Chapter 7: Supply Chain Management1 OPERATIONS MANAGEMENT for MBAs Third Edition Prepared by E. Sonny Butler Georgia Southern University Meredith and Shafer

Chapter 7: Supply Chain Management 1

OPERATIONS MANAGEMENTfor MBAs Third Edition

Prepared byE. Sonny Butler

Georgia Southern University

Meredith and Shafer

John Wiley and Sons, Inc.

Chapter 7

Supply Chain Management

Introduction


Palm Inc.

During the year 2000, Palm Inc. was selling every PDA (computerized Personal Digital Assistant) that wasn’t nailed down.

In the last few years, Palm has developed a strategic supply chain management function.

They have gone from doing business with hundreds of suppliers to developing deep relationships with only a few suppliers


Palm Inc. continued The secret to driving the cost so low was

working closely with their suppliers to hit tight cost targets for the display, the processor, the memory, the battery, and the mechanicals.

The result of their new strategic emphasis on supply chain management has been a 20-30 percent reduction in materials costs and a 27 percent reduction in overall costs, an increase in inventory turns from 3 to 22, and a 30 percent increase in profit margins.


B2B Networks and Private Exchanges

B2B Online Marketplaces Private Exchanges

HP Ace Hardware IBM


B2B Online Internet Marketplaces

When the Internet revolution began, a number of organizations rushed to establish B2B online marketplaces for entire industries including steel, automobile manufacturing, and electronics.

More recently, however, a number of firms including HP, IBM, and Wal-Mart created their own private exchanges (also called corporate marketplaces).


B2B Online Internet Marketplaces continued These links allow the parties to

collaborate and manage the supply chain in real time.

Ace Hardware provides another example.

Ace's motivation for the development of its system was the desire to manage its inventory more efficiently and be able to collaborate with suppliers in real time.


B2B Online Internet Marketplaces continued Ace used its supply chain management

software to link the computer systems located in its 14 distribution centers with nine suppliers.

IBM's system provides links to over 20,000 of its suppliers.

IBM further estimates that it realized almost $400 million in savings that year due to the increased efficiency of its Web-based procurement system.


Dell Computer

Direct Model Use of Information Technology

provides suppliers with access to Dell’s inventories

Minimum Inventory Levels


Dell Computer

Classic case in supply chain management. Established in 1984, Dell experienced

supply problems in 1993 and thereupon completely redesigned its supply chain process along the lines of what its founder, Michael Dell, called the “direct” model.

Between 1993 and 1998, Dell's earnings subsequently grew at 65 percent per year.


Dell Computer continued Dell's supply chain redesign was based on the

following elements. First, Dell sells directly to customers, eliminating

the wholesaler and retailer. Second, Dell also takes advantage of new

information technologies in their communications with suppliers who can access Dell's component inventories, production plans, and forecasts in real time and thus keep their production precisely matched to Dell's needs.

Third, Dell deliberately maintains absolute minimum inventory levels at every stage of production, averaging 4 days overall


Supply Chain Management Crusade

Focus is on entire value chain Includes

lean production JIT TQM purchasing product/service design


Defining Supply Chain Management

Coordination and integration of all supply chain activities into seamless process.

Enables organizations to plan and collaborate across supply chain.

Goal is to deliver right product to right place at right time in order to maximize profit.


Strategic Advantages of Supply Chain

Supply chain management includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between its environment.

Goal of supply chain management is to integrate the entire process of satisfying the customer’s needs all along the supply chain.


Strategic Advantages of Supply Chain Management continued

Supply chain costs often represent 50% or more of total operating costs

Firms that have implemented supply chain management Have 45% supply chain cost advantage 50% lower inventory 17% faster delivery of final product Larger market shares and higher

customer loyalty


Supply Chain Strategy

Supply chain strategy needs to be tailored to meet the needs of its customers which isn’t always the lowest cost.

In situations where the goods are basic commodities with standard benefits (food, home supplies, standard clothing), then cost reduction will be the focus.

In fashion goods, timeliness should be the focus of the supply chain.


Strategic Need for Supply Chain Management Total supply chain costs represent better

than half, and in some cases three-quarters, of the total operating expenses for most organizations.

The broader concept of the supply chain includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between it and its environment.


Strategic Need for Supply Chain Management continued

As organizations have continued to adopt more efficient production techniques such as lean manufacturing, total quality management, inventory reduction techniques to reduce costs and improve the quality, functionality, and speed of delivery of their products and services to customers, the costs and delays of procuring the requisite inputs and distributing the resulting goods and services are taking a greater and greater fraction of the total cost and time.


Other Factors Driving Need to Better Manage Supply Chain

Increasing global competition Outsourcing E-commerce Shorter life cycles Greater supply chain complexity


Measures of Supply Chain Performance

Lower inventories, will be reflected in less need for working capital (WC) and a higher return on asset (ROA) ratio.

Lower cost to carry these inventories will be seen in a reduced cost of goods sold (CGS), and thus a higher contribution margin, return on sales (ROS), and operating income.


Operations-Oriented Measures Performance measures related to inventory

reduction: First we calculate the aggregate inventory value (at

cost) on average for the year (AAIV):AAIV = raw materials + work-in-process + finished

goods % Assets in Inventories = AAIV/total assets Another inventory measure is the inventory turnover

(or “turns,” as it is sometimes called): Inventory turnover (“turns”) = annual cost of goods

sold/AAIV


Supply Chain Design

The supply chain consists of the network of organizations that supply inputs to the business unit, the business unit itself, and the customer network.


The Supply Chain

Logistics


Logistics

Planning and controlling efficient, effective flows of goods, services, and information from one point to another.


The Bullwhip Effect

Each segment further down the whip goes faster than the one above it.

Same effect often observed in supply chains.

Transportation


Modes of Transportation and Routing

Water Rail Truck Air


Factors to Consider in Transportation Decisions

Cost per unit shipped

Ability to fill the transporting vehicle

Total shipment cost Safety of contents Shipping time Availability of

insurance Perishability

Difficulty of arranging shipment

Delivery accommodations

Seasonal considerations

Consolidation possibilities

Size of product


Location Besides distributing outputs to customers by

transporting them, if there is a facilitating good, we can also locate where our customers can easily obtain them.

Advances in information and telecommunications technology have allowed some pure service organizations (i.e., those without a facilitating good) to reach their recipients through phone, cable, the Internet, or microwave links.


Trade-offs Between Transportation and Location

Processing Natural Resources Large loss in size

or weight during processing

High economies of scale exist

Raw material is perishable

Immobile Outputs


Processing Natural Resources

Organizations that process natural or basic resources as raw materials or other essential inputs to obtain their outputs will locate near their resource if one of the following conditions holds: There is a large loss in size or weight during

processing. High economies of scale exist for the product. The raw material is perishable.


Immobile Outputs

The outputs of some organizations may be relatively immobile, such as dams, roads, buildings, and bridges.

The organization locates itself at the construction site and transports all required inputs to that location


Distribution Requirements Planning

The distribution process is illustrated on the next slide where retailers order from local warehouses, the warehouses are supplied from regional centers, and the regional centers draw from the central distribution facility, which gets its inventory directly from the factory.


Distribution Requirements Planning (DRP)

Purchasing/Procurement


Purchasing Activities to reliably obtain materials by the

time they are needed in the product supply process.

Important considerations include price, quality, lead times, and reliability.

Manufacturing organizations spend an average of 55 percent of revenue for outside materials and services.

These same organizations spend only 6 percent on labor and 3 percent on overhead.


Purchasing Versus Procurement

Purchasing implies a monetary transaction.

Procurement is simply the responsibility for acquiring the goods and services the organization needs.


Potential for Lowering Cost and Increasing Profits

Total sales = $10,000,000

Purchased materials = 7,000,000

Labor and salaries = 2,000,000

Overhead = 500,000

Profit = 500,000


To Double Profits ...

Increase sales by 100 percent Increase selling price by 5 percent Decrease labor and salaries by 25

percent Decrease overhead by 100 percent Decrease purchase cost by 7.1

percent


JIT and Purchasing

Widespread use of JIT has increased importance of purchasing and procurement since delays in the receipt of materials will stop a JIT program dead in its tracks.


Differences Between Purchasing by Individuals and Organizations

Organizations purchase larger volumes and dollar amounts.

Organization may be larger than its suppliers.

Very few suppliers exist for certain organizational goods, whereas many typically exist for consumer goods.

Certain discounts may be available to organizations.


Value Analysis

A special responsibility of purchasing, or purchasing working jointly with engineering/design and operations (and sometimes even the supplier), is to regularly evaluate the function of purchased items or services, especially those that are expensive or used in high volumes.

The goal is to either reduce the cost of the item or improve its performance.


Key Elements of Effective Purchasing

They leverage their buying power. They commit to a small number of

dependable suppliers. They work with and help their suppliers

reduce total cost.

Supplier Management


Supplier Selection and Vendor Analysis Characteristics of a good supplier are:

Deliveries are made on time and are of the quality and in the quantity specified.

Prices are fair, and efforts are made to hold or reduce the price.

Able to react to unforeseen changes. Supplier continually improves products

and services. Supplier is willing to share information and

be an important link in the supply chain.


Supplier Relationships

In the past, most customers purchased from the lowest bidders who could meet their quality and delivery needs.

Customers are seeking a closer, more cooperative relationship with their suppliers.


Supplier Certification and Audits Sole-sourcing arrangements are

becoming virtual partnerships with the customer.

This means longer-term relationships. Suppliers are being certified or qualified

so that their shipments do not need to be inspected by the customer—the items go directly to the production line.


Outsourcing and Global Sourcing

Outsourcing is the process of contracting with external suppliers for goods and services that were formally provided internally.

Global sourcing is an important aspect of supply chain outsourcing strategy and we see it occurring more and more.


Primary Reasons Outsourcing Occurring

1. The fall of communism and the economic insulation it had maintained.

2. The advent of telecommunications and computer technology that physically allowed work that previously had to be done locally or regionally to now be conducted overseas.

Outsourcing in general is a major strategic element of SCM these days, not just for production materials but for a wide range of services as well.

The Role of Information Technology in Supply Chain Management


Role of Information Technology In the not-too-distant past, the primary

means of communication between members of a supply chain was paper.

One problem with paper-based systems has been the time and money that is wasted re-keying the same information into different computer systems.

Much of this problem has been solved with UPC and RFID being used extensively.


Role of Information Technology More and more computing power is

becoming available for less and less money, hence it is becoming omnipresent, appearing everywhere we go and in everything we buy.

Growth of networks. As a result the growth of computers, which

support networks, and networks that support people’s needs (business transactions, communication, blogging, etc.), has exploded.


Electronic Business (e-business) is the use of electronic

information technology to help various groups of business people communicate and conduct business transactions.

Three primary advantages: enhanced productivity and reduced costs Speed creation of new value opportunities


E-Commerce Traditional means of communication was paper Electronic commerce is a term used to describe a variety of

approaches for conducting business in a paperless environment Electronic Data Interchange (EDI) Bar Coding and Scanning Databases Email Electronic funds transfer Internet Point of sale terminals ERP systems RFID


Internet The most significant information technology

development for supply chain management. The Web will be the global infrastructure for

electronic commerce. The Web will allow various forms of

purchasing fulfillment to take place, from placing electronic catalogues on a Web site to holding joint purchasing bazaars, exchanges, and auction marketplaces involving massive amounts of materials


Intranets

Web-based networks that allow all employees of a firm to intercommunicate.

They are usually firewall protected and use existing Internet technologies to create portals for company-specific information and communication, such as newsletters, training, human resource information and forms, product information, and so on.


Extranets

Private networks to allow the organization to securely interact with external parties.

They use Internet protocols and public telecommunication systems to work with external vendors, suppliers, dealers, customers, and so on.


Customer Relationship Management (CRM) Systems

Designed to collect and interpret customer-based data.

CRM systems provide comprehensive customer data so the firm can provide better customer service and design and offer the most appropriate products and services for them.


Enterprise Resource Planning (ERP) Systems

Facilitate communication throughout the supply chain and over the Internet.

The ERP system embodies much more than just the supply chain, it also includes all the electronic information concerning the various parts of the firm.


Successful Supply Chain Management

The basic requirements for successful supply chain management are trustworthy partners, good communication, appropriate performance measures, and competent managers with vision.


Examples of Visionary SCM Innovations Dell’s “direct model” and Palm’s “strategic

sourcing”. Wal-Mart’s “cross-docking” technique of off-

loading goods from incoming trucks at a warehouse directly into outbound distribution trucks instead of being placed into inventory.

“delayed differentiation” where final modules are either inventoried for last-minute assembly to customer order, or differentiating features are added to the final product upon receipt of the customer’s order.


Examples of Visionary SCM Innovations continued

Sport Obermeyer’s and Hewlett-Packard’s “postponement” approach to delayed differentiation where variety and customization is delayed until as late in the production process as possible, sometimes even arranging with the carrier to perform the final customization (called channel assembly).

Chapter 7: Supply Chain Management

65


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Chapter 7: Supply Chain Management1 OPERATIONS MANAGEMENT for MBAs Third Edition Prepared by E. Sonny Butler Georgia Southern University Meredith and Shafer