Supply Chain Management
Chapter 15
Learning Objectives
• You should be able to:
1. Know definitions of key words.
2. Discuss the key issues of supply chain management
(SCM)
3. Summarize the motivations and risks of outsourcing as
a strategy
4. List some of the strategic responsibilities of SCM
5. Give examples of some advantages of e-business
6. Explain the importance of supplier partnerships
Instructor Slides
2
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.
15-3
Typical Supply Chains
Supplier
Supplier
Storage
Mfg.
Storage
Distributor
Retailer
Supplier
Supplier
Storage
Service
Customer
Supplier
• Every business organization is part of at least one
supply chain, and many are part of multiple supply
4
chains
Customer
Thai Floods Jolt PC Supply Chain
•
The flooding in Thailand, the world's second-largest exporter of hard-disk drives, comes
during the key selling season for hard-disk drives, with PC makers obtaining supplies for
holiday sales.
•
The flood's impact also comes at a tough time for the companies, which saw disruption in
the PC supply chain from an earthquake and tsunami in Japan earlier this year. Analysts
said the flooding in Thailand could have a greater impact on the hard-drive makers than
the Japan quake, with more components suppliers affected.
•
About 60% of Western Digital's hard-disk drives come from its Thailand sites. In addition,
many components companies also have suspended operations, hurting other disk-drive
makers.
•
Analyst estimates any factory outages longer than three weeks would hurt even the top
PC makers, with hard-drive inventories recently running "on the lean side.“
•
Analysts said it likely will lead to higher prices and potential supply constraints later this
year or early next year.
•
The company's other facilities in Malaysia, Singapore and the U.S. remain fully
operational, the company said.
wsj.com Oct. 18, 2011
5
Source: http://online.wsj.com/article/SB10001424052970203658804576636951367373290.html
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
15-6
Why so much interest in Supply
Chain Management?*
•
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.
15-7
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
15-8
Management Responsibility: Strategic
• 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, http://www.youtube.com/watch?v=Z
2Bs0nqVyqs
distribution centers.
15-9
Management Responsibility: Strategic
• 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.
15-10
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.
15-11
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.
15-12
Choosing Suppliers (Supplier Audits)
• 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
15-13
Supplier Relationship Management
• Type of relationship is often governed by the duration
of the trading relationship:
– Short-term contracts
• Often involves competitive bidding
• Minimal interaction
– Medium-term contracts
• Often involves an ongoing relationship
– Long-term contracts
• Often involves greater cooperation that evolves into a
partnership
15-14
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
Flexibility
Many of the
May be brief
benefits go to
Major consideration
the buyer,
May not be high
while much of
Low
the
May be unreliable; buyer inspects
investment
May be low due to many
falls on the
suppliers
supplier.
Relatively low
Location
Widely dispersed
Length of relationship
Low price
Reliability
Openness
Quality
Volume of business
Long-term
Moderately important
High
High
At the source; vendor certified
High
Relatively high
Nearness is important for short
15-15
lead time and quick service
Logistics
• Logistics
– The part of the SC involved with the forward and
reverse flow of goods, services, cash, and
information.
• Logistics Management
– Management of :
•
•
•
•
•
•
•
inbound and outbound transportation
material handling
Warehousing
Inventory
order fulfillment and distribution
third party logistics
reverse logistics (return from customers)
15-16
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
17
3-PL
• Third-party logistics (3-PL)
– The outsourcing of logistics management
• Warehousing
• Distribution
• Provider’s information system
• 3PSCM
– 3PL extended to include procurement of other
SC services
15-18
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
15-19
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.
15-20
Beer-Game – Typical Results*
Bullwhip Effect
100
90
80
70
Orders
Customer
60
Retailer
50
Wholesaler
Distributor
40
Factory
30
20
10
0
Week
Week
Beergame Debriefing, by Kai Riemer, http://www.beergame.org
21
Beer-Game – Typical Results*
Out of stock = Serious lack of service level!
150
100
Inventory
50
Retailer
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Distributor
-50
Factory
-100
-150
-200
Week
Beergame Debriefing, by Kai Riemer, http://www.beergame.org
Wholesaler
22
Beer-Game – Typical Results*
Total Cost
1400
1200
Cost
1000
Retailer
800
Wholesaler
Distributor
600
Factory
400
200
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Week
Beergame Debriefing, by Kai Riemer, http://www.beergame.org
23
Bullwhip Effect – Problems*
•
•
•
•
Low service level (backorders)
High inventory levels
High cost
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!
• In the end: high overall cost in the supply chain
Beergame Debriefing, by Kai Riemer, http://www.beergame.org
24
Bullwhip Effect – Causes*
1. 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.
2. 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)
3. 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.
Beergame Debriefing, by Kai Riemer, http://www.beergame.org
25
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
15-26