Supply Chain
Management
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Supply Chain (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) Chains
• Supply Component: Starts at the beginning of the SC
and ends with the internal operations of the organization.
• Demand Component: Starts ath the point where the
organization’s output is delivered to its immediate
cusotmer and ends withp the final customer in the chain.
Demand chain is the sales and distributon portion of the
value chain
The Supply Chain
Suppliers
Producers
Distributors
Customers
Materials,
parts, subassemblies,
and
services
Finished
goods, end
products
and services
Package
and delivery
Total
satisfaction
with quality,
price,
delivery, and
service
Inventory
Products
and
Services
Inventory
Products
and
Services
Products
and
Services
Inventory
Downstream SC members
The Supply Chain
Information
Suppliers
Producers
Distributors
Customers
Materials,
parts, subassemblies,
and
services
Finished
goods, end
products
and services
Package
and delivery
Total
satisfaction
with quality,
price,
delivery, and
service
Inventory
Products
and
Services
Inventory
Products
and
Services
Inventory
Products
and
Services
The Supply Chain
Information
Suppliers
Producers
Distributors
Customers
Materials,
parts, subassemblies,
and
services
Finished
goods, end
products
and services
Package
and delivery
Total
satisfaction
with quality,
price,
delivery, and
service
Inventory
Products
and
Services
Products
and
Services
Inventory
Inventory
Cash
Products
and
Services
The Supply-Chain
VISA
®
Material Flow Credit Flow
Supplier
Manufacturer
Supplier
Schedules
Order
Flow
Retailer
Consumer
Wholesaler
Retailer
Cash
Flow
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
Supply Chain Management
 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)
 Encompasses 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.
Key Issues Related to SCM
•
•
•
•
•
Determining the appropriate level of outsourcing
Managing procurement
Managing suppliers
Managing customer relationships
Being able to quickly identify problems and
respond to them
• Flow management
• Managing risk
Goals of Supply Chain Management
(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 Supply Chain Management
(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
Ultimate goal: Achieving customer satisfaction
Facilities Involved in SCM
Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices
Strategic &Operational
Decisions in Supply Chains
Two types of decisions in supply chain management
– Strategic – design and policy
– Operational – day-today activities
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
Processes Involved in SCM
Acquiring customer orders
Procuring materials and components from
suppliers
Producing or manufacturing products
Filling customer orders
Logistics ( thepart of the SC involved with the
forward and reverse flow of goods, services,
cash and information
Typical Supply Chain Activities
Production
Distribution
Purchasing Receiving Storage Operations Storage
Major decision areas:
•Location
•Production
•Inventory
•Distribution
Functions and Activities Involved in SCM
Forecasting
Scheduling
Purchasing
Inventory management
Information management
Quality assurance
Production
Distribution and delivery
Logistics
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
Trends in SCM
•
•
•
•
•
Reevaluation of outsourcing
Risk management
Inventory management
Lean supply chains
Sustainability
Supply-Chain Costs as a Percent of Sales
Industry
•
•
•
•
•
•
•
All industry
Automobile
Food
Lumber
Paper
Petroleum
Transportation
Percent of Sales
•
•
•
•
•
•
•
52%
67%
60%
61%
55%
79%
62%
Factors That Contribute to the Increased
Need for Effective Supply Chain
Management:
need toimprove operations
increased levels of outsourcing
increasing transportation costs
competitive pressures
increasing globalization
increasing importance of e-commerce
increasing complexity of supply chains
increasing pressure to decrease inventories
Benefits of Supply Chain Management
Lower inventories
Lower costs
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
Integration of seperate organizations into a cohesive
operating system
Actual Benefits Gained by 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
Requirements of a Successful Supply Chain
Trust among trading partners
Effective 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 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
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
Measuring SC Performance: Inventory
Turnover
•
One of the most commonly used measures is “Inventory
Turnover”
Cost of goods sold
Inventory turnover 
Average aggregate inventory value
Supply Chain Performance Drivers
1. Quality
2. Cost
3. Flexibility
4. Velocity
5. Customer service
Measuring SC Performance:
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
Supply 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 Management within a SC
• Use of centralized inventories
• Use of decentralized inventories
Bullwhip Effect
Demand
Initial
Supplier
Final Customer
Inventory oscillations become progressively
larger moving backward through the supply chain
Inventories in a SC: Bullwhip Effect
The magnification of variability in orders in the supply-chain
Retailer’s Orders
Time
A lot of retailers
each with little
variability in their
orders….
Wholesaler’s
Orders
Manufacturer’s
Orders
Time
…can lead to greater
variability for a fewer
number of
wholesalers, and…
Time
…can lead to even
greater variability for
a single
manufacturer.
Inventories in a SC: Bullwhip Effect
Amount of
= inventory
Tier 2
Suppliers
Tier 1
Suppliers
Producer
Distributor
Retailer
Final
Customer
Vendor-Managed Inventories
The use of a local supplier to maintain inventory for
the manufacturer
 Stocking information is accessed using EDI
 A first step towards supply chain collaboration
 Increased speed, reduced errors, and improved
service
Order Fulfillment
Approaches to order fulfillment
• Engineer-to-Order
• Make-to-Order
• Assemble-to-Order
• Make-o-Stock
Role of Information in the Supply Chain
(1 of 2)
 Centralized coordination of information flows
 Integration of transportation, distribution, ordering, and
production
 Direct access to domestic and global transportation and
distribution channels
 Locating and tracking the movement of every item in the
supply chain
Role of Information in the Supply Chain
(2 of 2)
 Data interchange
 Data acquisition at the point of origin and point of sale
 Intercompany and intracompany information access
 Instantaneous updating of inventory levels
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)
RFID Technology
•Used to track goods in supply chain
•RFID tags attached to objects
•Similar to bar codes but uses radio frequency to transmit
product information to receiver
•RFID eliminates need for manual counting and bar code
scanning
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 Internet
 Instant global access to organizations,
individuals, and information sources
 Fundamentally changes the way organizations
do business
 Removed geographic
barriers
 Adds speed and accessibility
to the supply chain
Build-to-Order Cars over the
Internet
Electronic Business
• E-Business: the use of electronic technology to
facilitate business transactions
Replacement of physical processes with
electronic ones
• Applications include:
– Internet buying and selling
– E-mail
– Order and shipment tracking
– Electronic data interchange
Advantages of E-Business (1 of 2)
Global presence and increased visibility
Global access to markets and customers
Improved competitiveness, quality and service
Greater choices and more information for customers
Collection and analysis of customer data and
preferences
Shortened supply chain response times
Advantages of E-Business (2 of 2)
Shorten transaction times for ordering and
delivery
Cost and price reductions
Virtual companies with lower prices
Leveling the playing field for small companies
Reducing or eliminating intermediaries
Improved service
Disadvantages of E-Business
• Customer expectations
– Order quickly -> fast delivery
• Order fulfillment
– Order rate often exceeds ability to fulfill it
• Inventory holding
– Outsourcing loss of control
– Internal holding costs
IT 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
Procurement
Development and implementation of purchasing
plans for products and services that support
operations strategies
Purchasing
• 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.
Importance 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
Goals of Purchasing
• 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
Duties of Purchasing
• Identifying sources of supply
• Negotiating contracts
• Maintaining a database of suppliers
• Obtaining goods and services
• Managing supplies
Purchasing Interfaces
Legal
Operations
Accounting
Purchasing
Data
processing
Design
Receiving
Suppliers
Purchasing Cycle
Legal
1. Requisition received
Operations
Accounting
2. Supplier selected
3. Order is placed
Purchasing
Data
processing
4. Orders are monitored
5. Orders are received
Design
Receiving
Suppliers
Centralized vs Decentralized
Purchasing
• Centralized purchasing
– Purchasing is handled by one special
department
• Decentralized purchasing
–Individual departments or separate
locations handle their own purchasing
requirements
Suppliers
• Choosing suppliers
• Evaluating sources of supply (vendor analysis)
• Supplier audits
• Supplier certification
• Supplier relationships
• Supplier partnerships
• Strategic partnering
Sourcing
 Sourcing 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
Suppliers
 Purchased 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
Vendor Analysis
Evaluating the sources of supply in terms of:
• Price
• Quality and quality pratices
• Flexibility
• Location
• Product or service changes
• Reputation and financial stability
• Lead times and on-time delivery
• Inventory policy
• Services (such as technical support) provided
Supplier as a Partner
Aspect
Adversary
Partner
Number 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
Supplier Partnerships
• 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
CPFR
Collaborative Planning, Forecasting, and Replenishment
A system based on the notion that there should be
cooperation among supply chain partners in
planning, coordination of activities and information
sharing, which in turn requires partners to agree
on common goals (goal sharing)
CPFR 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
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
CPFR 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
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
E-Procurement
 Business-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
The Wal-Mart Supply
Chain
Logistics Wall-Mart Case

Wal-Mart has a satellite network for electronic data
interchange that allows vendors to directly access pointof-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.
Centralized Supply at Honda
America
Distribution 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.
Distribution
 The actual movement of products and materials
between locations
 Handling of materials and products at receiving docks,
storing products, packaging, and shipping
 Often called logistics
 Driving force today
is speed
 Particularly important
for Internet dot-coms
Logistics
Refers to the movement of materials, services, cash and
information within a facility and to incoming and outgoing
shipments of goods and materials in a supply chain.
Includes:
• movement within a facility,
• overseeing incoming and outgoing shipments of goods and
materials, and
• information flow throughout the supply chain (RFID to track
goods)
Logistics Management
Integrates all materials functions
 Purchasing
 Inventory management
 Production control
 Inbound (incoming, outgoing) traffic
 Warehousing and stores
 Incoming quality control
Objective: Efficient, low cost operations
Materials Movement
Work center
Work center
Work
center
Storage
Work
center
Storage
RECEIVING
Storage
Shipping
Figure 7.5 Order Fulfillment
at Amazon.com
Third-Party Logistics
The term used to describe the outsourcing of logistics
management.
Reverse Logistics
• Reverse logistics – the backward flow of goods
returned to the supply chain
• Processing returned goods
– Sorting, examining/testing, restocking, repairing
– Reconditioning, recycling, disposing
• Gatekeeping – screening goods to prevent incorrect
acceptance of goods
• Avoidance – finding ways to minimize the number of
items that are returned
Distribution Centers
and 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 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
Transportation
 The movement of products and materials from one
location to another as it makes its way to the end-use
customer
 Important element, often overlooked
 Common methods are railroads, trucking, water, air,
intermodal, package carriers, and pipelines
Linking the Supply Chain with SAP
Global Supply Chain Problems
 National and regional differences
 Customs, business practices, and regulations
 Foreign markets are
not homogeneous
 Quality can be a
major issue
Some Issues in Global Supply Chains
– Language
– Culture
– Currency fluctuations
– Lead times
– Political
– Transportation costs
– Local capabilities
– Finance and economics
– Environmental
Infrastructure Obstacles to Global
Trade
 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 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
Velocity
Inventory velocity
–The rate at which inventory(material) goes
through the supply chain
Information velocity
–The rate at which information is communicated
in a supply chain
Challenges to Optimizing SCs
Barriers to integration of organizations
Getting top management on board
Small businesses
Variability and uncertainty
Long lead times
Dealing with trade-offs
Trade-offs in SCM
1. Lot-size-inventory (bullwhip)
2. Inventory-transportation costs
– Cross-docking
3. Lead time-transportation costs
4. Product variety-inventory
– Delayed differentiation
5. Cost-customer service
– Disintermediation
Techniques 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 (supplier shipping directly to the end customer, rather than
the seller)
Other 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
• Vendor managed inventory systems
• Electronic ordering and funds transfer (paperless ordering,
payment by wire)
• Internet purchasing (e-procurement)
Potential Solutions to SC Problems
Problem
Potential
Improvement
Benefits
Possible
Drawbacks
Large
inventories
Smaller, more frequent Reduced holding
deliveries
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
Critical Issues 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
Compared
Administrative costs as
percent of purchases
Lead time (weeks)
Benchmark
Typical Firms
Firms
3.3%
0.8%
15
8
Time spent in placing order
42 minutes
15 minutes
Percentage of late deliveries
33%
2%
Percentage of rejected material
1.5%
.0001%
400
4
Number of shortages per year