CHAPTER 11
Supply Chain Management
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. Stevenson
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Supply Chain Management

Supply Chain: the sequence of
organizations - their facilities,
functions, and activities - that
are involved in producing and
delivering a product or service.
Sometimes referred to as value chains
Facilities
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Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices
Functions and Activities
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Forecasting
Purchasing
Inventory management
Information management
Quality assurance
Scheduling
Production and delivery
Customer service
Typical Supply Chains
Production
Distribution
Purchasing Receiving Storage Operations Storage
Typical Supply Chain for a Manufacturer
Supplier
Supplier
Supplier
}
Storage
Mfg.
Storage
Dist.
Retailer
Customer
Typical Supply Chain for a Service
Supplier
Supplier
}
Storage
Service
Customer
Need for Supply Chain Management
1.
2.
3.
4.
5.
6.
7.
8.
Improve operations
Increasing levels of outsourcing
Increasing transportation costs
Competitive pressures
Increasing globalization
Increasing importance of e-commerce
Complexity of supply chains
Manage inventories
Bullwhip Effect
Amount of
= inventory
Tier 2
Suppliers
Tier 1
Suppliers
Producer
Distributor
Retailer
Final
Customer
Benefits of Supply Chain Management
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
Benefits of Supply Chain Management
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Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
Elements of Supply Chain Management
Element
Typical Issues
Customers
Determining what customers want
Forecasting
Predicting quantity and timing of demand
Design
Incorporating customer wants, mfg., and time
Processing
Controlling quality, scheduling work
Inventory
Meeting demand while managing inventory costs
Purchasing
Evaluating suppliers and supporting operations
Suppliers
Monitoring supplier quality, delivery, and relations
Location
Determining location of facilities
Logistics
Deciding how to best move and store materials
Logistics

Logistics

Refers to the movement of materials
and information within a facility and
to incoming and outgoing shipments
of goods and materials in a supply
chain
Logistics
• Movement within the facility
• Incoming and outgoing shipments
• Bar coding
• EDI
• Distribution
• JIT Deliveries
0
214800 232087768
Materials Movement
Work center
Work center
Work
center
Storage
Work
center
Storage
RECEIVING
Storage
Shipping
Distribution Requirements Planning

Distribution requirements planning
(DRP) is a system for inventory
management and distribution
planning

Extends the concepts of MRPII
Uses of DRP

Management uses DRP to plan and
coordinate:
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Transportation
Warehousing
Workers
Equipment
Financial flows
Electronic Data Interchange
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EDI – the direct transmission of interorganizational transactions, computerto-computer, including purchase orders,
shipping notices, and debit or credit
memos.
Electronic Data Interchange
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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
Efficient Consumer Response

Efficient consumer response (ECR)
is a supply chain management
initiative specific to the food
industry

Reflects companies’ efforts to achieve
quick response using EDI and bar
codes
E-Commerce
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E-Commerce: the use of electronic
technology to facilitate business
transactions
Applications include
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Internet buying and selling
E-mail
Order and shipment tracking
Electronic data interchange
Advantages E-Commerce
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Companies can:
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Have a global presence
Improve competitiveness and quality
Analyze customer interests
Collect detailed information
Shorten supply chain response times
Realize substantial cost savings
Create virtual companies
Level the playing field for small companies
Disadvantages of E-Commerce
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Customer expectations
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Order fulfillment
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Order quickly -> fast delivery
Order rate often exceeds ability to fulfill it
Inventory holding
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Outsourcing loss of control
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Internal holding costs
Successful Supply Chain
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Trust among trading partners
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Effective communications
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Supply chain visibility
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Event-management capability
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The ability to detect and respond to
unplanned events
Performance metrics
SCOR Metrics
Perspective
Metrics
Reliability
On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment
Flexibility
Supply chain response time
Upside production flexibility
Expenses
Supply chain management costs
Warranty cost as a percent of revenue
Value added per employee
Assets/utilization
Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
CPFR
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Collaborative Planning, Forecasting, and
Replenishment
Focuses on information sharing among
trading partners
Forecasts can be frozen and then
converted into a shipping plan
Eliminates typical order processing
CPFR Process
Step 1 – Front-end agreement
Step 2 – Joint business plan
Steps 3-5 – Sales forecast
Steps 6-8 – Order forecast collaboration
Step 9 – Order generation/delivery
execution
CPFR Results
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Nabisco and Wegmans
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50% increase in category sales
Wal-mart and Sara Lee
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14% reduction in store-level inventory
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32% increase in sales
Kimberly-Clark and Kmart
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Increased category sales that exceeded
market growth
Creating an Effective Supply Chain
1.
2.
3.
4.
5.
Develop strategic objectives and tactics
Integrate and coordinate activities in
the internal supply chain
Coordinate activities with suppliers with
customers
Coordinate planning and execution
across the supply chain
Form strategic partnerships
Supply Chain Performance Drivers
1.
Quality
2.
Cost
3.
Flexibility
4.
Velocity
5.
Customer service
Velocity
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Inventory velocity
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The rate at which inventory(material) goes
through the supply chain
Information velocity
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The rate at which information is
communicated in a supply chain
Challenges

Barriers to integration of organizations
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Getting top management on board
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Dealing with trade-offs
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Small businesses
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Variability and uncertainty
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Long lead times
Trade-offs
1.
Lot-size-inventory
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2.
Bullwhip effect
Inventory-transportation costs
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Cross-docking
3.
Lead time-transportation costs
4.
Product variety-inventory
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5.
Delayed differentiation
Cost-customer service
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Disintermediation
Trade-offs
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Bullwhip effect
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Inventories are progressively larger moving
backward through the supply chain
Cross-docking
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Goods arriving at a warehouse from a
supplier are unloaded from the supplier’s
truck and loaded onto outbound trucks
Avoids warehouse storage
Trade-offs
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Delayed differentiation
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Production of standard components and
subassemblies, which are held until late in
the process to add differentiating features
Disintermediation

Reducing one or more steps in a supply
chain by cutting out one or more
intermediaries
Supply Chain Issues
Strategic
Issues
Design of the
supply chain,
partnering
Tactical Issues
Inventory policies
Purchasing policies
Production policies
Transportation
policies
Quality policies
Operating Issues
Quality control
Production planning and
control
Supply Chain Benefits and Drawbacks
Problem
Potential
Improvement
Benefits
Possible
Drawbacks
Large
inventories
Smaller, more
frequent deliveries
Reduced holding
costs
Traffic congestion
Increased costs
Long lead
times
Delayed
differentiation
Disintermediation
Quick response
May not be
feasible
May need absorb
functions
Large
number of
parts
Modular
Fewer parts
Simpler ordering
Less variety
Cost
Quality
Outsourcing
Reduced cost,
higher quality
Loss of control
Variability
Shorter lead times,
better forecasts
Able to match
supply and
demand
Less variety
Purchasing

Purchasing is responsible for
obtaining the materials, parts, and
supplies and services needed to
produce a product or provide a
service.
Goal of Purchasing

Develop and implement purchasing
plans for products and services
that support operations strategies
Duties of Purchasing
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Identifying sources of supply
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Negotiating contracts
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Maintaining a database of suppliers
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Obtaining goods and services
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Managing supplies
Purchasing Interfaces
Legal
Operations
Accounting
Purchasing
Data
processing
Design
Receiving
Suppliers
Purchasing Cycle
Legal
1.
Requisition received
2.
Supplier selected
3.
Order is placed
4.
Monitor orders
5.
Receive orders
Operations
Accounting
Purchasing
Design
Receiving
Suppliers
Data
processing
Value Analysis vs. Outsourcing
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Value analysis
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Examination of the function of
purchased parts and materials in an
effort to reduce cost and/or improve
performance
Centralized vs Decentralized Purchasing
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Centralized purchasing
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Purchasing is handled by one special
department
Decentralized purchasing
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Individual departments or separate
locations handle their own purchasing
requirements
Suppliers
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Choosing suppliers
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Evaluating sources of supply
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Supplier audits
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Supplier certification
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Supplier relationships
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Supplier partnerships
Factors in Choosing a Supplier
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Quality and quality assurance
Flexibility
Location
Price
Factors in Choosing a Supplier
(cont’d)
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Product or service changes
Reputation and financial stability
Lead times and on-time delivery
Other accounts
Evaluating Sources of Supply
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Vendor analysis: Evaluating the
sources of supply in terms of price,
quality, reputation, and service
Evaluating Sources of Supply
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Vendor analysis - evaluating the
sources of supply in terms of
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Price
Quality
Services
Location
Inventory policy
Flexibility
Supplier Partnerships
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Ideas from suppliers could lead to improved
competitiveness
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
1.
Critical Issues
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Strategic importance
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Cost
Quality
Agility
Customer service
Competitive advantage
Technology management
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Benefits
Risks
Critical Issues
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Purchasing function
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Increased outsourcing
Increased conversion to lean production
Just-in-time deliveries
Globalization