1. Reid & Sanders, Operations Management © Wiley 2002 Supply Chain Management 4 C H A P T E R

2. Reid & Sanders, Operations Management © Wiley 2002 Page 2 Learning Objectives Describe supply chains and SCM Describe the bullwhip effect Describe SCM factors Describe the role of vertical integration Solve insourcing or outsourcing problems Describe the role of purchasing in SCM Describe the role of information sharing in SCM Describe the technologies used in information sharing Describe how to implement SCM Describe the role of warehouses in supply chains Describe trends in SCM

3. Reid & Sanders, Operations Management © Wiley 2002 Page 3 What is a Supply Chain? A network of activities that deliver a finished product or service to the customer. –The connected links of external suppliers, internal processes, and external distributors.

4. Reid & Sanders, Operations Management © Wiley 2002 Page 4 Components of a Typical Supply Chain External Suppliers Internal Functions External Distributors INFORMATION

5. Reid & Sanders, Operations Management © Wiley 2002 Page 5 A Basic Supply Chain

6. Reid & Sanders, Operations Management © Wiley 2002 Page 6 Supply Chain Management Supply Chain Management entails: –Coordinating the movement of goods and delivery of services. –Sharing information between members of the supply chain. For example: sales, forecasts, promotional campaigns, and inventory levels.

7. Reid & Sanders, Operations Management © Wiley 2002 Page 7 Supply Chain for Milk Products

8. Reid & Sanders, Operations Management © Wiley 2002 Page 8 External Suppliers External suppliers provide the necessary raw materials, services, and component parts. Purchased materials & services frequently represent 50% (or more) of the costs of goods sold. Suppliers are frequently members of several supply chains – often in different roles.

9. Reid & Sanders, Operations Management © Wiley 2002 Page 9 External Suppliers Tier one suppliers: –Directly supplies materials or services to the firm that does business with the final customer Tier two suppliers: –Provides materials or services to tier one suppliers Tier three suppliers: –Providers materials or services to tier two suppliers

10. Reid & Sanders, Operations Management © Wiley 2002 Page 10 Internal Functions Vary by industry & firm, but might include: –Processing –Purchasing –Production Planning & Control –Quality Assurance –Shipping

11. Reid & Sanders, Operations Management © Wiley 2002 Page 11 Logistics & Distribution Logistics: getting the right material to the right place at the right time in the right quantity: –Traffic Management: The selection, scheduling & control of carriers (e.g.: trucks & rail) for both incoming & outgoing materials & products –Distribution Management: The packaging, storing & handling of products in transit to the end-user.

12. Reid & Sanders, Operations Management © Wiley 2002 Page 12 Information Sharing Supply chain partners can benefit by sharing information on sales, demand forecasts, inventory levels & marketing campaigns Inaccurate or distorted information leads to the Bullwhip Effect

13. Reid & Sanders, Operations Management © Wiley 2002 Page 13 Typical Information Flow

14. Reid & Sanders, Operations Management © Wiley 2002 Page 14 The Bullwhip Effect If information isn’t shared, everyone has to guess what is going on downstream. Guessing wrong leads to too much or too little inventory: –If too much, firms hold off buying more until inventories fall (leading suppliers to think demand has fallen). –If too little, firms demand a rush order & order more than usual to avoid being caught short in the future (leading suppliers to think demand has risen).

15. Reid & Sanders, Operations Management © Wiley 2002 Page 15 The Bullwhip Effect Farther away from the customer, the quality of information gets worse & worse as supply chain members base their guesses on the bad guesses of their partners. The result is increasingly inefficient inventory management, manufacturing, & logistics

16. Reid & Sanders, Operations Management © Wiley 2002 Page 16 Short-Circuit the Bullwhip Make information transparent: –Use Electronic Data Interchange (EDI) to support Just-In-Time supplier replenishment –Use bar codes & electronic scanning to capture & share point-of-sale data Eliminate wholesale price promotions & quantity discounts Allocate scarce items in proportion to past sales to avoid attempts to ‘game’ the system

17. Reid & Sanders, Operations Management © Wiley 2002 Page 17 Electronic Data Interchange The most common method of using computer-to-computer links to exchange data between supply chain partners in a standardized format. Benefits include: –Quick transfer of information –Reduced paperwork & administration –Improved data accuracy & tracking capability

18. Reid & Sanders, Operations Management © Wiley 2002 Page 18 Vertical Integration A measure of how much of the supply chain is controlled by the manufacturer. –Backward integration: Acquiring control of raw material suppliers. –Forward integration: Acquiring control of distribution channels.

19. Reid & Sanders, Operations Management © Wiley 2002 Page 19 Outsourcing Entails paying third-party suppliers to provide raw materials and services, rather than making them in-house. Outsourcing is increasing as many firms try to focus their internal operations on what they do best.

20. Reid & Sanders, Operations Management © Wiley 2002 Page 20 Whether to Outsource? What volume is required? Are items of similar quality available in the marketplace? Is long-term demand for the item stable? Is the item critical to success of the firm? Does the item represent a core competency of the firm?

21. Reid & Sanders, Operations Management © Wiley 2002 Page 21 Breakeven Analysis

22. Reid & Sanders, Operations Management © Wiley 2002 Page 22 Example: The Bagel Shop Bill & Nancy plan to open a small bagel shop. –The local baker has offered to sell them bagels at 40 cents each. However, they will need to invest $1,000 in bread racks to transport the bagels back & forth from the bakery to their store. –Alternatively, they can bake the bagels at their store for 15 cents each if they invest $15,00 in kitchen equipment. –They expect to sell 60,000 bagels each year. What should they do?

23. Reid & Sanders, Operations Management © Wiley 2002 Page 23 Example Solved Interpretation: –They anticipate selling 60,000 bagels (greater than the indifference point of 56,000). –Therefore, make the bagels in-house.

24. Reid & Sanders, Operations Management © Wiley 2002 Page 24 Developing a Supply Base How to chose between suppliers? One supplier or many per item? Whether to partner with suppliers?

25. Reid & Sanders, Operations Management © Wiley 2002 Page 25 Criteria for Choosing Suppliers Cost: –Cost per unit & transaction costs Quality: –Conformance to specifications On-time delivery: –Speed & predictability

26. Reid & Sanders, Operations Management © Wiley 2002 Page 26 Arguments for One Supplier per Item May only be one practical source for the item –Patent issues, geography, or quality considerations) The supply chain is integrated to support JIT or EDI –Making multiple suppliers impractical Availability of quantity discounts Supplier may be more responsive if it’s guaranteed all your business for the item Contract might bind you to using only one supplier Deliveries may be scheduled more easily

27. Reid & Sanders, Operations Management © Wiley 2002 Page 27 Arguments for Multiple Suppliers per Item No single supplier may have sufficient capacity Competition may result in better pricing or service Multiple suppliers spreads the risk of supply chain interruption Eliminates purchaser’s dependence on a single source of supply Provides greater volume flexibility Government regulation may require multiple suppliers –Antitrust issues Allows testing new suppliers without risking a complete disruption of material flow

28. Reid & Sanders, Operations Management © Wiley 2002 Page 28 Partnering with Suppliers Involves developing a long-term, mutually-beneficial relationship: –Requires trust to share information, risk, opportunities, & investing in compatible technology –Work together to reduce waste and inefficiency & develop new products –Agree to share the gains

29. Reid & Sanders, Operations Management © Wiley 2002 Page 29 The Role of Warehouses General Warehouses: –Used for long-term storage of goods Distribution Warehouses: –Transportation consolidation: Consolidate LTL into TL deliveries –Product mixing & blending: Group multiple items from various suppliers –Improve service: Reduced response time Allow for last-minute customization

30. Reid & Sanders, Operations Management © Wiley 2002 Page 30 Future Challenges Household Replenishment: –Fulfilling consumer demand at the point of use (the home). –Often called ‘the last mile’ problem. Freeze Point Delay (Postponement): –Last minute customization to provide exactly what the consumer wants while maintaining very small inventories

31. Reid & Sanders, Operations Management © Wiley 2002 Page 31 The End Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.