Operations Management
(MD021)
Supply Chain Management
Agenda
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Basics of SCM
Drivers of SCM
Elements of SCM
E-Commerce Impact on SCM
Performance Measurement
Collaboration in SCM
Purchasing
How to Choose and Evaluate Suppliers
Basic Concepts of
Supply Chain Management
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
The Value Chain internal to a
company
Production
Distribution
Purchasing Receiving Storage Operations Storage
Typical Supply Chain
activities for a Manufacturer
internal
value
chain
Supplier
Supplier
}
Storage
Mfg.
Storage
Dist.
Retailer
Customer
Supplier
supply
chain
demand
chain
supply chain management (SCM) concerns supplier activities,
internal value chain activities, and demand chain activities
Typical Supply Chain for a
Service
Supplier
Supplier
}
Storage
Service
Customer
Goal of SCM
 Goal of SCM
 To link all components of the supply chain so
that market demand will be met as efficiently
as possible across the entire chain
 Match supply to demand at each stage of the
supply chain
Supply network encompasses a
number of facilities
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Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices
Supply network performs various
functions and activities
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Forecasting
Purchasing
Inventory management
Information management
Quality assurance
Scheduling
Production and delivery
Customer service
Supply Chain Management
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
Drivers of Supply Chain
Management
History of SCM
 Why attempt to manage supply chains?
 In the not too distant past (i.e. pre-1990s),
many companies didn’t manage their supply
chains
 Some advanced companies realized that
huge inefficiency resulted from no/poor SCM
 In particular, identified the “Bullwhip Effect”
Bullwhip Effect
Amount of
= inventory
Tier 2
Suppliers
Tier 1
Suppliers
“The sky
is falling!
Build 250!”
“@%*$!
“Wow! 8!
We are
I better
really
build 30!”
behind.
Build 100!”
Producer
Distributor
Retailer
“Hmm. Last
“I’ll order 2
period they
more.”
ordered 1.
Maybe demand
is up. I had
better order 8.”
Final
Customer
“I’ll buy 2”
Bullwhip Effect
Amount of
= inventory
Tier 2
Suppliers
Tier 1
Suppliers
Producer
Distributor
“0? But
“0? @%*$! “0? But I’ve “0?. But I’ve
got 6 left.
we’ve got
What are
got 22 in
150 in stock!” we gonna stock! Stop Don’t buy
any more.”
do with the the line.”
70 we have?”
Retailer
Final
Customer
“I’ll order 0 “I’ll buy 0”
more. I
have 2
in stock.”
Result of the Bullwhip Effect
Inventory
Time
Backorder
At each stage of the supply chain, a pattern like the above
develops, of huge inventory buildups (and costs), followed
by periods of huge stockouts and backordering (and mad
customers + backordering costs)
Benefits of Supply Chain
Management
 Counteract the Bullwhip Effect
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Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
Today, many other problems can also
drive 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
Supply Chain Benefits and
Drawbacks
Operational
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 Modular
of parts
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
Examples of SCM Benefits at
Various Companies
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
As a result of competitors working on
SCM, SCM has become strategic
 Strategic importance
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Cost
Quality
Agility
Customer service
Competitive advantage
But, SCM projects can be very
risky to undertake
 Technology management drives SCM
Adoption/Success/Failure
 Benefits
 SCM packages, when adopted well, can transform
an organization’s operations
 Risks
 Poorly planned for/implemented SCM packages
can wreck a company’s operations
 Very expensive to install these pages – many
millions of dollars
Elements of SCM
SCM involves coordinating
activities across supply chain
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
 Raw materials
 Work in process
 Finished goods
 Support items – fuel, equipment, parts, tools, etc.
Logistics
• Movement within the facility
• Traffic planning for 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 (DRP)
 Distribution requirements planning (DRP)
is a system for inventory management and
distribution planning
 Extends the concepts of MRPII to
multiechelon warehouse inventories
Uses of DRP
 Management uses DRP to plan and
coordinate:
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Transportation
Warehousing
Workers
Equipment
Financial flows
Electronic Data Interchange
(EDI)
 EDI
 The direct transmission of inter-organizational
transactions, computer-to-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
Third Party Logistics (3PL)
 3PL
 The outsourcing of logistics management
 Companies turn over their warehouse and
distribution to companies that specialize in
these areas
E-Commerce Impact on SCM
E-Commerce
 E-Commerce:
 The use of electronic technology (e.g., WWW, Web
Services, mobile devices) to facilitate business
transactions
 Applications include
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Internet buying and selling
E-mail
Order and shipment tracking
Electronic data interchange
SCM Benefits of E-Commerce
 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
SCM Challenges of E-Commerce
 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
How to Measure SCM
Performance?
Successful SCM has certain
characteristics
 Trust among trading partners
 Effective communications
 Supply chain visibility
 Access to real-time data on inventory levels, shipping
status, related information
 Requires data sharing between trading partners
 Event-management capability
 The ability to detect and respond to unplanned events
 Performance metrics
 Measure the system to make sure you are doing well
Overall Objectives for Supply
Chain Performance
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Cost
Quality
Flexibility
Velocity
Customer service
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
Trade-offs Between Performance
Measures
 Lot-size vs. inventory
 Ordering economies vs. inventory held
 Risks the Bullwhip effect
 Inventory vs. transportation costs
 Shippers prefer to ship full truckloads, which increases inventory
carrying costs
 Solutions: combine orders, smaller trucks, cross-docking
 Lead time vs. transportation costs
 Waiting for a full truck increases production lead times
 Product variety vs. inventory
 Higher variety leads to smaller lot sizes, more setups, other costs
 Solution: Delayed differentiation
 Cost vs. customer service
 Large volumes reduce cost, but can hurt customer service
 Solution: Disintermediation
Cross-Docking
 Cross-docking
 Goods arriving at a warehouse from a supplier are
unloaded from the supplier’s truck and loaded onto
outbound trucks
Delayed Differentiation
 Delayed differentiation
 Production of standard components and
subassemblies, which are held until late in the
process to add differentiating features
Disintermediation
 Disintermediation
 Reducing one or more steps in a supply chain
by cutting out one or more intermediaries
SCM Performance Measures
 SCOR (Supply Chain Operations
Reference) Model
 Plan, Source, Make Deliver, Return
 SCOR addresses …
 Product from supplier’s to customer’s
 SCOR does not address …
 Sales, Marketing, R&D, Support
SCOR Metrics provide a
standard way to measure SCM
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
SCOR’s SCM Performance
Metrics
 Reliability – delivery performance, fill rate,
perfect fulfillment
 Responsiveness – order fill lead time
 Flexibility – SC response time, ops flexibility
 Cost – warranty cost, productivity, CGS, SCM
cost
 Assets – turns, inventory days, cash cycle
Collaborative Approaches to
SCM
Creating an Effective Supply
Chain Involves Partnerships
 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
Collaboration Assumes Your
Supplier can be 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
Partnerships with suppliers can
improve your own operations
 Ideas from suppliers could lead to improved
competitiveness
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Reduce cost of making the purchase
Reduce transportation costs
Reduce production costs
Improve product quality
Improve product design
Reduce time to market
Improve customer satisfaction
Reduce inventory costs
Introduce new products or services
Efficient Consumer Response
 Efficient Consumer Response (ECR)
 A supply chain management initiative specific
to the food industry
 Reflects companies’ efforts to achieve
quick response using EDI and bar codes
CPFR
 Collaborative Planning, Forecasting, and
Replenishment (CPFR)
 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 on structure
of CPFR collaboration
 Step 2 – Develop joint business plan for
collaborators
 Steps 3-5 – Sales forecast collaboration
 Steps 6-8 – Order forecast collaboration
 Step 9 – Order generation/delivery
execution
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
Challenges to Collaboration
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Barriers to integration of organizations
Getting top management on board
Dealing with trade-offs
Small businesses – no money to invest, no time,
no slack resources, insufficient technology
 Actions that create more variability and
uncertainty
 Long lead times hinder the ability of a supply
chain to respond to changing customer
demands
Purchasing
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
 Quality of materials purchased is sufficient for operations
 Timing of deliveries supports operations
Fun Facts About Purchasing
 Institute for Supply
Management
 > 60% cost of finished
manufactured goods is
purchased
 >90% cost of retail &
wholesale goods is
purchased
Duties of Purchasing
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Identifying sources of supply
Negotiating contracts
Maintaining a database of suppliers
Obtaining goods and services
Managing supplies
Purchasing interfaces with other
functions and with external suppliers
Negotiates contracts
Uses
materials
Pays for
materials
Legal
Operations
Accounting
Purchasing
Data
processing
Design &
Engineering Specifies quality of
Receiving
materials
Suppliers
Inspects incoming shipments
Purchasing follows a cycle of
activities
Legal
1.
2.
3.
4.
5.
Requisition received
Operations
Supplier selected
Order is placed with supplier
Monitor orders
Receive orders
Accounting
Purchasing
Data
processing
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
How to Choose and Evaluate
Suppliers?
Management of Supplier Network
Involves Several Activities
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Choosing suppliers
Evaluating sources of supply
Supplier audits
Supplier certification
Supplier relationships
Supplier partnerships
Factors in Choosing a
Supplier
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Quality and quality assurance
Flexibility
Location
Price
Product or service changes
Reputation and financial stability
Lead times and on-time delivery
Other accounts
Evaluating Sources of Supply
 Vendor Analysis - evaluating the sources
of supply in terms of …
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Price
Quality
Services
Location
Inventory policy
Flexibility