Copyright 2013 John Wiley & Sons, Inc.

Chapter 7

Supply Chain Management

7-2

Overview

7-3

Apple

• Apple’s focus on improving its supply chain dates back to 1997

• Apple once spent $50 million to acquire all the available holiday air transport capacity– This also helped cripple competitors

• Apple has learned that making supply chain investments pays for itself in the long run

• Sipping directly to customers from China reduces inventory

7-4

Apple (Continued)

• Apple engineers work directly with suppliers

• Apple spent $7.1 billion on its supply chain in 2011

• Apple requires detailed bids from suppliers

• Also requires suppliers to keep two weeks worth of inventory

7-5

Introduction

• Tremendous benefits accrue to firms that have a well managed supply chain

• Supply change management plays an important role in an organization’s competitiveness

• Even service organizations benefit from good supply chain management

7-6

Defining Supply Chain Management (SCM)

• 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

7-7

The Supply Chain

Figure 7.1

7-8

More on SCM

• Value chain considers other important aspects of customer value besides cost

• Supply chain has many elements of the old push systems of production

• Pull systems call it a demand chain

• Services sometimes include the customer in the supply chain

7-9

Supply Chain Strategy

• Supply chain strategy needs to be tailored to meet the needs of its customers which is not 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

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Supply Chain Strategy (Continued)

• When operating in multiple markets, may need a different supply chain for each

• Many organizations choose to outsource portions of their SCM to third-party logistics (3PL) companies

• Shifting to 3PL allows a firm to focus on its core competencies

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Strategic Need for Supply Chain Management

• Total supply chain costs represent better than half 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

• The objective of SCM is to integrate the entire process of satisfying the customer’s needs all along the supply chain

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Factors Driving Need to Better Manage Supply Chain

• Procurement costs are increasing

• Increasing global competition

• Outsourcing

• E-commerce

• Shorter life cycles

• Greater supply chain complexity

• Increasing concern for the environment

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Measures of Supply Chain Performance

• Lower inventories– Will be reflected in less need for working

capital (WC)– Also, a higher return on asset (ROA) ratio

• Lower cost to carry these inventories– Will be seen in a reduced cost of goods sold

(CGS)– Thus a higher contribution margin, return

on sales (ROS), and operating income

7-14

Performance Measures

• One performance measure that provides a broad view is the cast conversion cycle (CCC)– Helps assess how well a firm is managing its

capital

• Another is the average aggregate inventory value (AAIV)

• Another is inventory turnover (or turns)– Equation can be converted to days of supply

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Performance Measures Calculations

7-16

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

• Supplier network can include both internal and external suppliers

• A broad view of the process focuses management attention on the entire process that creates value rather than individual activities

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Simplified Supply Chain

Figure 7.2

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Logistics

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

• Consists of inventories, distribution networks, storage and warehousing, transportation, information processing, and even production

• Logistic is taking on tremendous importance

7-19

The Bullwhip Effect

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

• Same effect often observed in supply chains but in reverse order

• Results when the variability of demand increases from the customer stage upstream to the factory stage

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Conditions Leading to the Bullwhip Effect

1. Long lead times between the stages of the supply chain

2. Large lot sizes with infrequent ordering

3. The sole transmission of information occurring by hand-offs from one link of the chain to the next

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Business Practices Leading to the Bullwhip Effect

1. Tendency for customers to place all their orders at beginning (or end) of period

2. Use of standard batch sizes

3. Trade promotions

4. Shortage gaming

7-22

Transportation

1. Water– Least expensive

– Good for long trips with bulky, nonperishable items

– Slow with limited accessibility

2. Rail– Handles small items well

– Good accessibility

– Relatively low cost

7-23

Transportation Continued

3. Truck– More advantages for short haul with small

volumes– Grown at the expense of rail

4. Air– Used for small, high-value, or perishable

items– Main advantage is speed

7-24

Factors to Consider in Transportation Decisions

Table 7.1

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Location

• Besides transporting outputs to customers, if there is a facilitating good, service can also locate where customers can easily obtain them

• Information and telecommunications technology advances have allowed some pure service organizations to reach their recipients electronically

• Some pure service organizations do transport their services

7-26

Processing Natural Resources Organization Locate at Raw Materials

1. Large loss in size or weight during processing

2. High economies of scale exist for the product

3. Raw material is perishable and cannot be shipped before being processed

7-27

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

7-28

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

• One danger to outsourcing is being hollowed out

• More recent trend is outsourcing entire production process to contract manufacturers

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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

7-30

Purchasing Versus Procurement

• Purchasing implies a monetary transaction

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

• Procurement allows the consideration of environmental aspects of obtaining and distributing products

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Potential for Lowering Cost and Increasing Profits

7-32

To Double Profits

1. Increase sales by 100 percent

2. Increase selling price by 5 percent

3. Decrease labor and salaries by 25 percent

4. Decrease overhead by 100 percent

5. Decrease purchase cost by 7.1 percent

7-33

JIT and Purchasing

• Widespread use of JIT has increased importance of purchasing and procurement

• Delays in the receipt of materials will stop a JIT program dead in its tracks

7-34

Value Analysis

• A special responsibility of purchasing, or purchasing working jointly with engineering/design and operations 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

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Key Elements of Effective Purchasing

1. They leverage their buying power

2. They commit to a small number of dependable suppliers

3. They work with and help their suppliers reduce total cost

7-36

Supplier Management

1. Selecting the suppliers

2. Contemporary relationships with suppliers

3. Certification and auditing of ongoing suppliers

Slide on each of these

7-37

Characteristics of a Good Supplier

• 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.

7-38

Supplier Relationships

• With intense global competition and SCM, the relationship between customers and suppliers has changed significantly

• 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

7-39

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– Items go directly to the production line

7-40

Inventory Management

• A key aspect of SCM is the use of inventory

• Salespeople generally prefer large quantities of inventory

• Finance personnel see inventory as tied up capital

• Operations sees inventory as a tool

7-41

Functions of Inventories

1. Transit inventories

2. Buffer inventories (safety stocks)

3. Anticipation inventories

4. Decoupling inventories

5. Cycle inventories

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Forms of Inventories

1. Raw materials

2. Maintenance, repair, and operating supplies

3. Work-in-process (WIP)

4. Finished goods

7-43

Inventory-Related Costs

• Ordering or setup costs• Inventory carrying or holding costs

– Capital costs– Storage costs– Risk costs

• Stockout costs• Opportunity costs• Cost of goods

7-44

Decisions in Inventory Management

• Objective of inventory management is to decide on the appropriate level and change in level of inventory

• Decision rules are needed to answer two basic questions:

1. When to order?

2. How much to order?

7-45

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

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Role of Information Technology (Continued)

• 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 has exploded

7-47

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:1. Enhanced productivity and reduced costs

2. Speed

3. Creation of new value opportunities

7-48

E-Commerce

• Electronic Data Interchange (EDI)• Bar Coding and Scanning• Databases• Email• Electronic funds transfer• Internet• Point of sale terminals• ERP systems• RFID

7-49

Radio Frequency Identification (RFID)

• Conventional bar codes are replaced with computer chips or smart tags

• Use wireless technology to track inventory

7-50

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

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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

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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

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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

• Aim is to develop a process for improving the firm’s response to its customers’ needs

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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

• Not only reduce cost and allow instant access to entire database, can also increase revenues

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Successful Supply Chain Management

• The basic requirements for successful SCM are trustworthy partners, good communication, appropriate performance measures, and competent managers with vision

• Innovation to suit the particular situation is particularly desirable

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Examples of Visionary SCM Innovations

• Dell’s “direct model”• Wal-Mart’s “cross-docking”

– Off-loading goods from incoming trucks directly into outbound distribution trucks

• Sport Obermeyer’s and Hewlett-Packard’s “postponement ”– Delayed differentiation where final modules are

either inventoried for later assembly, or differentiating features are added upon receipt of the customer’s order