Chapter 11:
Supply Chain
Management
PowerPoint by:
Ray A. DeCormier, Ph.D.
Central Connecticut State University
Chapter Topics
 The role of Supply Chain Management (SCM) in
business marketing strategy
 The importance of integrating both firms and
functions throughout the entire supply chain
 The critical role of logistics activities in achieving
supply chain management goals
 The importance of achieving high levels of
2
logistical service performance while
simultaneously controlling the cost of logistic
activities

Effective supply chain management includes:
1.
Integrated computer systems that provide the
production schedule and demand forecasts
to all supply chain members.
2.
Collaborative program management tools
that allow manufacturers and suppliers to
synchronize activities to respond to events
(threats and opportunities) in real time.
Speed: The Next Innovation

Supply Chain Management (SCM) has become a
more important strategic and competitive
variable

It’s pervasive nature affects every aspect of
business from:
1. Costs
2. Customer service
3. Asset productivity (inventory turns)
4. Revenue generation

The best are getting faster as they apply new
technologies and new innovations to SCM
Formal Definition:
Encompasses the planning and management of all
activities involved in sourcing and procurement,
conversion, and logistics.
Central to SCM are the coordination and
collaboration activities performed with channel
partners, which may included suppliers,
intermediaries, their party service providers, and
customers.
In essence, supply chain management integrates
supply and demand across companies.
Supply Chain Includes Getting:
Raw material suppliers
 Raw material producers (make products)
 Wholesalers
 Retailers
 Ultimate consumers


On time and at the right price!
Supply Chain – continued
 Also includes other necessary participants to
move product such as warehousing,
transportation, information processing and
materials handling.
SCM Critical Processes Include:
1.
2.
3.
4.
5.
6.
7.
8.
Customer Relations Management
Supplier Relations Management
Customer Service Management
Demand Management
Order Fulfillment
Manufacturing Flow Management
Product Development and Commercialization
Returns Management
Can improve overall company performance by:

1.
2.
Revenue enhancement
Cost reduction
Focuses on integrating the aforementioned
critical processes across all organizational
borders for purposes of:




Enhancing flow
Lowering costs
Increasing profits
SUCCESSFUL SCM PROGRAMS

Leading supply-chain-oriented firms focus on:
a.
Monitoring actual user demand rather than
forcing products into the market that may
not sell quickly.
a.
The result is to minimize the flow of raw
material, finished products and packaging
material, thus minimizing inventory
throughout the entire supply chain.





Many US companies have had an adversarial
(transactional) relationship sometimes called
“adversarial commerce.”
Movement towards SCM made companies realize that
adversarial commerce is inefficient and costly.
This limits the ability to compete in a global economy.
A better approach is to develop relationships
(partnerships) between members of the supply chain
but due to proprietary interest, this requires…
TRUST.
Traditional Approach
 The traditional approach is for each member in the
supply system to operate their business in such as way
as to individually manage their own part.
 However, this is inefficient and costly.
 Material is often moved around too much resulting in
higher transportation costs.
 Communication between sales and other departments
is excessive and time consuming.

Requires firms to share sensitive and
proprietary information about:
a.
Customers
Actual demand
Point-of-sales transactions
Corporate strategy
b.
c.
d.
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Successful SCM demands
 Joint planning and joint communications.
 To accomplish this, many companies set up
teams from their supply chain members
that cut across functional and company
boundaries to manage the movement of
goods through the supply chain.
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Efficient SCM Programs
 To make an SCM program work, there is a need to
create an “overlap” among participants in the supply
chain.
 There needs to be a long-term commitment and
interwoven relationships.
 This includes sharing information about, well,
everything.
 Fig. 11.1 illustrates the stages in the SCM adoption
process.
SCM: A Tool for Competitive Advantage

Many companies have now integrated SCM
into all phases of their operation to include:





Design
Sourcing
Manufacturing
Distribution
This has resulted in enhanced market
position and added value for customers.

SCM reduces costs through efficiencies
and

Speeds up the cash cycle, thus increasing
revenues.

An efficient and effective supply chain can be a powerful
competitive weapon providing:

Waste reduction – Minimizing duplication of efforts,
harmonizing operations and systems, and enhancing quality

Time compression – Compressing order-to-delivery cycle
time

Flexible response – Meeting customer’s unique
requirements in cost-effective manner

Unit cost reduction – Reducing cost per unit to end users by
determining performance levels that customers desire
More Is Needed!

Even though SCM is important, more is needed!

To stay ahead of the competition, companies need to
have agile, aligned and adaptable SC systems.

One key is to adapt to changing customer needs and
competitive challenges, and respond accordingly.

Another key is for the organizations to constantly
assess their alignment with the interest of all firms to
their own within the SC .
 Good
SC benefits the ultimate consumer, and
 Benefits
all the customers within the supply
chain.
 Note:
Each member is a customer of the
prior member until the product reaches the
ultimate consumer.
Innovative Supply Chains
The coupling of inventory movement with financial
movement can:
1.
1.
2.
3.
4.
5.

Open doors to greater end-to-end cost savings
Have better balance sheets
Lower total costs
Have higher margins
Have a more stable supply chain
And everybody wins!

1.
2.
3.
4.
5.
Financial:
Lower costs
Higher profits
Enhanced cash flow
Revenue growth
Higher rates of return on assets
SCM Drivers
 SCM efficiency & effectiveness is made possible
through:
 Powerful information systems
 Internet technology
 Supply chain software
Internet Technology
• Over the last 10 years, we’ve seen a
revolution take place in SCM technology
attributed directly to Internet
development.
• It was very difficult to integrate all the
various facets of the SC without real time
application provided by the Internet.

One determinant is the “nature of
demand for the product.”

Is it:
Functional?
or
Innovative?




Functional products include MRO, office furniture
etc.
They have a predictable demand pattern
Goal for functional products is to design an
efficient physical distribution system that
minimizes logistics and lowers inventory costs
Efficiency means developing systems that
effectively coordinate manufacturing, ordering and
delivering while minimizing production and
inventory costs
Innovative Products





Innovative products include software, wireless
products, and other high-tech products.
They have a less predictable demand.
They have short life cycles.
The focus is to have enough inventory to meet
demand and maximize profits.
Strategy is capture customer information so that the
SC organization can position inventory and
production capacity to properly respond to demand
ASAP.
Cooperation
• Supply chains are not supply chains if there is any
form of adversarial relationships.
• In order for a supply chain to work, the
participants need to work in a partnering way.
• Highly effective supply chains feature integrated
operations across participants, share information
in a timely fashion and add value for the customer.
1.
2.
3.


Need to clearly define strategic objectives
Understand where their objectives diverge, and
Work together to resolve any differences
Once partners agree on establishing an
integrated supply chain, performance metrics
can be established to track its goals.
The metrics must measure performance, and
are tied to a financial system that rewards each
participant fairly.



SCM is focused on the integration of all business
processes that add value for customers.
In business usage, logistics is similar to SCM,
however, it is not as encompassing.
Logistics refers to designing and managing
necessary activities centered around
transportation, inventory, warehousing and
communications to make materials available for
manufacturing and ultimately to consumers.

Logistics embodies two flows:

Inbound - Physical Supply: Flows that
provide raw materials, components, and
supplies to the production processes

Outbound - Physical Distribution:
Flows that deliver completed products
to customers and channel
intermediaries
Logistical Integration
SCM and Logistics has risen in importance due to:
1.
Time-based competition
2.
Improved communications & software technology
3.
Expanding globalization
4.
More attention to quality
5.
The changing face of inter-firm relationships
Managers can make virtually no logistical decision
without evaluating how it might affect other
logistical areas.
Fig 11.1 Supply Chain for Electric Motors
Strategic Role of Logistics
• Historically, logistics was viewed as a cost of doing
business.
• Its function was to deliver higher productivity.
• Today, it is viewed as a critical strategic weapon
against competition for delivering products to the
market in as efficient and effective way that offers
customers value.
• The result is loyal customers and more profitability.
Sales-Marketing-Logistics Integration
• Progressive firms have teams of sales,
production, logistics, information systems and
marketing personnel.
• Sales calls are made by teams of specialists who
contact customers and offer logistical solutions
to customer problems.
JIT SYSTEMS

Just In Time systems originally applied to moving inventory
through the production process.

The objective is to get the right part to the right place at the
right time in perfect condition (zero defects).

JIT’s purpose is to relate production to purchase.

Example: If 100 units are expected to be purchased, then
produce 100 units (getting product to match market needs).
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JIT continued

One consequence of JIT inventory has
been to reduce suppliers to preferred
supplier status (relationships).

Preferred suppliers have seen their
business grow tremendously.
LOGISTICAL SYSTEMS

Again, due to the interconnectedness of the
logistical system, almost no decisions can be
made without evaluating the effects upon other
areas (refer to next slide).

Linkages determine how quickly companies can
get their product from production to market.

As a result, poor performance on any member’s
part can result in extra cost, higher inventories,
or even lost customers.
Source: Adapted from James R. Stock and Douglas M. Lambert, Strategic Logistics Management, 5th ed. (Homewood, Ill.: McGraw-Hill, 2000)
When managing the logistical system, two
measurements need to be considered:
1. Total distribution costs
2. Level of logistical services provided to customers
Trying to reduce distribution cost yet still provide
good services to the customer is a balancing act.
The approach is to use the Total-Cost or
Trade-Off method.
Total Cost or Trade-Off Approach



Total Cost or Trade-Off considers the effect of costs vs.
efficiency at all levels within the logistical system.
The assumption is that a change at one stage will
affect something at another stage.
The method is to consider the total cost, considering
any trade offs in performance or quality at each stage,
then assess its effect on other members while
considering the total cost (including abstract costs such
as losing the customer).
Activity-Based Costing (ABC) is a technique
used to measure costs of performing specific
activities and trace those costs to:
1. Products
2. Customers
3. Channels that consumed the activity


This method even traces costs to the customer
demanding certain services. For example…
ABC continued

For example, assume a customer wants daily
JIT delivery, but the inventory ordered is too
small.
What would you do?

You’d track the cost of that service to the
customer and you’d either:
Charge him extra for the service
Have him increase his inventory order to
economic feasibility, or
Drop him as a customer.
a.
b.
c.

Determines the total cost of acquiring and using an
item from a particular supplier.

This approach identifies costs (often buried in
overhead/general expenses) that related to holding,
poor quality and/or delivery failure.

Buyers using TCO to analyze those costs as part of
the purchase price can discern suppliers with an
efficient logistics system. They should have lower
costs and lower prices.
B2B Logistical Service
 Logistics is a service similar to quality and is used by
customers to measure performance.
 When quality between competitors and price are the
same, the next determinant may be logistical speed.
 Logistical service translates into product availability.
Delivery & Responsiveness
 Logistical service relates to the availability and delivery
of products to the customer.
 Responsive logistical service advances customer
satisfaction and develops buyer-seller relationships.
 Effective logistics reduces inventory, thus saving costs;
consistent delivery leads to dependencies which leads
to repeat business.
What Is the Right Level of Logistical Service?

Different products require different logistical
services.

Made-to-order products (heavy equipment) have
a low logistical service requirement.

Replacement parts have very high logistical
service requirements. There is a great need to get
replacement products to the customer ASAP.



Poor logistics result in higher inventory
carrying costs to distributors.
Poor logistics implementation can result in
inventory shortages which can lead to
customer dissatisfaction (customer
disengagement).
Effective logistics allows distributors to
compete effectively since it allows them to be
more valuable to their (mutual) customers.
B2B LOGISTICAL MANAGEMENT
CONSIDERATIONS


Three major areas are logistically
intertwined. They are:
1. Logistical facilities
2. Transportation
3. Inventory considerations
The best approach is to take the
Total Cost view for these activities.
LOGISTICAL FACILITIES

Logistically located, proper facilities reduce
transportation costs, and/or increase delivery
service to customers.

Warehousing circumvents the need for expensive
transportation (e.g., air transportation vs. trucking)
and costly order processing by keeping products in
local markets.

Maintenance, Repair & Operating (MRO) products
are directly affected by this issue.
Logistic Facilities and Assembling,
Packaging, Order Processing & Labeling
• When manufacturer reps are employed, orders
should go directly to a local warehouse since reps
don’t own the product.
• One approach is to outsource local warehousing.
• In fact, not only is warehousing often outsourced,
but so is assembling, packaging, order processing
and labeling.
TRANSPORTATION
Transportation is usually the most expensive part
of the logistic process.
 There are various transportation choices (see next
slide for details).
 Cost, speed, reliability, and capability need to be
considered when making the choice.
 Studies show that carrier performance improved
when they were involved in buyer and seller
relationships.
 Further, if carriers are integrated into the chain,
overall competitive advantage increased.


1.
2.
3.
4.
The best decision as to which mode results
from balancing of:
Service
Variable costs
Investment required
Speed of ordinary vs. expedited (rush)
orders
 Buffer
between supply and demand
 Logistical
systems are necessary to
balance this difference
 Inventories are needed because:
1. Production and demand not perfectly matched.
Production usually occurs in anticipation of
demand.
2. Operating deficiencies in logistical system often
result in product unavailability.
3. Business customers cannot predict their product
needs with certainty.
Inventory Levels

Inventory levels depend upon
Customer requirements
2. Cost
3. Investment
4. Service required
5. Anticipated revenue
1.

The objective of Total Quality Management
and JIT principles is to eliminate excess
inventory.

Current thinking is that inefficiencies in the
system results in excess/shortfall inventory.

If there could be better forecasting, improved
delivery and zero manufacturing defects, the
possibility to eliminate the need for inventory
is possible, especially due to certain advances.

In high tech markets where obsolescence is
a reality, close attention to inventory is an
absolute must.

Inventory management considers four
factors (inventory driven costs) that can
reduce profits:
1. Obsolescence
2. Devaluation
3. Price protection
4. Return costs
Third Party Logistics
 Almost everything is a make or buy situation.
Same goes for various logistical functions.
 Most companies are now outsourcing
transportation, warehousing and information
processing. The trend is continuing.
 This is really a form of specialization and
division of labor.

The results of specialization are:
1.
2.
3.
4.
5.
Lower costs
Better service
Improved asset utilization
Increased flexibility
Access to leading technologies
Third Party Caution

Despite certain advantages, there
are some reasons for caution.

Due to outsourcing, companies can
lose control over the logistics
process.

Take product quality for example:
 Bad dog food
 Lead paint in toys