Supply-Chain Management Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so

Supply-Chain ManagementSupply-Chain Management

Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements.

SCM, is a strategic weapon that seeks to synchronize a firm’s functions and those of its suppliers to match the flow of materials, services, and information with customer demand

Supply Supply ChainChain

Supplier of materialsSupplier of services

Tier 1

Tier 3

Tier 2

Legend

Customer Customer Customer Customer

Distribution center

Distribution center

Manufacturer

Supply Chain Management

Involves coordination of key processes such as order placement, order fulfillment, purchasing, and supported by marketing, finance, engineering, operations and logistics

The basic purpose: manage the flow of materials. This flow determines inventory levels.

SCM Overview

Inventory – is a stock of materials used to satisfy customer demand or support the production of goods and services

The three categories of inventories are raw materials (RM), work-in-process (WIP), and finished goods (FG).

Manufacturers spend 60% of sales on purchased materials and services, and service providers spend as much as 40%. The management of materials flows is therefore important from a cost perspective alone.

How to gain control of the SC

Backward integration – firm controls upstream toward the sources of raw materials and parts. Can ensure its priority with the supplier and lead efforts to improve efficiency and productivity in managing flow of materials.

What is difficult with backward integration? Write agreements with first-tier suppliers that

hold them accountable for the performance of their suppliers (2nd and 3rd tier)

Developing Integrated SC

Purchasing Determining

suppliers Negotiating

contracts Make or buy Quality levels

Production Quantity levels Scheduling

Distribution Finished goods

inventories Storage/

transportation

Integrated Supply ChainIntegrated Supply Chain

Suppliers Purchasing Production Distribution Customers

Phase 1:Independent supply-chain entities

Suppliers Customers

Internal supply chainMaterials management department

ProductionPurchasing Distribution

Phase 2:Internal integration

Integrated supply chain

CustomersSuppliersInternal supply chain

Phase 3:Supply-chain integration

Conflicting Objectives in the Supply Chain

1. Purchasing Stable volume

requirements Flexible delivery time Little variation in mix Large quantities

2. Manufacturing Long run production High quality High productivity Low production cost

3. Warehousing Low inventory Reduced transportation

costs Quick replenishment

capability

4. Customers Short order lead time High in stock Enormous variety of

products Low prices

Managing the Customer Interface

Order-Placement Process Involves the activities required to register the need for a product or service and to confirm the acceptance of the order. It is advantageous to make this process simple and

fast The Internet has enabled firms to reengineer their

order-placement process to benefit both the customer and the firm. Advantages include

Cost reduction Revenue flow increase Global access Pricing flexibility

Managing the Customer Interface

Order-Fulfillment Process. Involves the activities required to deliver a product or service to a customer. Key elements include:

Information sharing Facilitated by the Internet and ERP systems

Finished goods inventory placement Forward placement Vendor-managed inventories (VMI Continuous replenishment Backward placement

Postponement is used by assemble-to-order and mass customization firms. Customization is delayed until the last possible moment Channel assembly

Managing the Supplier Interface

E-purchasing Electronic Data Interchange (EDI)

Enables the transmission of routine business documents with standard formats from computer to computer, in one-to-one connections

Documents include invoices, purchase orders, and payments Catalog hubs

Connect firms with to, potentially, hundreds of suppliers through the Internet

Does not require one-to-one connections as does EDI Exchanges

Electronic marketplaces where buying and selling firms come together to do business

Often used for spot purchases and commodities or “near-commodities” Auctions

An extension of the exchange Firms place competitive bids to buy something. Like exchanges, auctions are often used for spot purchases,

commodities, and near-commodities


Supplier selection and certification Supplier selection—three criteria often used are price, quality,

and delivery. Supplier certification—typically involves visits by cross-

functional teams to do an in-depth evaluation of the supplier’s processes.

Supplier relations Competitive orientation—a zero sum game. The purpose is to

drive costs down to the minimum level. Power in the supply chain relates to the purchasing clout a firm has.

Cooperative orientation—a partnership between buyers and sellers. This orientation implies long-term commitments, joint work on quality and buyer support of infrastructure. Typically, fewer suppliers are needed in this arrangement.


Outsourcing Degree of sourcing control. The degree of sourcing control is inversely related to the flexibility to

change the supply chain when needed. Centralized versus localized buying

Centralized—increases purchasing clout Localized—often reduces lead times and enables closer coordination

with local production schedules Value analysis

Value analysis is an intensive examination of the materials, processes, information systems, and material flows in the production of a good or service.

Benefits include reduced costs, better profits, increased customer satisfaction, and often improved employee morale.

Value analysis can improve the internal supply chain, but its greatest potential lies in applying it to the external supply chain

Measures of Supply-Chain Performance

Inventory measures Average aggregate inventory value—the total value

of all items held in inventory for a firm. The value is expressed at cost (as opposed to price) to avoid the differences that occur in prices over time. This measure is used in two other important measures.

Weeks of supply—average aggregate inventory value divided by weekly sales (at cost). From an inventory cost perspective, the lower the weeks of supply, the better.

Inventory turns—annual sales (at cost) divided by the average aggregate inventory value. The greater the turns, the lower the average inventory levels.

Inventory MeasuresInventory Measures

Average inventory = $2 millionCost of goods sold = $10 million52 business weeks per year

Weeks of supply = = 10.4 weeks$2 million

($10 million)/(52 weeks)


Average inventory = $2 millionCost of goods sold = $10 million52 business weeks per year

Weeks of supply = = 10.4 weeks$2 million

($10 million)/(52 weeks)

Inventory turns = = 5 turns/year$10 million

$2 million



Process measures, measuring costs, time, and quality as related to Order placementOrder fulfillmentPurchasing


Links to financial measures Current assets (return on assets)Working capitalContribution marginCash-to-cash (cash flow)

Supply-Chain Process MeasuresSupply-Chain Process Measures

Purchasing

Percent of suppliers’ deliveries on time

Suppliers’ lead times

Percent defects in purchased materials and services

Cost of purchased materials and services

Order Fulfillment

Percent of incomplete orders shipped

Percent of orders shipped on time

Time to fulfill the order

Percent of returned items or botched services

Cost to produce the item or service

Customer satisfaction with the order-fulfillment process

Order Placement

Percent orders taken accurately

Time to complete the order-placement process

Customer satisfaction with the order-placement process

Environments Best Suited for Efficient and Responsive Supply Chains

Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable; low Unpredictable; highforecast errors forecast errors

Competitive Low cost; consistent Development speed; fastpriorities quality; on-time delivery times;

delivery customization; volumeflexibility; high-performance designquality

New-product Infrequent Frequentintroduction

Contribution Low Highmargins

Product variety Low High

Design Features for Efficient and Responsive Supply Chains

Factor Efficient Supply Chains Responsive Supply Chains

Operations Make-to-stock or Assemble-to-order, make- strategy standardized services; to-order, or customized

emphasize high services; emphasize volume, standardized product or service products, or services variety

Capacity Low High cushion

Inventory Low; enable high As needed to enable fastinvestment inventory turns delivery time

Lead time Shorten, but do not Shorten aggressivelyincrease costs

Supplier Emphasize low prices; Emphasize fast delivery selection consistent quality; on- time; customization;

time delivery volume flexibility; high-performance design quality

Supply-Chain DynamicsSupply-Chain Dynamics

(a)

Customer Customer

Firm A

Firm B

Firm C

Firm C

Firm A

Time(b)

Figure 11.8

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The Future is NOT what it used to be….

A new e-Business modelReduce cost Increase Profit Increase service level Increase flexibility

Collaborative Planning, Forecasting and Replenishment (CPFR)

A business process for value chain partners – especially retail

to coordinate plans in order to better match supply and demand

Collaborative Planning1. Front-End Agreement2. Joint Business Plan

Collaborative Forecasting3. Create Sales Forecast4. Identify exceptions5. Resolve exceptions6. Create Order Forecast

CollaborativeReplenishment7. Identify exceptions8. Resolve exceptions9. Generate Order

Collaborative Planning, Forecasting and Replenishment (CPFR)