SUPPLY CHAIN MANAGEMENT
Supply Chain Management Crusade
Focus is on entire value chain
Includes
lean production
JIT
TQM
purchasing
product/service design
Defining Supply Chain Management
Coordination and integration of all supply chain activities into
seamless process.
Enables organizations to plan and collaborate across supply chain.
Goal is to deliver right product to right place at right time in order to
maximize profit.
Strategic Advantages of Supply Chain
Supply chain management includes the supply, storage, and movement of
materials, information, personnel, equipment, and finished goods within the
organization and between its environment.
Goal of supply chain management is to integrate the entire process of
satisfying the customer’s needs all along the supply chain.
Strategic Advantages of Supply Chain Management continued
Supply chain costs often represent 50% or more of total operating costs
Firms that have implemented supply chain management
Have 45% supply chain cost advantage
50% lower inventory
17% faster delivery of final product
Larger market shares and higher customer loyalty
Supply Chain Strategy
Supply chain strategy needs to be tailored to meet the needs of its customers
which isn’t always the lowest cost.In situations where the goods are basic
commodities with standard benefits (food, home supplies, standard
clothing), then cost reduction will be the focus. In fashion goods, timeliness
should be the focus of the supply chain.
Strategic Need for Supply Chain Management
Total supply chain costs represent better than half, and in some cases three-
quarters, of the total operating expenses for most organizations.The broader
concept of the supply chain includes the supply, storage, and movement of
materials, information, personnel, equipment, and finished goods within the
organization and between it and its environment. As organizations have
continued to adopt more efficient production techniques such as lean
manufacturing, total quality management, inventory reduction techniques to
reduce costs and improve the quality, functionality, and speed of delivery of
their products and services to customers, the costs and delays of procuring
the requisite inputs and distributing the resulting goods and services are
taking a greater and greater fraction of the total cost and time.
Other Factors Driving Need to Better Manage Supply Chain
Increasing global competition
Outsourcing
E-commerce
Shorter life cycles
Greater supply chain complexity
Measures of Supply Chain Performance
Lower inventories, will be reflected in less need for working capital
(WC) and a higher return on asset (ROA) ratio.
Lower cost to carry these inventories will be seen in a reduced cost of
goods sold (CGS), and thus a higher contribution margin, return on
sales (ROS), and operating income.
Operations-Oriented Measures
Performance measures related to inventory reduction:
First we calculate the aggregate inventory value (at cost) on average
for the year (AAIV):
AAIV = raw materials + work-in-process + finished goods
% Assets in Inventories = AAIV/total assets
Another inventory measure is the inventory turnover (or “turns,” as it
is sometimes called):
Inventory turnover (“turns”) = annual cost of goods sold/AAIV
Supply Chain Design
The supply chain consists of the network of organizations that supply inputs
to the business unit, the business unit itself, and the customer network.
The Supply Chain
Logistics
Planning and controlling efficient, effective flows of goods, services, and
information from one point to another.
The Bullwhip Effect
Each segment further down the whip goes faster than the one above it.
Same effect often observed in supply chains.
Transportation
Modes of Transportation and Routing
Water
Rail
Truck
Air
Factors to Consider in Transportation Decisions
Cost per unit shipped
Ability to fill the transporting vehicle
Total shipment cost
Safety of contents
Shipping time
Availability of insurance
Perishability
Difficulty of arranging shipment
Delivery accommodations
Seasonal considerations
Consolidation possibilities
Size of product
Location
Besides distributing outputs to customers by transporting them, if there is a
facilitating good, we can also locate where our customers can easily obtain
them.
Advances in information and telecommunications technology have allowed
some pure service organizations (i.e., those without a facilitating good) to
reach their recipients through phone, cable, the Internet, or microwave links.
Trade-offs Between Transportation and Location
Processing Natural Resources
Large loss in size or weight during processing
High economies of scale exist
Raw material is perishable
Immobile Outputs
Processing Natural Resources
Organizations that process natural or basic resources as raw materials or
other essential inputs to obtain their outputs will locate near their resource if
one of the following conditions holds:
There is a large loss in size or weight during processing.
High economies of scale exist for the product.
The raw material is perishable.
Immobile Outputs
The outputs of some organizations may be relatively immobile, such as
dams, roads, buildings, and bridges. The organization locates itself at the
construction site and transports all required inputs to that location
Distribution Requirements Planning
The distribution process is illustrated on the next slide where retailers order
from local warehouses, the warehouses are supplied from regional centers,
and the regional centers draw from the central distribution facility, which
gets its inventory directly from the factory.
Purchasing/Procurement
Purchasing
Activities to reliably obtain materials by the time they are needed in
the product supply process. Important considerations include price,
quality, lead times, and reliability. Manufacturing organizations spend
an average of 55 percent of revenue for outside materials and services.
These same organizations spend only 6 percent on labor and 3 percent
on overhead.
Purchasing Versus Procurement
Purchasing implies a monetary transaction.
Procurement is simply the responsibility for acquiring the goods and
services the organization needs.
JIT and Purchasing
Widespread use of JIT has increased importance of purchasing and
procurement since delays in the receipt of materials will stop a JIT
program dead in its tracks.
Differences Between Purchasing by Individuals and Organizations
Organizations purchase larger volumes and dollar amounts.
Organization may be larger than its suppliers.
Very few suppliers exist for certain organizational goods, whereas
many typically exist for consumer goods.
Certain discounts may be available to organizations.
Value Analysis
A special responsibility of purchasing, or purchasing working jointly
with engineering/design and operations (and sometimes even the
supplier), is to regularly evaluate the function of purchased items or
services, especially those that are expensive or used in high volumes.
The goal is to either reduce the cost of the item or improve its
performance.
Key Elements of Effective Purchasing
They leverage their buying power.
They commit to a small number of dependable suppliers.
They work with and help their suppliers reduce total cost.
Supplier Management
Supplier Selection and Vendor Analysis
Characteristics of a good supplier are:
Deliveries are made on time and are of the quality and in the quantity
specified.
Prices are fair, and efforts are made to hold or reduce the price.
Able to react to unforeseen changes.
Supplier continually improves products and services.
Supplier is willing to share information and be an important link in the
supply chain.
Supplier Relationships
In the past, most customers purchased from the lowest bidders who
could meet their quality and delivery needs.
Customers are seeking a closer, more cooperative relationship with
their suppliers.
Supplier Certification and Audits
Outsourcing and Global Sourcing
Outsourcing is the process of contracting with external suppliers for
goods and services that were formally provided internally.
Global sourcing is an important aspect of supply chain outsourcing
strategy and we see it occurring more and more.
Primary Reasons Outsourcing Occurring
1. The fall of communism and the economic insulation it had
maintained.
2. The advent of telecommunications and computer technology that
physically allowed work that previously had to be done locally or
regionally to now be conducted overseas.
Outsourcing in general is a major strategic element of SCM these
days, not just for production materials but for a wide range of services
as well.
The Role of Information Technology in Supply Chain Management
Role of Information Technology
In the not-too-distant past, the primary means of communication
between members of a supply chain was paper.
One problem with paper-based systems has been the time and money
that is wasted re-keying the same information into different computer
systems.
Much of this problem has been solved with UPC and RFID being used
extensively.
More and more computing power is becoming available for less and
less money, hence it is becoming omnipresent, appearing everywhere
we go and in everything we buy.
Growth of networks.
As a result the growth of computers, which support networks, and
networks that support people’s needs (business transactions,
communication, blogging, etc.), has exploded.
Electronic Business
(e-business) is the use of electronic information technology to help
various groups of business people communicate and conduct business
transactions.
Three primary advantages:
enhanced productivity and reduced costs
Speed
creation of new value opportunities
E-Commerce
Traditional means of communication was paper
Electronic commerce is a term used to describe a variety of
approaches for conducting business in a paperless environment
Electronic Data Interchange (EDI)
Bar Coding and Scanning
Databases
Email
Electronic funds transfer
Internet
Point of sale terminals
ERP systems
RFID
Internet
The most significant information technology development for supply
chain management.
Customer Relationship Management (CRM) Systems
Designed to collect and interpret customer-based data.
CRM systems provide comprehensive customer data so the firm can
provide better customer service and design and offer the most
appropriate products and services for them.
Enterprise Resource Planning (ERP) Systems
Facilitate communication throughout the supply chain and over the
Internet.
The ERP system embodies much more than just the supply chain, it
also includes all the electronic information concerning the various
parts of the firm.
Successful Supply Chain Management
The basic requirements for successful supply chain management are
trustworthy partners, good communication, appropriate performance
measures, and competent managers with vision.
Examples of Visionary SCM Innovations
Dell’s “direct model” and Palm’s “strategic sourcing”.
• Wal-Mart’s “cross-docking” technique of off-loading goods from
incoming trucks at a warehouse directly into outbound distribution trucks
instead of being placed into inventory.
• “delayed differentiation” where final modules are either inventoried
for last-minute assembly to customer order, or differentiating features are
added to the final product upon receipt of the customer’s order.
Examples of Visionary SCM Innovations continued
Sport Obermeyer’s and Hewlett-Packard’s “postponement” approach
to delayed differentiation where variety and customization is delayed
until as late in the production process as possible, sometimes even
arranging with the carrier to perform the final customization (called
channel assembly).
Dell Computer
Direct Model
Use of Information Technology
provides suppliers with access to Dell’s inventories
Minimum Inventory Levels
Classic case in supply chain management.
Established in 1984, Dell experienced supply problems in 1993 and
thereupon completely redesigned its supply chain process along the
lines of what its founder, Michael Dell, called the “direct” model.
Between 1993 and 1998, Dell's earnings subsequently grew at 65
percent per year.
Dell's supply chain redesign was based on the following elements.
First, Dell sells directly to customers, eliminating the wholesaler and
retailer.
Second, Dell also takes advantage of new information technologies in
their communications with suppliers who can access Dell's component
inventories, production plans, and forecasts in real time and thus keep
their production precisely matched to Dell's needs.
Third, Dell deliberately maintains absolute minimum inventory levels
at every stage of production, averaging 4 days overall.
