Chapter 4
Supply Chain Management
1
Importance of Supply
Chains


Every organization is part of a supply
chain, either as a customer or as a
supplier.
The reason is that every organization
that produces a finished product is
involved, directly or indirectly, with all of
the functions needed to make a
finished product.
2
These Functions Include:




Making or purchasing parts and
materials,
Assembling or processing them
into finished products,
Warehousing them, and
Delivering them to the customer.
3
Need For a Supply Chain



These functions are increasingly being
outsourced to other entities that can
perform more cost effectively.
Consequently, organizations many have
reduced their ownership of raw
materials sources and distribution
channels by outsourcing them.
Result: Less control and more
supply chain partners.
4
What is a Supply Chain?

A supply chain is the seamless
integration of all the functions needed
to make a finished product, from the
purchase of parts and materials through
the sale and delivery of the product to
the end user.
5
Members of Supply Chain





Suppliers
Company
Distributors
Wholesalers
Customers
6
How Good Supply Chains
Operate

Supply chains are not zero-sum
games, where manufacturing
customer’s gain from buying
something a bit cheaper is the
supplier’s (seller’s) loss.
7
How Good Supply Chains
Operate

Old, adversarial relationships in
which the buyers push for lower
prices and higher quality while
sellers push for just the opposite
are pretty much a hallmark of
losers these days.
8
How Good Supply Chains
Operate

If your company really wants to
operate efficiently and win
customers, it should team up with
your suppliers rather than bargain
with them.
9
How Good Supply Chains
Operate

When you give up the notion of the
winner-loser zero-sum game
and start working together with
your suppliers, you can please
more customers down the line and
create a win-win situation for both
of you.
10
How Supply Chain’s
Operate


Rather than just haggle over prices,
quality and delivery schedules, work to
align your processes and eliminate
the friction that costs you both time and
money.
Supply chains are based on mutual
benefits rather than straight cost.
11
Benefits of Successful
Supply Chains





Better supplier quality.
Reduced dependence on inspection of
incoming materials.
Greater on time delivery.
Shorter cycle times.
Sharing of supplier expertise, which
leads to greater process
improvements.
12
Benefits of Successful
Supply Chains

Sharing of demand information at all
levels of the chain results in
 more effective planning of
production schedules.
 Better capacity utilization.
 Less inventory.
13
Benefits of Successful
Supply Chains


Benefits mean ??? at all levels of
the supply chain.
In essence, successful supply
chains integrates supply and
demand within and across
companies.
14
Role of Inventory



Inventory is the last resort for
resolving supply-and-demand
imbalances between the levels in the
supply chain.
Goal of chain is to reduce inventory at
all levels of the chain through JIT
delivery.
Less inventory means lower cost.
15
Pull vs. Push Production

Supply chains are based on demand
pull production system rather than a
push system.
16
Pull production



Production is pulled through system
based on demand forecasts.
As demand changes, production
changes.
This balances supply and demand,
assuming accurate demand forecasts
are transmitted throughout the supply
chain.
17
Pull production



Balance between supply and demand
means ???
Pull is foundation of JIT, where parts
and materials are received as needed.
Potential problem is “Bullwhip” effect
(later.)
18
Push production


Production is pushed through system
based on fixed production schedules
without regard to demand.
Since demand changes, production may
exceed or fall short of demand, creating
inventory or shortages.
19
What is Supply Chain
Management (SCM)?

Supply chain management is the
seamless integration, evaluation, and
improvement of the processes
involved in the movement of goods and
information through the supply chain,
from suppliers to manufacturers to
distributors to final customer.
20
Criteria for selecting
suppliers

Quality





Are their processes in statistical control
Are their processes capable?
Require statistical evidence in form of
control charts and capability indices.
Price
On time delivery
21
Supply Chain Successes Procter & Gamble



P & G reorganized its product supply chain by
combining formerly independent functions of
purchasing, engineering, and distribution.
A product supply manager was created for
each division and the functions report to him.
Benefits:



reduced flow time
Reduced inventories, and
increased on-time delivery and quality.
22
Supply Chain Successes General Electric (GE)


GE actively draws on the experience of
its various suppliers when designing
new products.
It also works with suppliers to teach
them what it knows about building
winning organizations.
23
Role of Distributors

Move goods from different suppliers or
producers closer to consumer at a
lower cost than can be performed by
any one supplier or producer.
24
Role of Distributors

How?



Transportation consolidation –
warehouses consolidate less-than-truckload
(LTL) quantities into truckload (TL)
quantities
Product mixing – grouping a variety of
orders into a direct shipment to the
customer.
Cross-docking
25
Cross-docking


Practice of unloading materials from
an incoming trucks or rail cars and
loading these materials onto outbound
trucks or rail cars, with little or no
storage or warehousing in between.
This may be done to


sort material intended for different
destinations, or to
combine small shipments of materials
from different origins.
26
Cross-docking

In practice many "cross-docking"
operations require large staging areas
where inbound materials are sorted,
consolidated, and stored until the
outbound shipment is complete and
ready to ship.
27
Cross-docking


If the staging takes hours or a day,
the operation is usually referred to as a
"cross-dock" distribution center.
If it takes several days or even
weeks, the operation is usually
considered warehousing.
28
Wal-Mart's Cross-docking
Distribution System


Cross docking has been most
successfully implemented in Wal-Mart's
distribution system.
Individual Wal-Mart stores transmit
point-of-sale (POS) data from the
cash register back to corporate
headquarters several times a day.
29
Wal-Mart's Cross-docking
Distribution System


This provides instant feedback on
customer demand, which is transmitted
up the supply chain.
Demand information is used to order
shipments from


suppliers to the Wal-Mart distribution
center and from
the Wal-Mart distribution center to the
store.
30
Wal-Mart's Distribution
System


Wal-Mart’s supply chain is a demanddriven supply chain.
Benefits are




JIT delivery,
less inventory,
Fewer stock-outs and shortages,
lower costs throughout the supply chain.
31
Bullwhip Effect



Small changes in demand at the end
user level can result in large swings in
orders placed upstream.
That is, demand variability increases as
one moves up the supply chain away
from the retail customer.
This is called the “Bullwhip Effect.”
32
Bullwhip Effect



Result is that supply and demand
patterns do not match.
If supply exceeds demand, inventory
accumulates at various stages.
If demand exceeds supply, shortages
and delays occur.
33
Causes of Bullwhip Effect



Time delays in the transmission of
demand information upstream.
Inaccurate demand forecasts.
Misinterpretation upstream of actual
demand at the end-user level.
34
Example of Misinterpreting
Actual Demand



Suppose there is a 10% increase in
demand at the consumer level.
This could cause a much larger increase
in orders at the factory.
Why?
35
Example of Misinterpreting
Actual Demand


The factory will responds by ordering
10% more (the actual increase).
Factory may also order an additional
amount, called safety stock, if it felt
that the increase in demand was
actually the beginning of an upward
market trend when it is actually due to
a seasonal effect.
36
Sourcing Issues – Make or
Buy Decision

Should company can make parts and
materials



in-house – insourcing - or
buy from outside supplier – outsourcing?
Depends on total cost of two
alternatives.
37
Sourcing Issues – Make or
Buy Decision

FCBuy = fixed cost of buying item from supplier

VCBuy = variable cost per unit of buying
item from supplier

FCMake= fixed cost of making item in-house

VCMake = variable cost per unit of making
item in-house

Q = number of units of items needed
38
Sourcing Issues – Make or
Buy Decision
Total Cost of Outsourcin g :
TC Buy  FC Buy  VC Buy  Q 
Total Cost of Insourcing :
TC Make  FC Make  VC Make  Q 
39
Make or Buy Analysis
Make in - house if :
FC Make  VC Make  Q   FC Buy  VC Buy  Q 
or if :
Q 
FC Buy  FC Make
VC Make - VC Buy
 Q*
40
Example, Page 114, Text
Mary and Sue, have decided to open a
bagel shop. Their first decision is whether
they should make the bagels on-site or by
the bagels from a local bakery.
If they buy from the local bakery they will
need airtight containers at a fixed cost of
$1000 annually. They can buy the bagels
for $0.40 each.
Example, Page 114, Text
If they make the 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.
1. Develop the total cost functions of
the two alternatives.
2. Should they make or buy the bagels?
Solution #1

FCBuy = $1,000

VCBuy = $0.40

FCMake= $15,000

VCMake = $0.15
43
Solution #1
TCBuy = $1,000 + $0.40Q
TCMake = $15,000 + $0.15Q
44
Solution #2
Make in - house if
Q
FC Buy  FC Make
VC Make - VC Buy
Q
$1,000  $15,000
$0.15  $0.40
Q
56,000 Bagels
45
Graphical Solution: FCBuy > FCMake
and VCMake > VCBuy
TCBuy
TCMake
$15,000
$1,000
Q* = 56,000
If Q < 56,000, “Make”
Q
If Q > 56,000, “Buy”
46
Solution #2
Since Mary and Sue expect to sell 60,000
bagels and
60,000 > Q* = 56,000,
they should buy bagels from a local
bakery.
47