Operations Management by
R. Dan Reid & Nada R. Sanders
3 rd Edition © Wiley 2007
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Describe the different kinds of electronic commerce
Describe supply chains and supply chain management
Describe the bullwhip effect
Describe factors affecting SCM
Describe factors affecting global supply chains
Describe the role of vertical integration
Solve in-sourcing or out-sourcing problems
Describe the role of purchasing in SCM
Describe the ethics of supply chain management
Describe the role of information sharing in SCM
Describe the role of warehouses in supply chains
Describe the concept of cross-docking
Describe supply chain performance measures
Describe trends in SCM
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Business-to-business (B2B)
Business-to-consumer (B2C)
Customer-to-customer (C2C)
Peer-to-peer (P2P)
Mobile commerce (m-commerce)
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Business-to-Business (B2B) Evolution:
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Automated order entry systems started in 1970’s
Electronic Data Interchange (EDI) started in the 1970’s
Electronic Storefronts emerged in the 1990’s
Net Marketplaces emerged in the late 1990’s
Benefits of B2B E-Commerce
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Lower procurement Administrative costs,
Access to global suppliers
Lower inventory investment due to price transparency/reduced response time
Quality enhanced due to earlier involvement between buyers and sellers, especially during product design and development
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(cont.)
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Business-to-Consumer (B2C) Revenue Models
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Advertising revenue model
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Subscription revenue model
Transaction fee model
Sales revenue model
Affiliate revenue model
Consumer-to-Consumer (C2C) E-Commerce
Peer-to-Peer (P2P) E-Commerce
M-Commerce
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A supply chain is the network of activities that deliver a product/service to the customer
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Sourcing of: raw materials, assembly, warehousing, order entry, distribution, delivery
Supply Chain Management is the business function that coordinates all of the network links
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Coordinates movement of goods through supply chain from suppliers to manufacturers to distributors
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Promotes information sharing along chain like forecasts, sales data, & promotions
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External
Suppliers
Internal
Functions
External
Distributors
INFORMATION
FUNDS
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External Suppliers
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Tier one supplier supplies directly to the processor
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Tier two supplier supplies directly to tier one
Tier three supplier supplies directly to tier two
Internal Functions include:
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Processing, purchasing, planning, quality, shipping
External Distributors transport finished goods
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Logics function manages all material movement including selection and monitoring carriers
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The Bullwip Effect describes replenishment orders at different chain levels with no apparent link to final demand. Worst at Tier 3
Causes: poor demand forecasting at each level, waiting to batch orders, price fluctuations
& promotions, rationing
Counteracting the Effect:
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Collaborate forecast at all levels, share real demand information (POS terminals)
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Order based on demand rates, not batching
Stabilize pricing e.g. Wal-Mart “every day low prices”
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SCM must consider the following trends, improved capabilities, & realities:
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Consumer Expectations and Competition – power has shifted to the consumer
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Globalization – capitalize on emerging markets
Information Technology – e-commerce, Internet,
EDI, scanning data, intranets
Government Regulations - like trade barriers
Environment Issues – e.g. waste minimization
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Managing extensive global supply chains introduces many complications
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Substantial geographical distances increase lead times and inventory investment
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Forecasting accuracy complicated by longer lead times and different operating practices
Exchange rates fluctuate, inflation can be high
Infrastructure problems like transportation, communication, lack of skilled labor, & scarce local material supplies
Product proliferation created by the need to customize products for each market
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Backward integration – acquisition or control of sources of raw material and component parts
Forward integration – acquisition or control of its distribution channels
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What questions need to be asked before sourcing decisions are made?
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Is product/service technology critical to firm’s success?
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Is operation a core competency?
Do you have the capital to provide capacity & keep the process current?
Will outsourcing extend lead times and limit flexibility?
Can others do it for less cost and better quality?
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Analysis will look at the expected sales levels and cost of internal operations vs. cost of purchasing the product or service
Total
TC
Buy
Cost of
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FC
Buy
Outsourcin
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VC
Buy
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Q g
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Total
TC
Make
Cost
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FC of Insourcing
Make
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VC
Make
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Q
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Indifferen
FC
Buy
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VC
Buy
Point
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Q
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FC
Make
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VC
Make
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Example: Make-or-Buy analysis- A small snowboard manufacturing company is presently sourcing the major portion of its manufacturing process. The cost for the purchased board is $50 each and they estimate their current fixed manufacturing costs at $25,000. A consultant has presented a plan which would reduce the variable cost to
$20 each, but requires a major in-house investment which would increase their fixed cost to $400,000.
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The owner wants to know what unit sales must be to justify the new proposal.
FC
Buy
+ (VC
Buy x Q) = FC
Make
+ (VC
Make x Q)
$25,000 + ($50 x Q) = $400,000 + ($20 x Q)
Q = 12,500 units
Purchasing has identified a new supplier that can produce a board for $30 each.
Now what is the Indifference Point?
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$25,000 + ($30 x Q) = $400,000 + ($20 x Q)
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Q = 37,500 units
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Purchasing role has attained increased importance since material costs represent
50-60% of cost of goods sold
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Ethics considerations
Developing supplier relationships
Determining how many suppliers
Developing partnerships
Industry trend is to a much smaller supplier base. Why?
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Have a long-term orientation Share a common vision
Are strategic in nature Share short/long term plans
Share information
Share risks and opportunities
Driven by end-customer needs
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Benefits of Partnering
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Early supplier involvement (ESI) in the design process
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Using supplier expertise to develop and share cost improvements and eliminate costly processes
Shorten time to market
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Implementing integrated SCM requires:
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Analyzing the whole supply chain
Starting by integrating internal functions first
Integrating external suppliers through partnerships
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Possible Supply Chain Objectives
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Reduce costs, improve quality
Reduce lead time and inventory
Reduce time to market
Increase sales
Improve demand data/forecasting
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There are two types–general and distribution
What do warehouses do?
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Transportation consolidation from LTL quantities to TL quantities
Product mixing is a value added service which groups a variety of items together for better service and reduced cost
Services like providing a closer location point to the customer. Also customizing services like adding instruction books or proper voltage power cord
Cross-docking to eliminate storage and order picking costs, e.g. Home Depot, Wal-Mart, Costco
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Traditional measures include;
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Return on investment
Profitability
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Market share
Revenue growth
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Additional measures
Customer service levels
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Inventory turns
Weeks of supply
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Inventory obsolescence
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Dell Computer has achieved excellent results from their SCM implementation. They have made dramatic improvements in competitive priorities:
Cost – prices 10-15% lower than competition
Speed – Dell can take either a phone or Internet order and ship within 36 hours
- Dell’s nearby component warehouse has reduced inventories to 13 days of supply compared to Compaq’s 25
Flexibility – suppliers restock warehouse so Dell can build and ship customized make to order PC’s
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Supply chains will be more agile, flexible, and integrated to reflect consumer expectations
Technology will facilitate real time demand sharing throughout entire supply chains
Winning firms will have the best supply chains, e.g. Wal-
Mart
Greater use of net-marketplaces to bring more suppliers into contact with more suppliers to reduce price and lower transaction costs
Greater use of E-distributors providing products via ecatalog from thousands of suppliers at one market place
E-purchasing companies connecting online suppliers offering VCM for MRO supplies will charge fees to join the market
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More online exchanges for spot requirements of large firms in a single industry, e.g. E-steelcom, Egreenbiz.com
More use of industry owned consortia enabling buyers to purchase direct inputs from a limited set of invited participants, e.g. Covisint.com (automotive),
Avendra.com (hospitality), and ForestExpress.com
(paper and forest)
More use of value adding third party logistics providers like UPS
More virtual corporations overseeing networks of suppliers
SCM performance measurements will focus on quality, speed, flexibility, and value
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E-commerce is the use of the Internet to transact business; B2B, B2C, C2C, P2P, M-commerce
SCM involves integration of all process to make a product, from raw materials to end user sales
The bullwhip effect is the distortion of real demand cause by multi-level batching, bad estimates, price fluctuations, and rationing
Many factors affect SCM; demands for better service, quality, quicker response, and global marketplaces, fierce competition, & information technology
With global SCM, complicating factors include lengthened lead times, exchange rates, & many infrastructure issues in developing countries
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Vertical integration is more appropriate for high volume, standard products
Outsourcing is more appropriate for non-core processes and activities
Purchasing manages supplier selection and supplier relationships, including forming partnerships
The ISM has developed ethics principles & standards
Information sharing is critical to effective SCM to minimize the risk inherent in long supply chains
Technology like bar code scanners, POS terminals, EDI, & the Internet have moved information sharing of actual
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(continued)
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Warehouses do transportation consolidation, product mixing or blending, and reducing response time
Cross-docking eliminates costs of storage and order picking. Requires close coordination of carriers
Measuring supply chain performance needs to reflect potential improvements in quality costs, service, inventory and capital investment, and productivity
The most significant advance will be the increased use of electronic marketplaces; e-distributors, e-purchasing, online exchanges, and industry consortia
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1.a. determine Q that makes the two total costs equal.
 b. given the demand (Q), compare the costs for the two options.
4.a. Data for Downhill Boards (DB) is in problem #3, use that to determine in-house cost.
 b. Determine the indifference point for the costs of
DB versus FFI.
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Additional factors could be operations, marketing, and finance issues.
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