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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
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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
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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
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Supply Chain DynamicsSupply Chain Dynamics
Bullwhip effect Upstream members must react to the demand Slightest change in customer demand can
ripple through the entire chain
External causes
Internal causes
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Supply Chain DynamicsSupply Chain Dynamics
Consumers’ daily
demands
Retailers’ daily orders to
manufacturer
Manufacturer’s weekly orders to package supplier
Package supplier’s weekly orders to
cardboard supplier
9,000
7,000
5,000
3,000
0
Ord
er
qu
an
tity
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
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Supply Chain DynamicsSupply Chain Dynamics
Integrated supply chains High degree of functional and organizational
integration minimizes disruptions Integration must include linkages between the
firm, its suppliers, and its customers SCOR model
Plan Source Make Deliver Return
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Supply Chain DynamicsSupply Chain Dynamics
First-Tier Supplier Service/Product Provider
Support Processes
Ex
tern
al
Su
pp
lie
rs
Support Processes
Supplier relationship
process
New service/ product
development process
Order fulfillment process
Business-to-business
(B2B) customer
relationship process
Ex
tern
al C
on
su
me
rs
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
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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
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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
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Supplier Relationship ProcessSupplier Relationship Process
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
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Total Cost AnalysisTotal Cost Analysis
EXAMPLE 10.1
Compton 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?
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Total Cost AnalysisTotal Cost Analysis
Annual Freight Costs
Shipping Quantity (units/shipment)
Supplier 10,000 20,000 30,000
Belfast $380,000 $260,000 $237,000
Hong Kong $615,000 $547,000 $470,000
Shreveport $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
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Total Cost AnalysisTotal Cost Analysis
SOLUTION
The 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
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Total Cost AnalysisTotal Cost Analysis
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
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The total costs for all three shipping quantity options are similarly calculated and are contained in the following table.
Total Cost AnalysisTotal Cost Analysis
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast
Hong Kong
Shreveport
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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.
Total Cost AnalysisTotal Cost Analysis
$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
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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
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Application 10.1Application 10.1
SOLUTION
The 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
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Application 10.1Application 10.1
Kramer
Q = 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.
Sunrise
Q = 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
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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
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Using a Performance MatrixUsing a Performance Matrix
SOLUTION
The 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 9
On-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
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Application 10.2Application 10.2
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?
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Application 10.2Application 10.2
SOLUTION
Using the preference matrix approach, the weighted scores for each supplier are:
Scores
Criterion Weight Kramer Sunrise
Total 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
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Supplier Relationship ProcessSupplier Relationship Process
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
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Supplier Relationship ProcessSupplier Relationship Process
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)
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Order Fulfillment ProcessOrder Fulfillment Process
Customer demand planning Facilitates collaboration Demand forecasts
Supply planning Inventory management Operations planning and scheduling Resource planning
Production Logistics
Ownership Facility location Mode selection Capacity Cross-docking
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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
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Using Expected ValueUsing Expected Value
EXAMPLE 10.3
Tower 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.
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Using Expected ValueUsing Expected Value
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
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Using Expected ValueUsing Expected Value
SOLUTION
We 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.
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Using Expected ValueUsing Expected Value
C = monthly capital cost of ownership + variable operating cost per month + rental costs if needed
C(100,000 miles/month) =
C(150,000 miles/month) =
C(200,000 miles/month) =
C(250,000 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
($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(200,000 miles – 100,000 miles)
= $321,000
($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(250,000 miles – 100,000 miles)
= $421,000
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Using Expected ValueUsing Expected Value
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:
Expected Value (15 trucks) =
Expected Value (20 trucks) =
Expected Value (25 trucks) =
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
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Application 10.3Application 10.3
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) 200 400 600
Number of teams 1 2 3
Probability 0.20 0.50 0.30
How many teams should Schneider hire?
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Application 10.3Application 10.3
SOLUTION
We 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-House
C(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
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Application 10.3Application 10.3
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
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Application 10.3Application 10.3
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
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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 Business-to-Business (B2B) systems
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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
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The levers Sharing 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
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Performance measures Costs Time Quality Environmental impact
Levers for Improved Supply Chain Levers for Improved Supply Chain PerformancePerformance
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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
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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
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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
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