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SUPPLY CHAIN
MANAGEMENT
Chapter 15
MIS 373: Basic Operations Management
LEARNING OBJECTIVES
• After this lecture, students will be able to
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Explain the terms supply chain and logistics
Discuss the importance of supply chain management
Describe what bullwhip effect is
Explain the causes and remedies for the bullwhip effect
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STARBUCKS GLOBAL SUPPLY CHAIN
• [YouTube] A Behind the Scenes Look at Starbucks Global Supply Chain
SUPPLY CHAIN
• 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
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Value is added as goods and services progress through the chain.
• Logistics:
• the part of a supply chain involved with the forward and reverse flow
of goods, services, cash, and information.
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TYPICAL SUPPLY CHAINS
Supplier
Supplier
Storage
Manufact
uring
Storage
Distributor
Retailer
Customer
Supplier
Supplier
Supplier
Storage
Service
Customer
Supplier
• Every business organization is part of at least one supply
chain, and many are part of multiple supply chains
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SUPPLY CHAIN MANAGEMENT
• Supply Chain Management (SCM)
• The strategic coordination of business functions within a
business organization and throughout its supply chain for
the purpose of integrating supply and demand
management
• Supply:
• From the beginning of the chain to the internal operations of the
organization
• Demand:
• From the organization's output delivery to its immediate customer
to the final customer in the chain
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SUPPLY CHAIN MANAGEMENT
• Supply chain strategy
alignment
• Aligning supply and
distribution strategies with
organizational strategy.
• Deciding on the degree to
which outsourcing will be
employed.
• Network configuration
• Determining the number and
location of suppliers,
warehouses,
production/operations
facilities, distribution centers.
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WHY SO MUCH INTEREST IN SCM?
• As manufacturing becomes more efficient (or is
outsourced), companies look for ways to reduce
costs
• Several significant success stories. Efficient SCM
gives Walmart & others an important edge
• Web-based models for supply chains:
• Online retailers
• B2B business models.
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KEY SCM ISSUES
• The goal of SCM is to match supply to demand as
effectively and efficiently as possible
• Key issues:
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Determining appropriate levels of outsourcing
Managing procurement
Managing suppliers
Managing customer relationships
Being able to quickly identify problems and respond to
them
• Managing risk
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FLOW MANAGEMENT
• Three types of flow management
• 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
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OUTSOURCING
• Transfer or contracting (non productive) internal
activities (process) to outside vendors
• e.g.: IT, accounting, legal, logistics
• Utilize the efficiency that comes with specialization
• Make-or-Buy analysis
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BENEFITS & RISKS OF
OUTSOURCING
• Benefits:
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Lower prices may result from lower labor costs
The ability of the organization to focus on its core strengths
Permits the conversion of some fixed costs to variable costs
It can free up capital to address other needs
Some risks can be shifted to the supplier
The ability to take advantage of a supplier’s expertise
Makes it easier to expand outside of the home country
• Risks
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Inflexibility due to longer lead times
Increased transportation costs
Language and cultural differences
Loss of jobs
Loss of control
Lower productivity
Loss of business knowledge
Knowledge transfer and intellectual property concerns
Increased effort required to manage the supply chain
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SUPPLY CHAIN RISKS
• Supply Chain Risks
• Supply chain disruption
• Natural disasters
• Supplier problems
• Quality issues
• Another form of disruption that may disrupt supplies and lead to
product recalls, liability claims, and negative publicity
• Loss of control of sensitive information
• If suppliers divulge sensitive information to competitors, it can
weaken a firm’s competitive position
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RISK MANAGEMENT
• Risk management
• Involves identifying risks, assessing their likelihood of
occurring and their potential impact and then developing
strategies for addressing those risks.
• Strategies for addressing risk include:
• Risk avoidance
• Risk reduction
• Risk sharing
• Key elements of successful risk management include:
• Know your suppliers
• Provide supply chain visibility
• Develop event-response capability
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GLOBAL SUPPLY CHAINS
• Global 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
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Language and cultural differences
Currency fluctuations
Political instability
Increasing transportation costs and lead times
Increased need for trust amongst supply chain partners
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MANAGEMENT RESPONSIBILITY:
TACTICAL AND OPERATIONAL
• Tactical
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Forecasting
Sourcing
Operations Planning
Managing inventory
Transportation planning
Collaborating
MIS 373: Basic Operations Management
• Operational
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Scheduling
Receiving
Transforming
Order fulfilling
Managing inventory
Shipping
Information sharing
Controlling
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SUPPLIER MANAGEMENT
• Vendor analysis
• Evaluating the sources of supply in terms of price, quality, reputation,
and service
• 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
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SUPPLIER 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
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CHOOSING SUPPLIERS
• Quality and quality assurance
• Procedures for quality assurance and quality control
• Flexibility
• For changes in delivery schedules, quantity, product or service changes
• Location
• Nearby?
• Price
• Competitiveness, willingness to negotiate, cooperate to reduce prices
• Reputation and Financial Stability
• Supplier reputation, its financial stability
• Lead times and on-time delivery
• Procedures to assure on-time delivery and problem correction
• Other accounts
• Dependence on other customers and their priority
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SUPPLIER PARTNERSHIPS
• More organizations are seeking to establish partnerships with others in their
supply chain:
• Fewer suppliers, long term relationships, sharing of information (forecasts, sales data, problem
alerts), cooperation in planning
• Benefits:
• improved operations: higher quality, increased delivery speed and reliability, lower inventories, lower
costs, higher profits. Higher supplier flexibility in accepting changes (delivery schedules, quality,
quantity), suppliers can help in identifying problems and offer suggestions
Aspect
Adversary
Partner
Number of suppliers
Many; play one against the others
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 due to many suppliers
High
Flexibility
Relatively low
Relatively high
Location
Widely dispersed
Nearness is important for short lead
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time and quick service
MIS 373: Basic Operations Management
STRATEGIC SCM
• Information technology
• Integrating systems and sharing information (forecasts, inventory status,
shipments etc.) throughout the SC.
• Strategic partnerships
• Choice of partners, level of partnership.
• Distribution strategy
• Centralized or decentralized distribution. In-house distribution or third-party
logistics.
• Uncertainty and risk reduction
• Identifying potential risks and deciding on acceptable risk level.
• Capacity planning
• Assessing long term capacity needs and the degree of flexibility
• Products and services
• New products and services selection and design.
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LOGISTICS
• Logistics
• The part of the SC involved with the forward and reverse
flow of goods, services, cash, and information.
• Logistics Management
• Management of :
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inbound and outbound transportation
material handling
Warehousing
Inventory
order fulfillment and distribution
third party logistics
reverse logistics (return from customers)
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INVENTORY MANAGEMENT
• Inventory issues in SCM
• Inventory location
• Centralized inventories
• Lower overall inventory, lower cost, lower stock-out risk
• Decentralized inventories
• Faster delivery, lower shipping cost
• Inventory velocity
• The speed at which goods move through a supply chain
• The greater the velocity the lower the holding cost and the faster
orders are fulfilled and goods are turned into cash.
• The bullwhip effect
• Inventory oscillations that become increasingly larger looking
backward through the supply chain
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CREATING AN EFFECTIVE
SUPPLY CHAIN
• It begins with strategic sourcing
• Analyzing the procurement process to lower costs by reducing waste
and non-value-added activities, increase profits, reduce risks, and
improve supplier performance
• There must be
• Trust
• Effective communication
• Information velocity
• Supply chain visibility
• Event management capability
• Performance metrics
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TRADE-OFFS
1. 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
2. Inventory-transportation cost trade-off
• 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
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TRADE-OFFS
3. Lead time-transportation costs trade-off
• Suppliers like to ship in full loads, but waiting for sufficient orders
and/or production to achieve a full load may increase lead time
4. Product variety-inventory trade-off
• Greater product variety usually means smaller lot sizes and higher
setup costs, as well as higher transportation and inventory
management costs
• Delayed differentiation
• Production of standard components and subassemblies which are held
until late in the process to add differentiating features
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TRADE-OFFS
5. Cost-customer service trade-off
• Producing and shipping in large lots reduces costs, but increases
lead time
• Disintermediation
• Reducing one or more steps in a supply chain by cutting out one or more
intermediaries
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THE BULLWHIP EFFECT
• First noticed by P&G executives examining the order patterns
for Pampers disposable diapers.
• Although the customer demand is pretty steady, they noticed that
order variation increased dramatically as one moved from retailers to
distributors to the factory.
BULLWHIP EFFECT PROBLEMS
• High demand fluctuations.
• Variation in demand along the supply chain requires:
• Shipment capacity
• Production capacity
• Inventory capacity
to cope with peaks.
• Most of the time this capacity will be idle.
• There’s significant cost and investments attached!
• Low service level (backorders)
• High cost
• In the end: high overall cost in the supply chain
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BULLWHIP EFFECT - CAUSES
• Information (lack of)
• Game simulates SC with low levels of trust, where little information is
shared among the parties
• Only order amounts are perpetuated up the supply chain; information
about customer demand is lost upstream.
• Without actual customer demand data, all forecasts rely solely on the
incoming orders at each stage of the SC.
• SC structure
• The longer the lead time the stronger the bullwhip effect (the reorder
point is calculated by multiplying the forecasted demand by the lead time
plus the safety stock)
• Local optimization
• Local individual cost optimization, and a lack of cooperation
• Ordering involves fix cost. There is an incentive for individual players to
hold back and only place aggregate/batch orders. This aggravates the
problem of demand forecasting as little information about actual demand
is conveyed.
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MITIGATING THE BULLWHIP
EFFECT
• Good supply chain management can overcome the
bullwhip effect:
1. Information sharing
• Replenishment based on need
• Vendor-managed inventory
• Vendors monitor goods and replenish retail inventories when
supplies are low
• Lower ordering costs
2. Short lead times
3. Cooperation
• Competition is now supply chain against supply
chain and Network against network
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ORDER FULFILLMENT
• Order fulfillment refers to the processes involved in responding to
customer orders.
• Engineer-to-Order (ETO)
• Products are designed and built according to customer specifications. This
approach is frequently used for large-scale construction projects, custom
homebuilding, home remodeling, and for products made in job shops.
• Make-to-Order (MTO)
• A standard product design is used, but production of the final product is
linked to the final customer's specifications. This approach is used by aircraft
manufacturers such as Boeing. Fulfillment time is generally less than with
ETO fulfillment, but still fairly long.
• Assemble-to-Order (ATO)
• Products are assembled to customer specifications from a stock of standard
and modular components. Computer manufacturers such as Dell operate
using this approach. Fulfillment times are fairly short, often a week or less.
• Make-to-Stock (MTS)
• Production is based on a forecast, and products are sold to the customer
from finished goods stock. This approach is used in department stores and
supermarkets. The order fulfillment time is immediate.
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SMALL BUSINESSES
• Small businesses do not always give adequate attention to
their supply chains.
• Three aspects of supply chain management that are often of
concern to small businesses are:
1. Inventory management
2. Reducing risks
3. International trade
• Why the three are of concern to small businesses?
• How to mitigate the concerns?
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SUPPLY CHAIN
PERFORMANCE MEASURES
• Financial
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Return on assets
Cost
Cash flow
Profits
• Suppliers
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Quality
On-time delivery
Cooperation
Flexibility
• Operations
• Inventory
• Average value
• Turnover
• Weeks of supply
• Order fulfillment
• Order accuracy
• Time to fill orders
• % of orders delivered on time
• Customers
• Customer satisfaction
• % of customer complaints
• Productivity
• Quality
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MANAGING RETURNS
• Products are returned to companies or third-party handlers
for a variety of reasons, and in a variety of conditions. Among
them are the following:
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Defective products
Recalled products
Obsolete products
Unsold products returned from retailers
Parts replaced in the field
Items for recycling
Waste
• In the US, the annual value of returns is estimated to be in
the neighborhood of $100 billion
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MANAGING RETURNS
• Reverse logistics is the process of physically transporting
returned items.
• This involves either retrieving items from the field or moving items
from the point of return to a facility where they will be inspected and
sorted and then transporting to their final destination.
• Two key elements of managing returns
• Gatekeeping oversees the acceptance of returned goods with the
intent of reducing the cost of returns by screening returns at the point
of entry into the system and refusing to accept goods that should not
be returned or goods that are returned to the wrong destination.
• Avoidance refers to finding ways to minimize the number of items
that are returned.
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TRENDS IN SCM
• Trends affecting supply chain design and management:
• Measuring supply chain performance
• Incorporating economic metrics into decisions (e.g., inventory
velocity, inventory turnover)
• “Greening” the supply chain
• Redesigning products and services to reduce pollution from
transportation, choosing “green” suppliers, managing returns,
end-of-life programs (e.g., appliances)
• Re-evaluating outsourcing
• Reconsidering outsourcing due to long lead time, increased
transportation costs, language, culture, job loss, control loss,
lower productivity, loss of ability to perform work internally, loss of
business knowledge, management efforts.
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TRENDS IN SCM
• Trends affecting supply chain design and management:
• Integrating IT
• Real time data to enhance strategic planning, control costs,
measure quality and productivity, respond quickly to problems,
improve SC operations
• Managing risks
• Identifying risks, assessing likelihood of occurrence, potential
impacts, prioritizing, developing management strategies
(avoidance, reduction, transference).
• Adopting lean principles
• Eliminating non value-added processes, using “pull” systems to
improve product flow, using fewer suppliers, continuous
improvement.
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OPERATIONS STRATEGY
• Effective supply chains are necessary for
organizational success
• Requires integration of all aspects of the chain
• Supplier relationships are a critical component of supply
chain strategy
• Lean operations to improve supply chain success
• Future Supply Chains
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EXERCISE: CONCEPT MAP
• Work with a partner or two and develop a concept map based
on the following two articles about supply chain:
• Don't Let Your Supply Chain Control Your Business
• Don't Tweak your Supply Chain--Rethink It End to End
• Concept Map Examples
KEY POINTS
• Supply chains are a vital part of every business organization
and need to be managed effectively to achieve a balance of
supply and demand.
• There are a number of trade-offs to be made by supply chain
managers.
• Effective supply chains involve trust, communication, a rapid,
two-way flow of information, visibility, and event-response
capability.
• Among important trends in supply chain management are
measuring ROI, “greening” the supply chain, reevaluating
outsourcing, integrating IT, managing risks, and adopting lean
principles.
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