Chapter 4
Supply Chain
Management
Supply Chain
• A supply chain is the network of all the
activities involved in delivering a
finished product/service to the
customer.
Inventory at Different
Stocking Points
Raw
materials
Supplier
Figure 8.1
Work in
process
Manufacturing plant
Finished
goods
Distribution center
Retailer
Customer
Customer
Customer
Distribution
center
Customer
Distribution
center
Manufacturer
Tier 1
Tier 2
Tier 3
Figure 8.2
Legend
Supplier of services
Supplier of materials
Components
• Internal processor
• External suppliers
• External distributors
Supply-Chain for a Service Firm
Home
customers
Commercial
customers
Other electric
utilities
Electric
power utility
Electric
transformers
Figure 8.3
Facility
maintenance
services
Janitorial
services
Programming
services
Electric
energy
backup power
Office
supplies
Fuel
supplies
Bullwhip Effect in a Supply Chain
• Bullwhip effect is the inaccurate or
distorted demand information magnified
upstream in the supply chain.
Bullwhip Effect
Customer
Firm A
Firm B
Materials requirements
Customer
Firm C
Firm A
Firm C
Time
(a)
(b)
Figure 8.5
Causes
• What causes bullwhip effect in the chain:
– demand forecasting updating,
– order batching,
– price fluctuations,
– rationing and gaming
Consequence
• Consequences of bullwhip effect:
– Excessive inventory / production at each
spot of a supply chain due to erroneous
percept of demand information.
– Getting more serious when going upstream
of the supply chain.
Counteracting Bullwhip Effect
• Cooperation and information sharing
among companies in supply chain:
– Make order calculation information available at all
levels of the supply chain.
– Share real demand information.
– Replace order batching with improvisatory order
– Stabilize pricing with increased cooperation
– Eliminate gaming with cooperation and mutual
trust
B2B
• In B2B e-commerce, companies sell and
buy products to and from other business
through Internet.
• B2B facilitates purchasing research
(electronic storefront and net
marketplace) and automates purchasing
transaction process.
B2C
• B2C refers to the on-line business in
which a company reaches individual
consumers directly through Internet.
• B2C models:
– Advertising revenue model
– Subscription revenue model
– Transaction fee model
– Sales revenue model
– Affiliate revenue model
Intranet, Extranet, Internet
• An intranet is a computer network exclusively
for internal use of a company.
• An extranet is a computer network exclusively
for a company and its suppliers / customers.
• Internet is an open computer network.
Intranet
Extranet
Internet
Role of Purchasing
• Purchasing departments play an
important role in SCM and are
responsible for:
– Selecting suppliers
– Negotiating and administering long-term contracts
– Monitoring supplier performance
– Placing orders to suppliers
– Developing a responsible supplier base
– Maintaining good supplier relations
Traditional Purchasing Process
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E-purchasing Process
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Sourcing Issues
• Which products to produce in-house and
which are provided by other supply chain
members (make-or-buy decision)
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Role of Warehouse
• A warehouse is for storage and/or
distribution.
– Transportation consolidation
– Product mixing
– Service improving
• Crossdocking refers to the sole distribution
function of a warehouse with eliminated
storage and order-picking.
Management functions in a warehouse
Cross docking at a warehouse
Characteristics of Crossdocking
• Warehouse plays the role of transfer station
where less-than-truckload (LTL) quantities are
consolidated into truckload (TL), or items from
different suppliers are consolidated and
shipped to one customer.
• No storage and order picking.
• Crossdocking is carried out within 24 hours.
• Warehouse knows who are the owners of the
inbound items before they arrive.
Types of Crossdocking
• Based on purpose of crossdocking and
customers of the warehouse, four types:
– Manufacturing crossdocking
– Distribution crossdocking
– Transportation crossdocking
– Retail crossdocking
Stocking Pallets
Stock-Keeping Unit (SKU)
• SKU, like UPC (universal product code), is a
identification system for stored items in a
warehouse.
• For example, SKU 12345bX refers to a box of
100 units of black staplers from supplier X,
SKU 12345rY refers to a box of 75 red staplers
from supplier Y.
Vertical Integration
• Vertical integration – a measure of how much
of the supply chain is owned or operated by
the manufacturer
• Backward integration – owning or controlling
of sources of raw material and component
parts
• Forward integration – owning or control the
channels of distribution
Insourcing vs. Outsourcing
• Insourcing – to make in-house.
• Outsourcing – to make by other
companies
• Considerations in sourcing decision
making:
– Is product critical to firm’s success?
– Is product a core competency?
– Is it something your company must do to
survive?
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What could be outsourced?
From a survey 2008
Make or Buy Analysis
• Analysis will look at the expected sales levels and
cost of internal operations vs. cost of purchasing
the product or service
At indifferen ce point (or breakeven point)
TC Buy  TCMake
To find quantity Q at indifferen ce point :
FCBuy  VCBuy  Q   FCMake  VCMake  Q 
That is :
Q
FCmake  FCbuy
VCbuy  VCmake
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Example (p.121)
• Mary and Sue decide to open a bagel shop. They
need to decide whether they should make bagels onsite or buy bagels from a local bakery. If they buy
from the local bakery they will need airtight
containers at a fixed cost of $1,000 annually. They
can buy the bagels for $0.40 each. If they make
bagels in-house they will need a small kitchen at a
fixed cost of $15,000 annually. It will cost them
$0.15 per bagel to make. They believe they will sell
60,000 bagels.
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Example Solved
• Let Q be the quantity at indifference point
(breakeven point)
• FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
• $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)
• Solve it for Q, we have
15,000  1,000 14,000
Q

 56,000 bagels
0.4  0.15
0.25
• So, make or buy?
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Developing Supplier Relationship
• A strong supplier base is critical to the
success of many organizations
• Top three criteria for choosing suppliers
are:
– Price
– Quality
– On-time delivery
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Win-Win Partnership Relations
• Benefits of Partnering
– Early supplier involvement (ESI) in the
design process
– Using supplier expertise to develop and
share cost improvements and eliminate
costly processes
– Shorten time to market
– Efficient supply chain
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Ethics in Supply Management
• Global Standards of Supply Management
Conduct from ISM:
– Loyalty to your organization
– Justice to those with whom you deal
– Faith in your profession
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Supply Chain Metrics
• Measuring supply chain performance
– Traditional measures include:
•
•
•
•
Return on investment
Profitability
Market share
Revenue growth
– Additional measures
•
•
•
•
Customer service levels
Inventory turnover
Weeks of supply
Inventory obsolescence
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