McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
11
Supply Chain
Management

11-2
Learning Objectives
 Explain what a supply chain is.
 Explain the need to manage a supply chain and
the potential benefits of doing so.
 Explain the increasing importance of outsourcing.
 State the objective of supply chain management.
 List the elements of supply chain management.
 Identify the strategic, tactical, and operations
issues in supply chain management.
 Describe the bullwhip effect and the reasons why
it occurs.

11-3
Learning Objectives
 Explain the value of strategic partnering.
 Discuss the critical importance of information
exchange across a supply chain.
 Outline the key steps, and potential challenges, in
creating an effective supply chain.
 Explain the importance of the purchasing function
in business organizations.
 Describe the responsibilities of purchasing.
 Explain the term value analysis.
 Identify several guidelines for ethical behavior in
purchasing.

11-4
Supply Chain Management
 Supply Chain: the sequence of
organizations - their facilities,
functions, and activities - that are
involved in producing and delivering
a product or service.
Sometimes referred to as value chains

11-5
 Warehouses
 Factories
 Processing centers
 Distribution centers
 Retail outlets
 Offices
Facilities

11-6
Functions and Activities
 Forecasting
 Purchasing
 Inventory management
 Information management
 Quality assurance
 Scheduling
 Production and delivery
 Customer service

11-7
Typical Supply Chains
Purchasing
Receiving Storage Operations Storage
Production Distribution

11-8
Typical Supply Chain for a
Manufacturer
Supplier
Supplier
Supplier
Storage
} Mfg. Storage Dist. Retailer Customer
Figure 11.1a

11-9
Supplier
Supplier
}Storage Service Customer
Typical Supply Chain for a
Service
Figure 11.1b

11-10
1.Improve operations
2.Increasing levels of outsourcing
3.Increasing transportation costs
4.Competitive pressures
5.Increasing globalization
6.Increasing importance of e-commerce
7.Complexity of supply chains
8.Manage inventories
Need for Supply Chain
Management

11-11
Bullwhip Effect
Figure 16.3
Final Customer
Initial
Supplier
Demand
Inventory oscillations become progressively
larger looking backward through the supply chain

11-12
Benefits of Supply Chain
Management
Organization Benefit
Campbell Soup Doubled inventory turnover rate
Hewlett-Packard Cut supply costs 75%
Sport Obermeyer Doubled profits and increased sales 60%
National Bicycle Increased market share from 5% to 29%
Wal-Mart Largest and most profitable retailer in the
world

11-13
Benefits of Supply Chain Management
 Lower inventories
 Higher productivity
 Greater agility
 Shorter lead times
 Higher profits
 Greater customer loyalty
 Integrates separate organizations into a
cohesive operating system

11-14
Global Supply Chains
 Increasing more complex
 Language
 Culture
 Currency fluctuations
 Political
 Transportation costs
 Local capabilities
 Finance and economics
 Environmental

11-15
Elements of Supply Chain
Management
Deciding how to best move and store materials
Logistics
Determining location of facilities
Location
Monitoring supplier quality, delivery, and relations
Suppliers
Evaluating suppliers and supporting operations
Purchasing
Meeting demand while managing inventory costs
Inventory
Controlling quality, scheduling work
Processing
Incorporating customer wants, mfg., and time
Design
Predicting quantity and timing of demand
Forecasting
Determining what customers want
Customers
Typical Issues
Element
Table 11.1

11-16
Strategic or Operational
 Two types of decisions in supply chain
management
 Strategic – design and policy
 Operational – day-today activities
 Major decisions areas
 Location
 Production
 Inventory
 Distribution

11-17
 Logistics
 Refers to the movement of materials and
information within a facility and to incoming
and outgoing shipments of goods and
materials in a supply chain
Logistics

11-18
Logistics
• Movement within the facility
• Incoming and outgoing shipments
• Bar coding
• EDI
• Distribution
• JIT Deliveries
0
214800 232087768

11-19
Materials Movement
Figure 11.4
RECEIVING
Storage
Work
center
Work center
Work center
Storage
Work
center
Storage
Shipping

11-20
 Distribution requirements planning
(DRP) is a system for inventory
management and distribution planning
 Extends the concepts of MRPII
Distribution Requirements
Planning

11-21
 Management uses DRP to plan and
coordinate:
 Transportation
 Warehousing
 Workers
 Equipment
 Financial flows
Uses of DRP

11-22
 E-Business: the use of electronic
technology to facilitate business
transactions
 Applications include
 Internet buying and selling
 E-mail
 Order and shipment tracking
 Electronic data interchange
E-Business

11-23
 Companies can:
 Have a global presence
 Improve competitiveness and quality
 Analyze customer interests
 Collect detailed information
 Shorten supply chain response times
 Realize substantial cost savings
 Create virtual companies
 Level the playing field for small companies
Advantages E-Business

11-24
 Customer expectations
 Order quickly -> fast delivery
 Order fulfillment
 Order rate often exceeds ability to fulfill it
 Inventory holding
 Outsourcing loss of control
 Internal holding costs
Disadvantages of E-Business

11-25
Reverse Logistics
 Reverse logistics – the backward flow of
goods returned to the supply chain
 Processing returned goods
 Sorting, examining/testing, restocking, repairing
 Reconditioning, recycling, disposing
 Gatekeeping – screening goods to prevent
incorrect acceptance of goods
 Avoidance – finding ways to minimize the
number of items that are returned

11-26
Effective Supply Chain
 Requires linking the market, distribution
channels processes, and suppliers
 Supply chain should enable members to:
 Share forecasts
 Determine the status of orders in real time
 Access inventory data of partners

11-27
Successful Supply Chain
 Trust among trading partners
 Effective communications
 Supply chain visibility
 Event-management capability
 The ability to detect and respond to
unplanned events
 Performance metrics

11-28
SCOR Metrics
Perspective Metrics
Reliability On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment
Flexibility Supply chain response time
Upside production flexibility
Expenses Supply chain management costs
Warranty cost as a percent of revenue
Value added per employee
Assets/utilization Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
Table 11.4

11-29
RFID Technology
 Used to track goods in supply chain
 RFID tag attached to object
 Similar to bar codes but uses radio frequency
to transmit product information to receiver
 RFID eliminates need for manual counting
and bar code scanning

11-30
CPFR
 Collaborative Planning, Forecasting, and
Replenishment
 Focuses on information sharing among
trading partners
 Forecasts can be frozen and then
converted into a shipping plan
 Eliminates typical order processing

11-31
CPFR Process
Step 1 – Front-end agreement
Step 2 – Joint business plan
Steps 3-5 – Sales forecast
Steps 6-8 – Order forecast collaboration
Step 9 – Order generation/delivery execution

11-32
CPFR Results
 Nabisco and Wegmans
 50% increase in category sales
 Wal-mart and Sara Lee
 14% reduction in store-level inventory
 32% increase in sales
 Kimberly-Clark and Kmart
 Increased category sales that exceeded
market growth

11-33
1.Develop strategic objectives and tactics
2.Integrate and coordinate activities in the
internal supply chain
3.Coordinate activities with suppliers with
customers
4.Coordinate planning and execution
across the supply chain
5.Form strategic partnerships
Creating an Effective Supply
Chain

11-34
Supply Chain Performance Drivers
1.Quality
2.Cost
3.Flexibility
4.Velocity
5.Customer service

11-35
Velocity
 Inventory velocity
 The rate at which inventory(material) goes
through the supply chain
 Information velocity
 The rate at which information is
communicated in a supply chain

11-36
 Barriers to integration of organizations
 Getting top management on board
 Dealing with trade-offs
 Small businesses
 Variability and uncertainty
 Long lead times
Challenges

11-37
1.Lot-size-inventory
 Bullwhip effect
2.Inventory-transportation costs
 Cross-docking
3.Lead time-transportation costs
4.Product variety-inventory
 Delayed differentiation
5.Cost-customer service
 Disintermediation
Trade-offs

11-38
Trade-offs
 Bullwhip effect
 Inventories are progressively larger moving
backward through the supply chain
 Cross-docking
 Goods arriving at a warehouse from a
supplier are unloaded from the supplier’s
truck and loaded onto outbound trucks
 Avoids warehouse storage

11-39
Trade-offs
 Delayed differentiation
 Production of standard components and
subassemblies, which are held until late in
the process to add differentiating features
 Disintermediation
 Reducing one or more steps in a supply
chain by cutting out one or more
intermediaries

11-40
Supply Chain Issues
Quality control
Production planning and
control
Inventory policies
Purchasing policies
Production policies
Transportation
policies
Quality policies
Design of the
supply chain,
partnering
Operating Issues
Tactical Issues
Strategic
Issues

11-41
Supply Chain Benefits and
Drawbacks
Problem Potential
Improvement
Benefits Possible
Drawbacks
Large
inventories
Smaller, more
frequent deliveries
Reduced holding
costs
Traffic congestion
Increased costs
Long lead
times
Delayed
differentiation
Disintermediation
Quick response May not be
feasible
May need absorb
functions
Large
number of
parts
Modular Fewer parts
Simpler ordering
Less variety
Cost
Quality
Outsourcing Reduced cost,
higher quality
Loss of control
Variability Shorter lead times,
better forecasts
Able to match
supply and
demand
Less variety
Table 11.5

11-42
 Purchasing is responsible for obtaining
the materials, parts, and supplies and
services needed to produce a product
or provide a service.
 Purchasing cycle: Series of steps that
begin with a request for purchase and
end with notification of shipment
received in satisfactory condition.
Purchasing

11-43
 Develop and implement purchasing
plans for products and services that
support operations strategies
Goal of Purchasing

11-44
 Identifying sources of supply
 Negotiating contracts
 Maintaining a database of suppliers
 Obtaining goods and services
 Managing supplies
Duties of Purchasing

11-45
Purchasing Interfaces
Purchasing
Legal
Accounting
Operations
Data
processing
Design
Receiving
Suppliers
Figure 11.5

11-46
Purchasing Cycle
1.Requisition received
2.Supplier selected
3.Order is placed
4.Monitor orders
5.Receive orders
Purchasing
Legal
Accounting
Operations
Data
process-
ing
Design
Receiving
Suppliers

11-47
 Value analysis
 Examination of the function of purchased
parts and materials in an effort to reduce
cost and/or improve performance
Value Analysis vs. Outsourcing

11-48
 Centralized purchasing
 Purchasing is handled by one special
department
 Decentralized purchasing
 Individual departments or separate
locations handle their own purchasing
requirements
Centralized vs Decentralized
Purchasing

11-49
 Choosing suppliers
 Evaluating sources of supply
 Supplier audits
 Supplier certification
 Supplier relationships
 Supplier partnerships
Suppliers

11-50
 Quality and quality assurance
 Flexibility
 Location
 Price
Factors in Choosing a Supplier

11-51
 Product or service changes
 Reputation and financial stability
 Lead times and on-time delivery
 Other accounts
Factors in Choosing a Supplier
(cont’d)

11-52
Evaluating Sources of Supply
 Vendor analysis: Evaluating the
sources of supply in terms of price,
quality, reputation, and service

11-53
 Vendor analysis - evaluating the
sources of supply in terms of
 Price
 Quality
 Services
 Location
 Inventory policy
 Flexibility
Evaluating Sources of Supply

11-54
Supplier as a Partner
Aspect Adversary Partner
Number of suppliers Many One or a few
Length of
relationship
May be brief Long-term
Low price Major consideration Moderately important
Reliability May not be high High
Openness Low High
Quality May be unreliable;
buyer inspects
At the source;
vendor certified
Volume of business May be low High
Flexibility Relatively low Relatively high
Location Widely dispersed Nearness is
important
Table 11.9

11-55
 Ideas from suppliers could lead to improved
competitiveness
1.Reduce cost of making the purchase
2.Reduce transportation costs
3.Reduce production costs
4.Improve product quality
5.Improve product design
6.Reduce time to market
7.Improve customer satisfaction
8.Reduce inventory costs
9.Introduce new products or services
Supplier Partnerships

11-56
Critical Issues
 Strategic importance
 Cost
 Quality
 Agility
 Customer service
 Competitive advantage
 Technology management
 Benefits
 Risks

11-57
Critical Issues
 Purchasing function
 Increased outsourcing
 Increased conversion to lean production
 Just-in-time deliveries
 Globalization

11-58
Video: Tech Logistics

11-59
Video: Tracking, GPS

11-60
Video: Intermodel Transp.