Chapter 10

Supply-Chain Management

OBJECTIVES Supply-Chain ManagementMeasuring Supply-Chain PerformanceBullwhip EffectOutsourcingMass Customization

What is supply chain?Supply chain, which is also referred to as the logistics network, consists of:SuppliersManufacturing centersWarehousesDistribution centersRetail outlets And raw materials, work-in-process inventory, and finished goods that flows between the facilities.

Example of a supply chainConsider a customer walking into a Wal-Mart store to purchase detergent. The supply chain begins with the customer and her need for detergent. The next stage of this supply chain is the Wal-Mart retail store that the customer visits. Wal-Mart stocks its shelves using inventory that may have been supplied from a finished-goods warehouse that Wal-Mart managed or from a distributor using truck supplied by a third party. The distributor in turn is stocked by the manufacturer (say, Protect & Gamble [P&G] in this case). The P&G manufacturing plant from various suppliers, who may themselves have been supplied by lower-tier supplier, i.e. for packaging material

Another exampleWhen a customer purchases on-line from Dell Computer, the supply chain include, among other, the customer, the Web page that take the customers order, the Dell assembly plant, and all of Dells suppliers and their suppliers. The Web provide the customer information regarding pricing, product variety, and product availability. Having made a product choice, the customer enters the order information and pays for the product. The customer may later return to the Web page to check the status of the order.

The Supply-ChainConsumerRetailerManufacturingMaterial FlowVISACredit FlowSupplierSupplierWholesalerRetailerCashFlowOrderFlowSchedules

The Supply Chain

Definition of logisticsLogistics is part of the supply chain process that plan, implement, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers requirement.Definition of logistics by Council of Logistics Management (CLM)

Definition of supply chain managementSupply chain management is defined as the systematic, strategic coordination of the traditional business functions and the tactics across these business functions within particular company and across business within the supply chain, for the purpose of improving the long-term performance of the individual companies and the supply chain as a whole. (Mentzer et al.)

Definition of supply chain managementSupply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandize is produced and distributed at the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requirement. (Simchi-Levi et al.)

Supply-Chain ManagementPlanning, organizing, directing, & controlling flows of materials Begins with raw materialsContinues through internal operations Ends with distribution of finished goodsInvolves everyone in supply-chainExample: Your suppliers supplierObjective: Maximize value & lower waste

Material Costs in Supply-Chain

Supply-Chain Support for Overall StrategySuppliersgoal

Primary Selection Criteria

Supply-Chain Support for Overall Strategy - continued

Supply-Chain Support for Overall Strategy - continued

Network Configuration InvolvesProcureMakeMove Sell VendorsSourcing locationsSourcing quantitiesPlantsProduction locationsProduction quantitiesDistribution CentersJIT centersCross-dock locations/flow throughValue-added servicesFacility size requirementsDistribution ChannelsCustomer channel selectionMode selectionIntermediariesCustomer ServiceLead-timesAccuracyAvailability

Global Supply-Chain IssuesSupply chains in a global environment must be:Flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency ratesAble to use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products outStaffed with local specialists to handle duties, trade, freight, customs and political issues

Importance of PurchasingMajor cost centerAffects quality of final productAids strategy of low cost, response, and differentiation

Supply-Chain Costs as a Percent of SalesAll industryAutomobileFoodLumberPaperPetroleumTransportation52%67%60%61%55%79%62%IndustryPercent of Sales

Objectives of the Purchasing FunctionHelp identify the products and services that can be best obtained externally; andDevelop, evaluate, and determine the best supplier, price, and delivery for those products and services

One of the Purchasing techniques is Outsourcing?

Outsourcing is defined as the act of moving a firms internal activities and decision responsibility to outside providers

Reasons to OutsourceOrganizationally-drivenImprovement-drivenFinancially-drivenRevenue-drivenCost-drivenEmployee-driven

Make/Buy ConsiderationsMaintain core competencies and protect personnel from layoffLower production costUnsuitable suppliersAssure adequate supplyUtilize surplus labor and make a marginal contributionFrees management to deal with its primary businessLower acquisition costPreserve supplier commitmentObtain technical or management abilityInadequate capacity Reasons for Making Reasons for Buying

Make/Buy Considerations - ContinuedObtain desired quantityRemove supplier collusionObtain a unique item that would entail a prohibitive commitment from the supplierProtect proprietary design or qualityIncrease or maintain size of company

Reduce inventory costsEnsure flexibility and alternate source of supplyInadequate managerial or technical resourcesReciprocityItem is protected by patent or trade secret

Reasons for Making Reasons for Buying

Supply-Chain StrategiesPlans to help achieve company missionAffect long-term competitive positionStrategic optionsMany suppliersFew suppliersKeiretsu networkVertical integrationVirtual companyPlan 1995 Corel Corp.

Supply-Chain StrategiesNegotiate with many suppliers; play one supplier against anotherDevelop long-term partnering arrangements with a few suppliers who will work with you to satisfy the end customerVertically integrate; buy the actual supplierKeiretsu - have your suppliers become part of a company coalitionCreate a virtual company that uses suppliers on an as-needed basis.

Many Suppliers StrategyMany sources per itemAdversarial relationshipShort-termLittle opennessNegotiated, sporadic POsHigh pricesInfrequent, large lotsDelivery to receiving dock 1995 Corel Corp.

Few Suppliers Strategy1 or few sources per itemPartnership (JIT)Long-term, stableOn-site audits & visitsExclusive contractsLow prices (large orders)Frequent, small lotsDelivery to point of use 1995 Corel Corp.

Tactics for Close Supplier RelationshipsTacticReduce total number of suppliersCertify suppliers

Ask for JIT delivery from key suppliersInvolve key suppliers in new product designDevelop software linkages to suppliers

ResultsAverage 20% reduction in 5 years

Almost 40% of all companies surveyed were themselves currently certifiedAbout 60% ask for thisAbout 54% do thisAlmost 80% claim to do this About 50% claim this

Keiretsu Network StrategyJapanese word for affiliated chainSystem of mutual alliances and cross-ownershipCompany stock is held by allied firmsLowers need for short-term profitsLinks manufacturers, suppliers, distributors, & lendersPartnerships extend across entire supply chain

Vendor Managed Inventory (VMI)Postponement keeps product generic as long as possibleChannel Assembly sends to distributor individual components and modules rather than finished goodsDrop Shipping and Special Packaging supplier will ship to end consumer rather than to sellerBlanket Orders a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to shipStandardization reducing the number of variations in materials and componentsElectronic Ordering and Funds Transfer paperless ordering and 100% material acceptance, payment by wire

Vendor Selection StepsVendor evaluationIdentifying & selecting potential vendorsVendor developmentIntegrating buyer & supplierExample: Electronic data exchangeNegotiationsResults in contractSpecifies period of agreement, price, delivery terms etc.

Supplier Selection CriteriaCompanyFinancial stabilityManagementLocationProductQualityPriceServiceDelivery on timeCondition on arrivalTechnical supportTraining

Vendor Selection Rating Form

Logistics ManagementIntegrates all materials functionsPurchasingInventory managementProduction controlInbound trafficWarehousing and storesIncoming quality controlObjective: Efficient, low cost operations

Supply-Chain Performance Compared

Mass Customization

Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers

The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network

Three organizational design principles of an effective mass customization programPrinciple 1: A product should be designed so it consists of independent modules that can be assembled into different forms of the product easily and inexpensivelyPrinciple 2: Manufacturing and service processes should be designed so that they consist of independent modules that can be moved or rearranged easily to support different distribution network

Three organizational design principles of an effective mass customization program (contd)Principle 3: The supply network the positioning of inventory and location, number, and structure of service, manufacturing and distribution facility should be designed provide two capabilities. First, it must be able to supply the basic product to the facility performing the customization in a cost-effective manner. Second, it must have the flexibility and the responsiveness to take individual customers orders and delivery the finished, customized good quickly

This slide might be used to make the point about the various flows - material, information, money.

Students should be asked to explain the differences illustrated by these graphs.This and the following two slides look at how supply-chain strategy can support overall strategy.Ask students how these requirements differ from those in a national or domestic environment.Students might be asked how they believe the role of purchasing is changing given the increased use of information technology and strategies such as JIT. This slide should further impress upon students the importance of the purchasing function.While these are the main functions of purchasing, one would also expect the purchasing department to participate in make-buy decisions.Ask students to consider the product characteristics which might cause a company to choose one or the other of the make/buy options.Ask students to consider the product characteristics which might cause a company to choose one or the other of the make/buy options.The strategic options listed are expanded upon in later slides.Subsequent slides expand upon these strategies.We read in the management literature more and more about managing relationships. If you use the many supplier strategy, how do you develop useful relationships?The risk of having only a single supplier will probably be obvious to most students. What nature of relationship must you have with your supplier to reduce this risk?Students might be asked to consider what it would take to implement such a system in the U.S.Students should be asked to consider the problems which might be encountered at each step in this process.Students might be asked if they perceive one or another of these criteria to be especially important. Also, are there other criteria they would prefer to use or think should be added? (One such criteria might be the ability to communicate using EDT)Students might be asked to consider what additional information they might want before approving a vendor selection.In addition to framing the materials management function, this slide raises the issue of how does one begin assigning responsibilities for each of the facets of supply-chain management?This slide summarizes some of the benefits of effective supply-chain management.