1. Supply Chain Management
Production Planning and Control
© 2006 Prentice Hall, Inc.

2. What is Supply Chain and Supply Chain Management?
Supply Chain is a network of organizations, people, activities, and resources involved in the flow of material and information from supplier of suppliers to the end user.
While Supply Chain Management (SCM) is the strategic coordination and management of the functions, activities, and resources involved in moving the raw material and information from supplier of suppliers to end customers to create a world- wide competitive infrastructure.

3. A Supply Chain

4. Supply Chain Processes

5. Supply-Chain Management
The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer.
To increase competitive advantage on a global level (competition between supply chains)

6. Global Supply-Chain Issues
Supply chains in a global environment must be able to:
React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates
Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out
Staff with local specialists who handle duties, freight, customs and political issues

7. Supply-Chain Uncertainty and Inventory
A major objective of SCM:
respond to uncertainty in customer demand without creating costly excess inventory
Negative effects of uncertainty
lateness
incomplete orders
Inventory
insurance against supply chain uncertainty

8. Supply Chain Uncertainty and Inventory
Factors that contribute to uncertainty
inaccurate demand forecasting
long variable lead times
late deliveries
incomplete shipments
product changes
batch ordering
price fluctuations and discounts
inflated orders

9. Bullwhip Effect
Occurs when slight demand variability is magnified as information moves back upstream

10. Risk Management
Formal process for coping with supply chain uncertainty
Evaluate and anticipate likelihood of supply chain disruptions
Plan for possible disruptions

11. Risk Pooling
Risks are aggregated to reduce the impact of individual risks
Combine inventories from multiple locations into one
Reduce parts and product variability, thereby reducing the number of product components
Create flexible capacity

12. Supply Chain Sustainability
“Going green”
Meeting present needs without compromising the ability of future generations to meet their needs
Sustaining human and social resources
It can be cost effective and profitable
Can provide impetus for product and process innovations
Impetus comes from downstream in the supply chain and moves upstream to suppliers

13. Sustainability and Quality Management
Reducing waste through quality programs helps achieve sustainability goals
Improving fuel efficiency of vehicles
Telecommuting
Eco-friendly packing materials
Energy-efficient facilities
Changing thermostat settings

14. Supply Chain Management Levels of Decision-making
Strategic Level
Tactical Level
Operational level
Network configuration (Technology, location, capacity, etc.)
Processing, distribution, material quantities, flow decisions, etc.
Day-to-day scheduling on task level.

15. Supply-Chain Management
Important activities include determining
Transportation vendors
Credit and cash transfers
Suppliers
Distributors and banks
Accounts payable and receivable
Warehousing and inventory
Order fulfillment
Sharing customer, forecasting, and production information

16. How Supply-Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Supplier’s Goal
Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell)
Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers)
Share market research; jointly develop products and options (e.g., Benetton)
Primary Selection Criteria
Select primarily for cost
Select primarily for capacity, speed, and flexibility
Select primarily for product development skills
Table 11.1

17. How Supply-Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Process Charact-eristics
Maintain high average utilization
Invest in excess capacity and flexible processes
Modular processes that lend themselves to mass customization
Inventory Charact-eristics
Minimize inventory throughout the chain to hold down cost
Develop responsive system with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence
Table 11.1

18. How Supply-Chain Decisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Lead-Time Charact-eristics
Shorten lead time as long as it does not increase costs
Invest aggressively to reduce production lead time
Invest aggressively to reduce development lead time
Product-Design Charact-eristics
Maximize performance and minimize costs
Use product designs that lead to low setup time and rapid production ramp-up
Use modular design to postpone product differentiation as long as possible
Table 11.1

19. Make-or-Buy Decisions
Maintain core competence
Lower production cost
Unsuitable suppliers
Assure adequate supply (quantity or delivery)
Utilize surplus labor or facilities
Obtain desired quality
Remove supplier collusion
Obtain unique item that would entail a prohibitive commitment for a supplier
Protect personnel from a layoff
Protect proprietary design or quality
Increase or maintain size of company
Reasons for Making
Table 11.4

20. Make-or-Buy Decisions
Frees management to deal with its primary business
Lower acquisition cost
Preserve supplier commitment
Obtain technical or management ability
Inadequate capacity
Reduce inventory costs
Ensure alternative sources
Inadequate managerial or technical resources
Reciprocity
Item is protected by a patent or trade secret
Reasons for Buying
Table 11.4

21. Outsourcing
Transfers traditional internal activities and resources of a firm to outside vendors
Utilizes the efficiency that comes with specialization
Firms outsource information technology, accounting, legal, logistics, and production

22. Supply-Chain Strategies
Negotiating with many suppliers
Long-term partnering with few suppliers
Vertical integration
Keiretsu (few suppliers & Vertical integration)
Virtual companies that use suppliers on an as needed basis

23. Many Suppliers Commonly used for commodity products
Purchasing is typically based on price
Suppliers are rough against one another
Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

24. Few Suppliers
Buyer forms longer term relationships with fewer suppliers who are more likely to understand the broad objectives of the procuring firm and the customer.
Create value through economies of scale and learning curve improvements
Suppliers more willing to participate in JIT programs and contribute design and technological expertise
Cost of changing suppliers is huge

25. Computers Watches Calculators
Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material (suppliers)
Iron ore
Silicon
Farming
Backward integration
Steel
Current transformation
Automobiles
Integrated circuits
Flour milling
Forward integration
Distribution systems
Circuit boards
Finished goods (customers)
Dealers
Computers Watches Calculators
Baked goods
Figure 11.2

26. Vertical Integration
Developing the ability to produce goods or service previously purchased
Integration may be forward, towards the customer, or backward, towards suppliers
Can improve cost, quality, and inventory but requires capital, managerial skills, and demand
Risky in industries with rapid technological change

27. Keiretsu Networks
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

28. Virtual Companies
Rely on a variety of supplier relationships to provide services on demand
Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands
Exceptionally lean performance, low capital investment, flexibility, and speed

29. Managing the Supply Chain
There are significant management issues in controlling a supply chain involving many independent organizations
Mutual agreement on goals
Trust
Compatible organizational cultures

30. Issues in an Integrated Supply Chain
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

31. Opportunities in an Integrated Supply Chain
Accurate “pull” data
Lot size reduction
Single stage control of replenishment
Vendor managed inventory
Postponement

32. Opportunities in an Integrated Supply Chain
Channel assembly
Drop shipping and special packaging
Blanket orders
Standardization
Electronic ordering and funds transfer

33. Information Technology: A Supply Chain Enabler
Information links all aspects of supply chain
E-business
replacement of physical business processes with electronic ones
Electronic data interchange (EDI)
a computer-to-computer exchange of business documents
Bar code and point-of-sale
data creates an instantaneous computer record of a sale

34. IT: Supply Chain Enabler
Radio frequency identification (RFID)
technology can send product data from an item to a reader via radio waves
Internet
allows companies to communicate with suppliers, customers, shippers and other businesses around the world instantaneously
Build-to-order (BTO)
direct-sell-to-customers model via the Internet; extensive communication with suppliers and customer

35. E-Business & Supply Chain Management
Savings due to lower transaction costs
Reduction of intermediary roles
Shorter supply chain response times
Wider presence and increased visibility
Greater choices & more info for customers
Improved service
Collection & analysis of huge amounts of customer data & preferences
Access to global markets, suppliers & distribution channels

36. Electronic Data Interchange
Computer-to-computer exchange of documents in a standard format
Purchasing, shipping and receiving
Improve customer service
Reduce paperwork
Increase productivity
Improve billing and cost efficiency
Reduce bullwhip effect through information sharing

37. Internet Purchasing Four Common Variations
Internet used to communicate order releases against blanket purchase orders
Internet replaces other forms of electronic order releases

38. Internet Purchasing Four Common Variations
Internet used to buy non-standard items from catalogs
Long-term master agreements in place
Reduces order lead-time and purchasing costs

39. Internet Purchasing Four Common Variations
Traditional purchasing system, but Internet-based
Significantly speeds up requisitioning, bidding, supplier selection, and order placement

40. Internet Purchasing Four Common Variations Internet auctions
May be used for commodity items for which long-term contracts do not exist

41. Internet Purchasing Individual initiates requisition Purchasing
department/buyer
Supplier
Prepares requisition
Buyer reviews requisition
Receives electronic purchase order
Inputs request into
computer system
and transmits to
purchasing
department
Enters data into Internet system
Ships good; receives electronic payment
Assigns suppliers to bid; gives closing dates and conditions
Collects/reviews bids submitted electronically
Selects a supplier based on quality, cost, delivery performance; issues purchase order
Figure 11.3

42. Internet Purchasing Suppliers get closer to their customers
Shorter cycle times may improve cash flow
Capital investment is low
Buyers enjoy comparison shopping, rapid ordering, reduced transaction costs, and lower inventory
May be part of an integrated Enterprise Resource Planning (ERP) system

43. Bar Codes Automated data collection system
Bar code contains identifying information
Provide instantaneous tracking information
Checkout scanners create point-of-sale data
Update inventory records
Identify trends
Order material
Schedule orders
Plan deliveries

44. Radio Frequency Identification (RFID)
Use radio waves to transfer data from chip to a reader
Provides complete visibility of product location
Continuous inventory monitoring
Reduce labor to manage inventory
Reduce inventory costs
RFID is not standardized yet
Difficult to track between systems

45. RFID Capabilities

46. RFID Capabilities

47. Vendor Selection Vendor evaluation Critical decision
Find potential vendors
Determine the likelihood of them becoming good suppliers
Vendor Development
Training
Engineering and production help
Establish policies and procedures

48. Vendor Selection Negotiations
Cost-Based Price Model - supplier opens books to purchaser
Market-Based Price Model - price based on published, auction, or indexed price
Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult

49. Vendor Evaluation Criteria Weights Scores (1-5) Weight x Score
Engineering/research/innovation skills
.20 5
1.0
Production process capability (flexibility/technical assistance)
.15 4 .6
Distribution/delivery capability
.05 .2
Quality systems and performance
.10 2
Facilities/location .1
Financial and managerial strength (stability and cost structure)
Information systems capability (e-commerce, Internet)
Integrity (environmental compliance/ ethics)
Total
1.00
3.9

50. Logistics Management
Objective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities
A frequent candidate for outsourcing
Gain competitive advantage through reduced costs and improved customer service

51. Distribution Systems Trucking Railroads
Moves the vast majority of manufactured goods
Chief advantage is flexibility
Railroads
Capable of carrying large loads
Little flexibility though containers and piggybacking have helped with this

52. Distribution Systems Airfreight Waterways
Fast and flexible for light loads
May be expensive
Waterways
Typically used for bulky, low-value cargo
Used when shipping cost is more important than speed

53. Distribution Systems Pipelines
Used for transporting oil, gas, and other chemical products

54. Cost of Shipping Alternatives
Product in transit is a form of inventory and has a carrying cost
Faster shipping is generally more expensive than slower shipping
We can evaluate the two costs to better understand the trade-off

55. Cost of Shipping Alternatives
Value of connectors = $1,750.00
Holding cost = 40% per year
Second carrier is 1 day faster and $20 more expensive
Daily cost of holding product
= x /365
annual holding cost
product value
= (.40 x $1,750)/ 365 = $1.92
Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper

56. Logistics, Security, and JIT
Borders are becoming more open in the U.S. and around the world
Monitoring and controlling stock moving through supply chains is more important than ever
New technologies are being developed to allow close monitoring of location, storage conditions, and movement

57. Benchmarking Supply-Chain Management
Typical Firms
Benchmark Firms
Administrative costs as a percent of purchases
3.3%
.8%
Lead time (weeks) 15 8
Time spent placing an order
42 minutes
15 minutes
Percentage of late deliveries
33% 2%
Percentage of rejected material
1.5%
.0001%
Number of shortages per year
400 4
Table 11.6

58. Supply Chain Integration
Share information among supply chain members
Reduced bullwhip effect
Early problem detection
Faster response
Builds trust and confidence
Collaborative planning, forecasting, replenishment, and design
Lower costs (material, logistics, operating, etc.)
Higher capacity utilization
Improved customer service levels

59. Supply Chain Integration
Coordinated workflow, production and operations, procurement
Production efficiencies
Fast response
Improved service
Quicker to market
Adopt new business models and technologies
Penetration of new markets
Creation of new products
Improved efficiency
Mass customization

60. Collaborative Planning, Forecasting, and Replenishment (CPFR)
Two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand
Parties electronically exchange
past sales trends
point-of-sale data
on-hand inventory
scheduled promotions
forecasts

61. SCM Software Enterprise resource planning (ERP)
software that integrates the components of a company by sharing and organizing information and data

62. Measuring Supply Chain Performance
Key performance indicators
Metrics used to measure supply chain performance
Inventory turnover
Total value (at cost) of inventory

63. Measuring Supply Chain Performance
Days of supply
Fill rate: fraction of orders filled by a distribution center within a specific time period

64. Computing Key Performance Indicators

65. Process Control and SCOR
not only for manufacturing operations
can be used in any processes of supply chain
Supply Chain Operations Reference (SCOR)
a cross industry supply chain diagnostic tool maintained by the Supply Chain Council

66. SCOR Model Processes

67. SCOR Performance Metrics

68. Questions?