Operations Management(MD021)

Supply Chain Management

Agenda

Basics of SCM Drivers of SCM Elements of SCM E-Commerce Impact on SCM Performance Measurement Collaboration in SCM Purchasing How to Choose and Evaluate Suppliers

Basic Concepts of Supply Chain Management

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 Sometimes referred to as value chainsvalue chains

The Value Chain internal to a company

Purchasing Receiving Storage Operations Storage

Production Distribution

Typical Supply Chain activities for a Manufacturer

Supplier

Supplier

Supplier

Storage} Mfg. Storage Dist. Retailer Customer

supplychain

demandchain

internalvaluechain

supply chain management (SCM) concerns supplier activities, internal value chain activities, and demand chain activities

Supplier

Supplier

} Storage Service Customer

Typical Supply Chain for a Service

Goal of SCM

Goal of SCM To link all components of the supply chain so

that market demand will be met as efficiently as possible across the entire chain

Match supply to demand at each stage of the supply chain

Supply network encompasses a number of facilities

Warehouses Factories Processing centers Distribution centers Retail outlets Offices

Supply network performs various functions and activities

Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service

Supply Chain Management Issues

Quality controlProduction planning and control

Inventory policiesPurchasing policiesProduction policiesTransportation policiesQuality policies

Design of the supply chain, partnering

Operating IssuesTactical IssuesStrategic Issues

Drivers of Supply Chain Management

History of SCM

Why attempt to manage supply chains? In the not too distant past (i.e. pre-1990s),

many companies didn’t manage their supply chains

Some advanced companies realized that huge inefficiency resulted from no/poor SCM In particular, identified the “Bullwhip Effect”

Bullwhip Effect

Tier 2Suppliers

Tier 1Suppliers

Producer Distributor Retailer FinalFinalCustomerCustomer

Amount ofAmount ofinventoryinventory=

“I’ll buy 2”“I’ll order 2more.”

“Hmm. Lastperiod theyordered 1. Maybe demandis up. I had better order 8.”

“Wow! 8!I better build 30!”

“@%*$!We arereallybehind.Build 100!”

“The skyis falling!Build 250!”

Bullwhip Effect

Tier 2Suppliers

Tier 1Suppliers

Producer Distributor Retailer FinalFinalCustomerCustomer

Amount ofAmount ofinventoryinventory=

“I’ll buy 0”“I’ll order 0more. I have 2in stock.”

“0?. But I’vegot 6 left.Don’t buy any more.”

“0? But I’vegot 22 in stock! Stopthe line.”

“0? @%*$!What arewe gonnado with the70 we have?”

“0? Butwe’ve got150 in stock!”

Result of the Bullwhip Effect

Inventory

Backorder At each stage of the supply chain, a pattern like the abovedevelops, of huge inventory buildups (and costs), followedby periods of huge stockouts and backordering (and mad customers + backordering costs)

Time

Benefits of Supply Chain Management

Counteract the Bullwhip Effect Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty

Today, many other problems can also drive Supply Chain Management

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

Supply Chain Benefits and Drawbacks

OperationalProblem

PotentialImprovement

Benefits PossibleDrawbacks

Large inventories

Smaller, more frequent deliveries

Reduced holding costs

Traffic congestionIncreased costs

Long lead times

Delayed differentiationDisintermediation

Quick response May not be feasibleMay need absorb functions

Large number of parts

Modular Fewer partsSimpler ordering

Less variety

CostQuality

Outsourcing Reduced cost, higher quality

Loss of control

Variability Shorter lead times, better forecasts

Able to match supply and demand

Less variety

Examples of SCM Benefits at Various Companies

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

As a result of competitors working on SCM, SCM has become strategic

Strategic importance Cost Quality Agility Customer service Competitive advantage

But, SCM projects can be very risky to undertake

Technology management drives SCM Adoption/Success/Failure Benefits

SCM packages, when adopted well, can transform an organization’s operations

Risks Poorly planned for/implemented SCM packages

can wreck a company’s operations Very expensive to install these pages – many

millions of dollars

Elements of SCM

SCM involves coordinating activities across supply chain

Deciding how to best move and store materialsLogistics

Determining location of facilitiesLocation

Monitoring supplier quality, delivery, and relationsSuppliers

Evaluating suppliers and supporting operationsPurchasing

Meeting demand while managing inventory costsInventory

Controlling quality, scheduling workProcessing

Incorporating customer wants, mfg., and timeDesign

Predicting quantity and timing of demandForecasting

Determining what customers wantCustomers

Typical IssuesElement

Logistics

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 Raw materials Work in process Finished goods Support items – fuel, equipment, parts, tools, etc.

Logistics

• Movement within the facility

• Traffic planning for incoming and outgoing shipments

• Bar coding

• EDI

• Distribution

• JIT Deliveries

0

214800 232087768

Materials MovementR

EC

EIV

ING

Storage

Workcenter

Work centerWork center

Storage

Workcenter

Storage

Shipping

Distribution Requirements Planning (DRP)

Distribution requirements planning (DRP) is a system for inventory management and distribution planning

Extends the concepts of MRPII to multiechelon warehouse inventories

Uses of DRP

Management uses DRP to plan and coordinate: Transportation Warehousing Workers Equipment Financial flows

Electronic Data Interchange (EDI)

EDI The direct transmission of inter-organizational

transactions, computer-to-computer, including purchase orders, shipping notices, and debit or credit memos.

Electronic Data Interchange

Increased productivity Reduction of paperwork Lead time and inventory reduction Facilitation of just-in-time systems Electronic transfer of funds Improved control of operations Reduction in clerical labor Increased accuracy

Third Party Logistics (3PL)

3PL The outsourcing of logistics management Companies turn over their warehouse and

distribution to companies that specialize in these areas

E-Commerce Impact on SCM

E-Commerce

E-Commerce: The use of electronic technology (e.g., WWW, Web

Services, mobile devices) to facilitate business transactions

Applications include Internet buying and selling E-mail Order and shipment tracking Electronic data interchange

SCM Benefits of E-Commerce

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

SCM Challenges of E-Commerce

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

How to Measure SCM Performance?

Successful SCM has certain characteristics

Trust among trading partners Effective communications Supply chain visibility

Access to real-time data on inventory levels, shipping status, related information

Requires data sharing between trading partners

Event-management capability The ability to detect and respond to unplanned events

Performance metrics Measure the system to make sure you are doing well

Overall Objectives for Supply Chain Performance

Cost Quality Flexibility Velocity Customer service

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

Trade-offs Between Performance Measures

Lot-size vs. inventory Ordering economies vs. inventory held Risks the Bullwhip effect

Inventory vs. transportation costs Shippers prefer to ship full truckloads, which increases inventory

carrying costs Solutions: combine orders, smaller trucks, cross-docking

Lead time vs. transportation costs Waiting for a full truck increases production lead times

Product variety vs. inventory Higher variety leads to smaller lot sizes, more setups, other costs Solution: Delayed differentiation

Cost vs. customer service Large volumes reduce cost, but can hurt customer service Solution: Disintermediation

Cross-Docking

Cross-docking Goods arriving at a warehouse from a supplier are

unloaded from the supplier’s truck and loaded onto outbound trucks

Delayed Differentiation

Delayed differentiation Production of standard components and

subassemblies, which are held until late in the process to add differentiating features

Disintermediation

Disintermediation Reducing one or more steps in a supply chain

by cutting out one or more intermediaries

SCM Performance Measures

SCOR (Supply Chain Operations Reference) Model

Plan, Source, Make Deliver, Return SCOR addresses …

Product from supplier’s to customer’s

SCOR does not address … Sales, Marketing, R&D, Support

SCOR Metrics provide a standard way to measure SCM

Perspective Metrics

Reliability On-time deliveryOrder fulfillment lead timeFill rate (fraction of demand met from stock)Perfect order fulfillment

Flexibility Supply chain response timeUpside production flexibility

Expenses Supply chain management costsWarranty cost as a percent of revenueValue added per employee

Assets/utilization Total inventory days of supplyCash-to-cash cycle timeNet asset turns

SCOR’s SCM Performance Metrics

Reliability – delivery performance, fill rate, perfect fulfillment

Responsiveness – order fill lead time Flexibility – SC response time, ops flexibility Cost – warranty cost, productivity, CGS, SCM

cost Assets – turns, inventory days, cash cycle

Collaborative Approaches to SCM

Creating an Effective Supply Chain Involves Partnerships

Develop strategic objectives and tactics Integrate and coordinate activities in the

internal supply chain Coordinate activities with suppliers with

customers Coordinate planning and execution across

the supply chain Form strategic partnerships

Collaboration Assumes Your Supplier can be a Partner

Aspect Adversary PartnerNumber 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

Partnerships with suppliers can improve your own operations

Ideas from suppliers could lead to improved competitiveness Reduce cost of making the purchase Reduce transportation costs Reduce production costs Improve product quality Improve product design Reduce time to market Improve customer satisfaction Reduce inventory costs Introduce new products or services

Efficient Consumer Response

Efficient Consumer Response (ECR) A supply chain management initiative specific

to the food industry

Reflects companies’ efforts to achieve quick response using EDI and bar codes

CPFR

Collaborative Planning, Forecasting, and Replenishment (CPFR) Focuses on information sharing among

trading partners Forecasts can be frozen and then converted

into a shipping plan Eliminates typical order processing

CPFR Process

Step 1 – Front-end agreement on structure of CPFR collaboration

Step 2 – Develop joint business plan for collaborators

Steps 3-5 – Sales forecast collaboration Steps 6-8 – Order forecast collaboration Step 9 – Order generation/delivery

execution

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

Challenges to Collaboration

Barriers to integration of organizations Getting top management on board Dealing with trade-offs Small businesses – no money to invest, no time,

no slack resources, insufficient technology Actions that create more variability and

uncertainty Long lead times hinder the ability of a supply

chain to respond to changing customer demands

Purchasing

Purchasing

Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service.

Goal of Purchasing Develop and implement purchasing plans for products

and services that support operations strategies Quality of materials purchased is sufficient for operations Timing of deliveries supports operations

Fun Facts About Purchasing

Institute for Supply Management > 60% cost of finished

manufactured goods is purchased

>90% cost of retail & wholesale goods is purchased

Duties of Purchasing

Identifying sources of supply Negotiating contracts Maintaining a database of suppliers Obtaining goods and services Managing supplies

Purchasing interfaces with other functions and with external suppliers

Purchasing

Legal

AccountingOperations

Dataprocessing

Design &Engineering

ReceivingSuppliers

Usesmaterials

Negotiates contracts

Pays formaterials

Specifies quality ofmaterials

Inspects incoming shipments

Purchasing follows a cycle of activities

1. Requisition received

2. Supplier selected

3. Order is placed with supplier

4. Monitor orders

5. Receive orders

PurchasingPurchasing

LegalLegal

AccountingAccountingOperationsOperations

DataDataprocess-process-inging

DesignDesign

ReceivingReceiving

SuppliersSuppliers

Centralized vs. Decentralized Purchasing

Centralized purchasing Purchasing is handled by one special

department

Decentralized purchasing Individual departments or separate locations

handle their own purchasing requirements

How to Choose and Evaluate Suppliers?

Management of Supplier Network Involves Several Activities

Choosing suppliers Evaluating sources of supply Supplier audits Supplier certification Supplier relationships Supplier partnerships

Factors in Choosing a Supplier

Quality and quality assurance Flexibility Location Price Product or service changes Reputation and financial stability Lead times and on-time delivery Other accounts

Evaluating Sources of Supply

Vendor Analysis - evaluating the sources of supply in terms of … Price Quality Services Location Inventory policy Flexibility