10 - 2 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Operations Management Framework Insert New Resource/Profit

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McGraw-Hill/IrwinOperations Now, 2/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

Operations Management Framework

Insert New Resource/Profit Model

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C H A P T E R 10Supply Chain Management

L E A R N I N G O B J E C T I V E S

▬ Explain the motivating forces behind the adoption of supply chain management (SCM).

▬ List examples of how customer actions affect suppliers and how supplieractions affect customers.

▬ Explain the seven critical decision areas of SCM.▬ Describe the decisions that constitute the logistics network configuration.▬ Describe an example of a supply chain and identify points of interaction

between buyers and suppliers.▬ Explain the pros and cons of outsourcing supply chain services.▬ Explain the bullwhip effect and its possible causes.▬ Describe risk pooling and the implications it has for distribution networks.▬ Explain the current trend affecting supply chain management.

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A Systemwide Perspective

• IT makes communication in B2B relationships quick and effective

• Tight links between businesses enable consideration of effects of their decisions on others in the supply chain.

MANAGING RESOURCESTO CREATE VALUE

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Generic Supply Chain

Supply Chain – Encompasses all activities associated with the flow and transformation of goods from the raw material stage (extraction) through to the end user, as well as the associated information flows. Material and information flow both up and down the supply chain.

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The Motivating Forces

• Increased competition to meet customer expectations for value• Recognition that customer decisions and actions often dictate

costs and limitations for suppliers.• Recognition that supplier decisions and actions often dictate costs

and limitations for customers.• Increased potential for timely communication and feedback

brought about by technological advances.

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Motivating Forces: Increased Competition

• Increased, global competition forces companies to stretch and add value.

• Businesses, focused on core competencies and outsourcing, need closer relationships with firms they outsource to.

• Adding value by:- Reducing inventory throughout supply chain.- Improving timeliness and reliability of deliveries.- Working with suppliers to improve their product and service quality.- Communicating and cooperating in general.

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Motivating Forces: Supply Savings Example

• U.S. businesses spend 20-30% of revenue acquiring goods from outside suppliers - 60% for manufacturing).

• Purchase cost savings have strong impact on bottom line.- e.g., if the business saves just 6% in supply costs ($432,000),

profit will increase by 45%.

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Motivating Forces: The Impact of Customers on Suppliers

• Traditionally adversarial - “Us-against-them” attitude.• Bullwhip effect – The increasing variability of demand as one

moves upstream in supply chain.• Instability of demand increases costs. Hard to plan, hard to

produce efficiently, need for larger inventories.

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Motivating Forces: The Impact of Suppliers on Customers

• Many possible events can have negative impact on customers (missed delivery due dates, defective products...)

• Customers increase inventory to protect against supplier unreliability.

• Correct placement of inventory in a supply chain improves performance, reduces cost, and reduces impact of disruptions.

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Motivating Forces: Technological Advances

• The Internet provides a means of having immediate access to information, enabling integrated decision making.

• Rather than attempt to forecast demand, a supplier can view customers’ production schedules and eliminate forecasting.

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Supply Chain Management Components

• Distribution network configuration• Distribution strategy• Strategic alliances• Inventory management• Cooperative product design• Information management• Standardization• Electronic commerce

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Supply Chain Management Components: Distribution Network Configuration

• Distribution network includes warehouses, production facilities, retailers, and the inventory that flows between them.

• Configuring the network requires decisions related to:- Location of warehouses and production facilities- Where production should take place- How much inventory should be kept, and where- How to transport inventory from one place to another

• Maximize value and minimize cost.• Configuration must meet both current and future needs.

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Supply Chain Management Components: Distribution Strategy

• Warehousing – Holding inventory received from suppliers in warehouses until it is needed by retailers.- Advantage is risk pooling – Inventory held in one

warehouse to service a large number of retailers requires less inventory than if held at individual retailers.

- Another advantage is reduced inbound costs because all shipments are going to the same place.

- Likely to ship full truckloads (FTL) inbound, but may ship less than full truckload (LFTL) outbound. Shipping FTL is cheaper.

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• Direct Shipment – Direct ship from supplier to retailers.- Eliminates warehousing costs- Less likely to ship FTL- Each store will require high levels of safety stock

• Cross-docking – Continuous shipment from suppliers to warehouses, where goods are redirected and delivered to retailers in continuous shipments.- Requires excellent communication links- Requires very reliable transportation system- Demand forecasts are critical- Very cost effective, but typically used in high-volume

supply chains that have sophisticated information systems (Wal-Mart)

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Exhibit 10.3 Distribution Strategies

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Supply Chain Management Components: Strategic Alliances

• Develop alliances rather than just hiring suppliers.- Relationships create opportunity for communication- Communication enhances productivity improvement

• There are significant costs to switching suppliers

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Supply Chain Management Components: Strategic Alliances

• A balance between commitment to low prices and commitment to the relationship is needed

Exhibit 10.5 Cost of Switching Suppliers

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Supply Chain Management Components: Inventory Management

• Supply-chain network optimization – Optimization of decisions across the geographical network of the supply chain.

• Retailer-supplier partnerships (RSPs) – A retailer/supplier alliance that changes the way inventory is delivered and the way it changes hands.

• Vender managed inventory (VMI) – A retailer-supplier partnership in which the supplier manages the inventory in the retail store and in some cases maintains ownership of the inventory until it is purchased by the consumer.

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Supply Chain Management Components: Cooperative Product Design

• Make sure components from multiple suppliers can be assembled.

• Gain insight from your suppliers- Improve products- Reduce costs- Reduce time

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Supply Chain Management Components: Information Management

Three information management decisions related to supply chain management

• What data should be collected?• How should it be stored?• With whom should it be shared?

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• Traditional supply chain: Forecasts based on different data. Contributes to the bullwhip effect, excess inventory, and stockouts.

Insert exhibit 10.6 Traditional approach to forecasting demand in the supply chain

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• Improved approaches enabled by technology to collect, store and communicate data- Collaborative planning, forecasting, and replenishment

(CPFR) – Approach to demand planning in which partners negotiate and agree on a plan for meeting demand

Insert exhibit 10.7 new approach to forecasting demand in the supply chain

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Supply Chain Management Components: Standardization

• Long-term relationships drive businesses to make their processes compatible

• Standardizing processes makes for higher levels of productivity

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Supply Chain Management Components: Electronic Commerce

• Electronic commerce contributes to time reduction- Electronic cash transfers speed up the cash-to-cash cycle- Electronic order processing makes continuous

replenishment much more economical• Online auctions/reverse auctions

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A Typical Example of Supply Chain Management: Pacers

• Pacers shoes sold through national chains of athletic shoe stores.- Fabrication and assembly are

done at the same plant.- They purchase raw materials

(leather, foam, laces, etc.) from a variety of suppliers.

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What are the implications of a customer’s decision to have a promotion four months in the future?

• Pacers must revise the demand forecast- Effect of promotions harder to forecast- Must account for “post-promotion lag” in demand- Need to know when retailer needs the inventory, not date

when promotion starts.

• Which distribution center should Pacers ship to?

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What are the implications?

• When we’ve picked a distribution center, we need to pick a manufacturing facility.- Is there enough capacity at that facility, or will we be forced to produce

elsewhere?- Will the promotion disrupt the production pattern?- When should we fulfilling the order? The sooner we start the less

capacity will be a problem, but the longer inventory will have to be held

Results of all these decisions largely dictated by distribution network configuration, inventory management, and distribution

strategy.

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What are the implications?• Moving further up the chain:

- Do we have enough raw material transportation and storage capacity at the chosen manufacturing facility?

- Will we have to use multiple transportation channels?- How would that impact our manufacturing schedules?- Can our suppliers handle these additional orders?- Can our suppliers’ suppliers handle it? Will our suppliers run short on

raw materials?

If something goes wrong at any point, the order is at risk of being late. Standardization, information management, and electronic

commerce determine the efficiency of these interactions.

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Sourcing Decisions: Channel Selection

• Make versus buy, and how to buy.• The more strategically important the item, the more it makes

sense to ally with a supplier for it.• Low priority items should be purchased independently.

• Exchanges are another possible channel. - Pooled purchases on an exchange can result in cost savings.- Give sellers access to more buyers

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Sourcing Decisions: Outsourcing Supply Chain Activities

• Supply chain activities, especially warehousing and transportation, are complex- Many businesses choose to outsource these functions.

• Third party logistics provider (3PL)- A provider of logistics services such as warehousing or transportation

logistics.

• Outsourcing to a 3PL is primarily done to improve quality, because many companies cannot afford to invest in the expertise and technology required to do so.- Drawback is loss of control.

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Sourcing Decisions: Extending the Supply Chain Globally

• Extending the customer end- Potential to increase size of markets- Distribution network often forced to be different- Lack of technology infrastructure could inhibit utilization of

information and communication capabilities

• Extending the supplier end- Technology infrastructure problems- Cooperation and formation of strategic partnerships hampered by

distance and cultural differences- Difficulties in policy, procedure, and product standardization

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A Closer Look at the Bullwhip Effect: Causes

• As you go up a supply chain, demand increases in variability.

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A Closer Look at the Bullwhip Effect: Causes

• Demand forecast updating- Orders from suppliers must meet demand and fill safety stocks. The

longer the lead times, the more uncertain demand is and the more safety stock is held

• Order batching- Because of high transaction costs, orders are batched together, causing

“lumpy” demand. Suppliers similarly allow demand to accumulate before releasing orders

• Price fluctuation- Businesses often buy before they need to, and in larger amounts,

because suppliers offer pricing advantages

• Rationing and shortage gaming- Fear of supply shortages drives businesses to order in larger quantities

than they need

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A Closer Look at the Bullwhip Effect: Impact

• Impact on cost, quality, and timeliness- Spiking demand patterns puts businesses in ‘feast-or-famine’ mode.

Not good for productivity- High inventory costs- High inventory increases time for an innovation to get to market- Mismatch between demand and design capacity results in increased

cost per unit, whether demand is higher or lower than capacity- May cause low demand period layoffs, decreasing the quality of the

workforce as employees leave for more stable jobs- Long cash-to-cash cycles and diminishing financial returns

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A Closer Look at the Bullwhip Effect: Solutions

• Increase information supplied by businesses to their suppliers• Eliminate price discounts• Reduce order transaction costs• Very frequent deliveries of small quantities (continuous

replenishment)

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A Closer Look at Risk Pooling

• Uncertainty associated with customer demand must be accommodated through inventory safety stocks.

• If retailers are supplied from a central warehouse rather than hold their own inventory, safety stocks would be less because aggregated variability would be less. High demand at one place would cancel out low demand at another place.

• The savings from this must be compared to the costs of facility modification and changes in transportation.

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Supply Chain Performance

• There are tradeoffs that may bring performance measurements into conflict- Batch size/inventory cost tradeoff- Transportation costs/inventory cost tradeoff- Customer service/inventory cost tradeoff- Lead time/warehousing cost tradeoff

• The perfect order is one that arrives on time as promised, is of the correct quantity, is not damaged, and also includes all of the agreed-upon services.

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Trends in Supply Chain Management

• Trading Communities• Optimization Modeling• Radio-Frequency Identification (RFID)• Supply Chain Security

Documents

10 - 2 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Operations Management Framework Insert New Resource/Profit