STRM046: Managing Operations and the Supply Chain

Supply Chain Management

MBA - MASTER OF BUSINESS ADMINISTRATION

Dr Luciano Batista BSc MSc PhD MILT Senior Lecturer in Operations Management Member of CELAS Centre for Excellence in Logistics and Supply Chain Member of the Chartered Institute of Logistics and Transport UK Editorial Member of the International Journal of Supply Chain and Operations Resilience

Key topics

General SCM aspects

Core SCM activities

Warehouse operations

Inventory management

Global sourcing

The value chain model

SCM related activities

General SCM aspects

Creating value to customers

How can companies add value to their products?

Input resources Outputs

Feedback

Ex

tern

al su

pp

lie

rs

Cu

sto

mers

Process 1

Process 2

Process 3

Process n

Can SCM add value? How?

General SCM aspects

General SCM aspects

PR

OC

UR

EM

EN

T

IN

BO

UN

D

LO

GIS

TIC

S

OU

TB

OU

ND

LO

GIS

TIC

S

Buy- and Sell- side

SCM integrates supply and demand management within and across companies.

General SCM aspects

Customer Retailer Distributor Producer 2nd tier supplier 1st tier

supplier

Information flow

Materials flow

Upstream supply chain Downstream supply chain

The supply chain

A supply network

General SCM aspects

Logistics is part of SCM, which has a wider scope in terms of management.

SCM encompasses the planning and management of all activities involved in sourcing and logistics, including coordination and collaboration with partners, which can be suppliers, intermediaries, third party service providers, and customers. Source: CSCMP, http://cscmp.org/default.asp

Definition of SCM:

General SCM aspects

Conceptual views of Logistics and SCM

Supply chain management activities often encompass work in the categories of procurement, materials management, and physical

distribution and logistics.

1. Procurement

Selection and certification of suppliers.

Acquisition of inputs (transformed and

transforming), information and services.

Ensures that inputs are of the right quality, are

available when needed and have an appropriate

cost.

Inspection of incoming goods or services.

Purchasing responsibilities are generally

considered to end once the purchased inputs

have been delivered.

Core SCM activities

Core SCM activities

Key procurement processes

2. Materials management

Responsible for the activities that take place between the delivery

of materials by suppliers and their use in the transformation

process.

Manages the receipt of incoming materials, their storage and

handling, and their provision to the transformation process.

Responsible for testing, packaging and storing finished products

before they are shipped out of the production facility.

Core SCM activities

3. Physical distribution and logistics

It is concerned with transporting the physical

outputs, managing the movement of goods and

services to customers and clients.

Logistics is an extension of physical distribution

management. It includes all of the processes

involved in the physical distribution, both into

(inbound logistics) and from (outbound logistics) the

organisation, as well as associated services such as

credit and insurance.

Many organisations manage their own logistics.

However, many others outsource their logistics

activities to specialist providers (third-party logistics

- 3PL firms).

Core SCM activities

Warehouse operations

In business operations, materials need to be stored until they are needed. Warehousing is the storage of items in a relatively large scale.

Source: Commons wikimedia

Warehouse operations

Key warehouse activities

Source: Omar Youssef

Warehouse operations

Warehouse objectives

Effective use of space

Optimize use of equipment and labour

Optimize flow and access to materials

Effective use of information

Maximize protection of goods and premises

Minimize goods handling

Minimize operating costs

In essence inventory exists to compensate for the differences in timing between supply and demand

Inventory, or stock, is the stored accumulation of material resources that are necessary in a transformation system.

Why is it necessary?

Inventory management

Inventory systems

e.g. Local retail shop

Single-stage inventory system

Suppliers

Stock Sales

Inventory management

e.g. Automotive parts distributor

Suppliers

Central depot

Distribution Local distribution

point

Sales

Two-stage inventory system

Inventory systems

Inventory management

e.g. Television manufacturer

Suppliers

Input stock

Stage 1 WIP Stage 2 WIP Stage 3 Finished goods stock

Multi-stage inventory system

Inventory systems

Inventory management

Inventory systems

Multi-echelon inventory system

Yarn producers

Cloth manufacturers

Garment manufacturers

Regional warehouses

Retail stores

Disadvantages of holding inventory

It incurs storage costs (leasing space, maintenance, etc.)

It involves administrative and insurance costs

It may become obsolete

It can be damaged, or deteriorate

It uses space that could be used by adding-value processes

Is there any case where holding inventory adds value to the product over time?

Inventory management

Inventory analysis and control

100

90

80

70

60

50

40

30

20

10

100 90 80 70 60 50 40 30 20 10

Class C items Class B items Class A items

The ABC system based on the Pareto law (80/20 rule)

Percentage of types of items

Perc

enta

ge o

f va

lue

of

item

s

Pareto curve for stocked items

80% of sales are accounted for by only 20% of all stocked item types

Inventory management

Class A items the 20% or so of high-value items which account for around 80% of the total stock value.

Class B items the next 30% or so of medium-value items which account for around 10% of the total stock value.

Class C items the remaining 50% or so of low-value items which account for around the last 10% of the total stock value.

The ABC system based on the Pareto law (80/20 rule)

Inventory analysis and control

Inventory management

Attempt to identify the important few causes from the many causes.

The long-tail in inventories

Increased variety! Amazon.com: 40% of sales from long-tail items Higher profitability from long-tail items

Inventory management

Replenishment decisions

The replenishment challenge is to match supply and demand rates in order to keep inventory at a minimum level. This process requires two important decisions:

1. Inventory volume decisions decisions about how much to order.

2. Inventory timing decisions decisions about when to order.

These decisions are influenced by the costs, demand, and supply lead time.

Cost issues: placing orders, discount costs, storage costs, obsolescence

costs, etc.

Demand: average sales over a period of time.

Supply lead time: period of time between order placement and

delivery

Inventory management

The re-order level and re-order point

400

300

200

100

Inve

nto

ry le

vel

0 0 1 2 3 4 5 6 7 8

Re-order level

Re-order point

Time (in weeks)

Inventory = 400 items

Demand = 100 items per week

Lead time = 2 weeks

Order lead time

What would be the re-order level? i.e. minimum inventory level to sustain sales?

What would be the re-order point? i.e. point in time to place a replenishment order

Example:

Inventory management

Inve

nto

ry le

vel

S

Q

Time Lt1 Lt2

Re-order level (ROL)

Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are

uncertain.

Safety stock level

Inventory management

Safety stock

Factors promoting global sourcing:

Formation of free trade agreement

blocs

More sophisticated international

logistics systems

More efficient border-crossing

operations

Cost reduction

Global sourcing

Outsourcing and offshoring

Outsourcing Country A

Company A

Country B

Company B Company C

What is the difference between outsourcing and offshoring?

In outsourcing, the ownership of the operations transferred to a provider company is also handed over to the provider.

Skills availability in different regions

Legislation for part-time and temporary work

Storage conditions and climatic sensitivity

Transport costs and infrastructure

Supplier conformance to employment standards

Cultural view of acceptable quality

Global outsourcing

Some important issues:

Global sourcing

Offshoring Country A Country B

Company A Company A

Lower location costs

Less stringent regulatory controls

Lower communication and IT costs

Improved capabilities of offshoring regions

Ability to cluster specific capabilities in certain

regions.

In offshoring, the ownership of the operations transferred abroad remains with the company transferring them .

Some reasons to offshore:

Global sourcing

Outsourcing and offshoring

Increased complexity of dealing with suppliers from different countries

Risks of delays and hidden-costs related to border-crossing operations

Complex regulatory and documentation requirements

High transport and freight fees

Low performance of the services provided by third parties.

What are the risks associated with global sourcing?

Some potential problems associated with global sourcing:

Global sourcing

Risks

Thank you

MBA - MASTER OF BUSINESS ADMINISTRATION

Dr Luciano Batista BSc MSc PhD MILT Senior Lecturer in Operations Management