Chapter 10
Supply Chain Management
Operations Management - 6th Edition
Roberta Russell & Bernard W. Taylor, III
Copyright 2009 John Wiley & Sons, Inc.
Beni Asllani
University of Tennessee at Chattanooga
Principles of good process
design -- REVIEW
 Start with a vision
 Decide upon approach
 As few people as possible involved in
the final process
 Lots of involvement, empowerment and
ownership
 Measure before and after the change
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Principles of good process
design, Cont’d
 Simplicity, simplicity, simplicity
 Make it fun, make it easy
 Focus on outcomes




Shortened cycle times
Lower cost
Higher quality
Higher throughput
 Simulate the prototype
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BPR (and INNOVATION) VS
PROCESS IMPROVEMENT










Level of change
Starting point
Freq of change
Time required
Participation
Typical scope
Risk
Primary enabler
Type of change
IMPROVEMENT
Incremental
Existing process
Continuous
short
bottom-up
Narrow
Moderate
Statistical control
cultural
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BUS PROCESS REENG
Radical
Clean slate
One-time
long
top-down
Broad
High
Information technology
cultural / structural
6-4
Process Innovation
Continuous improvement
refines the breakthrough
Breakthrough
Improvement
Total redesign
of a process for
breakthrough
improvements
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Continuous improvement activities
peak; time to reengineer process
6-5
Lecture Outline
 Supply Chain Management
 Information Technology: A Supply Chain
Enabler
 Supply Chain Integration
 Suppliers
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10-6
Lecture Outline (cont.)
 E-Procurement
 Distribution
 Supply Chain Management Software
 Measuring Supply Chain Performance
 Global Supply Chain
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10-7
Supply Chain
 All facilities, functions, activities,
associated with the flow and
transformation of goods and services
from raw materials to the customer, as
well as the associated information flows
 An integrated group of processes to
“source,” “make,” and “deliver” products
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Supply Chain Illustration
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Supply
Chain
for
Denim
Jeans
(cont.)
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10-10
Supply Chain Processes
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Measuring Supply Chain
Performance
 Key performance indicators

inventory turnover



inventory days of supply



cost of annual sales per inventory unit
The more turns, the better
total value of all items being held in inventory
The fewer days of supply, the better
fill rate

fraction of orders filled by a distribution center within
a specific time period (like one day)
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Key Performance Indicators
Cost of goods sold/yr
Inventory turns/yr =
Average aggregate value of inventory
Average aggregate value of inventory =
= Σ(average inventory for item i) X (unit value item i)
Average aggregate value of inventory
Days of supply =
(Costs of goods sold)/(365 days)
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Inventory Turns
 The more, the better
 GM: 11.6 roughly, per year
 Toyota: used to be in the 60’s when all their
manufacturing was in Japan—now its in the
low teens
 DELL: > 50 turns a year
 PALM: increased its turns from 12 to 26
 Pfizer: 1.5 turns – needs to be fixed!
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Days of Supply (Units are ‘days’)
 Years of supply = 1/(Inventory turns/yr)
 Days of supply = 365 * Years of supply
 Days of supply = (365 days/yr)/(Inventory turns/yr)
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Key Performance Indicators:
Example
1.
2.
3.
4.
5.
Cost of goods sold: $425 million per year
Production materials and parts: $4,629,000
Work-in-process: $17,465,000
Finished goods: $12,322,000
Total average aggregate value of inventory (2+3+4): $34,416,000
$425, 000, 000
Inventory turns =
$34,416,000
= 12.3 per year
$34,416,000
= 29.6
Days of supply =
($425,000,000)/(365)
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Other Measures of Supply Chain
Performance
 Process Control

used to monitor and control any process in
supply chain
 Supply Chain Operations Reference
(SCOR)

establish targets to achieve “best in class”
performance
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10-17
Supply Chain for Service
Providers
 More difficult than manufacturing
 Does not focus on the flow of physical goods
 Focuses on human resources and support
services
 More compact and less extended
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Supply Chain
Management (SCM)
 Managing flow of information through supply
chain in order to attain the level of
synchronization that will make it more
responsive to customer needs while lowering
costs
 Keys to effective SCM




information
communication
cooperation
trust
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Value Chains
 Value chain


every step from raw materials to the eventual end user
ultimate goal is delivery of maximum value to the end user
 Supply chain


activities that get raw materials and subassemblies into
manufacturing operation
ultimate goal is same as that of value chain
 Demand chain

increase value for any part or all of chain
 Terms are used interchangeably
 Value

creation of value for customer is important aspect of supply
chain management
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Supply Chain Uncertainty
 One goal in 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
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 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
10-21
Bullwhip Effect
Occurs when slight demand variability is magnified as information
moves back upstream
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10-22
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
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10-23
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
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 Bar code and point-of-sale

data creates an
instantaneous computer
record of a sale
 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
10-24
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10-25
E-business and Supply Chain
 Cost savings and price reductions
 Reduction or elimination of the role of
intermediaries (disintermediation)

Dell’s Direct Marketing to the customer
 Shortening supply chain response and
transaction times
 Gaining a wider presence and increased
visibility for companies
 Greater choices and more information for
customers
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E-business and Supply Chain
(cont.)
 Improved service as a result of instant
accessibility to services
 Collection and analysis of voluminous amounts
of customer data and preferences
 Creation of virtual companies
 Leveling playing field for small companies
 Gaining global access to markets, suppliers,
and distribution channels
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Supply Chain Evolution at
Nabisco
Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.
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Supply Chain Evolution at
Nabisco (cont.)
Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.
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Supply Chain Evolution at
Nabisco (cont.)
Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.
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RFID Capabilities
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RFID Capabilities (cont.)
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Build-to-order cars over
the Internet
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E-automotive Supply Chain
Supply Chain
Processes
Automotive
Past
 Customer sales  Push—sell from
inventory stock
 Production
 Goal of even and
stable production
 Distribution
 Mass approach
 Customer
relationship
 Dealer-owned
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E-Automotive
 Pull—build-to-order
 Focus on customer
demand, respond with
supply chain flexibility
 Fast, reliable, and
customized to get cars
to specific customer
location
 Shared by dealers and
manufacturers
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E-automotive Supply Chain (cont.)
Supply
Chain
Processes
Automotive
Past
 Managing
uncertainty
 Large car
inventory at
dealers
 Procurement  Batch-oriented;
dealers order
based on
allocations
 Complex
 Product
products don’t
design
match customer
needs
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E-Automotive
 Small inventories with
shared information and
strategically placed parts
inventories
 Orders made in real time
based on available-topromise information
 Simplified products based on
better information about
what customers want
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Supply Chain Integration
 Information sharing among supply chain
members




Reduced bullwhip effect
Early problem detection
Faster response
Builds trust and confidence
 Collaborative planning, forecasting,
replenishment, and design




Reduced bullwhip effect
Lower Costs (material, logistics, operating, etc.)
Higher capacity utilization
Improved customer service levels
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Supply Chain Integration (cont.)
 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
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Collaborative Planning,
Forecasting, and Replenishment
 Process for 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
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Suppliers
 Procurement

purchase of goods and services from suppliers
 On-demand (direct response) delivery

requires supplier to deliver goods when
demanded by customer
 Continuous replenishment

supplying orders in a short period of time
according to a predetermined schedule
 Cross-enterprise teams coordinate
processes between company and supplier
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Outsourcing
 Sourcing

selection of suppliers
 Outsourcing

purchase of goods and services from an
outside supplier
 Core competencies

what a company does best
 Single sourcing

a company purchases goods and services
from only a few (or one) suppliers
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Original Equipment
Manufacturer
(OEM)
Maintenance
Repair and
Corporate
Operation (MPO)
Services
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E-Procurement
 Direct purchase from suppliers over the
Internet
 Direct products go directly into production
process; indirect products do not
 E-marketplaces


web sites where companies and suppliers conduct
business-to-business activities
www.covisint.com
 Reverse auction

a company posts orders on the Internet for
suppliers to bid on
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Online Sourcing/ Procurement
Process
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Online Sourcing/ Procurement
Process (cont.)
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Online Sourcing/ Procurement
Process (cont.)
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Relationship between Facilities and Functions
along the Wal-Mart Supply Chain
Source: Adapted from Garrison Wieland for “Wal-Mart’s
Supply Chain,” Harvard Business Review 70(2; March–April
1992), pp. 60–71.
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Distribution
 Encompasses all channels, processes, and
functions, including warehousing and
transportation, that a product passes on its
way to final customer
 Often called logistics
 Logistics
 transportation and distribution of goods
and services
 Driving force today is speed
 Particularly important for Internet dot-coms
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10-47
Amazon.com
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10-48
Distribution Centers (DC)
and Warehousing
 DCs are some of the largest business
facilities in the United States
 Trend is for more frequent orders in
smaller quantities
 Flow-through facilities and automated
material handling
 Postponement
 final assembly and product configuration
may be done at the DC
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Warehouse Management
Systems
 Highly automated system that runs day-to-day
operations of a DC
 Controls item putaway, picking, packing, and
shipping
 Features
 transportation management
 order management
 yard management
 labor management
 warehouse optimization
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A WMS
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Vendor-Managed Inventory
 Manufacturers generate orders, not distributors or
retailers
 Stocking information is accessed using EDI
 A first step towards supply chain collaboration
 Increased speed, reduced errors, and improved
service
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Transportation
 Rail


low-value, high-density, bulk
products, raw materials,
intermodal containers
not as economical for small
loads, slower, less flexible
than trucking
 Trucking



main mode of freight
transport in U.S.
small loads, point-to-point
service, flexible
More reliable, less damage
than rails; more expensive
than rails for long distance
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Transportation (cont.)
Air
most expensive and fastest, mode of
freight transport
 lightweight, small packages <500 lbs
 high-value, perishable and critical
goods
 less theft

Package Delivery
small packages
 fast and reliable
 increased with e-Business
 primary shipping mode for Internet
companies

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Transportation (cont.)
Water
low-cost shipping mode
 primary means of international shipping
 U.S. waterways
 slowest shipping mode

Intermodal
combines several modes of shippingtruck, water and rail
 key component is containers

Pipeline
transport oil and products in liquid form
 high capital cost, economical use
 long life and low operating cost

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Internet Transportation
Exchanges
 Bring together shippers and
carriers
 Initial contact, negotiations,
auctions
 Examples
www.nte.com
www.freightquote.com
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SCM Software
 Enterprise Resource Planning (ERP)



software that integrates components of a
company by sharing and organizing
information and data
SAP was first ERP software
mySAP.com

web enabled modules that allow collaboration
between companies along the supply chain
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Linking Supply Chain with SAP
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SCOR Model Processes
Plan
Develop a course
of action that best
meets sourcing,
production and
delivery
requirements
Source
Procure goods
and services to
meet planned
or actual
demand
Make
Transform
product to a
finished state to
meet planned
or actual
demand
Deliver
Provide products
to meet demand,
including order
management,
transportation
and distribution
Return
Return
products,
post-delivery
customer
support
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SCOR: Customer Facing
Performance Performance Definition
Attribute
Metric
Supply Chain
Delivery
Reliability
Delivery
performance
Percentage of orders delivered on time
and in full to the customer
Fill rate
Percentage of orders shipped within24
hours of order receipt
Perfect order
fulfillment
Percentage of orders delivered on time
and in full, perfectly matched with order
with no errors
Supply Chain
Order fulfillment Number of days from order receipt to
Responsivenes lead time
customer delivery
s
Supply Chain
Flexibility
Supply chain
response time
Number of days for supply chain to
respond to an unplanned significant
change in demand without a cost penalty
Production
flexibility
Number of days to achieve an unplanned
20% change in orders without a cost
penalty
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SCOR: Internal Facing
Performance Performance Definition
Attribute
Metric
Supply Chain
Cost
Supply Chain
Asset
Management
Efficiency
Supply chain
management cost
Direct and indirect cost to plan, source and deliver
products and services
Cost of goods
sold
Direct cost of material and labor to produce a
product or service
Value-added
productivity
Direct material cost subtracted from revenue and
divided by the number of employees, similar to
sales per employee
Warranty/returns
processing cost
Direct and indirect costs associated with returns
including defective, planned maintenance and
excess inventory
Cash-to-cash
cycle time
Number of days that cash is tied up as working
capital
Inventory days of
supply
Number of days that cash is tied up as inventory
Asset turns
Revenue divided by total assets including working
capital and fixed assets
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Global Supply Chain
 To compete globally requires an
effective supply chain
 Information technology is an
“enabler” of global trade
 Nations form trading groups
 No tariffs or duties
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Obstacles to Global Chain
Transactions
 Increased documentation for invoices, cargo
insurance, letters of credit, ocean bills of lading
or air waybills, and inspections
 Ever changing regulations that vary from
country to country that govern the import and
export of goods
 Trade groups, tariffs, duties, and landing costs
 Limited shipping modes
 Differences in communication technology and
availability
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Obstacles to Global Chain
Transactions (cont.)
 Different business practices as well as language
barriers
 Government codes and reporting requirements that
vary from country to country
 Numerous players, including forwarding agents,
custom house brokers, financial institutions, insurance
providers, multiple transportation carriers, and
government agencies
 Since 9/11, numerous security regulations and
requirements
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Duties and Tariffs
 Proliferation of trade agreements
 Group members charge uniform tariffs
 Member nations have a competitive
advantage within the group
 Trade specialists
include freight forwarders, customs
house brokers, export packers, and
export management and trading
companies
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10-65
Duties and Tariffs (cont.)
APEC
NAFTA
TAFTA
FTAA
ASEAN
CALM
ATPA
MERCOSUR
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ANZCERTA
10-66
Landed Cost
 Total cost of producing, storing, and
transporting a product to the site of
consumption
 Value added tax (VAT)

an indirect tax assessed on the increase in value of a good at
any stage of production process from raw material to final
product
 Clicker shock

Occurs when an order is placed with a company that does not
have the capability to calculate landed cost
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Web-based International Trade
Logistic Systems
 International trade logistics web-based software
systems reduce obstacles to global trade






convert language and currency
provide information on tariffs, duties, and customs processes
attach appropriate weights, measurements, and unit prices to
individual products ordered over the Web
incorporate transportation costs and conversion rates
calculate shipping costs online while a company enters an
order
track global shipments
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Recent Trends in Globalization for
U.S. Companies
 Two significant changes


passage of NAFTA
admission of China in WTO
 Electronic Industry


70% of cost is in components
major supply chains have moved to China
 Proliferation of counterfeit parts
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Effects of 9/11 on Global Chains
 Increase security measures


added time to supply chain schedules
Increased supply chain costs
 24 hours rules for “risk screening”


extended documentation
extend time by 3-4 days
 Inventory levels have increased 5%
 Other costs include:

new people, technologies, equipment, surveillance,
communication, and security systems, and training necessary
for screening at airports and seaports around the world
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10-70
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Collaborative Logistics and
Distribution Outsourcing
 Collaborative planning, forecasting, and
replenishment create greater economies of
scale
 Internet-based exchange of data and
information
 Significant decrease in inventory levels and
more efficient logistics
 Companies focus on core competencies
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10-77
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Supply Chain Management