Article on Value Added Supply Chain by mjb17904


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									Operations Management

  Supply Chain Management

   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 value chains
       The Value Chain internal to a

                    Production             Distribution
             Receiving Storage Operations Storage
           Typical Supply Chain
           activities for a Manufacturer



           Storage     Mfg.     Storage    Dist.    Retailer   Customer

supply                                              chain

    supply chain management (SCM) concerns supplier activities,
      internal value chain activities, and demand chain activities
    Typical Supply Chain for a


           }   Storage   Service   Customer
      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
    Strategic    Tactical Issues       Operating Issues
Design of the   Inventory policies    Quality control
supply chain,   Purchasing policies   Production planning and
partnering      Production policies   control
                Quality policies
Drivers of Supply Chain
      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
   Some advanced companies realized that
    huge inefficiency resulted from no/poor SCM
     In particular, identified the “Bullwhip Effect”
       Bullwhip Effect

                                                             Amount of
                                                           = inventory

  Tier 2        Tier 1                                                    Final
                          Producer     Distributor      Retailer
Suppliers     Suppliers                                                 Customer

“The sky      “@%*$!      “Wow! 8!     “Hmm. Last       “I’ll order 2    “I’ll buy 2”
is falling!   We are      I better
                                       period they      more.”
                                       ordered 1.
Build 250!”   really      build 30!”   Maybe demand
              behind.                  is up. I had
              Build 100!”              better order 8.”
        Bullwhip Effect

                                                             Amount of
                                                           = inventory

   Tier 2       Tier 1                                                Final
                          Producer      Distributor     Retailer
 Suppliers    Suppliers                                             Customer

“0? But        “0? @%*$! “0? But I’ve   “0?. But I’ve   “I’ll order 0 “I’ll buy 0”
we’ve got      What are    got 22 in    got 6 left.     more. I
150 in stock!” we gonna stock! Stop     Don’t buy       have 2
               do with the the line.”   any more.”      in stock.”
               70 we have?”
       Result of the Bullwhip Effect


Backorder   At each stage of the supply chain, a pattern like the above
            develops, of huge inventory buildups (and costs), followed
            by periods of huge stockouts and backordering (and mad
            customers + backordering costs)
        Benefits of Supply Chain
 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
Operational         Potential            Benefits           Possible
 Problem          Improvement                              Drawbacks
Large          Smaller, more         Reduced holding    Traffic congestion
inventories    frequent deliveries   costs              Increased costs
Long lead      Delayed               Quick response     May not be
times          differentiation                          feasible
               Disintermediation                        May need absorb
Large number Modular                 Fewer parts        Less variety
of parts                             Simpler ordering

Cost           Outsourcing           Reduced cost,      Loss of control
Quality                              higher quality
Variability    Shorter lead times,   Able to match      Less variety
               better forecasts      supply and
           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
   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

Element        Typical Issues
Customers      Determining what customers want
Forecasting    Predicting quantity and timing of demand
Design         Incorporating customer wants, mfg., and time
Processing     Controlling quality, scheduling work
Inventory      Meeting demand while managing inventory costs
Purchasing     Evaluating suppliers and supporting operations
Suppliers      Monitoring supplier quality, delivery, and relations
Location       Determining location of facilities
Logistics      Deciding how to best move and store materials

 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.

• Movement within the facility
• Traffic planning for incoming and
  outgoing shipments
• Bar coding
                              214800 232087768
• Distribution
• JIT Deliveries
            Materials Movement

               Work center
                                   Work center   Work

  Work                   Storage



      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
     Transportation
     Warehousing
     Workers
     Equipment
     Financial flows
        Electronic Data Interchange
   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:
   The use of electronic technology (e.g., WWW, Web
    Services, mobile devices) to facilitate business

 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
       Successful SCM has certain
 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

 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
 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
   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
   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 delivery
                     Order fulfillment lead time
                     Fill rate (fraction of demand met from stock)
                     Perfect order fulfillment
    Flexibility      Supply chain response time
                     Upside production flexibility

   Expenses          Supply chain management costs
                     Warranty cost as a percent of revenue
                     Value added per employee
Assets/utilization   Total inventory days of supply
                     Cash-to-cash cycle time
                     Net asset turns
       SCOR’s SCM Performance
 Reliability – delivery performance, fill rate,
  perfect fulfillment
 Responsiveness – order fill lead time
 Flexibility – SC response time, ops flexibility
 Cost – warranty cost, productivity, CGS, SCM
 Assets – turns, inventory days, cash cycle
Collaborative Approaches to
      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
 Coordinate planning and execution across
  the supply chain
 Form strategic partnerships
              Collaboration Assumes Your
              Supplier can be a Partner
Aspect                   Adversary             Partner
Number 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;    At the source; vendor
                         buyer inspects        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
     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

 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
 Steps 3-5 – Sales forecast collaboration
 Steps 6-8 – Order forecast collaboration
 Step 9 – Order generation/delivery
      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
 Long lead times hinder the ability of a supply
  chain to respond to changing customer

 Purchasing is responsible for obtaining the
  materials, parts, and supplies and services
  needed to produce a product or provide a

 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
   > 60% cost of finished
    manufactured goods is
   >90% cost of retail &
    wholesale goods is
        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
                                 Negotiates contracts

                                                                     Pays for
            materials                   Legal
                        Operations                      Accounting

                                     Purchasing                Data

                                                        Design &
                                                        Engineering Specifies quality of
                                      Receiving                       materials

                                                  Inspects incoming shipments
         Purchasing follows a cycle of


1.   Requisition received    Operations
2.   Supplier selected
3.   Order is placed with supplier
4.   Monitor orders                       Purchasing        process-

5.   Receive orders


      Centralized vs. Decentralized
 Centralized purchasing
   Purchasing is handled by one special

 Decentralized purchasing
   Individual departments or separate locations
    handle their own purchasing requirements
How to Choose and Evaluate
        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
   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

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