CHAPTER 5 Enterprise Integration and Supply Chain Management: A Strategic Perspective

Learning Objectives

After completing this chapter, you should be able to:Define supply chain management.Explain the consequences of not sharing information, and describe some of the information that can be shared in a supply chain.Define Digital Loyalty Networks and CPFR.Discuss various options in supply chain structure.Compare in sourcing, outsourcing, and vertical integration.Compare responsive supply chains to efficient supply chains.Describe some supply chain strategies.Discuss the impact of e-commerce on supply chain management.Explain how ERP facilitates e-commerce.Describe some supply chain performance measures and use the Strategic Profit Model.Discuss global issues in supply chain management.Explain the four principles of supply chain management

Introduction

Supply chain encompasses all activities associated with the flow and transfer of goods and services, from raw material extraction through use by the final consumer.

All of those different companies, as well as you as the consumer, are part of the supply chain.

The manufacturer purchased component parts from various tier 1 suppliers, such as companies that make plastic parts.

Those Tier 1 suppliers may have also purchased materials from tier 2 suppliers, such as companies that produce the chemicals for making plastic.

Introduction -- ContinuedThose tier 2 suppliers could have also purchased the raw materials to make those chemicals from tier 3 suppliers

The supply chain includes the companies that move these items, such as trucking companies, railroads, and shipping companies, as well as warehouses or distribution centers. They are called logistics.

Reserve Logistics is a activity that helps to return defective products to the manufacturer for repair or replacement

Overview of Supply Chain Management

Several factors have emerged that now require companies to use supply chain management as part of their competitive strategy.1-Globalization2-Increased competition3-Information technology4-Shorter product life cycles

Overview of Supply Chain Management -- Continued

Globalization has led to new markets, but at the same time it increases the competition.One way of winning market share is introducing new products, leading to shorter product life cycles.One way to be more competitive is through supply chain management.

Information Sharing in the Supply Chain

Traditionally, information has been shared only between adjacent supply chain pairs, and that information has been very limited.This limited approach to information sharing leads to bullwhip effect. To reduce the bullwhip effect, supply chains use a hub and spoke approach to sharing information.

Electronic Data Interchange

EDI connects the databases of different companies.Traditionally, EDI allowed companies utilizing material requirements planning (MRP) to inform suppliers of upcoming orders by providing them with access to the database of planned orders.EDI is a means of sharing information among all members of a supply chain.Shared databases can ensure that all supply chain members have access to the same information, providing visibility to everyone.

Forecast Accuracy

One problem with sharing information is that some of that information may not be accurate.By sharing forecast information, risk can be spread across the entire supply chain rather than being borne by the retailer.Information sharing can also lead to improved forecast accuracy.Simply realizing that forecasts will always be inaccurate can lead to improving supply chain management

Forecast Accuracy -- ContinuedWal-Mart is one company that has used EDI to improve forecast accuracy. Vendors can use Wal-Marts satellite network system to directly access real-time, point-of-sale (POS) data.This up-to-the-minute information can improve forecasts by spotting trends the moment they occur.

Digital Loyalty Networks

The term Digital Loyalty Networks describes links between a companys supply chain and its customer management operations.The idea is to customize the supply chain to meet the needs of a companys most important customers or market segments.By sharing information, the supply chain, the customer management operations, and the customer can all benefit through improved service and reduced costs.

Collaborative Planning Forecasting and Replenishment (CPFR)

Members of the supply chain may make assumptions about future actions of other supply chain members.CPFR seeks to minimize this guessing game through collaboration among supply chain partners.CPFR requires that all supply chain parties be committed to the plans developed jointly.Once a plan is developed, suppliers can begin production knowing that their customers in the supply chain have committed to those orders.

Supply Chain Structure

The upstream side of the supply chain also production planning and purchasing, which are part of the internal supply chain.Also it includes logistics, which is responsible for moving materials between supply chain members.The downstream side, supply chain partners are divided into echelons.Echelon 1 includes organizations, such as distributors, importers, or exporters, that receive the product directly from the organization.Echelon 2 might include retailers, dealers, or even final consumers.

Supply Chain StructureMany Suppliers versus Few Suppliers: By using many suppliers, a company can often take advantage of competition among those suppliers to meet the companys demands for cost, quality and delivery.If one supplier goes out of business or is unable to provide the good or service , it is a simple matter to use another supplier.Having one supplier ensure the long-term partnership arrangements.It helps them to get greater integration of the supply chain.

Supply Chain StructureInsourcing versus Outsourcing:If those goods and services are provided by the organization itself, they are insourced.Goods and services obtained from outside suppliers are outsourced.One basic reason companies decide to outsource is that the goods or services can be obtained less expensively from outside suppliers.

Supply Chain StructureVertical Integration:If a company owns its suppliers, it is called backward vertical integration.If companies own the distribution systems and retail outlets that sell their products, then that is forward vertical integration.Both integration help the companies to get a close coordination with suppliers.

Vertical Supply Chain Structure

Advantages: Disadvantages:

Better coordinationHigher overheadLower costMismatch of business typesGreater control over supplyLack of flexibilityUtilize excess capacityCapacity mismatch

Virtual OrganizationsOutsourcing is gaining in popularity because of cost advantages and the opportunities for greater coordination.This system has even led to virtual corporations, that exist only as an administrative shell, with all other functions outsourced.One virtual corporation is Mr. Coffee Concepts, which provides in-room coffeemakers for hotel chains, such as Marriott .

Disintermediation

An intermediary is a business entity that exists between two other parts of the supply chain. Disintermediation is a process to achieve efficiencies in the supply chain by eliminating some intermediaries.Travelocity is one company that has succeeded by utilizing the Internet to provide travelers with easily accessible information from airlines, hotels, and car rental companies.

Types of Supply Chains

Responsive Supply Chains: respond quickly as new products are introduced and as demand changes.

Efficient Supply Chains: focus on operating efficiently to minimize costs.

Types of Supply Chains -- Continued

Exhibit 5.5: Responsive vs. Efficient Supply Chains

Responsive Supply chain for innovative productEfficient Supply chains for functional productsClosely integrated in production planning and control, quality management, service, after-sales support.Track work-in-process and finished goods inventory.Share more information.Use system wide measures of end-use-customer satisfaction.Suppliers are evaluated based on product development time, geographic proximity, lead time, and cycle time. Use traditional criteria for evaluating suppliers.Place high value on integrity, commitment, reliability, and consistency.Value suppliers for ability to provide cost savings, reduce downtime, and reduce inventory.

Supply Chain Strategies

Quick Response ProgramsVendor Managed Inventory (VMI)Efficient Consumer ResponsePostponementRevenue SharingCross Docking

Exhibit 5.6: Revenue Sharing Example

E-CommerceThe Internet is now an important part of the supply chain management and communication strategy for many companies.That particular aspect of the Internet, transactions between businesses and consumers, is referred to as B2C (business to consumer) B2C transactions over the Internet are dwarfed by the much larger volume of B2B (business to business) transactions.

B2C

It is now possible to buy nearly anything over the Internet.Customers can be given a much wider choice than would be possible in a traditional retail establishment.The customer takes care of the order entry process by entering his or her own credit card number, address, measurements, and so forth.

B2BB2B (business-to-business) transactions account for more than 80 percent of all transactions on the Internet.Different types of B2B: 1-Exchanges2-MRO Hubs3-Yield Managers

Enterprise Resource Planning (ERP)The idea behind ERP is to allow access to one anothers databases or, ideally, the use of one common database.The advantage of that approach is that anyone anywhere within the organization has access to all information .Microsoft expected to save $18 million annually by using ERP to replace 33 different financial tracking systems.

Performance Measurement

Strategic Profit Model

Global Issues in Supply Chain Management

Operating in todays global economy, companies have increased opportunities and challenges for managing their supply chains. Decisions about supply chains must focus on the type of product and a companys competitive strategy.Maintaining control over the supply chain can also be an important global issue.

Principles of Supply Chain ManagementBuild a competitive infrastructure Leverage the worldwide logistics network Synchronize supply to demandMeasure performance globally