04/12/23 1

BA 339, OM – Chapter 11Supply Chain Management (SCM)

Definition & strategic importanceOrganization structure & SCMFunctional aspects of the supply chain –

• Purchasing – make/buy, orientation toward suppliers, centralized vs. local,

• Inventory – management/measurement, placement• Distribution/logistics – inbound/outbound

Supply chain strategies – many/few, vertical integration, E-procurementSupplier evaluation/selectionSupplier risk assessment/managementGlobal supply chain issues

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BA 339, OM – Chapter 11SCM Defined

“Integration of the activities that procure materials, transform them into intermediate goods and final products, and deliver them to customers” “Managing the flow of materials and services within a firm”Includes: Purchasing, supplier management, warehousing, inventory (raw materials, WIP, finished goods), logistics & distribution, accounts payable/receivable, and forecastingInvolves coordination of these functions with marketing/sales, engineering, finance, IT, and operations

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BA 339, OM – Chapter 11Strategic Importance of SCM

Material costs in the supply chain• 58% in mfg.; 83% in wholesale; 71% in retail

Purchasing cost are significant portion of sales and finished goods

• All industries – 52%• Automobile – 67%• Petroleum – 79%• Food – 60%• Transportation – 62%

Purchasing savings have substantial impact upon profitability (relative to increasing sales) > see Table 11.3 on page 436 in textProvides competitive advantage via cost, quality, responsiveness & differentiation > see Table 11.1 on page 435 in test

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BA 339, OM – Chapter 11Organization Structure & SCM

Evolution away from functional “stove pipes” to more integrated approaches (generally purchasing, production control, inventory, and distribution/logistics)Materials management – often includes purchasing (mat’l & services), inventory, production levels, schedules, distribution, and staffing patterns

• Also referred to as Logistics Management in more service oriented firms

• Segmented structure – traditional, department organizations such as purchasing, production control and distribution reporting to separate managers

• Integrated structure – incorporates functional groups into a single organization that elevates its manager to a higher level in the firm (director, executive, etc.)

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BA 339, OM – Chapter 11

Functional Aspects of the Supply Chain

Purchasing• Acquisition of materials, supplies,

equipment and services• 5 basic steps:

– Recognize a need – technical handoff– Evaluate/select suppliers– Issue/place the order or contract– Track/manage the order or contract– Receive the order – inventory/logistics handoff

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BA 339, OM – Chapter 11Purchasing

E-Commerce/E-procurement • E-Marketplace

– Competitive marketplace located on the internet; generally formed around common industries such as auto, energy, etc. (vertical); horizontal support MRO & commercial items

– Integration ranges from web-browser based transactions > EDI > integration w/E-P > integration w. ERP system

• E-procurement– Electronic purchase of goods & services– Hosted – S/W is located on marketplace; functionality

differs based on host locations– Non-hosted – S/W is located & maintained with the buyer

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BA 339, OM – Chapter 11

PurchasingE-Commerce/E-procurement • Auctions

– Forward – seller driven; one seller, many buyers, price rises with time; assets and surplus inventory

– Reverse – buyer driven; one buyer, many sellers, price falls with time; materials & services

• Business case usually required because of capital outlays required for S/W & H/W

• Considerations: core business function/competency, scope, volume, etc.

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BA 339, OM – Chapter 11Reasons for Making

Lower production costsUnsuitable suppliersAssure adequate supplyUtilize surplus labor/facilitiesObtain desired “Q”Remove supplier collusionUnique item would require prohibitive commitment for a supplierMaintain organizational talent; preclude layoffProtect proprietary designIncrease size of firm

Reason for BuyingLower acquisition costPreserve supplier commitmentObtain technical or management abilityInadequate capacityReduce inventory costsEnsure alternative sourcesInadequate managerial or technical resourcesReciprocityItem protected by patent or trade secretFrees management to deal with primary business

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BA 339, OM – Chapter 11Purchasing

Orientation toward suppliers• Competitive (Example – U.S. auto industry)

– Negotiation is a zero-sum game – winner & loser– Short-term advantages valued over long-term

commitment– Buyer pushes price to survival levels– Seller pushes for higher price for specific levels of

quality, customer services & volume flexibility• Cooperative (Example – VW facility in Brazil)

– Work together toward common goals; more information sharing; partnership

– Favors few suppliers with 1-2 as the optimal numbers– Suppliers become extension of buyer– Fewer transactions lower internal cost; reduction in

supply chain reduces cost and complexity

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BA 339, OM – Chapter 11Purchasing

Centralize vs. local (de-centralized) buying• Centralized

– Increased purchasing clout (volume) > can lead to better service, better availability, improved development of supplier capability

– Favored by companies w/ overseas suppliers because of specialized skills required (language, international commercial/contract law) and use of info. tech. and internet

– Loss of control at local level can negatively affect responsiveness to customers

– Loss of appreciation of cultural impacts due to limited management experience

– Often have longer lead times, more internal bureaucracy and increase logistics cost

• Compromise – IBM’s centralized purchasing based on local needs.

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BA 339, OM – Chapter 11

Functional Aspects - Inventory Management

Key issues:• Measurement – average aggregate inventory

value, weeks of supply, inventory turnaround (“turns”)

• Location and size of warehouse/distribution centers

• Standardization of materials/suppliers and related handling equipment

• Volume

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BA 339, OM – Chapter 11Functional Aspects - Distribution/Logistics

Inbound & outbound materials flowInbound sometimes considered as part of purchasing or logisticsOutbound equated with distribution

Considerations:• Placement of finished goods inventory – critical for

international operations (customer proximity, customs, etc.) > forward (closer to customers) & backward (centralized – evens out regional demand)

• Selection of transportation mode & carriers– Truck – 40% of U.S. freight– Rail – 30% of U.S. freight

• Scheduling/routing must align with purchasing and production schedules

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BA 339, OM – Chapter 11

Supply Chain StrategiesMany suppliers

• Many sources per item• Adversarial relationship• Short-term emphasis• Little openness• Negotiated, sporadic POs• High prices• Infrequent, large lots• Delivery to receiving dock

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BA 339, OM – Chapter 11Supply Chain Strategies

Few suppliers• 1 or few sources per item• Partnership (JIT)• Emphasis on long-term, stability• On-site audits visits• Exclusive contract• Low prices (large orders)• Frequent, small lots• Delivery to point of use

E-commerce/E-procurement• Vertical/horizontal marketplace, technology driven

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BA 339, OM – Chapter 11Supplier Evaluation/Selection

Considerations:• Alignment with business model, competitive strategy

(cost, responsiveness, differentiation), product/service lifecycle, risk strategy & purchasing strategy

Evaluation models• Company, product, service

– Financial stability, management, location– Quality, price– On-time delivery, condition on arrival, technical

support, training• Technical, business, services

– Design, production, quality– Procurement, financial, logistics, customer satisfaction

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BA 339, OM – Chapter 11Supplier Risk Assessment/Management

Risk Assessment • Act of identifying, classifying, quantifying & analyzing risk• Components

– Probability – likelihood of some event occurring– Impact – consequence of that event occurring

• Includes internal and external sources of risk• Includes qualitative (adjectival) and quantitative

(numerical) assessments

Risk Management• Act of responding to, controlling, mitigating, influencing,

avoiding, sharing, accepting, or diversifying risk• Implies some method of assessment that can be

qualitative or quantitative

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BA 339, OM – Chapter 11

Source of Risk in the Supply ChainProduct – complexity, maturity, criticality, technological maturity, delivery schedule criticality, & performance historyProcess – design/engineering, production/manufacturing, qualitySystem – multiple, interlocking systems & sub-systems

• Quality management system• Logistics systems

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BA 339, OM – Chapter 11

Sources of Risk (cont.)Financial – lack of capital, poor cash flow, product litigation, inefficient use of assets• Useful ratios

– Current ratio – ratio of assets to liabilities– Quick ratio – ratio of cash, marketable securities

& accounts receivables to current liabilities– Return on sales ratio – ratio of net income to net

sales– ROI – (Net operating income/sales) x (Sales/avg.

operating assets)

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BA 339, OM – Chapter 11Managing Risk

Understand your suppliers’/service providers’ supply chain, critical processes and capabilityDefine critical suppliers, supply chain processes and critical products/servicesIdentify sources of risk or variation in the supply chain

• Cost• Schedule• Quality• Requirements• Technology

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BA 339, OM – Chapter 11Managing Risk

Asses & measure risk• Select & develop a risk methodology based on

organizational maturity/capability• Develop measures based on availability and

reliability of data– Assessment measures can be qualitative or

quantitative

Approaches• ORCA

– Identify business Objectives– Identify operations and other Risks– Define Controls– Assess Process

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BA 339, OM – Chapter 11

SC in a global Environment must be:Flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties and currency ratesAble to use the latest computer and transmission technology to schedule and manage shipment of parts in and finished parts outStaffed with local specialists to handle duties, trade, freight, customs, and political issues