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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