Supply Chain Management
MGT3303
Reading: Chapter 7
MGT3303
Michel Leseure
Learning Objectives
• Understand the meaning and importance
of supply chains
• Understand the strategic issues in supply
chain management
• Understand the operational challenges,
solutions, and techniques of supply chain
operations
MGT3303
Michel Leseure
Example of a Supply Chain
1.
2.
3.
4.
Suppliers
Manufacturer
Wholesalers
Retailers, e-commerce
MGT3303
Michel Leseure
Example
Direction of flow of demand
Tier-I
Suppliers
Tier-II
Suppliers
Direction of flow of product
Manufacturers
Distribution
Centers
Retailers
Customers
E-tailers
Typical Supply Chain Structure
MGT3303
Michel Leseure
Supply Chain
Suppliers
Manufacturing
Warehousing
Customers
MGT3303
Michel Leseure
MGT3303
Michel Leseure
Supply Chain Examples

It takes a box of cereal 3+ months from factory
to supermarket.


Efficient Consumer Response (ECR) initiative estimates $30 billion opportunity by streamlining
grocery supply chain
Matching supply and demand:


“Boeing lost $2.6 billion in Oct. 97 due to raw
material, internal, and supplier shortages…”
(W.S.J., 10-23-97)
Supply chain management is closely tied to
strategic partnerships and logistics

Cross-docking logistics & inventory practices at
Walmart helped them beat Kmart)
MGT3303
Michel Leseure
Supply Chain Management
• Efficiently integrating suppliers, manufacturers,
warehouses, and customers so that products are
produced and distributed at the right quantities, to the
right locations, and at the right time, in order to
minimize system wide costs while satisfying service
level requirements.
– every player in the system has to be considered
– minimize costs across the system
– efficient integration includes all activities from strategic
to operational level
– information flow is upstream (from retailer to supplier),
but product flow goes downstream
• Notion of Demand Chain Management
MGT3303
Michel Leseure
Supply Chain Management
Supply Chain Design
Supplier Selection
Purchasing
Supply
Chain
Management
Supply
Chain
Performance
Relationship
Management
Logistical Management
MGT3303
Michel Leseure
Key Issues in Supply Chain
Management
• Dependence
– customers depend on suppliers in terms of
punctuality of delivery, quality, reliability, etc.
– How can this dependence be managed?
• Relationship/Trust
– By opposition to a contractual relationship
– What is a good approach?
• Effectiveness/Productivity
– Supply chain performance
– Comparative advantage
– Key issue of responsibility/equity
MGT3303
Michel Leseure
Key Issues in Supply Chain
Management
• Integration
– How can one co-ordinate independent
companies with:
• Secretive corporate cultures
• An orientation toward competition
• Different perceptions of operations (i.e. inventory)
• Bargaining power
• System dynamics:
– Bullwhip effect
MGT3303
Michel Leseure
Bullwhip Effect


Demand propagates from the lower levels of the supply chain
(consumer end) to the upper levels (supplier end).
Unfortunately, variability does the same and is amplified by
each echelon of the chain. Terms for this include
 Information distortion
 Bullwhip Effect

Modest movement at the whip handle (representing
consumer demand fluctuations) leads to wild swings at the
whip’s tip (demand experienced by the supplier). Bullwhip
cracks are loud because of the Doppler effect (e.g. as seen
visibly in a boat’s wake) which generates a small sonic boom
as the whip tip breaks the sound barrier at about 800 mph.
The supply chain bullwhip crack can be heard through
bankruptcy filings as vulnerable suppliers and manufacturers
experience deadly cash flow variability.
MGT3303
Michel Leseure
Procter & Gamble
P&G Pampers disposable diapers - best
selling product
 sales of the product at retail stores were fluctuating, but
the variabilities were not excessive. Reason & data
suggest that diaper sales should be fairly constant
because birth rate is constant over a year!
 orders placed by the distributors to P&G exhibited a much
greater variability
 P&G orders to supplier, 3M, had even greater swings and
variability!
MGT3303
Michel Leseure
The Bullwhip Effect
MGT3303
Michel Leseure
The Bullwhip Effect
MGT3303
Michel Leseure
Causes of the Bullwhip Effect




Demand Forecast Updating
Order Batching
Price Fluctuations & Promotions
Shortage Gaming (Inflated orders during
shortages)
 Others:
 Long lead times (increase variability)
 Ineffective IT or lack of partnerships keep everyone
starved for real, consistent information
MGT3303
Michel Leseure
Current Trends in Supply Chain
Management
• Strategic Sourcing (Single sourcing)
– Reduction of the number of suppliers
– Centralisation and optimisation of data/decisions
– Virtual communities
• Strategic alliances
– long term commitment, open book, profit sharing,
exchange of workers
• Integration of linkages:
– Project managers
– EDI, Internet
– ERP with SAP
MGT3303
Michel Leseure
Supply Chain System Design
• Several management decision models
• Extensions of the traditional accounting
make or buy decision frameworks
E xternal
E nvironm ent
Internal
P erform ance
Internal
E xternal
B enchm ark
M ake or
B uy D ecision
P erform ance
Im provem ent
S uppliers
P erform ance
MGT3303
Michel Leseure
Transaction Cost Theory
A sset
S pecificity
Frequency
B ounded
R ationality
& O pportunism
G overnance
S tructure
D ecision
M inim ise
Trasaction
C osts
Transaction
U ncertainty
MGT3303
Michel Leseure
Core Competencies Theory
C om petencies
C haracteristics
C ore
C om petency
D ecision
Industry
S tructure
& S upply B ase
S trategic
C om petitiveness
Future
E volution
w ithin
Industry
MGT3303
Michel Leseure
Supply Chain System Design
MGT3303
Michel Leseure
Logistical Management
• The operational management of the supply chain
• Similar in most respect to standard operations
management
– Quality management, planning and scheduling, etc.
– But increased importance of co-ordination
• Role of IT systems, especially ERP
– Looking for optimal solutions and practices
– Unique features:
• Standardisation and specifications
• Purchasing management / Procurement
– E-procurement
• Transportation Management
MGT3303
Michel Leseure
Specifications
• The task of detailing precisely the
characteristics of the product/service to be
purchased
• Usually as an appendix to a contract
– Strict legal liability – not such thing as a
fuzzy specification
• Use of standards reduce the cost of
specifications
• An example of a transaction cost
MGT3303
Michel Leseure
Procurement
MGT3303
Michel Leseure
MGT3303
Michel Leseure
Purchasing Management
• How should problems/delays be dealt
with?
–
–
–
–
Penalties
Increased communication, collaboration
Switch supplier
Multiple sourcing
MGT3303
Michel Leseure
Transportation Management
• Network design
– More a strategic issue
• Mode selection
– Which mode of transport
• Rail, air, road, water, etc.
– Which routes
• Transportation method
MGT3303
Michel Leseure
SCM – Part III
Transportation Method
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Michel Leseure
Transportation Method
Netherlands
Source
Amsterdam
The Hague
*
50
* Tilburg
80 0
*
Antwer
050
p
70 0
*
BelgiumLiege
0
20
0
*
Miles
0
Destination
*
50
100
Germany
*
Leipzig
40
0
Nancy
90
0
MGT3303
Michel Leseure
Transportation Costs
From Origin
Amsterdam
Antwerp
The Hague
Leipzig
120
61
102.5
To Destination
Nancy
Liege
130
41
40
100
90
122
Tilburg
59.5
110
42
Unit transportation costs from harbors to plants
Minimize
the transportation costs involved in moving
the motors from the harbors to the plants
MGT3303
Michel Leseure
Transportation Model
Autopower Transportation Model
Unit Cost
From/To
Leipzig
Nancy
Liege
Tilburg
Amsterdam
$
120.0
$
130.0
$
41.0
$
59.5
Antwerp
$
61.0
$
40.0
$
100.0
$
110.0
The Hague
$
102.5
$
90.0
$
122.0
$
42.0
Shipments
From/To
Leipzig
Nancy
Liege
Tilburg
Total
Available
Amsterdam
-
-
-
-
-
500
Antwerp
-
-
-
-
-
700
The Hague
-
-
-
-
-
800
Total
-
-
-
-
-
Required
400
900
200
500
Total Cost
From/To
Leipzig
Nancy
Liege
Tilburg
Total
Amsterdam $
-
$
-
$
-
$
-
$
-
Antwerp
$
-
$
-
$
-
$
-
$
-
The Hague
$
-
$
-
$
-
$
-
$
-
Total
$
-
$
-
$
-
$
-
$
-
MGT3303
Michel Leseure
Building a Solver Model
• Tools | Solver…
In the Transportation spreadsheet that’s G19
- the total transportation cost
– Set Target Cell: The cell holding the value
you want to minimize (cost) or maximize
(revenue)
In the Transportation spreadsheet we choose
Min to minimize transport cost
– Equal to:
• Choose Max to maximize or Min to minimize this
– By Changing Cells: The cells or variables
the model is allowed to adjust
In the Transportation spreadsheet that is
C9:F11 - the Shipment volumes
MGT3303
Michel Leseure
Building a Solver Model
• Subject to the Constraints:
– The constraints that limit the choices of the values
of the adjustable cells
– Click on Add
• Cell Reference is a cell that holds a value calculated from
the adjustables In the Transportation spreadsheet for example, G9 is the
total volume shipped out of Amsterdam
• Constraint is a cell that holds a value that constraints the
Cell Reference. In the Transportation spreadsheet for example, H9 is
the total volume we can ship out of Amsterdam
• <=, =, => is the sense of the constraint. Choose one
<= in this case. Don’t ship more than we have in AMS
MGT3303
Michel Leseure
What are the constraints?
• Supply Constraints
– Amsterdam: G9 <= H9
– Antwerp: G10 <= H10
– The Hague: G11 <= H11
• Demand Constraints
–
–
–
–
Leipzig: C12 => C13
Nancy: D12 => D13
Liege: E12 => E13
Tilburg: F12 => F13
G9 is the total
volume shipped
from Amsterdam
Short cut:
G9:G11 <= H9:H11
C12 is the total
volume shipped to
Leipzig
Short cut:
C12:F12 => C13:F13
MGT3303
Michel Leseure
The Model
MGT3303
Michel Leseure
Solution
Transportation Model
Unit Cost
From/To
Leipzig
Amsterdam $
Nancy
Liege
120.0
$
130.0
$
41.0
$
61.0
$
40.0
$
The Hague $
102.5
$
90.0
$
Antwerp
Tilburg
$
59.5
100.0
$
110.0
122.0
$
42.0
Shipmen
ts
From/To
Leipzig
Amsterdam
Nancy
Liege
-
-
200
Antwerp
-
700
The Hague
400
200
Total
400
900
Required
400
900
Tilburg
Total
Available
300
500
500
-
-
700
700
-
200
800
800
200
500
2,000
200
500
Total
Cost
From/To
Leipzig
Nancy
Liege
Tilburg
$ 8,200.00
$17,850.00
$ 26,050.00
$
$ 28,000.00
Amsterdam $
-
$
Antwerp
-
$28,000.00
$
-
The Hague $41,000.00
$18,000.00
$
-
Total
$ 46,000.00
$ 8,200.00
$
$ 41,000.00
-
-
Total
$ 8,400.00
$ 67,400.00
$ 26,250.00
$ 121,450.00
MGT3303
Michel Leseure
Suggested Homework
• How developed are supply chain management
practices in Morocco? Describe:
– The extent to which outsourcing takes place
– The state of the art of logistical and transportation
management
– The factors that hinder transportation management
effectiveness
• Is transaction cost theory relevant in the case of
Morocco?
• Problem 7-1, p. 313
MGT3303
Michel Leseure