Supply Chain Management
Chapter 15
Learning Objectives
• 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
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
• 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.
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
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
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
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.
Key SCM Issues
• The goal of SCM is to match supply to demand as
effectively and efficiently as possible
• Key issues:
–
–
–
–
–
–
Determining appropriate levels of outsourcing
Managing procurement
Managing suppliers
Managing customer relationships
Being able to quickly identify problems and respond to them
Managing risk
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
–
–
–
–
–
Language and cultural differences
Currency fluctuations
Political instability
Increasing transportation costs and lead times
Increased need for trust amongst supply chain partners
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
Procurement
• The purchasing department is responsible for
obtaining the materials, parts, and supplies
and services needed to produce a product or
provide a service.
• The goal of procurement
– Develop and implement purchasing plans for
products and services that support operations
strategies
Purchasing Interfaces
• Purchasing has interfaces with a number of
other functional areas, as well as with outside
suppliers.
– Operations & legal department
– Accounting
– Design and engineering
– Receiving
– Suppliers
The Purchasing Cycle
• The main steps:
1. Purchasing receives the requisition
1)
2)
3)
4)
A description of the item or material desired
The quantity and quality necessary
Desired delivery dates
Who is requesting
2. Purchasing selects a supplier
3. Purchasing places the order with a vendor
1) Bid
2) Blanket purchase orders
4. Monitoring orders
1) Communicate
5. Receiving orders
E-Business
• The use of electronic technology to facilitate
business transactions
• Applications include
–
–
–
–
–
–
Internet buying and selling
E-mail
Order and shipment tracking
Electronic data interchange
Product and service promotion
Provide information about products and services
E-Business Order Fulfillment Problems
• Customer expectations
– Order quickly  Quick delivery
• Demand variability creates order fulfillment problems
• Sometimes Internet demand exceeds an organization’s
ability to fulfill orders
• Inventory
– Outsourcing order fulfillment
• Loss of control
– Build large warehouses
• Internal holding costs
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
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
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
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
time and quick service
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.
Logistics
• Refers to the movement of materials, services,
cash, and information in a supply chain
– Movements within a facility
– Incoming shipments
– Outgoing shipments
Movement Within a Facility
Incoming and Outgoing Shipments
• Traffic management
– Overseeing the shipment of incoming and
outgoing goods
• Handles schedules and decisions on shipping method
and times, taking into account:
–
–
–
–
Costs of shipping alternatives
Government regulations
Needs of the organization
Shipping delays or disruptions
3-PL
• Third-party logistics (3-PL)
– The outsourcing of logistics management
– Includes
• Warehousing and distribution
– Potential benefits include taking advantage of:
• The specialists’ knowledge
• Their well-developed information system
• Their ability to obtain more favorable shipping rates
Supply Chain Risks
1. Supply chain disruption
– Natural disasters
– Supplier problems
2. Quality issues
– Another form of disruption that may disrupt supplies
and lead to product recalls, liability claims, and
negative publicity
3. Loss of control of sensitive information
– If suppliers divulge sensitive information to
competitors, it can weaken a firm’s competitive
position
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
Inventory Management
• Inventory issues in SCM
– Inventory location
• Centralized inventories
• Decentralized inventories
– Inventory velocity
• The speed at which goods move through a supply chain
– The bullwhip effect
• Inventory oscillations that become increasingly larger
looking backward through the supply chain
In-Class Competition
• http://www.youtube.com/watch?v=qxpgM8p
aegQ
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 to cope with peaks.
• Inventory capacity
– 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
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.
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
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
MIS 373: Basic Operations Management
34
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
MIS 373: Basic Operations Management
35
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
MIS 373: Basic Operations Management
36
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
MIS 373: Basic Operations Management
37
Small Business
• 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?
MIS 373: Basic Operations Management
38
Supply Chain Performance Measures
• Financial
–
–
–
–
Return on assets
Cost
Cash flow
Profits
• Suppliers
–
–
–
–
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
MIS 373: Basic Operations Management
39
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:
–
–
–
–
–
–
–
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
MIS 373: Basic Operations Management
40
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.
MIS 373: Basic Operations Management
41
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-oflife 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.
MIS 373: Basic Operations Management
42
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.
MIS 373: Basic Operations Management
43
Transportation Problem
• Finding the lowestcost plan for
distributing stocks
from multiple origins
(supply points) to
multiple destinations.
8S-44
Model: Information Requirements
• Information requirements
1. A list of the origins and their supply quantity
(capacity) per period.
2. A list of the destinations their demand per period.
3. The unit cost of shipping items from each origin
to each destination
8S-45
Model: Assumptions
• Transportation model assumptions
1. The items to be shipped are homogeneous
2. Shipping cost per unit is the same regardless of
the number of units shipped
3. There is only one route or mode of transportation
being used between each origin and destination
8S-46
Cost to ship one
unit from factory 1
to warehouse A
Warehouse
A
F 1
a
c
t 2
o
r 3
y
Demand
80
B
C
D
Supply
4
7
7
1
100
12
3
8
8
200
8
10
16
5
150
90
120
Warehouse B can use
90 units per period
160
450
Factory 1 can
supply 100 units
per period
Total capacity
per period
Total Demand per
period
8S-47
The Minimum Cell Cost (greedy) Heuristic
1. Search for the minimum unit cost
2. Place min{demand, supply}
3. Erase row/column corresponding to min{demand, supply}
4. Subtract min{demand, supply} from paired48 row/column
5. Stop when all columns and rows are saturated
repeat
Min{160, 100}
Warehouse
A
F 1
a
c
t 2
o
r 3
y
Demand
B
4
C
7
D
7
Supply
1
100
0
100
80
12
3
8
8
200
8
10
16
5
150
160 60
450
90
120
100-100
160-100
8S-49
Min{90, 200}
Warehouse
A
F 1
a
c
t 2
o
r 3
y
Demand
B
C
4
7
D
7
Supply
1
100
0
8
200
110
100
12
3
8
90
8
80
10
90 0
16
120
5
160 60
200-90
150
450
90-90
8S-50
Warehouse
A
F 1
a
c
t 2
o
r 3
y
Demand
B
4
C
D
7
7
Supply
1
100
0
8
200
110
100
12
3
8
90
8
10
16
5
60
80
90 0
120
160 60
150-60
150
90
0 450
Min{60, 150}
60-60
8S-51
Tie breaking rule: choose randomly
Warehouse
A
B
F 1
a
c
t 2
o
r
y 3
Demand
4
C
D
7
7
Supply
1
100
0
8
8
200
110
0
16
5
60
150
90
160 60 0
450
100
12
3
110
90
8
80
10
90 0
Min{110, 120}
120 10
110-110
120-110
8S-52
Warehouse
A
F 1
a
c
t 2
o
r
y 3
B
4
C
7
7
Min{80, 90}
Supply
1
100
0
8
8
200
110
0
16
5
60
150
90 10
160 60 0
450
100
12
3
90
8
110
10
80
Demand
D
80 0
90 0
120 10
90-80
80-80
8S-53
Warehouse
A
F 1
a
c
t 2
o
r
y 3
B
4
C
7
7
Supply
1
100
0
8
8
200
110
0
16
5
60
150
90 0
10
160 60 0
450
100
12
3
90
8
110
10
10
80
Demand
D
80 0
90 0
120 10
10-10
0
10-10
Min{10, 10}
8S-54
Warehouse
A
F 1
a
c
t 2
o
r 3
y
B
4
C
7
D
7
Supply
1
100
8
8
200
16
5
150
100
12
3
90
8
10
80
Demand
80
110
90
10
60
120
160
450
Total cost:
TC = 100*1 + 90*3 + 110*8 + 80*8 + 10*16 + 60*5 = 2,350
8S-55
Recap