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Chapter 7
Supply Chain Management
Copyright 2013 John Wiley & Sons, Inc.
Overview
7-2
Apple
• Apple’s focus on improving its supply chain
dates back to 1997
• Apple once spent $50 million to acquire all the
available holiday air transport capacity
– This also helped cripple competitors
• Apple has learned that making supply chain
investments pays for itself in the long run
• Sipping directly to customers from China
reduces inventory
7-3
Apple (Continued)
• Apple engineers work directly with
suppliers
• Apple spent $7.1 billion on its supply
chain in 2011
• Apple requires detailed bids from
suppliers
• Also requires suppliers to keep two
weeks worth of inventory
7-4
Introduction
• Tremendous benefits accrue to firms that
have a well managed supply chain
• Supply change management plays an
important role in an organization’s
competitiveness
• Even service organizations benefit from
good supply chain management
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Defining Supply Chain
Management (SCM)
• Coordination and integration of all
supply chain activities into seamless
process
• Enables organizations to plan and
collaborate across supply chain
• Goal is to deliver right product to right
place at right time in order to maximize
profit
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The Supply Chain
Figure 7.1
7-7
More on SCM
• Value chain considers other important
aspects of customer value besides cost
• Supply chain has many elements of the
old push systems of production
• Pull systems call it a demand chain
• Services sometimes include the customer
in the supply chain
7-8
Supply Chain Strategy
• Supply chain strategy needs to be tailored to
meet the needs of its customers which is not
always the lowest cost
• In situations where the goods are basic
commodities with standard benefits (food,
home supplies, standard clothing), then cost
reduction will be the focus
• In fashion goods, timeliness should be the
focus of the supply chain
7-9
Supply Chain Strategy (Continued)
• When operating in multiple markets,
may need a different supply chain for
each
• Many organizations choose to outsource
portions of their SCM to third-party
logistics (3PL) companies
• Shifting to 3PL allows a firm to focus on
its core competencies
7-10
Strategic Need for Supply
Chain Management
• Total supply chain costs represent better than
half of the total operating expenses for most
organizations
• The broader concept of the supply chain
includes the supply, storage, and movement of
materials, information, personnel, equipment,
and finished goods within the organization and
between it and its environment
• The objective of SCM is to integrate the entire
process of satisfying the customer’s needs all
along the supply chain
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Factors Driving Need to Better
Manage Supply Chain
•
•
•
•
•
•
•
Procurement costs are increasing
Increasing global competition
Outsourcing
E-commerce
Shorter life cycles
Greater supply chain complexity
Increasing concern for the environment
7-12
Successful Supply Chain
Management
• The basic requirements for successful
SCM are trustworthy partners, good
communication, appropriate
performance measures, and competent
managers with vision
• Innovation to suit the particular situation
is particularly desirable
7-13
Examples of Visionary SCM
Innovations
• Dell’s “direct model”
• Wal-Mart’s “cross-docking”
– Off-loading goods from incoming trucks directly
into outbound distribution trucks
• Sport Obermeyer’s and Hewlett-Packard’s
“postponement ”
– Delayed differentiation where final modules are
either inventoried for later assembly, or
differentiating features are added upon receipt of
the customer’s order
7-14
Measures of Supply Chain
Performance
• Lower inventories
– Will be reflected in less need for working
capital (WC)
– Also, a higher return on asset (ROA) ratio
• Lower cost to carry these inventories
– Will be seen in a reduced cost of goods sold
(CGS)
– Thus a higher contribution margin, return
on sales (ROS), and operating income
7-15
Performance Measures
• One performance measure that provides a
broad view is the cast conversion cycle (CCC)
– Helps assess how well a firm is managing its
capital
• Another is the average aggregate inventory
value (AAIV)
• Another is inventory turnover (or turns)
– Equation can be converted to days of supply
7-16
Performance Measures
Calculations
7-17
Sourcing Performance Measures
 Inventory turnover: how often
inventory is replaced during the
year
 Cost of goods sold: the annual
cost for a company to produce
the goods or services provided
to customers
 Average aggregate inventory
value: the total value of all
items held in inventory
 Weeks of supply: how many
weeks’ worth of inventory is in
the system at a particular point
in time
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7-18
Example 16.2
16-19
7-19
Logistics
• Planning and controlling efficient, effective
flows of goods, services, and information from
one point to another
• Consists of inventories, distribution networks,
storage and warehousing, transportation,
information processing, and even production
• Logistic is taking on tremendous importance
7-20
The Bullwhip Effect
• Each segment further down the whip
goes faster than the one above it
• Same effect often observed in supply
chains but in reverse order
• Results when the variability of demand
increases from the customer stage
upstream to the factory stage
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The Bullwhip Effect
• Bullwhip effect: phenomenon of variability
magnification as we move from the customer
to the producer in the supply chain
– A slight change in consumer sales ripples
backward as magnified oscillations upstream, like
the result of a flick of a bullwhip handle.
• Continuous replenishment: inventory is
replaced frequently, as part of an ongoing
process
16-22
7-22
The Bullwhip Effect
Consumer
sales are
predictable
and steady.
Retailer orders start to
show variability as lot
sizes and other factors
have an impact.
Farther up the supply
chain variability
increases.
16-23
7-23
Conditions Leading to the
Bullwhip Effect
1. Long lead times between the stages of
the supply chain
2. Large lot sizes with infrequent ordering
3. The sole transmission of information
occurring by hand-offs from one link
of the chain to the next
7-24
Business Practices Leading to the
Bullwhip Effect
1. Tendency for customers to place all
their orders at beginning (or end) of
period
2. Use of standard batch sizes
3. Trade promotions
4. Shortage gaming
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Outsourcing
• Outsourcing: moving some of a firm’s
internal activities and decision responsibility
to outside providers
• Allows a company to create a competitive
advantage while reducing cost.
• An entire function may be outsourced, or
some elements of an activity may be
outsourced, with the rest kept in-house.
16-26
7-26
Reasons to Outsource
Financial
Improve return on assets by reducing inventory and selling unnecessary assets
Generate cash by selling low-return entities
Gain access to new markets, particularly in developing countries
Reduce costs through lower cost structure
Turn fixed costs into variable costs
Improvement
Improve quality and productivity
Shorten cycle time
Obtain expertise, skills, and technologies that are otherwise unavailable
Improve risk management
Improve credibility and image by associating with superior providers
Organizational
Improve effectiveness by focusing on what the firm does best
Increase flexibility to meet changing demand for products and services
Increase product and service value by improving response to customer needs
16-27
7-27
Outsourcing and Global Sourcing
• Outsourcing is the process of contracting with
external suppliers for goods and services that
were formally provided internally
• Global sourcing is an important aspect of
supply chain outsourcing strategy and we see
it occurring more and more
• One danger to outsourcing is being hollowed
out
• More recent trend is outsourcing entire
production process to contract manufacturers
7-28
Transportation
1. Water
–
–
–
Least expensive
Good for long trips with bulky, nonperishable
items
Slow with limited accessibility
2. Rail
–
–
–
Handles small items well
Good accessibility
Relatively low cost
7-29
Transportation Continued
3. Truck
–
–
More advantages for short haul with small
volumes
Grown at the expense of rail
4. Air
–
–
Used for small, high-value, or perishable
items
Main advantage is speed
7-30
Factors to Consider in
Transportation Decisions
Table 7.1
7-31
Purchasing
• Activities to reliably obtain materials by the
time they are needed in the product supply
process
• Important considerations include price,
quality, lead times, and reliability
• Manufacturing organizations spend an average
of 55 percent of revenue for outside materials
and services.
• These same organizations spend only 6 percent
on labor and 3 percent on overhead
7-32
Purchasing Versus Procurement
• Purchasing implies a monetary
transaction
• Procurement is simply the responsibility
for acquiring the goods and services the
organization needs
• Procurement allows the consideration of
environmental aspects of obtaining and
distributing products
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JIT and Purchasing
• Widespread use of JIT has increased
importance of purchasing and
procurement
• Delays in the receipt of materials will
stop a JIT program dead in its tracks
7-34
Supplier Management
1. Selecting the suppliers
2. Contemporary relationships with
suppliers
3. Certification and auditing of ongoing
suppliers
Slide on each of these
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Characteristics of a Good Supplier
• Deliveries are made on time and are of the
quality and in the quantity specified.
• Prices are fair, and efforts are made to hold or
reduce the price.
• Able to react to unforeseen changes.
• Supplier continually improves products and
services.
• Supplier is willing to share information and be
an important link in the supply chain.
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Supplier Relationships
• With intense global competition and SCM, the
relationship between customers and suppliers
has changed significantly
• In the past, most customers purchased from the
lowest bidders who could meet their quality
and delivery needs
• Customers are seeking a closer, more
cooperative relationship with their suppliers
7-37
Inventory Management
• A key aspect of SCM is the use of
inventory
• Salespeople generally prefer large
quantities of inventory
• Finance personnel see inventory as tied
up capital
• Operations sees inventory as a tool
7-38
Functions of Inventories
1.
2.
3.
4.
5.
Transit inventories
Buffer inventories (safety stocks)
Anticipation inventories
Decoupling inventories
Cycle inventories
7-39
Forms of Inventories
1. Raw materials
2. Maintenance, repair, and operating
supplies
3. Work-in-process (WIP)
4. Finished goods
7-40
Inventory-Related Costs
• Ordering or setup costs
• Inventory carrying or holding costs
– Capital costs
– Storage costs
– Risk costs
• Stockout costs
• Opportunity costs
• Cost of goods
7-41
Decisions in Inventory
Management
•
•
Objective of inventory management is
to decide on the appropriate level and
change in level of inventory
Decision rules are needed to answer
two basic questions:
1. When to order?
2. How much to order?
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Inventory Models
Single-period model
• Used when we are making a one-time purchase of an item
Fixed-order quantity model
• Used when we want to maintain an item “in-stock,” and when
we restock, a certain number of units must be ordered
Fixed–time period model
• Item is ordered at certain intervals of time
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Fixed-Order Quantity Models –
Assumptions
• Demand for the product is constant and
uniform throughout the period.
• Lead time (time from ordering to receipt) is
constant.
• Price per unit of product is constant.
• Inventory holding cost is based on average
inventory.
• Ordering or setup costs are constant.
• All demands for the product will be satisfied.
20-44
7-44
Fixed-Order Quantity Model
Always order Q units
when inventory reaches
reorder point (R).
Inventory is
consumed at a
constant rate, with
a new order
placed when the
reorder point (R) is
reached once
again.
Inventory arrives after
lead time (L).
Inventory is raised to
maximum level (Q).
20-45
7-45
Economic Order Quantity (EOQ)
The optimal order
quantity (Qopt)
occurs where
total costs are at
their minimum
20-46
7-46
Example 20.2
20-47
7-47
Establishing Safety Stock Levels
Safety stock – refers to the amount of inventory
carried in addition to expected demand.
• Safety stock can be determined based on many different criteria.
A common approach is to simply keep a certain
number of weeks of supply.
A better approach is to use probability.
• Assume demand is normally distributed.
• Assume we know mean and standard deviation.
• To determine probability, we plot a normal distribution for
expected demand and note where the amount we have lies on the
curve.
20-48
7-48
Fixed-Order Quantity Model with
Safety Stock
Demand is variable,
but follows a known
distribution/
After the reorder is placed,
demand during the lead time
may be higher than expected,
consuming some (or all) of the
safety stock/
20-49
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Example 20.4
For 95%
probability,
z = 1.64.
Policy – place a new
order for 936 units
whenever stock falls to
388 units on hand. This
results in a 95%
probability of not
stocking out during the
lead time.
20-50
7-50
Fixed-Time Period Model
20-51
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Fixed-Time Period Model
Time periods
are equal,
but ending
inventory
varies.
Reorder quantity varies,
depending upon ending
inventory level. Beginning
inventory is always the same.
20-52
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Example 20.5
20-53
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E-Commerce
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•
•
•
•
•
•
•
•
Electronic Data Interchange (EDI)
Bar Coding and Scanning
Databases
Email
Electronic funds transfer
Internet
Point of sale terminals
ERP systems
RFID
7-54
Radio Frequency Identification
(RFID)
• Conventional bar codes are replaced
with computer chips or smart tags
• Use wireless technology to track
inventory
7-55
Internet
• The most significant information
technology development for supply
chain management
• The Web will be the global
infrastructure for electronic commerce
• The Web will allow various forms of
purchasing fulfillment to take place
7-56
Intranets
• Web-based networks that allow all employees
of a firm to intercommunicate
• They are usually firewall protected and use
existing Internet technologies to create portals
for company-specific information and
communication, such as newsletters, training,
human resource information and forms,
product information, and so on
7-57
Extranets
• Private networks to allow the
organization to securely interact with
external parties
• They use Internet protocols and public
telecommunication systems to work with
external vendors, suppliers, dealers,
customers, and so on
7-58
Enterprise Resource Planning
(ERP) Systems
• Facilitate communication throughout the
supply chain and over the Internet
• The ERP system embodies much more than
just the supply chain, it also includes all the
electronic information concerning the various
parts of the firm
• Not only reduce cost and allow instant access
to entire database, can also increase revenues
7-59