Supply Chain Integration 2

10 – 1Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Supply Chain IntegrationSupply Chain Integration10

For For Operations Management, 9eOperations Management, 9e by by Krajewski/Ritzman/Malhotra Krajewski/Ritzman/Malhotra © 2010 Pearson Education© 2010 Pearson Education

PowerPoint Slides PowerPoint Slides by Jeff Heylby Jeff Heyl


Supply Chain IntegrationSupply Chain Integration

The effective coordination of supply chain processes through the seamless flow of information up and down the supply chain

A river that flows from raw material suppliers to consumers Upstream Downstream

Mitigating the effects of supply chain disruptions


Supply Chain IntegrationSupply Chain Integration

Upstream

Tier 3 Tier 2 Tier 1

Downstream

Information flows

Cash flows

Tomatosuppliers

Tomatopaste

factories

Tomatogradingstations

Retailsales ConsumersKetchup

factory

Figure 10.1 – Supply Chain for a Ketchup Factory


Supply Chain DynamicsSupply Chain Dynamics

Bullwhip effect Upstream members must react to the demand Slightest change in customer demand can

ripple through the entire chainExternal causes Internal causes



Consumers’ daily

demands

Retailers’ daily orders to

manufacturer

Manufacturer’s weekly orders to package supplier

Package supplier’s weekly orders to

cardboard supplier9,000

7,000

5,000

3,000

0

Ord

er q

uant

ity

Month of April

Day 1 Day 30 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30

Figure 10.2 – Supply Chain Dynamics for Facial Tissue



Integrated supply chains High degree of functional and organizational

integration minimizes disruptions(disturbance) Integration must include linkages between the

firm, its suppliers, and its customers SCOR model

Plan Source Make Deliver Return



First-Tier Supplier Service/Product Provider

Support Processes

Exte

rnal

Sup

plie

rs

Support Processes

Supplier relationship

process

New service/ product

development process

Order fulfillment process

Business-to-business

(B2B) customer

relationship process

External Consum

ers

Supplier relationship

process

New service/ product

development process

Order fulfillment process

Business-to-business

(B2B) customer

relationship process

Figure 10.3 – External Supply Chain Linkages


New Service or Product DevelopmentNew Service or Product Development

Design

Analysis

Development

Full Launch

Service or product not profitable

Need to rethink the new offering or production process

Post-launch review

Figure 10.4 – New Service/Product Development Process


Supplier Relationship ProcessSupplier Relationship Process

Sourcing Supplier selection

Material costs

Freight costs Inventory costs

Annual material costs = pD

Cycle inventory = Q/2Pipeline inventory = dL

Annual inventory costs = (Q/2 + dL)H

Administrative costs



Total Annual Cost = pD + Freight costs + (Q/2 + dL)H+ Administrative costs

The total annual cost for a supplier is the sum of these costs:

Other supplier selection criteria Green purchasing Supplier certification and evaluation


Total Cost AnalysisTotal Cost Analysis

EXAMPLE 10.1Compton Electronics manufactures laptops for major computer manufacturers. A key element of the laptop is the keyboard. Compton has identified three potential suppliers for the keyboard, each located in a different part of the world. Important cost considerations are the price per keyboard, freight costs, inventory costs, and contract administrative costs. The annual requirements for the keyboard are 300,000 units. Assume Compton has 250 business days a year. Managers have acquired the following data for each supplier.

Which supplier provides the lowest annual total cost to Compton?



Annual Freight CostsShipping Quantity (units/shipment)

Supplier 10,000 20,000 30,000Belfast $380,000 $260,000 $237,000Hong Kong $615,000 $547,000 $470,000Shreveport $285,000 $240,000 $200,000

Keyboard Costs and Shipping Lead Times

Annual Inventory Shipping Administrative

Supplier Price/Unit Carrying Cost/Unit Lead Time (days) Costs

Belfast $100 $20.00 15 $180.000

Hong Kong $96 $19.20 25 $300.000

Shreveport $99 $19.80 5 $150.000



SOLUTIONThe average requirements per day are

Each option must be evaluated with consideration for the shipping quantity using the following equation:

Total Annual Cost = Material costs + Freight costs+ Inventory costs + Administrative costs

= pD + Freight costs + (Q/2 + dL)H + Administrative costs

d = 300,000/250 = 1,200 keyboards



For example, consider the Belfast option for a shipping quantity of Q = 10,000 units. The costs are

Material costs = pD =

Freight costs= $380,000

Administrative costs= $180,000

Total Annual Cost =

= (10,000 units/2 + 1200 units/day(15 days))$20/unit/year

= $460,000

= $31,020,000$30,000,000 + $380,000 + $460,000 + $180,000

= $30,000,000($100/unit)(300,000 units)

Inventory costs= (cycle inventory + pipeline inventory)H = (Q/2 + dL)H


The total costs for all three shipping quantity options are similarly calculated and are contained in the following table.


Total Annual Costs for the Keyboard Suppliers

Shipping Quantity

Supplier 10,000 20,000 30,000

Belfast

Hong Kong

Shreveport


Total Annual Costs for the Keyboard Suppliers

Shipping Quantity

Supplier 10,000 20,000 30,000

Belfast

Hong Kong

Shreveport

The total costs for all three shipping quantity options are similarly calculated and are contained in the following table.


$30,387,000 $30,415,000 $30,434,000

$31,020,000 $31,000,000 $31,077,000

$30,352,800 $30,406,800 $30,465,800


Application 10.1Application 10.1

ABC Electric Repair is a repair facility for several major electronic appliance manufactures. ABC wants to find a low-cost supplier for an electric relay switch used in many appliances. The annual requirements for the relay switch (D) are 100,000 units. ABC operates 250 days a year. The following data are available for two suppliers. Kramer and Sunrise, for the part:

Freight Costs

Shipping Quantity (Q)

Supplier 2,000 10,000Price/Unit

(p)

Carrying Cost/Unit

(H)Lead Time (L)(days)

Administrative Costs

Kramer $30,000 $20,000 $5.00 $1.00 5 $10,000

Sunrise $28,000 $18,000 $4.90 $0.98 9 $11,000



SOLUTIONThe daily requirements for the relay switch are:

100,000/250 = 400 unitsd =

We must calculate the total annual costs for each alternative:

Total annual cost = Material costs + Freight costs + Inventory costs + Administrative costs

= pD + Freight costs + (Q/2 + dL)H + Administrative costs



KramerQ = 2,000:

Q = 10,000:

The analysis reveals that using Sunrise and a shipping quantity of 10,000 units will yield the lowest annual total costs.

SunriseQ = 2,000:

Q = 10,000:

($5.00)(100,000) + $30,000 + (2,000/2 + 400(5))($1) + $10,000 = $543,000($5.00)(100,000) + $20,000+ (10,000/2 + 400(5))($1) + $10,000 = $537,000

($4.90)(100,000) + $28,000 + (2,000/2 + 400(9))($0.98) + $11,000 = $538,508(4.90)(100,000) + $18,000 + (10,000/2 + 400(9))($0.98) + $11,000 = $527,428


Using a Performance MatrixUsing a Performance Matrix

The management of Compton Electronics has done a total cost analysis for three international suppliers of keyboards (see Example 10.1). Compton also considers on-time delivery, consistent quality, and environmental stewardship in its selection process. Each criterion is given a weight (total of 100 points), and each supplier is given a score (1 = poor, 10 = excellent) on each criterion. The data are shown in the following table.

Score

Criterion Weight Belfast Hong Kong Shreveport

Total Cost 25 5 8 9

On-Time Delivery 30 9 6 7

Consistent Quality 30 8 9 6

Environment 15 9 6 8


Using a Performance MatrixUsing a Performance Matrix

SOLUTIONThe weighted score for each supplier is calculated by multiplying the weight by the score for each criterion and arriving at a total. For example, the Belfast weighted score is

Score

Criterion Weight Belfast Hong Kong Shreveport

Total Cost 25 5 8 9On-Time Delivery 30 9 6 7

Consistent Quality 30 8 9 6

Environment 15 9 6 8

WS =

Similarly, the weighted score for Hong Kong is 740, and for Shreveport, 735. Consequently, Belfast is the preferred supplier.

(25 5) + (30 9) + (30 8) + (15 9) = 770



ABC Electric Repair wants to select a supplier based on total annual cost, consistent quality, and delivery speed. The following table shows the weights management assigned to each criterion (total of 100 points) and the scores assigned to each supplier (Excellent = 5, Poor = 1).

Scores

Criterion Weight Kramer Sunrise

Total annual cost 30 4 5

Consistent quality 40 3 4

Delivery speed 30 5 3

Which supplier should ABC select, given these criteria and scores?



SOLUTIONUsing the preference matrix approach, the weighted scores for each supplier are:

ScoresCriterion Weight Kramer SunriseTotal annual cost 30 4 5

Consistent quality 40 3 4

Delivery speed 30 5 3

WSKramer =

WSSunrise =

Based on the weighted scores, ABC should select Sunrise even though delivery speed performance would be better with Kramer.

(30 4) + (40 3) + (30 5) = 390

(30 5) + (40 4) + (30 3) = 400



Design collaboration Early supplier involvement Presourcing Value analysis

Negotiation Obtain an effective contract that meets the

price, quality, and delivery requirements Competitive orientation Cooperative orientation



Buying Procurement of the service or material from

the supplier e-purchasing Loss of control

Information exchange Radio frequency identification (RFID) Vendor managed inventories (VMI)


Order Fulfillment Process(produce Order Fulfillment Process(produce and delivers )and delivers )

Customer demand planning Facilitates collaboration(supplier and customer) Demand forecasts

Supply planning Inventory management(i.e nokia repair service) Operations planning and scheduling Resource planning

Production(i.e dell` 3 ways) Logistics

Ownership Facility location(POS,storage,manufacture) Mode selection(5 modes) Capacity Cross-docking


4Kitting

8Delivery

7 Boxingand shipping

Order Fulfillment ProcessOrder Fulfillment Process

6 Testing andsystem integration

3Traveler Sheet

2JIT Inventory

1 (d) Directrelationship sales

1 (a)Web site

1 (b)Voice-to-voice

1 (c)Face-to-face

5 Assembleto order

Figure 10.5 – Dell’s Order Fulfillment Process


Using Expected ValueUsing Expected Value

EXAMPLE 10.3Tower Distributors provides logistical services to local manufacturers. Tower picks up products from the manufacturers, takes them to its distribution center, and then assembles shipments to retailers in the region. Tower needs to build a new distribution center; consequently, it needs to make a decision on how many trucks to have. The monthly amortized capital cost of ownership is $2,100 per truck. Operating variable costs are $1 per mile for each truck owned by Tower. If capacity is exceeded in any month, Tower can rent trucks at $2 per mile. Each truck Tower owns can be used 10,000 miles per month. The requirements for the trucks, however, are uncertain. Managers have estimated the following probabilities for several possible demand levels and corresponding fleet sizes.



Notice that the sum of the probabilities must equal 1.0. If Tower Distributors wants to minimize the expected cost of operations, how many trucks should it have?

Requirements (miles/month) 100,000 150,000 200,000 250,000

Fleet Size (trucks) 10 15 20 25

Probability 0.2 0.3 0.4 0.1



SOLUTIONWe use the expected value decision rule to evaluate the alternative fleet sizes where we want to minimize the expected monthly cost. To begin, the monthly cost, C, must be determined for each possible combination of fleet size and requirements. The cost will depend on whether additional capacity must be rented for the month. For example, consider the 10 truck fleet size alternative, which represents a capacity of 100,000 miles per month.



C = monthly capital cost of ownership + variable operating cost per month + rental costs if needed

C(100,000 miles/month) =




($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) = $121,000

($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(150,000 miles – 100,000 miles)

= $221,000


= $321,000


= $421,000



Next, calculate the expected value for the 10 truck fleet size alternative as follows:

Expected Value (10 trucks) =

Using similar logic, we can calculate the expected costs for each of the other fleet-size options:




0.2($121,000) + 0.3($221,000) + 0.4($321,000) + 0.1($421,000) = $261,000

0.2($131,500) + 0.3($181,500) + 0.4($281,500) + 0.1($381,000) = $231,500

0.2($142,000) + 0.3($192,000) + 0.4($242,000) + 0.1($342,000) = $217,000

0.2($152,500) + 0.3($302,500) + 0.4($252,500) + 0.1($302,500) = $222,500



Schneider Logistics Company has built a new warehouse in Columbus, Ohio, to facilitate the consolidation of freight shipments to customers in the region. How many teams of dock workers he should hire to handle the cross docking operations and the other warehouse activities? Each team costs $5,000 a week in wages and overhead. Extra capacity can be subcontracted at a cost of $8,000 a team per week. Each team can satisfy 200 labor hours of work a week. Management has estimated the following probabilities for the requirements:

Requirements (hours/wk) 200 400 600Number of teams 1 2 3Probability 0.20 0.50 0.30

How many teams should Schneider hire?



SOLUTIONWe use the expected value decision rule by first computing the cost for each option for each possible level of requirements and then using the probabilities to determine the expected value for each option. The option with the lowest expected cost is the one Schneider will implement. We demonstrate the approach using the “one team” in-house option.

One Team In-HouseC(200) = C(400) = C(600) =

Expected Value(One Team) = 0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800

$5,000 + $8,000 + $8,000 = $21,000$5,000 + $8,000 = $13,000$5,000



A table of the complete results is below.

Weekly Labor Requirements

In-House 200 hrs 400 hrs 600 hrs Expected Value

One team

Two teams

Three teams



A table of the complete results is below.

Based on the expected value decision rule, Schneider should employ two teams at the warehouse.

$5,000 $13,000 $21,000 $13,800

$10,000 $10,000 $18,000 $12,400

$15,000 $15,000 $15,000 $15,000

Weekly Labor Requirements

In-House 200 hrs 400 hrs 600 hrs Expected Value

One team

Two teams

Three teams


The Customer Relationship ProcessThe Customer Relationship Process

Customer relationship management (CRM) programs identify, attract, and build relationships with customers

Marketing Electronic commerce (e-commerce) Business-to-Consumer (B2C)

systems(amazon) Business-to-Business (B2B) systems


The Customer Relationship ProcessThe Customer Relationship Process

Customer service Helps customers with answers to

questions, resolves problems, and, provides general information

Call centers

Order placement Execute a sale, register the specifics,

confirm acceptance, and track progress Internet provides advantage


The levers Sharing data(point of sale data) Collaborative activities Reduce replenishment lead times Reduce order lot sizes Ration short supplies Use everyday low pricing (EDLP) Be cooperative and trustworthy

Levers for Improved Supply Chain Levers for Improved Supply Chain PerformancePerformance


Performance measures Costs Time Quality Environmental impact

Levers for Improved Supply Chain Levers for Improved Supply Chain PerformancePerformance


Performance MeasuresPerformance Measures

TABLE 10.1 | SUPPLY CHAIN PROCESS MEASURES

Customer Relationship Order Fulfillment Supplier Relationship Percent of orders taken

accurately Time to complete the

order placement process Customer satisfaction

with the order placement process

Customer’s evaluation of firm’s environmental stewardship

Percent of incomplete orders shipped

Percent of orders shipped on-time

Time to fulfill the order Percent of botched

services or returned items Cost to produce the

service or item Customer satisfaction

with the order fulfillment process

Inventory levels of work-in-process and finished goods

Amount of greenhouse gasses emitted into the air

Percent of suppliers’ deliveries on-time

Suppliers’ lead times Percent defects in

services and purchased materials

Cost of services and purchased materials

Inventory levels of supplies and purchased components

Evaluation of supplier’s collaboration on streamlining and waste conversion

Amount of transfer of environmental technologies to suppliers


Supply Chains and the EnvironmentSupply Chains and the Environment

Sustainability Environmental stewardship Environmental protection Productivity improvement Risk minimization Innovation

Reverse logistics Planning, implementing, and controlling flows

from consumption back to origin Closed-loop supply chain


Closed Loop Supply ChainClosed Loop Supply Chain

Wastedisposal

Recycle partsand materials

Remanufacture

Direct reuse Repair

Product information

Forward logistics flow

Reverse logistics flow

Returnsprocessor

Figure 10.6 – Flows in a Closed-Loop Supply Chain

CustomersDistribution/RetailersProduction process

New service/productdevelopment process


Documents

Supply Chain Integration 2