Supply chain management
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Supply chain management

Supply-Chain Management

Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements.

SCM, is a strategic weapon that seeks to synchronize a firm’s functions and those of its suppliers to match the flow of materials, services, and information with customer demand

Supply chain management





Distribution center

Distribution center


Tier 1

Tier 2

Tier 3


Supplier of services

Supplier of materials

Supply Chain

Supply chain management1

Supply Chain Management

  • Involves coordination of key processes such as order placement, order fulfillment, purchasing, and supported by marketing, finance, engineering, operations and logistics

  • The basic purpose: manage the flow of materials. This flow determines inventory levels.

Scm overview

SCM Overview

  • Inventory – is a stock of materials used to satisfy customer demand or support the production of goods and services

  • The three categories of inventories are raw materials (RM), work-in-process (WIP), and finished goods (FG).

  • Manufacturers spend 60% of sales on purchased materials and services, and service providers spend as much as 40%. The management of materials flows is therefore important from a cost perspective alone.

How to gain control of the sc

How to gain control of the SC

  • Backward integration – firm controls upstream toward the sources of raw materials and parts. Can ensure its priority with the supplier and lead efforts to improve efficiency and productivity in managing flow of materials.

  • What is difficult with backward integration?

  • Write agreements with first-tier suppliers that hold them accountable for the performance of their suppliers (2nd and 3rd tier)

Developing integrated sc


Determining suppliers

Negotiating contracts

Make or buy

Quality levels


Quantity levels



Finished goods inventories


Developing Integrated SC

Supply chain management

Phase 1:

Independent supply-chain entities






Phase 2:

Internal integration






Internal supply chain

Materials management department

Phase 3:

Supply-chain integration

Internal supply chain



Integrated supply chain

Integrated Supply Chain

Conflicting objectives in the supply chain

1. Purchasing

Stable volume requirements

Flexible delivery time

Little variation in mix

Large quantities

2. Manufacturing

Long run production

High quality

High productivity

Low production cost

3. Warehousing

Low inventory

Reduced transportation costs

Quick replenishment capability

4. Customers

Short order lead time

High in stock

Enormous variety of products

Low prices

Conflicting Objectives in the Supply Chain

Managing the customer interface

Managing the Customer Interface

  • Order-Placement Process Involves the activities required to register the need for a product or service and to confirm the acceptance of the order.

    • It is advantageous to make this process simple and fast

    • The Internet has enabled firms to reengineer their order-placement process to benefit both the customer and the firm. Advantages include

      • Cost reduction

      • Revenue flow increase

      • Global access

      • Pricing flexibility

Managing the customer interface1

Managing the Customer Interface

Order-Fulfillment Process. Involves the activities required to deliver a product or service to a customer. Key elements include:

  • Information sharing

    • Facilitated by the Internet and ERP systems

  • Finished goods inventory placement

    • Forward placement

    • Vendor-managed inventories (VMI

    • Continuous replenishment

    • Backward placement

  • Postponement is used by assemble-to-order and mass customization firms. Customization is delayed until the last possible moment

    • Channel assembly

Managing the supplier interface

Managing the Supplier Interface

  • E-purchasing

    • Electronic Data Interchange (EDI)

      • Enables the transmission of routine business documents with standard formats from computer to computer, in one-to-one connections

      • Documents include invoices, purchase orders, and payments

    • Catalog hubs

      • Connect firms with to, potentially, hundreds of suppliers through the Internet

      • Does not require one-to-one connections as does EDI

    • Exchanges

      • Electronic marketplaces where buying and selling firms come together to do business

      • Often used for spot purchases and commodities or “near-commodities”

    • Auctions

      • An extension of the exchange

      • Firms place competitive bids to buy something.

      • Like exchanges, auctions are often used for spot purchases, commodities, and near-commodities

Managing the supplier interface1

Managing the Supplier Interface

  • Supplier selection and certification

    • Supplier selection—three criteria often used are price, quality, and delivery.

    • Supplier certification—typically involves visits by cross-functional teams to do an in-depth evaluation of the supplier’s processes.

  • Supplier relations

    • Competitive orientation—a zero sum game. The purpose is to drive costs down to the minimum level. Power in the supply chain relates to the purchasing clout a firm has.

    • Cooperative orientation—a partnership between buyers and sellers. This orientation implies long-term commitments, joint work on quality and buyer support of infrastructure. Typically, fewer suppliers are needed in this arrangement.

Managing the supplier interface2

Managing the Supplier Interface

  • Outsourcing

    • Degree of sourcing control.

    • The degree of sourcing control is inversely related to the flexibility to change the supply chain when needed.

  • Centralized versus localized buying

    • Centralized—increases purchasing clout

    • Localized—often reduces lead times and enables closer coordination with local production schedules

  • Value analysis

    • Value analysis is an intensive examination of the materials, processes, information systems, and material flows in the production of a good or service.

    • Benefits include reduced costs, better profits, increased customer satisfaction, and often improved employee morale.

    • Value analysis can improve the internal supply chain, but its greatest potential lies in applying it to the external supply chain

Measures of supply chain performance

Measures of Supply-Chain Performance

  • Inventory measures

    • Average aggregate inventory value—the total value of all items held in inventory for a firm. The value is expressed at cost (as opposed to price) to avoid the differences that occur in prices over time. This measure is used in two other important measures.

    • Weeks of supply—average aggregate inventory value divided by weekly sales (at cost). From an inventory cost perspective, the lower the weeks of supply, the better.

    • Inventory turns—annual sales (at cost) divided by the average aggregate inventory value. The greater the turns, the lower the average inventory levels.

Supply chain management

$2 million

($10 million)/(52 weeks)

Weeks of supply = = 10.4 weeks

Inventory Measures

Average inventory = $2 million

Cost of goods sold = $10 million

52 business weeks per year

Supply chain management

$2 million

($10 million)/(52 weeks)

Weeks of supply = = 10.4 weeks

$10 million

$2 million

Inventory turns = = 5 turns/year

Inventory Measures

Average inventory = $2 million

Cost of goods sold = $10 million

52 business weeks per year

Supply chain management

Inventory Measures

Inventory measures

Inventory Measures

  • Process measures, measuring costs, time, and quality as related to

    • Order placement

    • Order fulfillment

    • Purchasing

Inventory measures1

Inventory Measures

  • Links to financial measures

    • Current assets (return on assets)

    • Working capital

    • Contribution margin

    • Cash-to-cash (cash flow)

Supply chain management

Order Placement

  • Percent orders taken accurately

  • Time to complete the order-placement process

  • Customer satisfaction with the order-placement process

Order Fulfillment

  • Percent of incomplete orders shipped

  • Percent of orders shipped on time

  • Time to fulfill the order

  • Percent of returned items or botched services

  • Cost to produce the item or service

  • Customer satisfaction with the order-fulfillment process


  • Percent of suppliers’ deliveries on time

  • Suppliers’ lead times

  • Percent defects in purchased materials and services

  • Cost of purchased materials and services

Supply-Chain Process Measures

Supply chain management

FactorEfficient Supply ChainsResponsive Supply Chains

DemandPredictable; low Unpredictable; high

forecast errors forecast errors

CompetitiveLow cost; consistent Development speed; fast

prioritiesquality; on-time delivery times;

delivery customization; volume

flexibility; high-

performance design






Product varietyLowHigh

Environments Best Suited for Efficient and Responsive Supply Chains

Supply chain management

FactorEfficient Supply ChainsResponsive Supply Chains

Operations Make-to-stock or Assemble-to-order, make-

strategy standardized services;to-order, or customized

emphasize high services; emphasize

volume, standardized product or service

products, or services variety

Capacity LowHigh


InventoryLow; enable high As needed to enable fast

investmentinventory turnsdelivery time

Lead timeShorten, but do not Shorten aggressively

increase costs

Supplier Emphasize low prices; Emphasize fast delivery

selection consistent quality; on-time; customization;

time deliveryvolume flexibility; high-

performance design quality

Design Features for Efficient and Responsive Supply Chains

Supply chain management



Firm A

Materials requirements

Firm B

Firm C



Figure 11.8

Supply-Chain Dynamics

Firm C

Firm A


The future is not what it used to be

The Future is NOT what it used to be….

  • A new e-Business model

    • Reduce cost

    • Increase Profit

    • Increase service level

    • Increase flexibility

Collaborative planning forecasting and replenishment cpfr

Collaborative Planning, Forecasting and Replenishment (CPFR)

  • A business process for value chain partners – especially retail

  • to coordinate plans in order to better match supply and demand

Supply chain management

Collaborative Planning, Forecasting

and Replenishment (CPFR)

Collaborative Planning

1. Front-End Agreement

2. Joint Business Plan

Collaborative Forecasting

3. Create Sales Forecast

4. Identify exceptions

5. Resolve exceptions

6. Create Order Forecast



7. Identify exceptions

8. Resolve exceptions

9. Generate Order

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