Chapter 15

1. Chapter 15 Supply Chain Management

2. Learning Objectives • You should be able to: • Know definitions of key words. • Discuss the key issues of supply chain management (SCM) • Summarize the motivations and risks of outsourcing as a strategy • List some of the strategic responsibilities of SCM • Give examples of some advantages of e-business • Explain the importance of supplier partnerships Instructor Slides

3. Supply Chain • 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 value chains • Value is added as goods and services progress through the chain. 15-3

4. Typical Supply Chains Supplier Supplier Storage Mfg. Storage Distributor Retailer Customer Supplier Supplier Storage Service Customer Supplier • Every business organization is part of at least one supply chain, and many are part of multiple supply chains

5. Thai Floods Jolt PC Supply Chain • The flooding in Thailand, the world's second-largest exporter of hard-disk drives, comes during the key selling season for hard-disk drives, with PC makers obtaining supplies for holiday sales. • The flood's impact also comes at a tough time for the companies, which saw disruption in the PC supply chain from an earthquake and tsunami in Japan earlier this year. Analysts said the flooding in Thailand could have a greater impact on the hard-drive makers than the Japan quake, with more components suppliers affected. • About 60% of Western Digital's hard-disk drives come from its Thailand sites. In addition, many components companies also have suspended operations, hurting other disk-drive makers. • Analyst estimates any factory outages longer than three weeks would hurt even the top PC makers, with hard-drive inventories recently running "on the lean side.“ • Analysts said it likely will lead to higher prices and potential supply constraints later this year or early next year. • The company's other facilities in Malaysia, Singapore and the U.S. remain fully operational, the company said. wsj.com Oct. 18, 2011 Source: http://online.wsj.com/article/SB10001424052970203658804576636951367373290.html

6. Supply Chain Management • Supply: • From the beginning of the chain to the internal operations of the organization • Demand: • From the organization's output delivery to its immediate customer to the final customer in the chain • Supply Chain Management (SCM) • The strategic coordination of business functions within a business organization and throughout its supply chain for the purpose of integrating supply and demand management 15-6

7. Why so much interest in Supply Chain Management?* • As manufacturing becomes more efficient (or is outsourced), companies look for ways to reduce costs • Several significant success stories. Efficient SCM gives Walmart & others an important edge • Web-based models for supply chains: • Online retailers • B2B business models. 15-7

8. Key SCM Issues • The goal of SCM is to match supply to demand as effectively and efficiently as possible • Key issues: • Determining appropriate levels of outsourcing • Managing procurement • Managing suppliers • Managing customer relationships • Being able to quickly identify problems and respond to them • Managing risk 15-8

9. Management Responsibility:Strategic • Supply chain strategy alignment • Aligning supply and distribution strategies with organizational strategy. • Deciding on the degree to which outsourcing will be employed. • Network configuration • Determining the number and location of suppliers, warehouses, production/operations facilities, distribution centers. http://www.youtube.com/watch?v=Z2Bs0nqVyqs 15-9

10. Management Responsibility:Strategic • Information technology • Integrating systems and sharing information (forecasts, inventory status, shipments etc.) throughout the SC. • Strategic partnerships • Choice of partners, level of partnership. • Distribution strategy • Centralized or decentralized distribution. In-house distribution or third-party logistics. • Uncertainty and risk reduction • Identifying potential risks and deciding on acceptable risk level. • Capacity planning • Assessing long term capacity needs and the degree of flexibility • Products and services • New products and services selection and design. 15-10

11. Trends in SCM* • Trends affecting supply chain design and management: • Measuring supply chain performance • incorporating economic metrics into decisions (e.g., inventory velocity, inventory turnover) • “Greening” the supply chain • Redesigning products and services to reduce pollution from transportation, choosing “green” suppliers, managing returns, end-of-life programs (e.g., appliances) • Re-evaluating outsourcing • Reconsidering outsourcing due to long lead time, increased transportation costs, language, culture, job loss, control loss, lower productivity, loss of ability to perform work internally, loss of business knowledge, management efforts. 15-11

12. Trends in SCM* • Trends affecting supply chain design and management: • Integrating IT • Real time data to enhance strategic planning, control costs, measure quality and productivity, respond quickly to problems, improve SC operations • Managing risks • Identifying risks, assessing likelihood of occurrence, potential impacts, prioritizing, developing management strategies (avoidance, reduction, transference). • Adopting lean principles • Eliminating non value-added processes, using “pull” systems to improve product flow, using fewer suppliers, continuous improvement. 15-12

13. Choosing Suppliers (Supplier Audits) • Quality and quality assurance • Procedures for quality assurance and quality control • Flexibility • For changes in delivery schedules, quantity, product or service changes • Location • Nearby? • Price • Competitiveness, willingness to negotiate, cooperate to reduce prices • Reputation and Financial Stability • Supplier reputation, its financial stability • Lead times and on-time delivery • Procedures to assure on-time delivery and problem correction • Other accounts • Dependence on other customers and their priority 15-13

14. Supplier Relationship Management • Type of relationship is often governed by the duration of the trading relationship: • Short-term contracts • Often involves competitive bidding • Minimal interaction • Medium-term contracts • Often involves an ongoing relationship • Long-term contracts • Often involves greater cooperation that evolves into a partnership 15-14

15. Supplier Partnerships Many of the benefits go to the buyer, while much of the investment falls on the supplier. • More organizations are seeking to establish partnerships with others in their supply chain: • Fewer suppliers, long term relationships, sharing of information (forecasts, sales data, problem alerts), cooperation in planning • Benefits: • improved operations: higher quality, increased delivery speed and reliability, lower inventories, lower costs, higher profits. Higher supplier flexibility in accepting changes (delivery schedules, quality, quantity), suppliers can help in identifying problems and offer suggestions 15-15

16. Logistics • Logistics • The part of the SC involved with the forward and reverse flow of goods, services, cash, and information. • Logistics Management • Management of : • inbound and outbound transportation • material handling • Warehousing • Inventory • order fulfillment and distribution • third party logistics • reverse logistics (return from customers) 15-16

17. Outsourcing • Transfer or contracting (non productive) internal activities (process) to outside vendors • e.g.: IT, accounting, legal, logistics • Utilize the efficiency that comes with specialization • Make-or-Buy analysis

18. 3-PL • Third-party logistics (3-PL) • The outsourcing of logistics management • Warehousing • Distribution • Provider’s information system • 3PSCM • 3PL extended to include procurement of other SC services 15-18

19. Inventory Management • Inventory issues in SCM • Inventory location • Centralized inventories • Lower overall inventory, lower cost, lower stock-out risk • Decentralized inventories • Faster delivery, lower shipping cost • Inventory velocity • The speed at which goods move through a supply chain • The greater the velocity the lower the holding cost and the faster orders are fulfilled and goods are turned into cash. • The bullwhip effect • Inventory oscillations that become increasingly larger looking backward through the supply chain 15-19

20. The Bullwhip Effect • First noticed by P&G executives examining the order patterns for Pampers disposable diapers. • Although the customer demand is pretty steady, they noticed that order variation increased dramatically as one moved from retailers to distributors to the factory. 15-20

21. Beer-Game – Typical Results* Beergame Debriefing, by Kai Riemer, http://www.beergame.org

22. Beer-Game – Typical Results* Beergame Debriefing, by Kai Riemer, http://www.beergame.org

23. Beer-Game – Typical Results* Beergame Debriefing, by Kai Riemer, http://www.beergame.org

24. Bullwhip Effect – Problems* • Low service level (backorders) • High inventory levels • High cost • High demand fluctuations. • Variation in demand along the supply chain requires: • Shipment capacity • Production capacity to cope with peaks. • Inventory capacity • Most of the time this capacity will be idle. • There’s significant cost and investments attached! • In the end: high overall cost in the supply chain Beergame Debriefing, by Kai Riemer, http://www.beergame.org

25. Bullwhip Effect – Causes* • Information (lack of) • Game simulates SC with low levels of trust, where little information is shared among the parties • Only order amounts are perpetuated up the supply chain; information about customer demand is lost upstream. • Without actual customer demand data, all forecasts rely solely on the incoming orders at each stage of the SC. • SC structure • The longer the lead time the stronger the bullwhip effect (the reorder point is calculated by multiplying the forecasted demand by the lead time plus the safety stock) • Local optimization • Local individual cost optimization, and a lack of cooperation • Ordering involves fix cost. There is an incentive for individual players to hold back and only place aggregate/batch orders. This aggravates the problem of demand forecasting as little information about actual demand is conveyed. Beergame Debriefing, by Kai Riemer, http://www.beergame.org

26. Mitigating the Bullwhip Effect* • Good supply chain management can overcome the bullwhip effect: • Information sharing • Replenishment based on need • Vendor-managed inventory • Vendors monitor goods and replenish retail inventories when supplies are low • Lower ordering costs • Short lead times • Cooperation • Competition is now supply chain against supply chain and Network against network 15-26