10 Supply Chain Integration

For Operations Management, 9e by

PowerPoint Slides
Krajewski/Ritzman/Malhotra
by Jeff Heyl © 2010 Pearson Education
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Supply Chain Integration

 The effective coordination of supply chain

processes through the seamless flow of
information up and down the supply chain
 A river that flows from raw material
suppliers to consumers
 Upstream

 Downstream

 Mitigating the effects of supply chain

disruptions

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Supply Chain Integration

Upstream Downstream

Tier 3 Tier 2 Tier 1

Tomato Tomato
Tomato Ketchup Retail
grading paste Consumers
suppliers factory sales
stations factories

Information flows

Cash flows

Figure 10.1 – Supply Chain for a Ketchup Factory

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Supply Chain Dynamics

 Bullwhip effect
 Upstream members must react to the demand
 Slightest change in customer demand can
ripple through the entire chain
 External causes
 Internal causes

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Supply Chain Dynamics

Manufacturer’s Package supplier’s

weekly orders to weekly orders to
package supplier cardboard supplier
9,000
Retailers’ daily
orders to
Order quantity

manufacturer
7,000
Consumers’
daily
demands
5,000

3,000

0
Day 1 Day 30 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30
Month of April

Figure 10.2 – Supply Chain Dynamics for Facial Tissue

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Supply Chain Dynamics

 Integrated supply chains

 High degree of functional and organizational
integration minimizes disruptions
 Integration must include linkages between the
firm, its suppliers, and its customers
 SCOR model
 Plan
 Source
 Make
 Deliver
 Return

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 Supply Chain Dynamics

First-Tier Supplier Service/Product Provider

Support Processes Support Processes

New service/ Business- New service/ Business-

product to-business product to-business
development (B2B) development (B2B)

External Consumers
process customer process customer
External Suppliers

relationship relationship
process process

Supplier Order Supplier Order

relationship fulfillment relationship fulfillment
process process process process

Figure 10.3 – External Supply Chain Linkages

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New Service or Product Development

Design

 Service or
product not
profitable

Analysis  Need to rethink

the new offering
or production
process

Development

 Post-launch
review

Figure 10.4 – New Service/Product Development Process Full Launch

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Supplier Relationship Process

 Sourcing
 Supplier selection
 Material costs
Annual material costs = pD

 Freight costs
 Inventory costs
Cycle inventory = Q/2
Pipeline inventory = dL
Annual inventory costs = (Q/2 + dL)H

 Administrative costs

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Supplier Relationship Process

 The total annual cost for a supplier is the

sum of these costs:

Total Annual Cost = pD + Freight costs

+ (Q/2 + dL)H
+ Administrative costs

 Other supplier selection criteria

 Green purchasing
 Supplier certification and evaluation

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Total Cost Analysis

EXAMPLE 10.1
Compton Electronics manufactures laptops for major computer
manufacturers. A key element of the laptop is the keyboard.
Compton has identified three potential suppliers for the
keyboard, each located in a different part of the world.
Important cost considerations are the price per keyboard,
freight costs, inventory costs, and contract administrative
costs. The annual requirements for the keyboard are 300,000
units. Assume Compton has 250 business days a year.
Managers have acquired the following data for each supplier.

Which supplier provides the lowest annual total cost to

Compton?

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Total Cost Analysis
Annual Freight Costs
Shipping Quantity (units/shipment)
Supplier 10,000 20,000 30,000
Belfast $380,000 $260,000 $237,000
Hong Kong $615,000 $547,000 $470,000
Shreveport $285,000 $240,000 $200,000

Keyboard Costs and Shipping Lead Times

Annual Inventory Shipping Administrative
Supplier Price/Unit Carrying Cost/Unit Lead Time (days) Costs
Belfast $100 $20.00 15 $180.000
Hong Kong $96 $19.20 25 $300.000
Shreveport $99 $19.80 5 $150.000

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Total Cost Analysis
SOLUTION
The average requirements per day are

d = 300,000/250 = 1,200 keyboards

Each option must be evaluated with consideration for the

shipping quantity using the following equation:

Total Annual Cost = Material costs + Freight costs

+ Inventory costs + Administrative costs

= pD + Freight costs + (Q/2 + dL)H + Administrative costs

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Total Cost Analysis
For example, consider the Belfast option for a shipping quantity
of Q = 10,000 units. The costs are
Material costs = pD = ($100/unit)(300,000 units)
= $30,000,000
Freight costs = $380,000
Inventory costs = (cycle inventory + pipeline inventory)H
= (Q/2 + dL)H
= (10,000 units/2
+ 1200 units/day(15 days))$20/unit/year
= $460,000
Administrative costs = $180,000
Total Annual Cost = $30,000,000 + $380,000
+ $460,000 + $180,000 = $31,020,000
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Total Cost Analysis
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.

Total Annual Costs for the Keyboard Suppliers

Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast
Hong Kong
Shreveport

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Total Cost Analysis
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.

Total Annual Costs for the Keyboard Suppliers

Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast $31,020,000 $31,000,000 $31,077,000

Hong Kong $30,387,000 $30,415,000 $30,434,000

Shreveport $30,352,800 $30,406,800 $30,465,800

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Application 10.1
ABC Electric Repair is a repair facility for several major
electronic appliance manufactures. ABC wants to find a low-
cost supplier for an electric relay switch used in many
appliances. The annual requirements for the relay switch (D) are
100,000 units. ABC operates 250 days a year. The following data
are available for two suppliers. Kramer and Sunrise, for the
part:

Freight Costs
Shipping Quantity (Q)
Carrying
Price/Unit Cost/Unit Lead Time Administrative
Supplier 2,000 10,000 (p) (H) (L)(days) Costs
Kramer $30,000 $20,000 $5.00 $1.00 5 $10,000
Sunrise $28,000 $18,000 $4.90 $0.98 9 $11,000

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Application 10.1
SOLUTION
The daily requirements for the relay switch are:

d = 100,000/250 = 400 units

We must calculate the total annual costs for each alternative:

Total annual cost = Material costs + Freight costs

+ Inventory costs + Administrative costs

= pD + Freight costs + (Q/2 + dL)H

+ Administrative costs

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Application 10.1
Kramer
Q = 2,000: ($5.00)(100,000) + $30,000
+ (2,000/2 + 400(5))($1) + $10,000 = $543,000
Q = 10,000: ($5.00)(100,000) + $20,000
+ (10,000/2 + 400(5))($1) + $10,000 = $537,000

Sunrise
Q = 2,000: ($4.90)(100,000) + $28,000
+ (2,000/2 + 400(9))($0.98) + $11,000 = $538,508
Q = 10,000: (4.90)(100,000) + $18,000
+ (10,000/2 + 400(9))($0.98) + $11,000 = $527,428

The analysis reveals that using Sunrise and a shipping quantity

of 10,000 units will yield the lowest annual total costs.

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Using a Performance Matrix
The management of Compton Electronics has done a total cost
analysis for three international suppliers of keyboards (see
Example 10.1). Compton also considers on-time delivery,
consistent quality, and environmental stewardship in its
selection process. Each criterion is given a weight (total of 100
points), and each supplier is given a score (1 = poor, 10 =
excellent) on each criterion. The data are shown in the following
table.

Score
Criterion Weight Belfast Hong Kong Shreveport
Total Cost 25 5 8 9
On-Time Delivery 30 9 6 7
Consistent Quality 30 8 9 6
Environment 15 9 6 8

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Using a Performance Matrix
SOLUTION
Score
The weighted score for Criterion Weight Belfast
Hong
Shreveport
Kong
each supplier is calculated
Total Cost 25 5 8 9
by multiplying the weight
On-Time
by the score for each Delivery
30 9 6 7

criterion and arriving at a Consistent

30 8 9 6
Quality
total. For example, the
Environment 15 9 6 8
Belfast weighted score is

WS = (25 × 5) + (30 × 9) + (30 × 8) + (15 × 9) = 770

Similarly, the weighted score for Hong Kong is 740, and for
Shreveport, 735. Consequently, Belfast is the preferred
supplier.

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Application 10.2
ABC Electric Repair wants to select a supplier based on total
annual cost, consistent quality, and delivery speed. The
following table shows the weights management assigned to
each criterion (total of 100 points) and the scores assigned to
each supplier (Excellent = 5, Poor = 1).

Scores
Criterion Weight Kramer Sunrise
Total annual cost 30 4 5
Consistent quality 40 3 4
Delivery speed 30 5 3

Which supplier should ABC select, given these criteria

and scores?

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Application 10.2
SOLUTION Scores
Criterion Weight Kramer Sunrise
Using the preference matrix Total annual
30 4 5
approach, the weighted scores cost
for each supplier are: Consistent
40 3 4
quality
Delivery
30 5 3
speed

WSKramer = (30 × 4) + (40 × 3) + (30 × 5) = 390

WSSunrise = (30 × 5) + (40 × 4) + (30 × 3) = 400

Based on the weighted scores, ABC should select Sunrise

even though delivery speed performance would be better
with Kramer.

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Supplier Relationship Process

 Design collaboration
 Early supplier involvement
 Presourcing

 Value analysis
 Negotiation
 Obtain an effective contract that meets the
price, quality, and delivery requirements
 Competitive orientation
 Cooperative orientation

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Supplier Relationship Process

 Buying
 Procurement of the service or material from
the supplier
 e-purchasing
 Loss of control
 Information exchange
 Radio frequency identification (RFID)
 Vendor managed inventories (VMI)

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Order Fulfillment Process
 Customer demand planning
 Facilitates collaboration
 Demand forecasts
 Supply planning
 Inventory management
 Operations planning and scheduling
 Resource planning
 Production
 Logistics
 Ownership
 Facility location
 Mode selection
 Capacity
 Cross-docking
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Order Fulfillment Process

1 (a) 2 3
Web site JIT Inventory Traveler Sheet

1 (b) 1 (d) Direct 4

Voice-to-voice relationship sales Kitting

1 (c) 5 Assemble
Face-to-face to order

6 Testing and
system integration

7 Boxing 8
and shipping Delivery

Figure 10.5 – Dell’s Order Fulfillment Process

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Using Expected Value
EXAMPLE 10.3
Tower Distributors provides logistical services to local
manufacturers. Tower picks up products from the
manufacturers, takes them to its distribution center, and then
assembles shipments to retailers in the region. Tower needs to
build a new distribution center; consequently, it needs to make
a decision on how many trucks to have. The monthly amortized
capital cost of ownership is $2,100 per truck. Operating variable
costs are $1 per mile for each truck owned by Tower. If capacity
is exceeded in any month, Tower can rent trucks at $2 per mile.
Each truck Tower owns can be used 10,000 miles per month.
The requirements for the trucks, however, are uncertain.
Managers have estimated the following probabilities for several
possible demand levels and corresponding fleet sizes.

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Using Expected Value

Requirements (miles/month) 100,000 150,000 200,000 250,000

Fleet Size (trucks) 10 15 20 25

Probability 0.2 0.3 0.4 0.1

Notice that the sum of the probabilities must equal 1.0. If Tower
Distributors wants to minimize the expected cost of operations,
how many trucks should it have?

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Using Expected Value
SOLUTION
We use the expected value decision rule to evaluate the
alternative fleet sizes where we want to minimize the expected
monthly cost. To begin, the monthly cost, C, must be
determined for each possible combination of fleet size and
requirements. The cost will depend on whether additional
capacity must be rented for the month. For example, consider
the 10 truck fleet size alternative, which represents a capacity
of 100,000 miles per month.

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Using Expected Value
C = monthly capital cost of ownership
+ variable operating cost per month + rental costs if needed

C(100,000 miles/month) = ($2,100/truck)(10 trucks)

+ ($1/mile)(100,000 miles) = $121,000
C(150,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(150,000 miles – 100,000 miles)
= $221,000
C(200,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(200,000 miles – 100,000 miles)
= $321,000
C(250,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(250,000 miles – 100,000 miles)
= $421,000

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Using Expected Value
Next, calculate the expected value for the 10 truck fleet size alternative
as follows:

Expected Value (10 trucks) = 0.2($121,000) + 0.3($221,000)

+ 0.4($321,000) + 0.1($421,000) = $261,000

Using similar logic, we can calculate the expected costs for each of
the other fleet-size options:

Expected Value (15 trucks) = 0.2($131,500) + 0.3($181,500)

+ 0.4($281,500) + 0.1($381,000) = $231,500

Expected Value (20 trucks) = 0.2($142,000) + 0.3($192,000)

+ 0.4($242,000) + 0.1($342,000) = $217,000

Expected Value (25 trucks) = 0.2($152,500) + 0.3($302,500)

+ 0.4($252,500) + 0.1($302,500) = $222,500

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Application 10.3
Schneider Logistics Company has built a new warehouse in
Columbus, Ohio, to facilitate the consolidation of freight
shipments to customers in the region. How many teams of dock
workers he should hire to handle the cross docking operations
and the other warehouse activities? Each team costs $5,000 a
week in wages and overhead. Extra capacity can be
subcontracted at a cost of $8,000 a team per week. Each team
can satisfy 200 labor hours of work a week. Management has
estimated the following probabilities for the requirements:

Requirements (hours/wk) 200 400 600

Number of teams 1 2 3
Probability 0.20 0.50 0.30

How many teams should Schneider hire?

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Application 10.3
SOLUTION
We use the expected value decision rule by first computing the
cost for each option for each possible level of requirements and
then using the probabilities to determine the expected value for
each option. The option with the lowest expected cost is the
one Schneider will implement. We demonstrate the approach
using the “one team” in-house option.

One Team In-House

C(200) = $5,000
C(400) = $5,000 + $8,000 = $13,000
C(600) = $5,000 + $8,000 + $8,000 = $21,000
Expected Value
(One Team) = 0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800

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Application 10.3
A table of the complete results is below.

Weekly Labor Requirements

In-House 200 hrs 400 hrs 600 hrs Expected Value

One team

Two teams

Three teams

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Application 10.3
A table of the complete results is below.

Weekly Labor Requirements

In-House 200 hrs 400 hrs 600 hrs Expected Value

One team $5,000 $13,000 $21,000 $13,800

Two teams $10,000 $10,000 $18,000 $12,400

Three teams $15,000 $15,000 $15,000 $15,000

Based on the expected value decision rule, Schneider should

employ two teams at the warehouse.

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The Customer Relationship Process

 Customer relationship management

(CRM) programs identify, attract, and
build relationships with customers
 Marketing
 Electronic commerce (e-commerce)
 Business-to-Consumer (B2C) systems
 Business-to-Business (B2B) systems

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The Customer Relationship Process

 Order placement
 Execute a sale, register the specifics,
confirm acceptance, and track progress
 Internet provides advantage
 Customer service
 Helps customers with answers to
questions, resolves problems, and,
provides general information
 Call centers

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Levers for Improved Supply Chain
Performance

 The levers
 Sharing data
 Collaborative activities
 Reduce replenishment lead times
 Reduce order lot sizes
 Ration short supplies
 Use everyday low pricing (EDLP)
 Be cooperative and trustworthy

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Levers for Improved Supply Chain
Performance

 Performance measures
 Costs
 Time
 Quality
 Environmental impact

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Performance Measures
TABLE 10.1 | SUPPLY CHAIN PROCESS MEASURES
Customer Relationship Order Fulfillment Supplier Relationship
 Percent of orders taken  Percent of incomplete  Percent of suppliers’
accurately orders shipped deliveries on-time
 Time to complete the order  Percent of orders shipped  Suppliers’ lead times
placement process on-time  Percent defects in
 Customer satisfaction with  Time to fulfill the order services and purchased
the order placement  Percent of botched materials
process services or returned items  Cost of services and
 Customer’s evaluation of  Cost to produce the purchased materials
firm’s environmental service or item  Inventory levels of
stewardship supplies and purchased
 Customer satisfaction with
the order fulfillment components
process  Evaluation of supplier’s
 Inventory levels of work- collaboration on
in-process and finished streamlining and waste
goods conversion

 Amount of greenhouse  Amount of transfer of

gasses emitted into the air environmental
technologies to suppliers

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Supply Chains and the Environment

 Sustainability
 Environmental stewardship
 Environmental protection
 Productivity improvement
 Risk minimization
 Innovation
 Reverse logistics
 Planning, implementing, and controlling flows
from consumption back to origin
 Closed-loop supply chain

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Closed Loop Supply Chain

Production process Distribution/Retailers Customers

New service/product Direct reuse Repair

development process
Returns
Remanufacture processor

Recycle parts
and materials

Waste
Product information
disposal

Forward logistics flow

Figure 10.6 – Flows in a Closed-Loop Supply Chain Reverse logistics flow

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