Supply-Chain Management
Supply Chain Management is primarily
concerned with the efficient integration of
suppliers, factories, warehouses and stores so
that merchandise is produced and distributed in
the right quantities, to the right locations and at
the right time, and so as to minimize total system
cost subject to satisfying service requirements.
SCM, is a strategic weapon that seeks to
synchronize a firm’s functions and those of its
suppliers to match the flow of materials, services,
and information with customer demand
Customer
Customer
Customer
Distribution
center
Supply
Chain
Customer
Distribution
center
Manufacturer
Tier 1
Tier 2
Tier 3
Legend
Supplier of services
Supplier of materials
Supply Chain Management
Involves coordination of key processes
such as order placement, order
fulfillment, purchasing, and supported by
marketing, finance, engineering,
operations and logistics
 The basic purpose: manage the flow of
materials. This flow determines inventory
levels.

SCM Overview
Inventory – is a stock of materials used to
satisfy customer demand or support the
production of goods and services
 The three categories of inventories are raw
materials (RM), work-in-process (WIP), and
finished goods (FG).
 Manufacturers spend 60% of sales on
purchased materials and services, and service
providers spend as much as 40%. The
management of materials flows is therefore
important from a cost perspective alone.

How to gain control of the SC
Backward integration – firm controls upstream
toward the sources of raw materials and parts.
Can ensure its priority with the supplier and
lead efforts to improve efficiency and
productivity in managing flow of materials.
 What is difficult with backward integration?
 Write agreements with first-tier suppliers that
hold them accountable for the performance of
their suppliers (2nd and 3rd tier)

Developing Integrated SC

Purchasing





Determining
suppliers
Negotiating
contracts
Make or buy
Quality levels
Production


Quantity levels
Scheduling

Distribution


Finished goods
inventories
Storage/
transportation
Integrated Supply Chain
Phase 1:
Independent
supply-chain
entities
Suppliers
Phase 2:
Internal
integration
Suppliers
Purchasing
Production
Distribution
Purchasing Production Distribution
Internal supply chain
Materials management department
Phase 3:
Supply-chain
integration
Suppliers
Internal
supply
chain
Customers
Integrated supply chain
Customers
Customers
Conflicting Objectives in the
Supply Chain
1. Purchasing




Stable volume
requirements
Flexible delivery time
Little variation in mix
Large quantities
2. Manufacturing




Long run production
High quality
High productivity
Low production cost
3. Warehousing



Low inventory
Reduced transportation
costs
Quick replenishment
capability
4. Customers




Short order lead time
High in stock
Enormous variety of
products
Low prices
Managing the Customer Interface

Order-Placement Process Involves the
activities required to register the need for a
product or service and to confirm the
acceptance of the order.


It is advantageous to make this process simple and
fast
The Internet has enabled firms to reengineer their
order-placement process to benefit both the
customer and the firm. Advantages include




Cost reduction
Revenue flow increase
Global access
Pricing flexibility
Managing the Customer Interface
Order-Fulfillment Process. Involves the activities required to deliver
a product or service to a customer. Key elements include:

Information sharing
 Facilitated by the Internet and ERP systems

Finished goods inventory placement
 Forward placement
 Vendor-managed inventories (VMI
 Continuous replenishment
 Backward placement

Postponement is used by assemble-to-order and mass
customization firms. Customization is delayed until the last
possible moment
 Channel assembly
Managing the Supplier Interface

E-purchasing

Electronic Data Interchange (EDI)



Catalog hubs



Connect firms with to, potentially, hundreds of suppliers through the
Internet
Does not require one-to-one connections as does EDI
Exchanges



Enables the transmission of routine business documents with standard
formats from computer to computer, in one-to-one connections
Documents include invoices, purchase orders, and payments
Electronic marketplaces where buying and selling firms come together to
do business
Often used for spot purchases and commodities or “near-commodities”
Auctions



An extension of the exchange
Firms place competitive bids to buy something.
Like exchanges, auctions are often used for spot purchases,
commodities, and near-commodities
Managing the Supplier Interface

Supplier selection and certification



Supplier selection—three criteria often used are price, quality,
and delivery.
Supplier certification—typically involves visits by crossfunctional teams to do an in-depth evaluation of the supplier’s
processes.
Supplier relations


Competitive orientation—a zero sum game. The purpose is to
drive costs down to the minimum level. Power in the supply
chain relates to the purchasing clout a firm has.
Cooperative orientation—a partnership between buyers and
sellers. This orientation implies long-term commitments, joint
work on quality and buyer support of infrastructure. Typically,
fewer suppliers are needed in this arrangement.
Managing the Supplier Interface

Outsourcing



Centralized versus localized buying



Degree of sourcing control.
The degree of sourcing control is inversely related to the flexibility to
change the supply chain when needed.
Centralized—increases purchasing clout
Localized—often reduces lead times and enables closer coordination
with local production schedules
Value analysis



Value analysis is an intensive examination of the materials,
processes, information systems, and material flows in the production
of a good or service.
Benefits include reduced costs, better profits, increased customer
satisfaction, and often improved employee morale.
Value analysis can improve the internal supply chain, but its greatest
potential lies in applying it to the external supply chain
Measures of Supply-Chain Performance

Inventory measures



Average aggregate inventory value—the total value
of all items held in inventory for a firm. The value is
expressed at cost (as opposed to price) to avoid
the differences that occur in prices over time. This
measure is used in two other important measures.
Weeks of supply—average aggregate inventory
value divided by weekly sales (at cost). From an
inventory cost perspective, the lower the weeks of
supply, the better.
Inventory turns—annual sales (at cost) divided by
the average aggregate inventory value. The greater
the turns, the lower the average inventory levels.
Inventory Measures
Average inventory = $2 million
Cost of goods sold = $10 million
52 business weeks per year
$2 million
Weeks of supply =
= 10.4 weeks
($10 million)/(52 weeks)
Inventory Measures
Average inventory = $2 million
Cost of goods sold = $10 million
52 business weeks per year
$2 million
Weeks of supply =
= 10.4 weeks
($10 million)/(52 weeks)
$10 million
Inventory turns =
= 5 turns/year
$2 million
Inventory Measures
Inventory Measures

Process measures, measuring costs,
time, and quality as related to
Order placement
 Order fulfillment
 Purchasing

Inventory Measures

Links to financial measures
Current assets (return on assets)
 Working capital
 Contribution margin
 Cash-to-cash (cash flow)

Supply-Chain Process Measures
Order Placement
 Percent orders
taken accurately
 Time to complete
the orderplacement process
 Customer
satisfaction with
the orderplacement process
Order Fulfillment
 Percent of incomplete





Purchasing
 Percent of
orders shipped
suppliers’
Percent of orders
deliveries on time
shipped on time
 Suppliers’ lead
Time to fulfill the
times
order
 Percent defects in
Percent of returned
purchased
items or botched
materials and
services
services
Cost to produce the
 Cost of purchased
item or service
materials and
Customer satisfaction
services
with the orderfulfillment process
Environments Best Suited for Efficient and
Responsive Supply Chains
Factor
Demand
Competitive
priorities
New-product
introduction
Contribution
margins
Product variety
Efficient Supply Chains
Responsive Supply Chains
Predictable; low
forecast errors
Low cost; consistent
quality; on-time
delivery
Infrequent
Unpredictable; high
forecast errors
Development speed; fast
delivery times;
customization; volume
flexibility; highperformance design
quality
Frequent
Low
High
Low
High
Design Features for Efficient and
Responsive Supply Chains
Factor
Efficient Supply Chains
Responsive Supply Chains
Operations
strategy
Make-to-stock or
standardized services;
emphasize high
volume, standardized
products, or services
Low
Assemble-to-order, maketo-order, or customized
services; emphasize
product or service
variety
High
Low; enable high
inventory turns
Shorten, but do not
increase costs
Emphasize low prices;
consistent quality; ontime delivery
As needed to enable fast
delivery time
Shorten aggressively
Capacity
cushion
Inventory
investment
Lead time
Supplier
selection
Emphasize fast delivery
time; customization;
volume flexibility; highperformance design quality
Supply-Chain Dynamics
Customer
Firm A
Firm B
Materials requirements
Customer
Firm C
Firm A
Firm C
Time
(a)
(b)
Figure 11.8
The Future is NOT what it used to
be….

A new e-Business model
Reduce cost
 Increase Profit
 Increase service level
 Increase flexibility

Collaborative Planning, Forecasting
and Replenishment (CPFR)
A business process for value chain
partners – especially retail
 to coordinate plans in order to better
match supply and demand

Collaborative Planning, Forecasting
and Replenishment (CPFR)
Collaborative Planning
1. Front-End Agreement
2. Joint Business Plan
Collaborative Forecasting
3. Create Sales Forecast
4. Identify exceptions
5. Resolve exceptions
6. Create Order Forecast
Collaborative
Replenishment
7. Identify exceptions
8. Resolve exceptions
9. Generate Order