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10-1
Chapter 6
Information Systems and
Supply Chain Management
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What Is a Supply Chain?
Flow of products and services from:
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Raw materials manufacturers
Intermediate products manufacturers
End product manufacturers
Wholesalers and distributors and
Retailers
• Connected by transportation and storage
activities
• Integrated through information, planning,
and integration activities
• Cost and service levels
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Supply Chain Management
Supply chain management is a set of
approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and
stores, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to
minimize system wide costs while satisfying
service level requirements.
Ryan McVay/Getty Images
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Strategic Importance of SCM
• Opportunity to Reduce Costs
– Transportation Costs
– Inventory Holding Costs
• Provide Value to Customers by Making
the Right Merchandise is in the Right
Place at the Right Time
– Fewer Stockouts
– Greater Assortment with Less Inventory
• Improved ROI
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Supply Chain Illustration
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Supply Chain for Denim Jeans
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Supply Chain for Denim Jeans
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SCM Collaboration
Optimizing
product mix
Capacity
Planning
Demand
Management
Resource
Planning
Shipping
Optimization
Warehousing
Management
Ordering
Administration
Collaboration
on Forecasting
Analyzing
Supply
Chain
Inventory
Planning
Transcctional
Status Management
Shop Floor
Control
Operational
Transcctional
Inventory
Tracking
Matching
demand
-supply
Production
Planning
Analyzing
Supply
Chain
Collaboration
on Resource
Planning
Demand
Forecasting
Tactical
Operational
Collaboration
on Capacity
Planning
Tactical
Collaboration
on Forecasting
Shippment
Tracking
Order &
Shipments
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Benefits of Efficient SCM
Fewer stockouts – merchandise will be available when
the customer wants them
Tailoring assortments – the right merchandise is
available at the right store
Customers respond to the convenience as evidenced
by increased sales
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High Return on Investment
An efficient supply chain can improve a retailer’s ROI
• Increases sales – customers are offered more
attractive assortments
• Net profit is improved by increasing gross margin and
lowering expenses
• Inventory levels are lower, lower investment and total
assets are lower with asset turnover higher
PhotoLink/Getty Images
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Improve Return on Investment
Total assets: The combined value of all items of monetary value owned by
an individual or business.
A company's assets include tangible assets, such as equipment, inventory
and real property, and intangible assets such as goodwill (the value of a
company's name in the market), patents and other intellectual property,
which are owned by a company.
Net profit : The gross revenue minus all expenses
Net Sales: The value of sales generated by a company after deduction of
returns, discounts and the value of damaged or lost goods
ROI Calculation
ROI = Net Profit/ Total assets * 100
Break down ROI into a profit-on-sales component and an
asset-efficiency component.
ROI =
Net profit x Net sales
Net sales
Total assets
* 100
Net profit after taxes $300, total assets $2500, Net sales $5000
ROI = 300/5000 * 5000/2500 * 100 = 0.06 * 2 *100 = 12%
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Wal-Mart’s Sustainable Advantage
Wal-Mart’s success is its information and supply chain
management systems. Why are competitor’s lagging behind?
Wal-Mart made a substantial investment
in developing its systems and has the
scale economies to justify it.
The software is unavailable
elsewhere and is constantly
updated and improved
Ryan McVay/Getty Images
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Minimizing Stockouts
Make sure merchandise in stockrooms is on the shelves
Stores need to place orders with distribution centers in a
timely fashion
Distribution Centers need to send right quantities
Managers need to provide enough lead time for deliveries
Forecast demand accurately
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Information and Merchandise Flow
buyer/planner- A buyer, authorized to
determine sourcing, negotiate agreements
and place purchase orders with vendors,
who also performs material planning and
review functions done solely by planners
in other organizations.
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Information Technology: A Supply Chain Enabler
Information links all aspects of supply chain
• E-business
– replacement of physical business processes with electronic ones
• Electronic data interchange (EDI)
– a computer-to-computer exchange of business documents
• Bar code and point-of-sale
– data creates an instantaneous computer record of a sale
• Radio frequency identification (RFID)
– technology can send product data from an item to a reader via
radio waves
• Build to order using Internet
– allows companies to communicate with suppliers, customers,
shippers and other businesses around the world, instantaneously
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E-business and Supply Chain
• Cost savings and price reductions
• Reduction or elimination of the role of
intermediaries
• Shortening supply chain response and
transaction times
• Gaining a wider presence and increased
visibility for companies
• Greater choices and more information for
customers
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E-business and Supply Chain (cont.)
• Improved service as a result of instant
accessibility to services
• Collection and analysis of voluminous
amounts of customer data and
preferences
• Creation of virtual companies
• Gaining global access to markets,
suppliers, and distribution channels
Walmart E-business
Walmart E-business
Walmart E-business
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RFID Capabilities
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RFID Capabilities (cont.)
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Information Flow
1. When customer makes a
purchase, sales associate
scans UPC code or RFID chip on
merchandise and customer
credit card/loyalty card
Steve Cole/Getty Images
2. Information about purchase is
transmitted from POS terminal to the
buyer/planner
3. Information about purchases are
aggregated by buyer/planner and
sent to distribution center and
vendor to ship merchandise
StockTrek/Getty Images
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Information Flow
4. Buyer/planner communicates with
vendor and places a purchase order
to re-supply stores.
5. Buyer/planner notifies distribution
center about incoming orders and
how they are to be distributed to stores
PhotoLink/Getty Images
6. Store managers inform
distribution center about
receipt of merchandise
and coordinate deliveries
David Buffington/Getty Images
Build-to-order cars over the Internet
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Electronic Data Interchange
• EDI is the computer-to-computer exchange of
business documents between retailers and vendors
• Merchandise sales
• Inventory On Hand
• Orders
• Advanced shipping notices
• Receipt of merchandise
• Invoices for payment
Royalty-Free/CORBIS
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EDI Security
There are implications of security failures (loss of data, loss of
public confidence), but retailers have security policy objectives:
Authentication – system assures person on
other end of session is who it claims to be
Authorization - that person has permission to
carry out request
Integrity – info arriving is the same that was
sent
Ryan McVay/Getty Images
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Benefits of EDI
• Improves overall quality of communications
through better record-keeping
• Information can be easily analyzed
Stockbyte/Punchstock Images
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Advantages of Using a Distribution Center
• Effects of forecast error for individual stores are
minimized
• Enables retailers to carry less merchandise in
the store
• Easier to avoid running out of stock
• Retail store space is more expensive than space
at the distribution center
Ryan McVay/Getty Images
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Logistics Strategy
Pull Supply Chain
Merchandise shipped
to stores based on
sales and inventory
levels in the stores
Push Supply Chain
Merchandise shipped to
the stores based on
forecasted sales rate
(c) Brand X Pictures/PunchStock
Pull Strategy
• The consumer requests the product and
"pulls" it through the delivery channel.
• An example: Car manufacturing company
Ford Australia. Ford Australia only
produces cars when they have been
ordered by the customers.
Pull Strategy
• Used where demand uncertainty is high
• Production and distribution are demand
driven
• No inventory, response to specific orders
Push Strategy
• Demand is forecasted based on historical sales data.
• Make-to-stock is the primary production approach.
• Make-to-stock: involves holding products in inventory
for immediate delivery, so as to minimize customer
delivery times
Push Strategy
Push vs. Pull Strategy
Pull-Push Strategy
•The push/pull approach is important in designing
supply chain. Demand uncertainty and variations
are treated differently in these two systems.
•In a push system, safety stock is used to manage
demand variability;
•While in a pull system, flexible capacity is required
to meet the demand variability
Pull-Push Strategy
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Activities Performed by Distribution Center
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Managing inbound transportation
Receiving and checking merchandise
Storing or cross docking merchandise
Preparing merchandise for the sales
floor
– Ticketing and marking
– Putting on hangers
• Shipping merchandise to
stores
• Managing outbound
transportation
Ryan McVay/Getty Images
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Who Can Use DC’s?
• Retailers selling non-perishable
merchandise
• Retailers offering merchandise
that has highly uncertain
demand like apparel
• Retailers selling merchandise
that needs to be replenished
frequently
• Retailers that carry a large
number of items shipped in
broken case quantities like drug
stores
• Retailers with many outlets
Ryan McVay/Getty Images
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Crossdocking
Ryan McVay/Getty Images
Merchandise flows directly from the vendor’s trucks
through the retailer’s distribution center and is
loaded on the trucks going to the retailer’s stores
without being stored in the distribution center
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Reverse Logistics
• Process of moving goods from their typical final destination
for the purpose of capturing value, or proper disposal.
• Retailers recover loss through on-line auctions
© image100 Ltd
Customer
The McGraw-Hill Companies,
Inc./Andrew Resek, photographer
Store
Steve Cole/Getty Images
Distribution Center
Royalty-Free/CORBIS
Vendor
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Bull-Whip Effect
An uncoordinated channel of built up
inventory when retailers and vendors do
not coordinate their supply chain activities
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What Causes a Bull-Whip Effect?
Chad Baker / Ryan McVay/Getty Images
• Delays in transmitting orders and receiving
merchandise
• Over-reacting to shortage
• Ordering in batches rather than generating
a number of small orders
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Retailers and Vendors Work Together
By working together they can
reduce the level of inventory in
the chain and reduce the
number of stockouts.
• Use EDI
• Exchange information to reduce need for
backup inventory, improve sales forecasts
and production efficiency
• Vendor manage inventory
• Collaborative planning, forecasting and
replacement
PhotoDisc/Getty Images
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Vendor Managed Inventory