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Chapter 7
Supply Chain
Management
BA 320 Operations Management
Supply Chain
 All activities associated with the flow
and transformation of goods and
services from raw materials to the end
user, the customer
 A sequence of business activities
from suppliers through customers
that provide the products, services,
and information to achieve customer
satisfaction
BA 320 Operations Management
The Supply Chain
BA 320 Operations Management
The Supply Chain
Suppliers
Producers
Distributors
Customers
Materials,
parts, subassemblies,
and
services
Finished
goods, end
products
and services
Package
and delivery
Total
satisfaction
with quality,
price,
delivery, and
service
Inventory
Products
and
Services
Inventory
Products
and
Services
Products
and
Services
Inventory
Figure 7.1
BA 320 Operations Management
The Supply Chain
Information
Suppliers
Producers
Distributors
Customers
Materials,
parts, subassemblies,
and
services
Finished
goods, end
products
and services
Package
and delivery
Total
satisfaction
with quality,
price,
delivery, and
service
Inventory
Products
and
Services
Inventory
Products
and
Services
Products
and
Services
Inventory
Figure 7.1
BA 320 Operations Management
The Supply Chain
Information
Suppliers
Producers
Distributors
Customers
Materials,
parts, subassemblies,
and
services
Finished
goods, end
products
and services
Package
and delivery
Total
satisfaction
with quality,
price,
delivery, and
service
Inventory
Products
and
Services
Products
and
Services
Products
and
Services
Inventory
Inventory
Cash
Figure 7.1
BA 320 Operations Management
Supply Chain Management
 Synchronization of activities
required to achieve maximum
competitive benefits
 Coordination, cooperation, and
communication
 Rapid flow of information
 Vertical integration
BA 320 Operations Management
Supply Chain Uncertainty
 Forecasting, lead times, batch
ordering, price fluctuations, and
inflated orders contribute to
variability
 Inventory is a form of insurance
 Distorted information is one of
the main causes of uncertainty
BA 320 Operations Management
Information in the
Supply Chain
 Centralized coordination of
information flows
 Integration of transportation,
distribution, ordering, and production
 Direct access to domestic and global
transportation and distribution
channels
 Locating and tracking the movement
of every item in the supply chain
BA 320 Operations Management
Information in the
Supply Chain
 Consolidation of purchasing from all
suppliers
 Intercompany and intracompany
information access
 Data interchange
 Data acquisition at the point of origin
and point of sale
 Instantaneous updating of inventory
levels
BA 320 Operations Management
Electronic Business
 Replacement of physical processes
with electronic ones
 Cost and price reductions
 Reduction or elimination of
intermediaries
 Shortening transaction times for
ordering and delivery
 Wider presence and increased visibility
BA 320 Operations Management
Electronic Business
 Greater choices and more information for
customers
 Improved service
 Collection and analysis of customer data
and preferences
 Virtual companies with lower prices
 Leveling the playing field for smaller
companies
 Gain global access to markets & customers
BA 320 Operations Management
Table 7.1
Supply
Chain
Evolution
at Nabisco
BA 320 Operations Management
Electronic Data Interchange
 Computer-to-computer exchange of
business documents in a standard
format
 Quick access, better customer service,
less paperwork, better communication,
increased productivity, improved
tracing and expediting, improves billing
and cost efficiency
BA 320 Operations Management
Bar Codes
 Computer readable codes attached to
items flowing through the supply chain
 Generates point-of-sale data which is
useful for determining sales trends,
ordering, production scheduling, and
deliver plans
1234
5678
BA 320 Operations Management
The Internet
 Instant global access to organizations,
individuals, and information sources
 Fundamentally changes the way
organizations do business
 Removed geographic
barriers
 Adds speed and accessibility
to the supply chain
BA 320 Operations Management
Figure 7.2 Build-to-Order Cars
over the Internet
BA 320 Operations Management
The E-Automotive Supply Chain
BA 320 Operations Management
The E-Automotive Supply Chain
SUPPLY CHAIN PROCESS
AUTOMOTIVE PAST
E-AUTOMOTIVE
Customer sales
Push—sell from inventory
Pull—Build-to-order
Production
Goal of even and stable
production
Focus on customer demand,
respond with supply chain
flexibility
Distribution
Mass approach
Fast, reliable, and customized to
get cars to specific customer
location
Customer relationships
Dealer-owned
Shared by dealers and
manufacturers
Managing uncertainty
Large car inventory at dealers
Small inventories with shared
information and strategically
placed parts inventories
Procurement
Batch-oriented; dealers order
based on allocations
Orders made in real time based
on available-to-promise
information
Product design
Complex products don’t match
customer needs
Simplified products based on
better information about what
customers want
Table 7.2
BA 320 Operations Management
Intranets and Extranets
 Intranets are internet-like networks that
operate within a single organization
 Extranets are intranets that can be
connected to the global internet
 Difference is in who has access to the
system
BA 320 Operations Management
IT Issues
 Increased benefits and sophistication
come with increased costs
 Efficient web sites do not necessarily
mean the rest of the supply chain will
be as efficient
 Security problems are very real
 Partnership and trust are important
elements that may be new to business
relationships
BA 320 Operations Management
Suppliers
 Purchased materials account for about
half of manufacturing costs
 Materials, parts, and service must be
delivered on time, of high quality, and
low cost
 Suppliers should be integrated into
their customers’ supply chains
 Partnerships should be established
 On-demand delivery (JIT) is a frequent
requirement
BA 320 Operations Management
Sourcing
 Relationship between customers and
suppliers focuses on collaboration and
cooperation
 Outsourcing has become a long-term
strategic decision
 Organizations focus on core
competencies
 Single-sourcing is
increasingly a part
of supplier relations
BA 320 Operations Management
E-Procurement
 Business-to-business commerce
conducted on the Internet
 Benefits include lower transaction
costs, lower prices, reduce clerical labor
costs, and faster ordering and delivery
times
 Currently used more for indirect goods
 E-Marketplaces service industry-specific
companies and suppliers
BA 320 Operations Management
Figure 7.3 The Wal-Mart
Supply Chain
BA 320 Operations Management
Figure 7.4 Centralized Supply
at Honda America
BA 320 Operations Management
Distribution
 The actual movement of products
and materials between locations
 Handling of materials and products at
receiving docks, storing products,
packaging, and shipping
 Often called logistics
 Driving force today
is speed
 Particularly important
for Internet dot-coms
BA 320 Operations Management
Figure 7.5 Order Fulfillment
at Amazon.com
BA 320 Operations Management
Distribution Centers
and Warehousing
 DCs are some of the largest business
facilities in the United States
 Trend is for more frequent orders in
smaller quantities
 Flow-through facilities and automated
material handling
 Final assembly and product
configuration may be done at the DC
BA 320 Operations Management
Warehouse Management
Systems
 Highly automated systems
 Controls item putaway, picking,
packing, and shipping
 Transportation management,
order management, yard
management, labor management,
warehouse optimization
BA 320 Operations Management
Figure 7.6 A WMS
BA 320 Operations Management
Vendor-Managed Inventory
 Manufacturers generate orders, not
distributors
 Stocking information is accessed
using EDI
 A first step towards supply chain
collaboration
 Increased speed, reduced errors, and
improved service
BA 320 Operations Management
Collaborative Distribution
and Outsourcing
 Collaborative planning, forecasting, and
replenishment (CPFR)
 Internet-based exchange of data and
information
 Significant decrease in inventory levels
and more efficient logistics
 Companies focus on core competencies
BA 320 Operations Management
Transportation
 Important element, often
overlooked
 Common methods are railroads,
trucking, water, air, intermodal,
package carriers, and pipelines
BA 320 Operations Management
Railroads
 150,000 miles in US
 Low cost, high-volume
 Improving flexibility
 intermodal service
 double stacking
BA 320 Operations Management
Trucking
 Most used mode in US
 Flexible, small loads
 Consolidation,
Internet load match sites
 Part of TQM supplier-customer
relationship
 Single sourcing reduces number of
trucking firms serving a company
BA 320 Operations Management
Air
 Rapidly growing segment of
transportation industry
 Lightweight, small items
 Quick, reliable,
expensive
 Major airlines
and US Postal Service,
UPS, FedEx, DHL
BA 320 Operations Management
Package Carriers
 FedEx, UPS, US Postal Service, DHL
 Significant growth driven by
e-businesses
 Use several modes
of transportation
 Expensive
 Fast and reliable
 Innovative use of
technologies
BA 320 Operations Management
Intermodal
 Combination of several modes of
transportation
 Most common are truck/rail/truck
and truck/water/rail/truck
 Enabled by the
use of containers
BA 320 Operations Management
Water
 One of oldest means of transport
 Low-cost, high-volume, slow
 Bulky, heavy and/or large items
 Standardized shipping containers
improve service
 The most common
form of international
shipping
BA 320 Operations Management
Pipelines
 Primarily for oil & refined oil
products
 Slurry lines carry coal or kaolin
 High capital investment
 Low operating costs
 Can cross difficult terrain
BA 320 Operations Management
Internet Transportation
Exchanges
 Bring together shippers and carriers
 Initial contact, negotiations,
auctions
 Typically only one
form of transportation,
intermodal exchanges
have been difficult to develop
BA 320 Operations Management
The Transportation Method
 Ship items at lowest cost
 Sources have fixed supplies
 Destinations have fixed demand
BA 320 Operations Management
Transportation
Problem
BA 320 Operations Management
Transportation
Problem
GRAIN ELEVATOR
SUPPLY
MILL
DEMAND
1. Kansas City
2. Omaha
3. Des Moines
150
175
275
A. Chicago
B. St. Louis
C. Cincinnati
200
100
300
600 tons
600 tons
Example 7.1
BA 320 Operations Management
Transportation
Problem
GRAIN ELEVATOR
SUPPLY
MILL
DEMAND
1. Kansas City
2. Omaha
3. Des Moines
150
175
275
A. Chicago
B. St. Louis
C. Cincinnati
200
100
300
600 tons
600 tons
MILL
GRAIN
ELEVATOR
Chicago
A
St. Louis
B
Cincinnati
C
Kansas City
Omaha
Des Moines
$6
7
4
$8
11
5
$10
11
12
Example 7.1
BA 320 Operations Management
The Transportation
Tableau
BA 320 Operations Management
The Transportation
Tableau
TO
FROM
Kansas City
Omaha
Des Moines
DEMAND
Chicago
St. Louis
Cincinnati
SUPPLY
6
7
4
200
8
11
5
100
10
11
12
300
150
175
275
600
Example 7.1
BA 320 Operations Management
The Transportation
Tableau
TO
FROM
Kansas City
Omaha
Des Moines
DEMAND
Chicago
St. Louis
Cincinnati
SUPPLY
6
7
4
200
8
11
5
100
10
11
12
300
150
175
275
600
Supply (tons)
Demand (tons)
4
Des Moines (275)
Omaha (175)
Chicago (200)
7
11
12
5
6
Cincinnati (300)
10
St. Louis (100)
Kansas City (150)
8
Figure 7.7
BA 320 Operations Management
Solving Transportation
Problems
Manual methods
Stepping-stone
Modified distribution (MODI)
Computer solution
Excel
POM/QM for Windows
BA 320 Operations Management
Solution for Grain
Shipment
BA 320 Operations Management
Solution for Grain
Shipment
TO
FROM
GRAIN
Chicago St. Louis Cincinnati SUPPLY SHIPPED
Kansas City
Omaha
Des Moines
DEMAND
25
0
175
200
0
0
100
100
125
175
0
300
GRAIN
SHIPPED
200
100
300
COST
150
175
275
600
$4525
Based on Exhibit 7.3
BA 320 Operations Management
150
175
275
Figure 7.8 Linking the Supply Chain with SAP
BA 320 Operations Management
Global Supply Chain
 Free trade & global opportunities
 Nations form trading groups
 No tariffs or duties
 Freely transport
goods across borders
BA 320 Operations Management
Global Supply Chain
Problems
 National and regional differences
 Customs, business practices, and
regulations
 Foreign markets are
not homogeneous
 Quality can be a
major issue
BA 320 Operations Management
Duties and Tariffs
 Proliferation of trade agreements
 Group members charge uniform
tariffs
 Member nations have a
competitive advantage within the
group
BA 320 Operations Management
Duties and Tariffs
BA 320 Operations Management
Duties and Tariffs
APEC
NAFTA
TAFTA
FTAA
ASEAN
CALM
ATPA
MERCOSUR
ANZCERTA
Figure 7.9
BA 320 Operations Management
Landed Cost and InternetBased ITL Systems
 Knowing landed cost is critical in
international trade
 Common components are
transportation charges, tariffs,
duties, and taxes
 ITL systems convert language and
currency between trading partners
BA 320 Operations Management
Infrastructure Obstacles
to Global Trade
 Some emerging markets lack
suitable distribution systems, i.e.
roads, rail systems
 Existing roads and
ports may be inadequate
 Market instability,
political instability
 Vertical integration is a common
solution
BA 320 Operations Management