Supply Chains & SCM

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A supply chain is the network of all the activities involved in delivering a finished product/service to the customerSourcing of: raw materials, assembly,

warehousing, order entry, distribution, deliverySupply Chain Management is the vital

business function that coordinates all of the network linksCoordinates movement of goods through supply

chain from suppliers to manufacturers to distributors

Promotes information sharing along chain like forecasts, sales data, & promotions

Components of a Supply Chain

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External Suppliers– source of raw materialTier one supplier supplies directly to the

processorTier two supplier supplies directly to tier oneTier three supplier supplies directly to tier two

Internal Functions include – processing functionsProcessing, purchasing, planning, quality,

shippingExternal Distributors transport finished

products to appropriate locationsLogistics managers are responsible for traffic

management and distribution management

Components of a Supply Chain

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External Distributors transport finished products to appropriate locationsLogistics managers are responsible for

managing the movement of products between locations. Includes;traffic management – arranging the method of

shipment for both incoming and outgoing products or material

distribution management – movement of material from manufacturer to the customer

A Basic Supply Chain

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The Bullwhip Effect

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Bullwhip effect - the inaccurate or distorted demand information created in the supply chain

Causes are generated by: demand forecasting updating,order batching, price fluctuations, rationing andgaming

The Bullwhip Effect

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Counteracting the Effect: Change the way suppliers forecast product

demand by making this information available at all levels of the supply chain

Share real demand information (POS terminals)

Eliminate order batching Stabilize pricingEliminate gaming

Issues Affecting Supply Chain Management

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Information technology – enablers include the Internet, Web, EDI, intranets and extranets, bar code scanners, and point-of-sales demand information

E-commerce and e-business – uses internet and web to transact business

Two types of e-commerce areBusiness-to-business (B2B) andBusiness-to-consumer (B2C)

SCM Factors

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SCM must consider the following trends, improved capabilities, & realities:Consumer Expectations and Competition

– power has shifted to the consumerGlobalization – capitalize on emerging

marketsGovernment Regulations and E-

Commerce – issues of Internet government regulations

Environment Implications of E-Commerce – recycling, sustainable eco-efficiency, and waste minimization

Global SCM Factors

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Managing extensive global supply chains introduces many complicationsGeographically dispersed members - increase

replenishment transit times and inventory investmentForecasting accuracy complicated by longer lead

times and different operating practicesExchange rates fluctuate, inflation can be highInfrastructure issues like transportation,

communication, lack of skilled labor, & scarce local material supplies

Product proliferation created by the need to customize products for each market

Sourcing Issues

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Which products to produce in-house and which are provided by other supply chain members

Vertical integration – a measure of how much of the supply chain is owned by the manufacturerBackward integration – owning or controlling of

sources of raw material and component partsForward integration – owning or control the channels

of distributionVertical integration related to levels of

insourcing or outsourcing products or services

Insourcing vs. Outsourcing

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What questions need to be asked before sourcing decisions are made?Is product/service technology critical to firm’s

success?Is product/service a core competency? Is it something your company must do to

survive?

Make or Buy Analysis

Analysis will look at the expected sales levels and cost of internal operations vs. cost of purchasing the product or service

QVCFCQVCFC

QVCFCTC

QVCFCTC

MakeMakeBuyBuy

MakeMakeMake

BuyBuyBuy

:PointceIndifferen

:InsourcingofCostTotal

:gOutsourcinofCostTotal

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Example: Make-or-Buy analysis- Mary and Sue, have decided to open a bagel shop. Their first decision is whether they should make the bagels on-site or by the bagels from a local bakery. If they buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually. They can buy the bagels for $0.40 each. If they make the bagels in-house they will need a small kitchen at a fixed cost of $15,000 annually. It will cost them $0.15 per bagel to make. The believe they will sell 60,000 bagels.

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Mary and Sue wants to know if they should make or buy the bagels.

FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q) $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q) Q = 56,000 bagels

Since the costs are equal at 56,000 bagels and Mary and Sue expect to use 60,000 bagels, they should make the bagels in-house

The Role of Purchasing

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Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold Ethics considerations is a constant concernDeveloping supplier relationships is essentialDetermining how many suppliers to useDeveloping partnerships

Critical Factors in Successful Partnership Relations

Critical factors in successful partnering include;Impact – attaining levels of productivity and

competitiveness that are not possible through normal supplier relationships

Intimacy – working relationship between two partners

Vision – the mission or objectives of the partnership

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Critical Factors in Successful Partnership Relations

Have a long-term orientation

Share a common vision

Are strategic in nature Share short/long term plans

Share information Driven by end-customer needs

Share risks and opportunities

Benefits of PartneringEarly supplier involvement (ESI) in the design processUsing supplier expertise to develop and share cost

improvements and eliminate costly processesShorten time to market

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Integrated SCMImplementing integrated SCM requires:

Analyzing the whole supply chainStarting by integrating internal functions firstIntegrating external suppliers through

partnerships Manufacturer’s Goals

Reduce costsReduce duplication of effortImprove qualityReduce lead timeImplement cost reduction

programInvolve suppliers earlyReduce time to market© 2007 Wiley 17

Supplier’s Goals Increase sales volume Increase customer

loyalty Reduce cost Improve demand data Improve profitability

Supply Chain Measurements

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Measuring supply chain performanceTraditional measures include;

Return on investmentProfitabilityMarket shareRevenue growth

Additional measuresCustomer service levelsInventory turnsWeeks of supplyInventory obsolescence

Supply Chain Performance Measurement

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Customer demands for better-quality requires company’s to develop ways to measure improvements

Some measurements includeWarranty costs Products returnedCost reductions allowed because of product defectsCompany response timesTransaction costs

Current Trends in SCM

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Increased use of electronic marketplace such asE-distributors – independently owned net

marketplaces having catalogs representing thousands of suppliers and designed for spot purchases

E-purchasing – companies that connect on-line MRO suppliers to business who pay fees to join the market, usually for long-term contractual purchasing

Current Trends in SCM - continued

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Increased use of electronic marketplace such asValue chain management – automation of a firm’s

purchasing or selling processesExchanges – marketplace that focuses on spot

requirements of large firms in a single industryIndustry consortia – industry-owned markets that

enable buyers to purchase direct inputs from a limited set of invited suppliers

Decreased supply chain velocity due to greater distances with greater uncertainty and generally less efficient.

SCM Across the Organization

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SCM changes the way companies do business.Accounting shares SCM benefits due to

inventory level decreasesMarketing benefits by improved customer

service levelsInformation systems are critical for information

sharing through, the Internet, intranet, and extranets

Purchasing is responsible for sourcing materials

Operations use timely demand information to more effectively plan production schedules

The Retail IndustryBrick-and-mortar companies establish

virtual retail storesWal-Mart, K-Mart, Barnes & Noble, Circuit

CityAn effective approach - hybrid stocking

strategy High volume/fast moving products for local

storageLow volume/slow moving products for

browsing and purchase on line (risk pooling)Danger of channel conflict

Existing Channels for BusinessProduct information

Physical stores, EDO, catalogs, face to face,Order placement

Physical store, EDI, phone, fax, face to face,Order tracking

EDI, phone, fax, …Order fulfillment

Customer pick up, physical delivery

Potential Revenue Opportunities from E-BusinessDirect sales to customers24 hour access for order placementInformation aggregationInformation sharing in supply chainFlexibility on pricing and promotionPrice and service discriminationFaster time to market

Potential Cost Opportunities from E-BusinessDirect customer contact for manufacturersCoordination in the supply chainCustomer participationPostpone product differentiation to after

order is placedReduce facility costsGeographical centralization and resulting

reduction in inventories

Basic evaluation frameworkHow does going online impact revenues?How does going online impact costs?

Facility (site + personnel)InventoryTransportationInformation

Should the e-commerce channel position itself for efficiency or responsiveness?

Who in the supply chain can extract most value?

Is the value to existing players or new entrants?

The Computer Industry: Dell on-line

Customer Order andManufacturing Cycle

Procurement Cycle

Dell Supply Chain Cycles

Procurement cycleCustomer Order andManufacturing Cycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

Potential opportunities exploited by Dell

Revenue opportunities24 hour access for order placementDirect salesProviding customization and large selection

informationFlexibility on pricing and promotionFaster time to marketEfficient funds transfer - reduce working capital

Revenue negativesLonger response time than store and no help with

selection

Potential opportunities exploited by DellCost opportunities

Direct sales eliminating intermediaryCustomer participation: Call center & catalog costsInformation sharing in supply chainReduce facility costsGeographical Centralization and reduced

inventoriesPostpone product differentiation to after order is

placed using product platforms and common components

Outbound transportation costs increase

Retailing: Amazon.com

Publisher

Distributor

Amazon

Customer

Amazon Supply Chain

Publisher

Warehouse (?)

Retail Store

Customer

Bookstore Supply Chain

Pull Pull

Potential opportunities exploited by Amazon

Revenue opportunities24 hour access for order placementProviding large selection and other informationAttract customers who do not want to go to

storeFlexibility on pricingEfficient funds transfer

Revenue negativesIntermediary (distributor) reduces marginLonger response time than bookstore

Potential opportunities exploited by AmazonCost opportunities

Reduce facility costsGeographical centralization and reduced

inventories: Most effective for low volume, hard to forecast books, least effective for high volume best sellers

Cost increasesOutbound transportation costs increaseHandling cost increase

How should bookstore chains react?An on line channel allows it to match

Amazon’s revenue advantagesUse a hybrid approach in stocking and

pricingHigh volume books for local storageLow volume books for browsing and purchase

on linePricing varies by delivery and pick up option

Grocery on-line

Manufacturer

Online Grocer

Customer

On-Line Supply Chain

Manufacturer

Warehouse (?)

Supermarket

Customer

Supermarket Supply Chain

Potential opportunities for on line grocerRevenue opportunities

Attract customers who do not want to go to supermarket

Out of town customers for specialty itemsMenus and other value added

Cost opportunitiesReduced facility costs (sites as well as

checkout clerks)Inventory savings from centralization

(primarily for slow moving, specialty items)

Added costs for online grocerAdditional outbound transportation cost:

Have to cover the last mile to the customerAdditional picking and packing costs

What accounts for Wal-Mart’s remarkable successA focus on satisfying customer needs

providing customers access to goods when and where they want them

cost structures that enable competitive pricingThis was achieved by way the company

replenished inventory the centerpiece of its strategy.

Wal-Mart employed a logistics technique known as cross-dockinggoods are continuously delivered to warehouses

where they are dispatched to stores without ever sitting in inventory.

This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.

Characteristics of Cross-Docking:Goods spend at most 48 hours in the

warehouseCross Docking avoids inventory and

handling costs,Wal-Mart delivers about 85% of its

goods through its warehouse system, compared to about 50% for Kmart

Stores trigger orders for products.