7. Supply Chain Management (SCM)

Supply Chain Management Integration of the activities that procure

materials and services, transform them into intermediate goods and the final product, and deliver them to customers

Competition is no longer between companies; it is between supply chains

A Sample Supply Chain

Supply Chain Strategies Negotiating with many suppliers Long term partnering with few suppliers Vertical integration Keiretsu (affiliated chain)

Many Suppliers Commonly used for commodity products

– many sources per item Adversarial short term relationship Infrequent large lots Purchasing is typically based on price -

suppliers are pitted against one another

Few Suppliers Longer term stable relationships Partnership - JIT programs, design and

technological contribution High quality and possibly low price Frequent small lots Cost of changing suppliers is huge

Vertical Integration Ability to produce goods or service

previously purchased – make or buy decisions

Integration may be forward, towards the customer, or backward, towards suppliers

Can improve cost, quality, and inventory but requires major financial commitment

Hard to do all things well

Vertical Integration

Raw material (suppliers) Iron ore Silicon Farming

Backward integrationSteel

Current transformation Automobiles Integrated circuits Flour milling

Forward integrationDistribution

systemsCircuit boards

Finished goods (customers) Dealers

Computers Watches

CalculatorsBaked goods

Vertical Integration Examples of Vertical Integration

Keiretsu Networks (affiliated chain)

A middle ground between few suppliers and vertical integration

Supplier becomes part of the company coalition

Often provide financial support for suppliers through ownership or loans

Members expect long-term relationships and provide technical expertise and stable deliveries

May extend through several levels of the supply chain

Make or Buy Decisions

1. Lower production cost2. Obtain desired quality3. Assure adequate supply (quantity or

delivery)4. Utilize surplus labor or facilities5. Protect proprietary design or quality6. Increase or maintain size of company

Reasons for Making

Make – or – Buy Decisions

1. Frees management to deal with its primary business

2. Inadequate capacity3. Reduce inventory costs4. Ensure alternative sources5. Inadequate managerial or technical

resources6. Item is protected by a patent or trade

secret

Reasons for Buying

Issues in SCM Local optimization - focusing on local profit

or cost minimization based on limited knowledge

Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale

Large lots - low unit cost but do not reflect sales

Bullwhip effect - stable demand becomes lumpy orders through the supply chain

Opportunities in SCM Accurate “pull” data Lot size reduction Single stage control of replenishment Vendor managed inventory Standardization Electronic ordering and funds transfer

Example

Vendor Evaluation

CriteriaWeight

sScores (1-5)

Weight x Score

Engineering/research .20 5 1.0

Production/process capability .15 4 .6

Distribution/delivery capability .05 4 .2

Quality systems and performance .10 2 .2

Facilities/location .05 2 .1

Financial and managerial strength (stability and cost structure)

.15 4 .6

Information systems (ERP) .10 2 .2

Integrity (compliance/ethics) .20 5 1.0

Total 1.00 3.9

Supply Chain Performance Inventory Investment

=Total Inventory / Total Assets * 100 Example:

Inventory: $11.4 billion, Assets: $44.4 billion

Inventory investment = 11.4/44/4*100 = 25.7%

Manufacturing 20% (Toyota 5%)

Wholesale 34% (Coca-Cola 2.9%)

Restaurants 2.9% (McDonald’s .05%)

Retail 27% (Home Depot 25.7%)

Supply Chain Performance Inventory Turnover

=Cost of Goods Sold / Total Inventory Example:

Inventory Turnover = 14.2 / 1.69 = 8.4

Net revenue $32.5Cost of goods sold $14.2Inventory:

Raw material inventory $.74Work-in-process inventory $.11Finished goods inventory $.84

Total inventory investment $1.69

Supply Chain Performance

Examples of Annual Inventory Turnover

Food, Beverage, Retail Manufacturing

Anheuser Busch 15 Dell Computer 90

Coca-Cola 14 Johnson Controls 22

Home Depot 5 Toyota (overall) 13

McDonald’s 112 Nissan (assembly) 150

Network Design in a Supply Chain Facility location Capacity allocation Market and supply allocation

Cost vs. Number

Percent Service Level Within

Promised Time

TransportationCos

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Op

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s

Number of Facilities

Inventory

Facilities

Total Costs

Labor

Conventional Network

CustomerCustomerStoreStore

MaterialsMaterialsDCDC

ComponentComponentManufacturinManufacturin

gg

VendorVendorDCDC

Final Final AssemblyAssembly

FinishedFinishedGoods DCGoods DC

ComponentsComponentsDCDC

VendorVendorDCDC PlantPlant

WarehouseWarehouse

FinishedFinishedGoods DCGoods DC

CustomerCustomerDCDC

CustomerCustomerDCDC

CustomerCustomerDCDC

CustomerCustomerStoreStore

CustomerCustomerStoreStore

CustomerCustomerStoreStore

CustomerCustomerStoreStore

VendorVendorDCDC

Tailored Network

RegionalRegionalFinishedFinished

Goods DCGoods DC

RegionalRegionalFinishedFinished

Goods DCGoods DC

Customer 1Customer 1DCDC

Store 1Store 1

NationalNationalFinishedFinished

Goods DCGoods DC

Local DCLocal DCCross-DockCross-Dock

Local DC Local DC Cross-DockCross-Dock

Local DCLocal DCCross-DockCross-Dock

Customer 2Customer 2DCDC

Store 1Store 1

Store 2Store 2

Store 2Store 2

Store 3Store 3

Store 3Store 3

Network/Location Decisions Long-term decisions Decisions made infrequently Decision greatly affects both fixed and

variable costs Once committed to a location, many

resource and cost issues are difficult to change

Critical Factors to Consider Proximity to raw materials and customers Labor, availability, costs Land/construction costs Government incentives and fiscal policies Corporate desires Environmental regulations

Methods of Evaluating Locations Factor Rating Method Locational Break-Even Analysis Center of Gravity Method Transportation Method

Factor Rating method Most widely used location technique

1. Develop a list of relevant factors 2. Assign a weight to each factor3. Score each location for each factor4. Multiply score by weights for each factor

for each location

Example

CriticalCritical ScoresScoresSuccessSuccess (out of 100)(out of 100) Weighted ScoresWeighted ScoresFactorFactor WeightWeight FranceFrance DenmarkDenmark FranceFrance DenmarkDenmark

Labor availability and attitude .25 70 60 (.25)(70) = 17.5

(.25)(60) = 15.0People-to car ratio .05 50 60 (.05)(50) = 2.5

(.05)(60) = 3.0Per capita income .10 85 80 (.10)(85) = 8.5

(.10)(80) = 8.0Tax structure .39 75 70 (.39)(75) = 29.3

(.39)(70) = 27.3Education and health .21 60 70 (.21)(60) = 12.6

(.21)(70) = 14.7

Totals 1.00 70.468.0

Locational Break Even Analysis Method of cost-volume analysis used for

industrial locations

1. Determine fixed and variable costs for each location

2. Plot the cost for each location 3. Select location with lowest total cost for

expected production volume

Example

AkronAkron $30,000$30,000 $75$75 $180,000$180,000

Bowling GreenBowling Green $60,000$60,000 $45$45 $150,000$150,000

ChicagoChicago $110,000$110,000 $25$25 $160,000$160,000

Selling price Selling price = $120= $120

Expected volumeExpected volume = 2,000 = 2,000 unitsunits

FixedFixed VariableVariable TotalTotalCityCity CostCost CostCost CostCost

Example

–$180,000 $180,000 –

–$160,000 $160,000 –$150,000 $150,000 –

–$130,000 $130,000 –

–$110,000 $110,000 –

––

$80,000 $80,000 ––

$60,000 $60,000 –––

$30,000 $30,000 ––

$10,000 $10,000 ––

An

nu

al c

ost

An

nu

al c

ost

| | | | | | |

00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000

VolumeVolume

Akron Akron lowest lowest costcost

Bowling Green Bowling Green lowest costlowest cost

Chicago Chicago lowest lowest costcost

Chicago cost curve

Chicago cost curve

Akron c

ost

Akron c

ost

curv

e

curv

e

Bowling Green

Bowling Green

cost curve

cost curve

Center of Gravity Method Find location of distribution center that

minimizes distribution costs Consider location of markets, volume of goods

shipped to those markets, and shipping cost (or distance)

1. Place existing locations on a coordinate grid2. Calculate X and Y coordinates for ‘center of

gravity’

Center of Gravity Method

x - coordinate = ∑dixQi / ∑Qi

Computation of center

y - coordinate = ∑diyQi / ∑Qi

Evaluation of potential locations

)()( 22 yyxxQ iiiMin

ExampleNorth-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin

Chicago Chicago (30, 120)(30, 120)New York New York (130, 130)(130, 130)

Pittsburgh Pittsburgh (90, 110)(90, 110)

Atlanta Atlanta (60, 40)(60, 40)

ExampleNumber of ContainersNumber of Containers

Store LocationStore Location Shipped per MonthShipped per Month

Chicago Chicago (30, 120)(30, 120) 2,0002,000Pittsburgh Pittsburgh (90, 110)(90, 110) 1,0001,000New York New York (130, 130)(130, 130) 1,0001,000Atlanta Atlanta (60, 40)(60, 40) 2,0002,000

x-coordinate =x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= = 66.766.7

y-coordinate =y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= = 93.393.3

ExampleNorth-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin

Chicago Chicago (30, 120)(30, 120)New York New York (130, 130)(130, 130)

Pittsburgh Pittsburgh (90, 110)(90, 110)

Atlanta Atlanta (60, 40)(60, 40)

Center of gravity Center of gravity (66.7, 93.3)(66.7, 93.3)+

Transportation Model Find amount to be shipped from several

points of supply to several points of demand

Solution will minimize total production and shipping costs

Transportation Model

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Location StrategyService/Retail/Professional Location Goods-Producing Location

Revenue Focus Cost Focus

Volume/revenueDrawing area; purchasing powerCompetition; advertising/pricing

Physical qualityParking/access; security/lighting; appearance/image

Cost determinantsRentManagement caliberOperations policies (hours, wage rates)

Tangible costsTransportation cost of raw materialShipment cost of finished goodsEnergy and utility cost; labor; raw material; taxes, and so on

Intangible and future costsAttitude toward unionQuality of lifeEducation expenditures by stateQuality of state and local government

Location StrategyService/Retail/Professional Location Goods-Producing Location

Techniques Techniques

Regression models to determine importance of various factors

Factor-rating methodTraffic countsDemographic analysis of drawing areaPurchasing power analysis of areaCenter-of-gravity methodGeographic information systems

Transportation methodsFactor-rating methodLocational break-even analysisCrossover charts

Location Strategy

Service/Retail/Professional Location Goods-Producing Location

Assumptions Assumptions

Location is a major determinant of revenue

High customer-contact issues are critical

Costs are relatively constant for a given area; therefore, the revenue function is critical

Location is a major determinant of cost

Most major costs can be identified explicitly for each site

Low customer contact allows focus on the identifiable costs

Intangible costs can be evaluated

Video Case Study

Beer Game Was the game realistic? Did you blame your customers or vendors? Who is responsible for the performance? Why not ship them directly from the factory

to the retailer? What was the real demand? Why are there big fluctuations? Can we use some inventory policies?