CHAPTER 11
Supply Chain Management
Operations Management, Eighth Edition, by William J. Stevenson
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Supply Chain Management
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
Facilities
Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices
Functions and Activities
Forecasting
Purchasing
Inventory management
Information management
Quality assurance
Scheduling
Production and delivery
Customer service
Typical Supply Chains
Production Distribution
Purchasing Receiving Storage Operations Storage
Typical Supply Chain for a Manufacturer
Supplier
Supplier
Supplier } Storage Mfg. Storage Dist. Retailer Customer
Typical Supply Chain for a Service
Supplier
Supplier
} Storage Service Customer
Need for Supply Chain Management
1. Improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-commerce
7. Complexity of supply chains
8. Manage inventories
Bullwhip Effect
Amount of
= inventory
Tier 2 Tier 1 Final
Producer Distributor Retailer
Suppliers Suppliers Customer
Benefits of Supply Chain Management
Organization Benefit
Campbell Soup Doubled inventory turnover rate
Hewlett-Packard Cut supply costs 75%
Sport Obermeyer Doubled profits and increased sales
60%
National Bicycle Increased market share from 5% to
29%
Wal-Mart Largest and most profitable retailer in
the world
Benefits of Supply Chain Management
Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
Elements of Supply Chain Management
Element Typical Issues
Customers Determining what customers want
Forecasting Predicting quantity and timing of demand
Design Incorporating customer wants, mfg., and time
Processing Controlling quality, scheduling work
Inventory Meeting demand while managing inventory costs
Purchasing Evaluating suppliers and supporting operations
Suppliers Monitoring supplier quality, delivery, and relations
Location Determining location of facilities
Logistics Deciding how to best move and store materials
Logistics
Logistics
Refers to the movement of materials
and information within a facility and
to incoming and outgoing shipments
of goods and materials in a supply
chain
Logistics
• Movement within the facility
• Incoming and outgoing shipments
• Bar coding
• EDI 0
• Distribution 214800 232087768
• JIT Deliveries
Materials Movement
Work center
Work center Work
center
Work Storage
center
Storage
Storage
RECEIVING
Shipping
Distribution Requirements Planning
Distribution requirements planning
(DRP) is a system for inventory
management and distribution
planning
Extends the concepts of MRPII
Uses of DRP
Management uses DRP to plan and
coordinate:
Transportation
Warehousing
Workers
Equipment
Financial flows
Electronic Data Interchange
EDI – the direct transmission of inter-
organizational transactions, computer-
to-computer, including purchase orders,
shipping notices, and debit or credit
memos.
Electronic Data Interchange
Increased productivity
Reduction of paperwork
Lead time and inventory reduction
Facilitation of just-in-time systems
Electronic transfer of funds
Improved control of operations
Reduction in clerical labor
Increased accuracy
Efficient Consumer Response
Efficient consumer response (ECR)
is a supply chain management
initiative specific to the food
industry
Reflects companies’ efforts to achieve
quick response using EDI and bar
codes
E-Commerce
E-Commerce: the use of electronic
technology to facilitate business
transactions
Applications include
Internet buying and selling
E-mail
Order and shipment tracking
Electronic data interchange
Advantages E-Commerce
Companies can:
Have a global presence
Improve competitiveness and quality
Analyze customer interests
Collect detailed information
Shorten supply chain response times
Realize substantial cost savings
Create virtual companies
Level the playing field for small companies
Disadvantages of E-Commerce
Customer expectations
Order quickly -> fast delivery
Order fulfillment
Order rate often exceeds ability to fulfill it
Inventory holding
Outsourcing loss of control
Internal holding costs
Successful Supply Chain
Trust among trading partners
Effective communications
Supply chain visibility
Event-management capability
The ability to detect and respond to
unplanned events
Performance metrics
SCOR Metrics
Perspective Metrics
Reliability On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment
Flexibility Supply chain response time
Upside production flexibility
Expenses Supply chain management costs
Warranty cost as a percent of revenue
Value added per employee
Assets/utilization Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
CPFR
Collaborative Planning, Forecasting, and
Replenishment
Focuses on information sharing among
trading partners
Forecasts can be frozen and then
converted into a shipping plan
Eliminates typical order processing
CPFR Process
Step 1 – Front-end agreement
Step 2 – Joint business plan
Steps 3-5 – Sales forecast
Steps 6-8 – Order forecast collaboration
Step 9 – Order generation/delivery
execution
CPFR Results
Nabisco and Wegmans
50% increase in category sales
Wal-mart and Sara Lee
14% reduction in store-level inventory
32% increase in sales
Kimberly-Clark and Kmart
Increased category sales that exceeded
market growth
Creating an Effective Supply Chain
1. Develop strategic objectives and tactics
2. Integrate and coordinate activities in
the internal supply chain
3. Coordinate activities with suppliers with
customers
4. Coordinate planning and execution
across the supply chain
5. Form strategic partnerships
Supply Chain Performance Drivers
1. Quality
2. Cost
3. Flexibility
4. Velocity
5. Customer service
Velocity
Inventory velocity
The rate at which inventory(material) goes
through the supply chain
Information velocity
The rate at which information is
communicated in a supply chain
Challenges
Barriers to integration of organizations
Getting top management on board
Dealing with trade-offs
Small businesses
Variability and uncertainty
Long lead times
Trade-offs
1. Lot-size-inventory
Bullwhip effect
2. Inventory-transportation costs
Cross-docking
3. Lead time-transportation costs
4. Product variety-inventory
Delayed differentiation
5. Cost-customer service
Disintermediation
Trade-offs
Bullwhip effect
Inventories are progressively larger moving
backward through the supply chain
Cross-docking
Goods arriving at a warehouse from a
supplier are unloaded from the supplier’s
truck and loaded onto outbound trucks
Avoids warehouse storage
Trade-offs
Delayed differentiation
Production of standard components and
subassemblies, which are held until late in
the process to add differentiating features
Disintermediation
Reducing one or more steps in a supply
chain by cutting out one or more
intermediaries
Supply Chain Issues
Strategic Tactical Issues Operating Issues
Issues
Design of the Inventory policies Quality control
supply chain, Purchasing policies Production planning and
partnering Production policies control
Transportation
policies
Quality policies
Supply Chain Benefits and Drawbacks
Problem Potential Benefits Possible
Improvement Drawbacks
Large Smaller, more Reduced holding Traffic congestion
inventories frequent deliveries costs Increased costs
Long lead Delayed Quick response May not be
times differentiation feasible
Disintermediation May need absorb
functions
Large Modular Fewer parts Less variety
number of Simpler ordering
parts
Cost Outsourcing Reduced cost, Loss of control
Quality higher quality
Variability Shorter lead times, Able to match Less variety
better forecasts supply and
demand
Purchasing
Purchasing is responsible for
obtaining the materials, parts, and
supplies and services needed to
produce a product or provide a
service.
Goal of Purchasing
Develop and implement purchasing
plans for products and services
that support operations strategies
Duties of Purchasing
Identifying sources of supply
Negotiating contracts
Maintaining a database of suppliers
Obtaining goods and services
Managing supplies
Purchasing Interfaces
Legal
Operations Accounting
Data
Purchasing
processing
Design
Receiving
Suppliers
Purchasing Cycle
Legal
1. Requisition received Operations
Accounting
2. Supplier selected
3. Order is placed Purchasing
Data
process-
ing
4. Monitor orders
5. Receive orders Design
Receiving
Suppliers
Value Analysis vs. Outsourcing
Value analysis
Examination of the function of
purchased parts and materials in an
effort to reduce cost and/or improve
performance
Centralized vs Decentralized Purchasing
Centralized purchasing
Purchasing is handled by one special
department
Decentralized purchasing
Individual departments or separate
locations handle their own purchasing
requirements
Suppliers
Choosing suppliers
Evaluating sources of supply
Supplier audits
Supplier certification
Supplier relationships
Supplier partnerships
Factors in Choosing a Supplier
Quality and quality assurance
Flexibility
Location
Price
Factors in Choosing a Supplier
(cont’d)
Product or service changes
Reputation and financial stability
Lead times and on-time delivery
Other accounts
Evaluating Sources of Supply
Vendor analysis: Evaluating the
sources of supply in terms of price,
quality, reputation, and service
Evaluating Sources of Supply
Vendor analysis - evaluating the
sources of supply in terms of
Price
Quality
Services
Location
Inventory policy
Flexibility
Supplier Partnerships
Ideas from suppliers could lead to improved
competitiveness
1. Reduce cost of making the purchase
2. Reduce transportation costs
3. Reduce production costs
4. Improve product quality
5. Improve product design
6. Reduce time to market
7. Improve customer satisfaction
8. Reduce inventory costs
9. Introduce new products or services
Critical Issues
Strategic importance
Cost
Quality
Agility
Customer service
Competitive advantage
Technology management
Benefits
Risks
Critical Issues
Purchasing function
Increased outsourcing
Increased conversion to lean production
Just-in-time deliveries
Globalization
