become progressively larger moving backward through the supply chain)

Inventories in a SC: Inventories in a SC: Bullwhip EffectBullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

n tit

y

Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chainThe magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

A lot of retailers each with little variability in their orders….

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

Inventories in a SC: Inventories in a SC: Bullwhip EffectBullwhip Effect

Tier 2Suppliers

Tier 1Suppliers

Producer Distributor Retailer FinalFinalCustomerCustomer

Amount ofAmount ofinventoryinventory=


Mitigating the Bullwhip EffectMitigating the Bullwhip Effect

• Good supply chain management can overcome the bullwhip effect– Strategic buffering

• Holding inventory at a distribution center rather than at retail outlets

– Replenishment based on need

• Vendor-managed inventory– Vendors monitor goods and replenish retail inventories

when supplies are low

Vendor-Managed InventorVendor-Managed Inventoriesies

The use of a local supplier to maintain inventory for the manufacturer

Stocking information is accessed using EDIA first step towards supply chain collaboration Increased speed, reduced errors, and improved

service


Supply Chains and

Information Technology

Role of Role of Information in the Supply ChainInformation in the Supply Chain(1 of 2) (1 of 2)

Centralized coordination of information flows Integration of transportation, distribution, ordering, and

productionDirect access to domestic and global transportation and

distribution channelsLocating and tracking the movement of every item in the

supply chain

Role of IRole of Information in the Supply Chainnformation in the Supply Chain (2 of 2)(2 of 2)

Data interchangeData acquisition at the point of origin and point of sale Intercompany and intracompany information access Instantaneous updating of inventory levels Increasing the rate at which information is communicated

in a SC.

Some IT Applications for SCM (1 of 3)Some IT Applications for SCM (1 of 3)Electronic Business (replacement of physical processes with electronic ones)

Electronic Data Interchange (a computer-to-computer exchange of business documentsincluding purchase orders, shipping notices, and debit or credit memos) in a standard format)

Bar Coding (computer readable codes attached to items flowing through the SC). Generates point-of-sale data which is useful for determining sales trends, ordering, production scheduling, and delivery plans

1234 5678


Some IT Applications for SCM (2 of 3)Some IT Applications for SCM (2 of 3)RFID (Radio Frequency Identification) Technology

A technology that uses radio waves to identify objects, such as goods in supply chains)Similar to bar codes but

uses radio frequency to transmit product information to receiverAre able to convey much more informationDo not require line-of-sight for readingDo not need to be read one at a time

Used to track goods in supply chainRFID tags attached to objectsRFID eliminates need for manual counting and bar code scanning

Some IT Applications for SCM (3 of 3) Some IT Applications for SCM (3 of 3)

Internet (provides instant access to organizations, individuals and information sources; fundamentaly changes the way organizations do business; add speed and accessibility to the SC)

Intranets (internet-like networks that operate within a single organization)

Extranets (intranets that can be connected to the global internet & that include a company’s suppliers and customers; they allow limited access)


The Wal-Mart Supply Chain


Wall-Mart CaseWall-Mart Case

Wal-Mart has a satellite network for electronic data interchange that allows vendors to directly access point-of-sale data in real time, enabling them to improve their forecasting and inventory management.

Wal-Mart also uses the system for issuing purchase orders and receiving invoices from its vendors.


• 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

Benefits of ElectronicBenefits of Electronic Data Interchange Data Interchange

The InternetThe Internet Instant global access to organizations,

individuals, and information sourcesFundamentally changes the way organizations

do businessRemoved geographic

barriersAdds speed and accessibility

to the supply chain

Build-to-Order Cars over the Internet


Linking the Supply Chain with SAP

• E-Business: the use of electronic technology to facilitate business transactions Involves the interaction of different business organizations as well as the interaction of individuals with business organizations. Replacement of physical processes with electronic ones

• Applications include:– Internet buying and selling– E-mail– Order and shipment tracking– Electronic data interchange

EElectronic lectronic BusinessBusiness


Essential Features of E-BusinessEssential Features of E-Business

The Web site (front-end design) Order fulfillment (back end)

Order processsingBillingİnventory managementWarehousingPackingShipingDelivery

Global presence and increased visibilityGlobal access to markets and customersImproved competitiveness, quality and serviceGreater choices and more and easy access to

information for customers Collection and analysis of detailed customer data,

interests and preferencesShortened supply chain response times

Advantages Advantages of of E-BusinessE-Business (1 of 2) (1 of 2)

Shortened transaction times for ordering and delivery Cost savings and price reductions Virtual companies with lower pricesLeveling the playing field for small companies Reducing or eliminating intermediaries (disintermetiation) Improved service

Advantages Advantages of of E-BusinessE-Business (2 of 2) (2 of 2)


E-Business Order Fulfillment ProblemsE-Business Order Fulfillment Problems• Efficient web sites do not necessarily mean the rest of the

supply chain will be as efficient

Customer expectations– Order quickly Quick delivery

• Demand variability creates order fulfillment problems• Sometimes Internet demand exceeds an organization’s ability

to fulfill orders• Inventory

– Outsourcing order fulfillment• Loss of control

– Build large warehouses• Internal holding costs

IT IssuesIT Issues Increased benefits and sophistication come with

increased costs

Efficient web sites do not necessarily mean the rest of the supply chain will be as efficient

Security problems are very real

Partnership and trust are important elements that may be new to business relationships


ProcurementProcurement

ProcurementProcurement

Development and implementation of purchasing plans for products and services that support operations strategies


E-ProcurementE-ProcurementBusiness-to-business commerce conducted on the

Internet

Benefits include lower transaction costs, lower prices, reduce clerical labor costs, and faster ordering and delivery times

Currently used more for indirect goods

E-Marketplaces service industry-specific companies and suppliers

• 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.

PurchasingPurchasing

Importance of PurchasingImportance of Purchasing

Purchasing is important because:

- it is a major cost center

- affect quality of final product

- aids strategy of low cost, response and differentiation

• Develop and implement purchasing plans for products and services that support operations strategies.

• Develop, evaluate, and determine the best supplier, price, and delivery for the products and services that can be best obtained externally

GoalGoals s of Purchasingof Purchasing

• Identifying sources of supply

• Negotiating contracts

• Maintaining a database of suppliers

• Obtaining goods and services

• Managing supplies

Duties of PurchasingDuties of Purchasing

Purchasing InterfacesPurchasing Interfaces

Purchasing

Legal

AccountingOperations

Dataprocessing

Design

ReceivingSuppliers

Purchasing CyclePurchasing Cycle

1. Requisition received

2. Supplier selected

3. Order is placed

4. Orders are monitored

5. Orders are received

PurchasingPurchasing

LegalLegal

AccountingAccountingOperationsOperations

DataDataprocess-process-inging

DesignDesign

ReceivingReceiving

SuppliersSuppliers

• Centralized purchasing

– Purchasing is handled by one special department

• Decentralized purchasing

– Individual departments or separate locations handle their own purchasing requirements

Centralized vs Decentralized Centralized vs Decentralized PurchasingPurchasing


Centralized Supply at Honda America


Supplier ManagementSupplier Management


SuppliersSuppliersPurchased materials account for about half of

manufacturing costs

Materials, parts, and service must be delivered on time, of high quality, and low cost

Suppliers should be integrated into their customers’ supply chains

Partnerships should be established

On-demand delivery (JIT) is a frequent requirement


• Sourcing (choosing suppliers)

– Vendor analysis (evaluating sources of supply)

– Supplier audits

– Supplier certification

• Supplier relationship management

• Supplier partnerships

– CPFR

– Strategic partnering

Supplier Related IssuesSupplier Related Issues

SourcingSourcingSourcing is the selection of suppliers

Relationship between customers and suppliers focuses on collaboration and cooperation

Outsourcing has become a long-term strategic decision

Organizations focus on core competencies

Single-sourcing is increasingly a part of supplier relations

Evaluating the sources of supply in terms of:• Price• Quality and quality pratices• Flexibility• Location• Past experience• Product or service changes• Reputation and financial stability• Lead times and on-time delivery• Inventory policy• Services (such as technical support and training) provided

The above criteria can be classified as 1) those related to the organization, 2) those related to the product, and 3) those related to the service provided

Vendor AnalysisVendor Analysis


Supplier Audits and CertificationSupplier Audits and Certification

• Supplier audit– A means of keeping current on suppliers’ production (or

service) capabilities, quality and delivery problems and resolutions, and performance on other criteria

• Supplier certification– Involves a detailed examination of a supplier’s policies

and capabilities– The process verifies the supplier meets or exceeds the

requirements of a buyer


Supplier Relationship ManagementSupplier Relationship Management

• Type of relationship is often governed by the duration of the trading relationship– Short-term

• Oftentimes involves competitive bidding• Minimal interaction

– Medium-term• Often involves an ongoing relationship

– Long-term• Often involves greater cooperation that evolves into a

partnership

Contrasting Supplier RelationshipsContrasting Supplier Relationships

Aspect Adversary PartnerNumber 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

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

Supplier PartnershipsSupplier Partnerships


CCollaborative ollaborative PPlanning, lanning, FForecasting, and orecasting, and RReplenishmenteplenishment

A system based on the notion that there should be

information sharing among supply chain trading partners in planning, forecasting and inventory replenishment

cooperation among supply chain trading partners in planning

coordination of activities

Requires partners to agree on common goals (goal sharing)


CPFR ProcessCPFR Process

• Internet-based exchange of data and information• Significant decrease in inventory levels and more

efficient logistics• Companies focus on core competencies• Eliminates typical order processig


CPFR ResultsCPFR 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


Strategic PartneringStrategic Partnering

Two or more business organizations that have complementary products or services join so that each may realize a strategic benefit


Order FulfillmentOrder Fulfillment


Order FulfillmentOrder Fulfillment

Order fulfillment– The process involved in responding to customer

orders– Often a function of the degree of customization

required• Common approaches

– Engineer-to-order (ETO)– Make-to-order (MTO)– Assemble-to-order (ATO)– Make-to-stock (MTS)


Figure 7.5 Order Fulfillment at Amazon.com


Distribution System DesignDistribution System Design


Distribution SystemDistribution System

Encompasses all of the distribution channels, processes and functions, including warehousing and transportation, that a product passes through on its way to the final customer.


LogisticsLogistics


Refers to the movement of materials, services, cash and information in a supply chain.

Includes:• movement within a facility, • incoming and outgoing shipments of goods and materials

(traffic management)• decisions on shipping methods and time • information flow throughout the supply chain (RFID to track

goods)

LogisticsLogistics


Logistics ManagementLogistics Management- Includes and Integrates all materials functions

Purchasing Inventory management Production control Management of inbound outbound

transportation, material handling Warehousing and stores Order fulfillment and distribution Incoming quality control

Objective: Efficient, low cost operations


Materials Materials Movement Within a FacilityMovement Within a Facility


Incoming and Outgoing ShipmentsIncoming and Outgoing Shipments

Traffic management– Overseeing the shipment of incoming and

outgoing goods• Handles schedules and decisions on shipping method

and times, taking into account:– Costs of shipping alternatives– Government regulations– Needs of the organization– Shipping delays or disruptions


DistributionDistribution

The actual movement of products and materials between locations

Handling of materials and products at receiving docks, storing products, packaging, and shipping

Often called logisticsDriving force today

is speedParticularly important

for Internet dot-coms


TransportationTransportationThe movement of products and materials from one

location to another as it makes its way to the end-use customer

Important element, often overlookedCommon methods are railroads, trucking, water, air,

intermodal, package carriers, and pipelines


Evaluating Shipping AlternativesEvaluating Shipping Alternatives

Considerations include:• Shipping costs• Availabilitiy• Materials being shipped• Coordination of shipments with other SC activities• Flexibility• Speed • Environmental considerations


Distribution Centers Distribution Centers and Warehousingand Warehousing

Trend is for more frequent orders in smaller quantities

Flow-through facilities and automated material handling

Final assembly and product configuration may be done at the DC


Warehouse Management SystemsWarehouse Management Systems

Highly automated systems

Controls item putaway, picking, packing, and shipping

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


A WMS


Third-Party LogisticsThird-Party Logistics

The term used to describe the outsourcing of logistics management.

Includes warehousing and distribution


Reverse LogisticsReverse LogisticsReverse logistics – the backward flow of goods returned to the supply

chain (the process of transporting returned items)Products are returned to companies or third party handlers for a variety

of reasons (Defective products,recalled products,obsolete products, unsold products, parts replaced in the field, items for recycling, waste) and in a variety of conditions

Processing returned goods• Sorting, examining/testing, restocking, repairing• Reconditioning, recycling, disposing

Elements of return management • Gatekeeping – screening returned goods to prevent incorrect

acceptance of goods• Avoidance – finding ways to minimize the number of items that are

returned


Global Supply Chain Management Global Supply Chain Management


Global Supply ChainsGlobal Supply Chains

Product design often uses inputs from around the world

Some manufacturing and service activities are outsourced to countries where labor and/or materials costs are lower

Products are sold globally


Complexities of Complexities of Global Supply ChainsGlobal Supply ChainsNational and regional differencesLanguage and cultural differencesCurrency fluctuationsPolitical instabilityQuality issuesCustoms, business practices, Nonhomogeneoity of foreign markets Financial and economic considerationsGovernmental, environmental and regulatory considerations. Increased transportation costs and lead time Increased need for trust amongst supply chain partnersLocal capabilities Inadequate transportation and communication infrastructures

Infrastructure Obstacles to Global Infrastructure Obstacles to Global TradeTrade

Some emerging markets lack suitable distribution systems, i.e. roads, rail systems

Existing roads and ports may be inadequate

Market instability, political instability

Vertical integration is a common solution

Global Supply-Chain IssuesGlobal Supply-Chain Issues

Supply chains in a global environment must be:– Flexible enough to react to sudden changes in parts

availability, distribution, or shipping channels, import duties, and currency rates

– Able to use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out

– Staffed with local specialists to handle duties, trade, freight, customs and political issues


Challanges within a Supply Chain Challanges within a Supply Chain

Barriers to integration of organizations

Getting top management on board

Small businesses

Variability and uncertainty

Long lead times

Dealing with trade-offs

ChallengesChallenges to Optimizing SCs to Optimizing SCs

1. Lot-size-inventory (bullwhip)2. Inventory-transportation costs

–Cross-docking3. Lead time-transportation costs4. Product variety-inventory

–Delayed differentiation5. Cost-customer service

–Disintermediation

Trade-offsTrade-offs in SCM in SCM


Trade-OffsTrade-Offs

• Lot-size-inventory trade-off– Large lot sizes yield benefits in terms of quantity discounts and lower

annual setup costs, but it increases the amount of safety stock (and inventory carrying costs) carried by suppliers

• Inventory-transportation costs– Suppliers prefer to ship full truckloads instead of partial loads to

spread shipping costs over as many units as possible. This leads to greater holding costs for customers

– Cross-docking• A technique whereby goods arriving at a warehouse from a supplier are unloaded from

the suppliers truck and loaded onto outbound truck, thereby avoiding warehouse storage



• Lead time-transportation costs– Suppliers like to ship in full loads, but waiting for sufficient orders

and/or production to achieve a full load may increase lead time

• Product variety-inventory– Greater product variety usually means smaller lot sizes and higher

setup costs, as well as higher transportation and inventory management costs

– Delayed differentiation (a technique to increase SC efficiency)• Production of standard components and subassemblies which are held until late in the

process to add differentiating features



• Cost-customer service– Producing and shipping in large lots reduces costs, but increases

lead time

– Disintermediation (a technique to increase SC efficiency)

• Reducing one or more steps in a supply chain by cutting out one or more intermediaries

– Drop Shipping

• Shipping directly from the supplier to the end consumer, rather than from the seller, saving both time and reshipping costs


Techniques to Increase SC EfficiencyTechniques to Increase SC Efficiency

Techniques to Increase SC EfficiencyTechniques to Increase SC Efficiency• Delayed differentiation

Postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network. Production of standard components and subassemblies, which are held until late in the process to add differentiating features

– Channel assembly (sending distributors the individual components and modules rather than finished goods)

• Disintermediation– Reducing one or more steps in a supply chain by cutting out one or more

intermediaries

+ Cross Docking

+ Drop Shipping

Other Techniques to Increase SC EfficiencyOther Techniques to Increase SC Efficiency• Outsourcing• Blanket orders (a long-term purchase commitment to a supplier

for items that are to be delivered against short-term releases to ship

Drop Shipping and Special Packaging – supplier will ship to end consumer rather than to seller

• Vendor managed inventory systems The use of a local supplier to maintain inventory for the manufacturer.

• Electronic ordering and funds transfer (paperless ordering, payment by wire)

• Internet purchasing (e-procurement)

Potential SolutionsPotential Solutions to SC Problemsto SC ProblemsProblem Potential

ImprovementBenefits Possible

DrawbacksLarge inventories

Smaller, more frequent deliveries

Reduced holding costs

Traffic congestionIncreased costs

Long lead times

Delayed differentiationDisintermediation

Quick response May not be feasibleMay need absorb functions

Large number of parts

Modular Fewer partsSimpler ordering

Less variety

CostQuality

Outsourcing Reduced cost, higher quality

Loss of control

Variability Shorter lead times, better forecasts

Able to match supply and demand

Less variety

Critical IssuesCritical Issues in SCM in SCM • Increased strategic importance • Emphasis on cost, quality,agility and customer

service• Technology management• Increased conversion to lean production• Just-in-time deliveries• Few suppliers and vendor integration• Increased outsourcing• Globalization

Supply-Chain Performance Supply-Chain Performance ComparedCompared

Typical FirmsBenchmark

FirmsAdministrative costs as percent of purchases

3.3% 0.8%

Lead time (weeks) 15 8

Time spent in placing 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


Documents

Supply Chain Management To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved