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Forecasting 7 Supply Chain Management SCM Supply

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  • pg 1
									 7. Supply Chain
Management (SCM)
Supply Chain Management
 Integration of the activities that procure
  materials and services, transform them
  into intermediate goods and the final
  product, and deliver them to customers
 Competition is no longer between
  companies; it is between supply chains
A Sample Supply Chain
Supply Chain Strategies
 Negotiating with many suppliers
 Long term partnering with few suppliers
 Vertical integration
 Keiretsu (affiliated chain)
Many Suppliers
   Commonly used for commodity products
    – many sources per item
   Adversarial short term relationship
   Infrequent large lots
   Purchasing is typically based on price -
    suppliers are pitted against one another
Few Suppliers
   Longer term stable relationships
   Partnership - JIT programs, design and
    technological contribution
   High quality and possibly low price
   Frequent small lots
   Cost of changing suppliers is huge
Vertical Integration
   Ability to produce goods or service
    previously purchased – make or buy
    decisions
   Integration may be forward, towards the
    customer, or backward, towards
    suppliers
   Can improve cost, quality, and inventory
    but requires major financial commitment
   Hard to do all things well
Vertical Integration
Vertical Integration           Examples of Vertical Integration
 Raw material
                         Iron ore            Silicon           Farming
 (suppliers)


 Backward integration      Steel


 Current
                        Automobiles    Integrated circuits   Flour milling
 transformation


                        Distribution
 Forward integration                     Circuit boards
                         systems


 Finished goods                           Computers
 (customers)              Dealers          Watches           Baked goods
                                          Calculators
Keiretsu Networks (affiliated chain)
    A middle ground between few suppliers and
     vertical integration
    Supplier becomes part of the company
     coalition
    Often provide financial support for suppliers
     through ownership or loans
    Members expect long-term relationships and
     provide technical expertise and stable
     deliveries
    May extend through several levels of the
     supply chain
Make or Buy Decisions
              Reasons for Making
   1. Lower production cost
   2. Obtain desired quality
   3. Assure adequate supply (quantity or
      delivery)
   4. Utilize surplus labor or facilities
   5. Protect proprietary design or quality
   6. Increase or maintain size of company
Make – or – Buy Decisions
              Reasons for Buying
   1. Frees management to deal with its
      primary business
   2. Inadequate capacity
   3. Reduce inventory costs
   4. Ensure alternative sources
   5. Inadequate managerial or technical
      resources
   6. Item is protected by a patent or trade
      secret
Issues in SCM
 Local optimization - focusing on local profit
  or cost minimization based on limited
  knowledge
 Incentives (sales incentives, quantity
  discounts, quotas, and promotions) - push
  merchandise prior to sale
 Large lots - low unit cost but do not reflect
  sales
 Bullwhip effect - stable demand becomes
  lumpy orders through the supply chain
Opportunities in SCM
 Accurate “pull” data
 Lot size reduction
 Single stage control of replenishment
 Vendor managed inventory
 Standardization
 Electronic ordering and funds transfer
Example
Vendor Evaluation
                                                Scores   Weight
Criteria                                Weights (1-5)    x Score
Engineering/research                      .20     5       1.0
Production/process capability             .15     4        .6
Distribution/delivery capability          .05     4        .2
Quality systems and performance           .10     2        .2
Facilities/location                       .05     2        .1
Financial and managerial strength         .15     4        .6
(stability and cost structure)
Information systems (ERP)                 .10     2        .2
Integrity (compliance/ethics)             .20     5       1.0
                                Total    1.00             3.9
Supply Chain Performance
 Inventory Investment
  =Total Inventory / Total Assets * 100
 Example:
    Inventory: $11.4 billion, Assets: $44.4 billion
    Inventory investment = 11.4/44/4*100 = 25.7%


Manufacturing    20%    (Toyota 5%)
Wholesale        34%    (Coca-Cola 2.9%)
Restaurants     2.9%    (McDonald’s .05%)
Retail           27%    (Home Depot 25.7%)
Supply Chain Performance
   Inventory Turnover
    =Cost of Goods Sold / Total Inventory
   Example:
     Net revenue                            $32.5
     Cost of goods sold                     $14.2
     Inventory:
        Raw material inventory      $.74
        Work-in-process inventory   $.11
        Finished goods inventory    $.84
     Total inventory investment             $1.69

Inventory Turnover = 14.2 / 1.69 = 8.4
Supply Chain Performance
      Examples of Annual Inventory Turnover
Food, Beverage, Retail     Manufacturing
Anheuser Busch      15     Dell Computer       90
Coca-Cola           14     Johnson Controls    22
Home Depot           5     Toyota (overall)    13
McDonald’s         112     Nissan (assembly)   150
Network Design in a Supply Chain
 Facility location
 Capacity allocation
 Market and supply allocation
Cost vs. Number
                                               Total Costs
Cost of Operations




                                            Percent Service
                                             Level Within
                                            Promised Time

                                              Facilities
                                              Inventory
                                             Transportation
                                              Labor



                     Number of Facilities
Conventional Network
          Materials                                        Customer
Vendor                               Finished   Customer
            DC                                              Store
 DC                                 Goods DC      DC

                                                           Customer
         Component                                          Store
Vendor   Manufacturin
 DC          g            Plant                 Customer   Customer
                        Warehouse                 DC        Store
         Components
            DC                                             Customer
Vendor                                                      Store
 DC                                  Finished
                                                Customer
            Final                   Goods DC
                                                  DC       Customer
          Assembly                                          Store
 Tailored Network
                         Local DC
                                                  Store 1
                        Cross-Dock
            Regional                 Customer 1
             Finished                   DC        Store 1
            Goods DC
                        Local DC
                        Cross-Dock
 National                                         Store 2
                                     Customer 2
 Finished
                                        DC
Goods DC
                         Local DC                 Store 2
                        Cross-Dock
            Regional
             Finished                             Store 3
            Goods DC

                                                  Store 3
Network/Location Decisions
 Long-term decisions
 Decisions made infrequently
 Decision greatly affects both fixed and
  variable costs
 Once committed to a location, many
  resource and cost issues are difficult to
  change
Critical Factors to Consider
   Proximity to raw materials and customers
   Labor, availability, costs
   Land/construction costs
   Government incentives and fiscal policies
   Corporate desires
   Environmental regulations
Methods of Evaluating Locations
   Factor Rating Method
   Locational Break-Even Analysis
   Center of Gravity Method
   Transportation Method
Factor Rating method
    Most widely used location technique

1.   Develop a list of relevant factors
2.   Assign a weight to each factor
3.   Score each location for each factor
4.   Multiply score by weights for each factor
     for each location
Example
 Critical                   Scores
 Success                  (out of 100)          Weighted Scores
  Factor        Weight France Denmark        France         Denmark
Labor
 availability
 and attitude    .25     70     60       (.25)(70) = 17.5 (.25)(60) = 15.0
People-to
 car ratio       .05     50     60        (.05)(50) = 2.5   (.05)(60) = 3.0
Per capita
 income          .10     85     80         (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure    .39     75     70       (.39)(75) = 29.3 (.39)(70) = 27.3
Education
 and health      .21     60     70       (.21)(60) = 12.6 (.21)(70) = 14.7
Totals          1.00                                70.4              68.0
Locational Break Even Analysis
    Method of cost-volume analysis used for
     industrial locations

1.   Determine fixed and variable costs for
     each location
2.   Plot the cost for each location
3.   Select location with lowest total cost for
     expected production volume
Example

                   Fixed Variable    Total
 City              Cost   Cost        Cost
 Akron            $30,000  $75      $180,000
 Bowling Green    $60,000  $45      $150,000
 Chicago         $110,000  $25      $160,000

 Selling price = $120
 Expected volume = 2,000 units
Example
                          –
                 $180,000 –
                          –
                 $160,000 –
                 $150,000 –
                          –
                 $130,000 –
   Annual cost




                          –
                 $110,000 –
                          –
                          –
                  $80,000 –
                          –
                  $60,000 –
                          –
                          –
                              Akron                                      Chicago
                  $30,000 –   lowest
                                               Bowling Green
                                                                          lowest
                          –    cost
                                                lowest cost
                                                                           cost
                  $10,000 –
                          |     |        |       |         |       |        |
                          –
                         0     500     1,000   1,500     2,000   2,500    3,000
                                                     Volume
Center of Gravity Method
    Find location of distribution center that
     minimizes distribution costs
    Consider location of markets, volume of
     goods shipped to those markets, and
     shipping cost (or distance)


1.   Place existing locations on a coordinate
     grid
2.   Calculate X and Y coordinates for „center
     of gravity‟
Center of Gravity Method
 Computation of center
      x - coordinate =   ∑dixQi / ∑Qi

      y - coordinate =   ∑diyQi / ∑Qi


 Evaluation of potential locations

         Min   Qi ( xi  x)2( yi  y)2
Example
  North-South
                                            New York (130, 130)
        Chicago (30, 120)
   120 –
                                             Pittsburgh (90, 110)
    90 –


    60 –


    30 –
                     Atlanta (60, 40)

       –
       |        |           |           |          |        |
                                                                  East-West
                30         60           90        120      150
       Arbitrary
       origin
Example
                             Number of Containers
       Store Location         Shipped per Month
         Chicago (30, 120)          2,000
         Pittsburgh (90, 110)       1,000
         New York (130, 130)        1,000
         Atlanta (60, 40)           2,000

                (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
x-coordinate =
                           2000 + 1000 + 1000 + 2000
             = 66.7
                (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
                            2000 + 1000 + 1000 + 2000
             = 93.3
Example
  North-South
                                            New York (130, 130)
        Chicago (30, 120)
   120 –
                                             Pittsburgh (90, 110)
    90 –                        +       Center of gravity (66.7, 93.3)

    60 –


    30 –
                     Atlanta (60, 40)

       –
       |        |           |           |          |        |
                                                                  East-West
                30         60           90        120      150
       Arbitrary
       origin
Transportation Model
   Find amount to be shipped from several
    points of supply to several points of
    demand
   Solution will minimize total production and
    shipping costs
Transportation Model
           n   m                  n          n m
   Min cij xij          Min  f i y i    cij xij
          i 1 j 1              i 1       i 1 j 1

   s.t.                   s.t.
    n                      n
                           xij  D j
    xij  D j
   i 1
                          i 1
                           n
    m
                           xij  K i y i
   x  K
   j 1
          ij          i   j 1
                          m
                           y i  k ; y i {0,1}
   xij  0                i 1
Location Strategy
 Service/Retail/Professional Location       Goods-Producing Location
            Revenue Focus                           Cost Focus
 Volume/revenue                         Tangible costs
   Drawing area; purchasing power         Transportation cost of raw material
   Competition; advertising/pricing       Shipment cost of finished goods
                                          Energy and utility cost; labor; raw
 Physical quality                           material; taxes, and so on
  Parking/access; security/lighting;
    appearance/image                    Intangible and future costs
                                          Attitude toward union
 Cost determinants                        Quality of life
  Rent                                    Education expenditures by state
  Management caliber                      Quality of state and local
  Operations policies (hours, wage          government
    rates)
Location Strategy
 Service/Retail/Professional Location       Goods-Producing Location
             Techniques                             Techniques
 Regression models to determine         Transportation methods
   importance of various factors        Factor-rating method
 Factor-rating method                   Locational break-even analysis
 Traffic counts                         Crossover charts
 Demographic analysis of drawing area
 Purchasing power analysis of area
 Center-of-gravity method
 Geographic information systems
Location Strategy
 Service/Retail/Professional Location       Goods-Producing Location
             Assumptions                           Assumptions
 Location is a major determinant of     Location is a major determinant of
   revenue                                cost
 High customer-contact issues are       Most major costs can be identified
   critical                               explicitly for each site
 Costs are relatively constant for a    Low customer contact allows focus
   given area; therefore, the revenue     on the identifiable costs
   function is critical                 Intangible costs can be evaluated
Video Case Study
Beer Game
 Was the game realistic?
 Did you blame your customers or vendors?
 Who is responsible for the performance?
 Why not ship them directly from the factory
  to the retailer?
 What was the real demand?
 Why are there big fluctuations?
 Can we use some inventory policies?

								
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